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Johnson's Russia List


May 2, 2000  
This Date's Issues:4279  4280


Johnson's Russia List


2 May 2000


[Note from David Johnson:
1. the eXile book review:  John Dolan reviews Leon Aron's Yeltsin: A Revolutionary Life.
2. New Statesman (UK): Is Putin fomenting a Holy War? Russia's 
Muslims are a heterogenous group. But the war in Chechnya is 
straining their loyalty, writes Christian Caryl.
3. Reuters: Gore sees possible give by Russia in amending ABM.
4. Vlad Ivanenko: re Helmer on Illarionov/4277.
5. Statement by Representative James A. Leach (Chairman, Committee 
on Banking and Financial Services U.S. House of Representatives)
before the Financial Academy, Moscow, Russia (re "the common threat 
America and Russia face from the danger of money laundering and
capital flight; and the future of the U.S.-Russian relationship,
particularly at the people-to-people, rather than the
government-to-government, level.")] 





The eXile

March 30 - April 13, 2000

Book Review

Yeltsin: A Revolting Lie

By John Dolan


Yeltsin: A Revolutionary Life

by Leon Aron

London: HarperCollins

After reviewing so many well-meaning, badly-written books, it's a pleasure to

dissect the work of a skilled liar. The liar in question is Leon Aron, the

book is Yeltsin: A Revolutionary Life. Aron's book attempts a task which is,

to borrow his favorite Classical allusion, "Augean": cleaning up the

filth-dripping career of Boris Yeltsin.

But though the task is, as he puts it, Herculean, Aron has one tremendous

advantage: he is writing for readers who know very little about contemporary

Russia. Only an audience deeply ignorant of Russia would stand for a

biography of Yeltsin which in 750 pages makes only four brief references to

Boris Berezovsky. Writing a Yeltsin biography which ignores Berezovsky is

like writing a history of the Nicaraguan Contras without mentioning Oliver

North. Yet Aron expects to get away with excluding Berezovsky from his story

- and based on the reviews of this book by what passes for the American

intelligentsia, he will succeed. Martin Malia has informed the readers of the

Wall Street Journal that "whoever wishes to understand post-Communist

Russia...must henceforth start with Mr. Aron's path-breaking book." The New

York Times, gullible as ever, has termed Aron's book "a fine, full-blooded

portrait of Yeltsin."


Sadly, very few of the readers who buy Aron's book on the strength of these

endorsements will know enough about Russia to see the scope of the Big Lie

Aron feeds them. They will end up believing that Yeltsin and his friends were

doing God's work, or at least Adam Smith's - rather than divvying up the

plunder of a fallen empire while its stunned, exhausted people were too busy

trying to survive to put up any resistance, and whose hope and faith in a

better, more just future had been coapted and perverted by some of the most

bloodless, amoral nihilists-posing as free-market democrats-that the world

has ever seen. Just taking the loans-for-shares scheme alone-a theft that

even the IMF and World Bank have disavowed-it is estimated that at least tens

of billions of dollars worth of state assets were literally given away to the

oligarchs (and often times even paid for by stealing the unpaid wages of

Russia's state workers and pensioners) for almost free. That alone would

qualify Yeltsin as the greatest thief that mankind has ever known.


Aron has so little respect for his American readers that he actually attempts

to tell them that the oligarchs aren't really such a big deal, that they're

largely myth:


"...The secrecy in which the Russian robber barons cloaked their dealings

resulted in a vast exaggeration of their wealth and power both by the Moscow

rumour mill and by the resident correspondents of Western newspapers and

television networks...The truth was further obscured by a deep suspicion of

personal wealth...and by self-aggrandizing claims and accusations with which

the perennially warring moguls puffed up their worth and which they hurled at

one another through their media outlets."


Aron's prose slips a bit here, particularly in that last sentence. If the

oligarchs are really so marginal, how is it that they apparently own all the

"media outlets"? Or is ownership of the electronic media such a minor

advantage? Aron simply dismisses other charges against Yeltsin without



"...equally bizarre [is] the 'theory' that explained Yeltsin's dependence on

the oligarchs by the gifts which they showered on his family - as if the

President of Russia, should he decide to do so, needed intermediaries in

raiding the country's treasury."


One would like to ask Mr. Aron exactly what is "bizarre" about this

"'theory'." "Intermediaries in raiding the country's treasury" is a fairly

exact description of the talents of Berezovsky and above all Chubais (whom

Aron treats very delicately). It seems less than "bizarre" that Yeltsin,

whose job was not to cook the books but to present a "democratic" face to the

West while the cooking was in progress, would work with the leading

embezzlers rather than carrying sacks of dollars out of the banks. He's not

in that sort of condition.


The one figure of the 1990's who stirs Aron's bile is Yavlinsky, the least

corrupt of all the "reformers." Quiz for non-Russian readers: explain why

Aron hates Yavlinsky, of all people, so intensely. In 25 words or less.

[Hint: Yavlinsky, as the only authentically democratic, untainted

Western-style politician in Russia, and the part-Jewish leader of the

fiercest opposition Duma faction, does WHAT to Aron's central argument that

all those opposed to Yeltsin were crypto-fascist/anti-Semitic-Stalinist



In whitewashing Yeltsin's astoundingly sleazy career, Aron leans heavily on

his readers' worship of the free market and the power of the individual to

transcend, even remake, the world around him. (In other words: successful

Americans.) Playing on the paradigmatic narratives Americans absorb with

their morning cartoons, Aron transforms young Yeltsin into a Siberian Abraham

Lincoln, growing up in "...the Ural-Siberian tradition of diversity,

acceptance and meritocracy." Yeltsin may not have lived in a log cabin, but

as Aron points out, his grandparents did. As a boy, Yeltsin rambles in the

woods, explores Siberian rivers and generally gets up to all sorts of

Huck-Finn deviltry (blowing half his hand off while playing with a grenade,

for example), but grows up to be the hardest-working, straightest-speaking

construction boss in the history of Sverdlovsk, a totally (!), incorruptible

workaholic who sternly rejects every attempt at a bribe or dubious gift. To

give Yeltsin due credit, one must admit that he certainly transcended that

provincial prejudice in later life.


Aron is at his best when his knack for hagiography has the fewest obstacles

(ie facts) to overcome. This means that his early chapters about Yeltsin's

life in Sverdlovsk are his best. When Boris is summoned to Moscow-his drive

and goodness recognized at last - Aron's task becomes much harder.


Aron has two strategies for wrestling his readers into respecting Yeltsin.

First, he uses his early chapters to paint the Soviet system so black that a

naive reader will accept any change as an improvement. In the process he

makes Yeltsin's task literally Herculean - and I mean literally: Aron

consistently compares Yeltsin's tasks to the labors of Hercules, above all to

the cleaning of the Augean stables. (Though, in a momentary lapse, he fudges

a bit by describing Yeltsin as "both Augeas and Hercules" - that is, the man

responsible for the mountain of dung, as well as its remover.)


Aron's not shy about enlisting a plurality of Classical heroes, either. When

Hercules tires, enter Sisyphus. Here is Aron's depiction of Yeltsin after he

has been rebuked by the CPSU:


"Yeltsin sat on the dais, motionless, his head in his hands. The monstrous

boulder that he, day and night, had pushed up, up, up the steep slope,

through briars, his hands cut and bleeding, his knees in muck, his sides

bruised and his heart strained - had finally crushed Sisyphus."


If I may resort to the argot of my native malls: what crap. The torture to

which Yeltsin has been subjected is no more than a public scolding by his

fellow apparatchiks, to which Yeltsin reacts not by standing up for his

rights in Lincolnesque fashion but by groveling, as Aron admits, "like a star

defendant of Stalin's show trials in the 1930's." And Yeltsin, when

challenged, shows that he can grovel with the best of 'em:


"I am very guilty before the Moscow party organization, very guilty before

the GorKom, before the buro, before all of you and, of course, I am very

guilty before Mikhail Sergeevich Gorbachev, whose authority is so high in our

country and in the whole world...."


But Yeltsin groveled, not before Stalin but...Gorbachev! It's no shame to

grovel before Stalin - God would grovel before Stalin - but to react to a

tonguelashing by his doddering epigones of 1987 vintage, as Yeltsin did, is

hardly Sisyphus-level heroic endurance.


Aron's other strategy for rehabilitating Yeltsin is simple old Russophobia.

He says outright that Yeltsin's opponents are anti-Semitic fascists, and

offers several grotesque cartoons out of Zavtra as evidence. In other words,

Russians who objected to seeing their jobs, their savings, their country

whisked away; who were bothered by the starvation and entropy of the

countryside; who found it suspicious that every item of value in the former

USSR had passed, somehow, into the hands of a dozen master embezzlers; that

all these people were no more than Jew-baiting racists. Now that is what Dr.

G. used to call the biiiiiiiiiiig lie. 900 pages of it. Now that's big.


The only remaining issue for the reader is guessing how big was Aron's

compensation package for producing this shameless encyclopedia of court

flattery. We'd bet that it was real big. And judging by the early reviews, it

was money well spent.


Check out Dr. DolanÆs new book, "Poetic Occasion From Milton To Wordsworth"

published by St. MartinÆs Press, or order it on .





New Statesman (UK)

1 May 2000

[for personal use only]

Is Putin fomenting a Holy War?

By Christian Caryl (110317.1466@CompuServe.COM)

Russia's Muslims are a heterogenous group. But the war in Chechnya is

straining their loyalty, writes Christian Caryl


You might be forgiven for thinking that Vladimir Putin was the scourge of

Islam after his recent visit to London, when his remarks about the war in

Chechnya stirred up a flurry of protest in quarters ranging from the Tories

to UK Islamic leaders. "We have seen European countries and European leaders

not able to support the Russian struggle", said Putin, "because they are

afraid of a reaction among the Muslim inhabitants of Europe, but that should

not be their conclusion." He urged Europeans to "wake up" to the threat of

"fundamentalist extremists on their borders". In his view, militant Islam is

mushrooming in central Asia, the Caucasus and Europe. But, he warned, "so

far, Russia is fighting alone".


If one is to take these remarks seriously, Putin would like to see an

international military campaign against extremist Islam, one that would unite

European (presumably meaning "Christian") countries in a sort of new Crusade

to cleanse the world from a monolithic threat.


Putin's admonishments, widely quoted in the British press, were played down

by the Russian media. They preferred to repeat, days after the event, a

different remark made by the Russian president at the same press conference:

"We will observe human rights. We are not fighting against Muslims and

Chechens, we are not enslaving Chechnya, we are liberating it from



Russian journalists have good reason to tiptoe around their president's more

divisive remarks on the Muslim question - namely the 20 or so million

believers in Islam who live within the Russian Federation. Out of Moscow's

total population of eight million, around one million are members of the

faithful; Muslim Muscovites like to claim that they live in the most Islamic

city in Europe.


The Chechens make up only a small fraction of the Muslims who live in Russia.

Most are Tatars, Turkic-speakers concentrated in a swathe along the southern

reaches of the Volga River where they have lived for thousands of years. In

the North Caucasus, the other Russian focal point of the faith, Chechens are

but one of a mixed basket of various Muslim peoples. Muslims can be found

across the length and breadth of the country. The geographical and cultural

heterogeneity prevents them from acting as a bloc. Most Tatars subscribe to

the moderate Hanafi school of mainstream Sunnism; there are Tatar

intellectuals who like to boast about their people's role in developing an

undogmatic "Euro-Islam". The Bashkirs, former nomads who inhabit the Siberian

plains farther east, profess an Islam that contains elements of steppe



Caucasians, in turn, are steeped in Sufi traditions. Even within families,

there can be broad differences in practice and belief. Younger Tatars who

live in cities mix with non-Muslims, attend mosques where women are allowed

to pray and eat pork, while their parents may live in villages with rigid

Koranic observances and mosques that women may not enter.

During the Soviet period, the few rudimentary Islamic institutions that

existed were controlled tightly by the KGB, and Russian Muslims were cut off

from fellow believers in other parts of the world. As a result, the cultural

and ethnic differences among Russian Muslims today tend to override religious

unity. That came through with startling clarity during last summer's little

war in Dagestan, the Muslim republic adjacent to Chechnya. When several

groups of Chechens invaded the republic under the banners of radical Islam,

they were repulsed by the combined forces of the Russian army and Muslim

Dagestani militias. A major divide within Chechnya itself runs between the

separatist government headed by President Aslan Maskhadov, who until recently

was claiming the allegiance of several radical Islamist warlords, and the

Mufti of the city of Gudermes, Khozh-Akhmed Kadyrov, who criticised Maskhadov

for, among other things, adopting elements of sharia law alien to the spirit

of the Chechen people. And it is quite common to hear other Russian Muslims -

particularly from areas bordering Chechnya - badmouthing the Chechens. In

that respect, they have something in common with their non-Muslim

co-citizens, whose historical hatred of the Chechens, stoked in the mid-1990s

by the humiliation of the first Chechen defeat and the years of

Chechen-orchestrated kidnappings that followed, has now reached a white-hot



But when terrorists set off a series of devastating bomb attacks in Moscow

and other Russian cities last year, the wave of popular fury that resulted

extended to all Chechens (regardless of their individual attitudes to the

independence question), to virtually anyone who looked like he might be from

the Caucasus and to Muslims in general. Madina, a Tatar housemaid in Moscow,

says: "It's not easy. On TV, they show pictures of the Chechen fighters at

prayers, and everyone sees those pictures and says, 'ee, they're Muslims'."

Because her appearance doesn't correspond to the average Russian's picture of

what a "Muslim" should look like, Madina says that she often finds herself

listening to tirades directed against her fellow believers. "Officially, it's

not supposed to matter what religion you are now," she says. "But most

Russians just assume that you're Orthodox."


Alexei Malashenko, a leading Russian scholar of Islam, speaks of burgeoning

"Islamophobia" in Russia. In a poll taken in 1992, says Mala-shenko, 17 per

cent of respondents said that Islam was a "bad thing". In a more recent

survey of young Russians, the figure was 80 per cent. Such underlying

tensions might help to bring about what Putin ostensibly aspires to avoid -

the politicisation of Russia's Muslims. He clearly understands the political

import of religious feeling in a way that Boris Yeltsin did not. "Yeltsin was

a party bureaucrat," says Malashenko. "Putin is younger and more sensitive to

the problem. He knows that there can be tensions between Muslims and

Christians. He doesn't have an approach or a policy. But he has a feeling

that it deserves attention."


His solution, says Malashenko, has been to promote a "loyalist" Islamic

movement that would give Muslims a political voice. During last year's

parliamentary elections, Putin's entourage even sponsored the creation of

Refah, an Islamic party that now claims the allegiance of a dozen deputies in

the 400-member State Duma.


Such attempts to co-opt Muslim aspirations clearly have limits. Last year,

during the war in Kosovo, Mintimer Shaimiyev, the president of Tatarstan and

one of Russia's most influential regional leaders, criticised attempts by

Russians in the republic to recruit volunteers to fight on the side of the

Serbs. That could lead, he warned, to a reaction among Tatars, who might take

up arms with the Albanians - a tendency, he said, that could end with Russian

boys killing other Russian boys in the Balkans.


That's why Putin and his entourage never lose an opportunity to blame the war

in Chechnya on the nefarious activities of Osama bin Laden, the Turkish

secret service, and "Arab mercenaries". Putin has gone much farther than

Yeltsin would have ever dared did in emphasising the "international" aspect

of the conflict. When I visited Chechnya last December, Russian soldiers

assured us that the enemy forces even included kilt-clad Scotsmen - evidently

members of a hitherto unknown Islamist group based in the Highlands.


Putin hopes that the strategy will pay off on several fronts. He can dampen

western criticisms by invoking the bogey of the Islamist threat. He can

reassert Russian influence in central Asia by promising support to regional

leaders facing fundamentalist threats of their own. And, above all else, he

can use the threat of an "external enemy" to consolidate Russian society

around him.


The question is, how long will Russia's Muslims be prepared to go along with

the team?





INTERVIEW-Gore sees possible give by Russia in amending ABM

By Thomas Ferraro


WASHINGTON, May 1 (Reuters) - Vice President Al Gore said Russia understands

why the United States wants to amend the 1972 Anti-Ballistic Missile (ABM)

Treaty and is hopeful Moscow will lift its stated opposition.


Gore said he is encouraged that Russia now at least recognises the value of

limited new defence systems that could protect it and the United States from

attack by rogue forces.


``Publicly, they are completely hard line'' against renegotiating the ABM,

said Gore, who has been a point man in U.S.-Russian relations.


``But there is clearly an understanding by them of why this sort of system

would be very valuable to them because there is a new awareness on their part

of the potential threat they face to their south with extremists groups,'' he



Gore made the comments in an interview with Reuters in Boston on Sunday night

after giving his first major foreign policy speech since become the

presumptive Democratic presidential nominee in March.


Russia has insisted it has no interest in renegotiating the ABM, a Cold War

pact designed to curb the arms race. Moscow has suggested there are other

ways to deal with rogue states, such as moving to prevent them from getting

nuclear arms.


Gore, in his foreign policy speech, spoke of the need to engage ``vital

partners,'' like Russia and China, and be prepared to stem nuclear threats

from rogue states.




In his interview, the vice president said he remains optimistic Russia will

sign off to some changes in the ABM to permit for limited national defence



``I hope to see an agreement between the U.S. and Russia on modifications to

the ABM treaty that ... allows a more limited approach that can protect our

country and theirs against a half-dozen or so missiles or fewer launched by

some rogue state,'' he said.


On other matters, Gore said despite complaints to the contrary, he has made a

concerted effort to win congressional approval of proposed permanent normal

trade relations with China.


``I have made numerous speeches and given numerous interviews expressing my

views'' in favour of it, Gore said. ``I have made numerous telephone calls to

members of the Congress.''


``I called (Commerce) Secretary (William) Daley a week or 10 days ago and

asked him for more assignments: 'Is there anything more I can do to help,'''

the vice president said.


Gore he expects the trade proposal to obtain congressional approval, but ``it

is going to be a hard, close fight.''




The question of amending the ABM to allow for limited national defence

missile system was expected to be a topic of discussion at the U.S.-Russian

summit set for June 4-5 summit in Moscow.


The ABM, signed by the United States and the Soviet Union in the the midst of

the Cold War, has become the cornerstone of international arms agreements.


To go ahead with a new national defence system, the United States must get

Russia to agree to change the treaty or withdraw from the treaty itself.


Toward this end, Gore called on Republican rival George W. Bush to ask Senate

Foreign Relations Committee Chairman Jesse Helms, a North Carolina

Republican, to drop his vow to prevent ratification of any new arms treaties

until a new president takes office on Jan. 20, 2001.


``If he (Bush) is truly interested in bipartisanship and comity in foreign

policy,'' the Texas governor should make such a request, Gore said.


Gore charged Helms as well as Bush complicated the upcoming U.S.-Russian

summit with stands they staked out last week.


While Helms vowed to block any treaty changes during Clinton's final months

in office, Bush reiterated his desire to develop a massive ``Star Wars''

defence system.


Gore noted many critics see a comprehensive ``Star Wars'' system as too

costly, technologically implausible and even destabilising.





Date: Mon, 01 May 2000

From: Vlad Ivanenko <>

Subject: Helmer on Illarionov/4277


Usually I agree with what John Helmer writes and his last piece on Andrei

Illarionov as a wooden cuckoo is no exception. Yet, I need to add that if

Illarionov is not quick answering on an economic question to a general

audience, it is not a big deal. No economist can do that, albeit Western

advisors are more experienced covering their ignorance with smooth words

than Illarionov apparently is.


The more problematic is the list of experts that he cites. I venture to

guess that they are hired by the IMF. The Fund employs plenty of

economists of Latin-American origin who have local expertise bound for

export, e.g. Chilean pension reform. Accidentally, Chileans appear in

Moscow at the same time as the proposition is discussed. One might recall

the handy appearance of a former Argentinean finance minister in the

Russian capital after the proposition regarding the Argentinean-type

currency board was floated in Russia after the August 1998 crisis. New

Zealand is famous for its excessively strict attempts to squash inflation

in the early 1990s and the IMF would be pleased to hear something similar

to be tried by Moscow. It would be informative to learn what is the source

of funding for these experts to travel to Russia. I do not suggest any

conspiracy theory but I do believe that those who have more money are

better positioned to promote the message they want.


They say that, unlike Gaidar who is awash with money and can generate

numerous papers (including prepared for Gref's center), Illarionov does

not have his own think tank (the center he runs is small) and needs to

rely on the work of the others. If this is true the selection of "experts"

who have access to Illarionov becomes a proxy fight for the now famous

Putin's ear (which has been surely exposed to such cacophony that only a

deaf person could work comfortably in that environment). Maybe, appointing

Illarionov as his "advisor", Putin has simply shielded him from the noise

emanated by would-be presidential economic advisors who have to

concentrate on Illarionov instead.


Vlad Ivanenko, Ph.D. candidate in economics

University of Western Ontario





From: "Francis Menezes" <>

Subject: Statement by Representative James A. Leach

Date: Mon, 1 May 2000


Dear David,


I am a staff member of the House Banking and Financial Services Committee.

On April 25, 2000, Representative James A. Leach, Chair of the House Banking

Committee gave a speech before the Financial Academy in Moscow, Russia. If

there are any questions, contact either David Runkel or Brookly McLaughlin

in the Press Office at (202)-226-0471. The Banking Committee's website is



Francis A. Menezes

Committee on Banking and Financial Services

2129 Rayburn Building

Washington, D.C. 20515




Statement by Representative James A. Leach

Chairman, Committee on Banking and Financial Services

U.S. House of Representatives

Before the Financial Academy

Moscow, Russia

April 25, 2000


Let me say at the beginning how honored I am to be invited to speak before

this distinguished institution.


I come as Chairman of the House Banking Committee, but principally as a

member of a legislature, which we in America call the people's body.


I would like to focus my remarks today on three issues: the importance of a

strong intermediary financial system to national well-being; the common

threat America and Russia face from the danger of money laundering and

capital flight; and the future of the U.S.-Russian relationship,

particularly at the people-to-people, rather than the

government-to-government, level.


In your country as in ours, the start of a new presidential administration

is a time of renewal. Coupled with what appears to be greater economic

stability and the prospect of some economic growth this year, thanks in part

to strong oil prices, this is a propitious moment to discuss the importance

of strengthening Russia's banking and financial system.


I have not come here to tell you how to organize or regulate your banks.

Attempts to overlay the system that works in one country onto the practices

of another country are presumptuous and almost always result in failure.

After all, no two economic systems and cultures are the same.


But in the free-market world of finance, there are some universal principles

without which a banking system cannot thrive, and without efficient banks

and capital markets, economies simply cannot grow to their potential. What

are these universal principles?

Universal Principles


One. There must be a commitment to provide a place of safety for savers to

put their money, and a place for borrowers to receive credit at non-usurious

rates commensurate with market risk. For this to happen, the public must be

convinced that their savings will earn a competitive interest rate and have

certainty that it will get its money on demand. As many of you probably

know, at the apogee of the Great Depression in the U.S. many banks failed

and many families lost their savings. We restored the public's confidence

in the banks with a government agency - the Federal Deposit Insurance

Corporation - that today insures every deposit up to $100,000. To qualify

for this insurance, banks must meet rigorous capital and regulatory

standards and submit to regular examinations and audits.


Trust is the hallmark of any viable banking and financial system. It cannot

be obtained unless standards are above reproach and there is an assumption

that financial institutions have as their mission protection of the saver

and advancement of the economy.


In this regard, it would appear in recent years that rather than recycling

the saved dollars of the public into entrepreneurial loans for small

business and housing, too many Russian banks have used the public's funds to

concentrate assets in their own names and transferred monies out of the

country, sometimes out of an understandable desire to protect against

inflation, sometimes as an effort to evade the law or protect ill-gotten

gains. But whatever the reasons, the Russian economy cannot grow unless the

people are allowed to control their own destiny and this cannot occur with

reliance on foreign investment to replace capital flight.


Two. There must be financial diversity. People from outside Russia

frequently point to the need for the country to develop laws and protections

to encourage foreign investment - and I share their concern - but I also

believe that of particular need in Russia today is the establishment of

indigenous institutions to provide small business and micro-credit loans.

Healthy economies have a variety of institutions from credit unions to money

center banks, from securities firms to insurance companies, each tailored to

market niches.


Having alternative means to channel an economy's savings into capital

investment expands competition to the benefit of consumers and offers a set

of backup facilities should the primary form of intermediation fail. During

the global financial crisis of the summer of 1998 in the United States, for

instance, banking displaced part of the capital markets while in the U.S.

Savings & Loan crisis of the 1980s, and in the Swedish banking crisis of

1992, the capital markets, largely unaffected by a decline in real estate

prices, were able to substitute for a reduction in financial intermediation

from traditional sources.


Three. Prompt corrective action is preferable to deferring financial

accountability. The speed with which the Swedish banking system overcame

its crisis in the last decade offers a telling contrast with the prolonged

difficulties of Japan, whose financial system is hallmarked by the dominance

of bank lending and keiretsu conglomeration.


Four. There must be capacity to interact with the world on a trustworthy

basis. Banks have to serve domestic depositors and borrowers, but in

today's economy they must also interact with globalized institutions. There

can be no credible interaction unless and until a system of regulation

characterized by transparency exists. A challenge for the U.S. as well as

Russia is to review the role of off-shore jurisdictions, such as in the

Caribbean and South Pacific, and the question of whether countries which

lack prudential regulation and cater to ill-gotten assets should be used by

or have access to the banking systems of advanced societies. Banks must not

become silent accomplices to attempts to circumvent the law.


Five. A strong financial system requires a strong independent central bank.

Arguably, the most innovative institutional step taken by America in the

20th century was the establishment in 1913 of the Federal Reserve System.

The delegation by Congress of monetary policy and certain bank regulatory

authority to the Federal Reserve was a recognition that legislative bodies

didn't have the professional capacity to deal on a daily basis with modern

finance and a reflection that monetary policy and bank regulation should be

above politics.


During the Cold War, when national security was the central concern, secrecy

in certain areas may have been of paramount importance in protecting a

country's citizens. Now that economic issues have become paramount,

transparency holds the key to protecting individual citizens.


Six. There must be a credible legal framework to protect property,

contracts and, in the securities area, the rights of minority shareholders.

Seven. Conglomeration of banking and finance ill serves the public. One of

the lessons of the banking and financial crises of recent years is that

difficulties in an economy are magnified when banks, instead of serving as

neutral providers of credit, are involved in commercial investments.


Last year, I shepherded a law through Congress, the Gramm-Leach-Bliley

Financial Services Modernization Act, that overturned legislation that

shaped the U.S. financial services industry throughout much of 20th century.

This new legal approach removes restrictions placed on commercial banks in

the uncertain days of the Great Depression and allows banks to expand into

insurance and securities activities. But while expanding the scope of

financial activities banks are authorized to enter, this new modernization

law strengthened the divide between commerce and banking and precludes banks

from intertwining with commercial companies.


I favor an independent banking system and healthy, vibrant competition

within finance, but not a system that leads to an unseemly concentration of

asset ownership.


I see no economies of scale and no benefit to the consumer if, for example,

Citigroup were allowed to merge with General Motors and Wal-Mart in the

United States. On the other hand, there are economies of scale that can be

developed when a commercial bank is allowed to offer securities and

insurance services, and vice versa. The recently passed Financial

Modernization bill is a three-way street for competition within the

financial industry. It is also a road-block to the kind of cross-ownership

that characterizes the keiretsu model of Japan, and the banking and commerce

model that has developed on parts of the continent, which has stultified

aspects of the German economy and cost the Spanish and French as well as

American taxpayers in the S&L crisis billions of dollars to rescue banks

which imprudently thought they could invest in and manage well commercial



During America's "Gilded Age" in the late 19th and early 20th century, a

dangerous concentration of economic power developed and the federal

government generally aligned itself with big business. But in 1902, a

Republican president named Theodore Roosevelt took the offensive against

powerful corporate trusts. He convinced Congress to create a Bureau of

Corporations to regulate big business, then shocked the nation by bringing

an anti-trust suit against J. P. Morgan's Northern Securities Corporation.

Regulating the great business trusts to foster fair competition without

socializing the free enterprise system was one of Roosevelt's primary

concerns and great legacies. Even in today's fast-moving "new economy," the

U.S. government is wary of power concentration, as shown in the legal

challenge against the Microsoft software empire of Bill Gates.


Bank Scandals and BONY


Let me say a few words about the Bank of New York. I know this case has

been the subject of interest and concern here. Last September when the

House Banking Committee met to consider issues relating to the global money

laundering threat - which the IMF quantifies as 3 to 5 percent of world GDP,

a matter of at least $600 billion a year - our focus was on allegations of

suspicious transfers of funds from Russia to accounts at one of America's

oldest and most venerated financial institutions, the Bank of New York.


Questions have been raised whether illegalities occurred in these transfers.


This February, the Federal Reserve and New York State Banking Department

took supervisory action against the Bank of New York requiring it to

implement new procedures for detecting suspicious activity. These were

plainly lacking during the three-year period in which some $7 billion flowed

through its accounts from dubious Russian sources. Well over half of these

funds were at some point wired through the island Nauru, a speck in the

South Pacific with a population of 11,000 people never known until now as a

financial center. More recently, Lucy Edwards, a former BONY executive and

her husband, Peter Berlin, plus another BONY accomplice, entered guilty

pleas in federal court to a variety of charges, including conspiracy to

commit money laundering and aiding and abetting Russian banks in conducting

unlawful and unlicensed banking operations in the United States.


The House Banking Committee is focusing on the Bank of New York scandal

because it is my belief that this matter raises fundamental issues,

including the extent to which access to the Western financial system has

contributed to the impoverishment of the Russian people. Processing

transactions involving the proceeds of crime, corruption and law evasion,

including the avoidance of taxes and customs duties, invoke the specter of

large-scale disregard for civil governance. The possibility of infiltration

of the American financial system by corrupt enterprises abroad is not a

threat that Congress can ignore and the probability that this capital flight

is destabilizing the economy of a great country, our most important ally in

the greatest war of the 20th century, is disturbing.

The deputy chairman of your central bank was quoted in the Washington Post

as estimating that in 1998 alone, $70 billion was transferred from Russian

banks to accounts of banks chartered in Nauru. Nauru's banking system,

characterized by draconian secrecy laws and minimal regulatory oversight,

was described in a 1999 State Department report as extending "an open

invitation to financial crime and money laundering."


For many, money laundering is a seemingly modest offense. But in reality it

reflects deeper problems in society and opens a window into greater crimes

that can have serious geopolitical as well as economic ramifications. The

Bank of New York case highlights the need for a U.S. foreign policy aligned

with the interests of the Russian people, not a commercial elite of either

country. The goal should be to insist that the laws of Russia are returned

to the people.


Recent years have witnessed the mushrooming of conflicts of interest

involving monetary elites in all countries. But some progress has been made

in introducing transparency and openness into the offshore financial sector,

and several jurisdictions previously notorious for offering safe haven to

criminal proceeds have executed Mutual Legal Assistance Treaties with the

U.S. authorizing the exchange of information and evidence in criminal

investigations. A growing number of offshore jurisdictions have enacted

meaningful anti-money laundering statutes that conform to internationally

recognized standards. However, even with laws on the books, there remains a

serious question as to whether there exists either the political will or the

legal infrastructure to enforce those laws, particularly given the sheer

volume of activity being conducted offshore. For financial crimes to be

properly pursued cooperation is needed in all jurisdictions. For instance,

in the Bank of New York as well as the Mabetex case, prosecutors require key

evidentiary material that exists principally in Moscow. Given the wealth

transfers of the past decade and the attendant capital flight few countries

have greater self-interest in asserting claims to stolen assets than Russia.


Hence, it is troubling and ironic that the U.S. Department of Justice is

having difficulty getting full cooperation from Russian counterparts.


Further complicating the international anti-money laundering effort is the

dynamic nature of the offshore market. No sooner does one jurisdiction

commit itself to meaningful counter-measure against money laundering than

another pops up in some other corner of the globe to service the business

flushed out of the first locale. Indeed, in recent years, U.S. authorities

have noted a migration of unsavory operators from havens in the Caribbean to

remote islands in the South Pacific - such as the aforementioned Nauru -

that did not even register on their collective radar screens five years ago.


It is self-evident that in an independent global economy with fewer and

fewer barriers to capital flows, an international anti-money laundering

regime is only as strong as its weakest link. Accordingly, the U.S. and its

allies in the anti-money laundering fight have little choice except to

embrace multilateral and bilateral strategies designed to encourage

jurisdictions that have been "missing in action" in this fight to adopt the

necessary legal reforms and dedicate the necessary resources to supervising

their financial sectors.


The kinds of legislation that countries like Russia may well want to

consider are prohibitions against monies being deposited in jurisdictions

which lack credible regulatory standards. Indeed, a case might be made, as

in many western countries, that public officials should be given incentives

to make their own systems work and be barred from holding foreign bank

accounts. On the assumption that public service must be about idealism

rather than self enrichment and that the public interest should not become

co-mingled with private interests, such policies might represent a

trust-building step. I don't know the salary schedules of Duma members and

senior civil servants, but sight unseen, I would urge a doubling on the

condition that their savings be invested at home rather than abroad.


Russia's New Opportunities


America's founders were moral philosophers as well as political activists.

To ensure democratic accountability, they recognized the frailty of human

nature and bifurcated and decentralized political power.


Following Montesquieu, they established a checks and balances system in

which tension would exist and power would be split between Congress, the

president, and the courts. This federal system of checks and balances was

then duplicated at the state level and again at the county and city levels,

where power was substantially devolved. And then through custom, a private

versus public sector check came into being with the citizen assumption that

no one could actively run a business and also hold a significant government

job. Self-interest and public interest were not only deemed incompatible,

but running businesses and the government at the same time was considered

beyond the ability of any one individual.

Now we are in a world where geo-economics is fast displacing geopolitics as

the driving force of social cohesion or disintegration. The role of

government is to protect people, establish and implement fair laws. The

work of the private sector is to maximize economic opportunity in such a way

that society benefits. Extraordinarily, issues of war and peace as well as

economic development are more and more influenced by private sector actions.

The business community can bring people together in positive and respectful

ways in all reaches of the earth or, instead of becoming the glue, business

- particularly the financial sector - can become the tool of international

criminality, exacerbating tensions between peoples and states.


It is the duty of public officials in all countries to see that the first

scenario comes to pass and that the second does not. The most propitious

way to establish free and fair markets is to establish credible law and

order at home and then, to the degree possible, build up international law.

In the area of trade, the rules that were gradually developed during the

GATT rounds that commenced under President Kennedy and that are now the

province of the World Trade Organization (WTO) would appear to be benchmarks

for modern states. Russia should aspire to the establishment of a system at

home which can lead in short order to normalized trade relations with all

countries - as symbolized by WTO membership.


John Locke, the English philosopher who so profoundly influenced Jefferson,

once noted that what distinguished civil society from a state of nature was

the existence of rules to govern disputes and third party arbitration. The

focus must remain on law, its fairness, and implementation.


In recent years, Russia has witnessed a dangerous concentration of economic

power that not only jeopardizes its people's dreams for a better standard of

living but also makes society vulnerable to the return of repressive

politics. What is needed today is a new balancing in society in which

political democracy is matched with open, competitive markets.


It took three-quarters of a century for the Duma to replace the Supreme

Soviet in the political realm. Neither Russia nor the world can afford so

lengthy a transition from oligarchic to competitive free markets.


The rationale for the House Banking Committee's hearings on the Bank of New

York stems not only from its oversight responsibility over U.S. bank

regulatory agencies and the International Monetary Fund, but my personal

conviction that a key goal of U.S. policy should be to shine the spotlight

of accountability on the growing problem of corruption in international

finance and endeavor to help return looted wealth to the Russian people.


I first used the term kleptocracy in the mid-1980s in relation to the late

Philippine dictator Ferdinand Marcos, his secret ownership of certain

property in New York City, and the eventual discovery that his family had

plundered the Philippines and transferred several billions of dollars of

looted assets abroad. No economy can prosper for long in such a system of

crony capitalism, nor can it long be tolerated by the people. The fact that

subsequent Philippine governments have filed valid claim to Marcos family

assets may be of some relevance to the BONY probe. There is no desire in

Congress to embarrass Russia; our inquiries are simply designed to shed

light on international financial crime and, to the degree possible, cause

any monies stolen from Russia to be returned. In this circumstance care

must be taken to recognize that there is a distinction between money

laundering and money transferring and that many Russian customers of BONY

and many senior bank officials are not guilty of any criminal behavior.


Here it may be relevant to point out certain aspects of 18th century

American and 20th century Latin history. As you may recall, the fledging

American Republic experimented for almost a decade with a weak executive

under what we called the Articles of Confederation. Upon ratification of

the Constitution a common market as well as political union between the

states was established. The practice of putting levies on the products of

states by other states was prohibited, and while tariffs were countenanced

with other countries, free trade was established internally in a world in

which external trade was minimal. Today in a more globalized economic

setting the U.S. has prospered on the general basis of free trade and while

angst exists in the American public as in all publics about competition,

sometimes unfair, from afar, the assumption is that free trade leads to

higher standards of living than systems based on political isolationism or

economic autarky.


Protectionism is particularly harmful in the credit, securities, and savings

industries because the general economy is so dependent on each. Hence, it

is instructive to note that in the U.S. today approximately one-fourth of

banking assets and one-third of commercial loans are made by foreign

entities. We consider foreign financial competition good for the American

economy and believe it is even more so in developing countries where

individuals and companies often have no place to safely deposit their

savings or seek prudential lending and capital assistance. One of the

extraordinary advantages to many countries in welcoming foreign financial

institutions is that those institutions come under the laws of their own as

well as the host country. Hence, complex legal and other regulatory

standards apply to foreign firms even if they do not have to be universally

followed by their domestic counterparts.


As for Latin America, much has been written in Russia about aspects of the

Pinochet model. Actually the Latin models from which the most relevant

lessons exist relate to the concentration of wealth, corruption, and capital

flight problems of so many Latin countries in the last century. Capital

flight in many circumstances is not illegal and attempts to artificially

constrain it often don't work, but no society can prosper and grow if wealth

and savings are diverted to safe havens abroad. It deserves stressing in

this regard, that while money laundering is the principal legal issue from

an American perspective in the BONY case, money transfers - i.e. quasi-legal

capital flight - is the larger problem for Russia.


Societies that allow concentration of wealth and don't establish democratic

institutions and provide legal protections for average citizens are

particularly vulnerable because those who come to disproportionately control

assets realize they are subject to revolutionary change and propensity to



For free markets to work people must have confidence not only that

government may be changed only through the ballot box but that its

governors, in the words of Lincoln, "are of, by, and for the people."

Elections alone do not define democracy. To maintain democratic legitimacy,

governments must be understood to be servants of the people, rather than

power brokers for a new oligarchic class.




History, particularly Russian history, has taught us that a great people can

rise and face extraordinary hardship, particularly if inflicted by a foreign

invader. But society is easily demoralized and splintered if

disillusionment develops internally with leaders who lack trust and laws

which are not equitably administered. Few countries on the planet have

greater potential or greater opportunity than Russia today. Early actions

in a new Presidency may be particularly meaningful, as exemplified in the

approval of both the START and Test Ban treaties. But while Franklin

Roosevelt produced a 100-day model, his was the only American presidency

which successfully undertook such comprehensive initiatives in such a short

period of time. The challenges for President Putin and the new Duma will be

to lead forthcomingly now and sustain momentum for the longer term.

Symbolic tokenism and scapegoating will not suffice.


>From an outside perspective it appears that Russia's future is in the

balance. The question of whether communism will simply give way to

corruptionism is the fundamental challenge that must be addressed. The

revolutionary struggle to root out corruption may be more difficult than

overthrowing communism because avarice is a more fundamental aspect of human

nature than the Marxist precept that people are subject to historical forces

beyond individual control.


There are many types of political systems chronicled in Western thought

since Aristotle. But history provides no model of a sustainable system

where corruption becomes endemic. Compromise is possible on most political

issues but on integrity there can be none. Given that Russia, like America,

is an expansive frontier country, analogies to the Wild West are much in

vogue. At the risk of exaggeration, from the outside it appears that the

principal differentiation is that in Russia today the outlaws may be running

rather than robbing the banks and the sheriffs may be controlling rather

than reporting to the politicians.


The Putin Administration and the new Duma have one of the most notable

opportunities in human history to begin anew and write from scratch on a

slate that was besmirched in the 20th century by totalitarian repression,

jeopardized by Nazi invasion, and subverted in recent years by a kind of

robber capitalism. The heroic people who repulsed Hitler's army at

Leningrad and drove the Wehrmacht back to the Elbe where they were met by

General Patton and a regiment led by my father; the people who suffered

under Stalinist purges and bravely demanded systemic change, deserve the

decency of a new era of honest, individual-rights centered government.


Few people suffered more in the past century or deserve a better fate in

this one. I come from the American people's House simply to underscore that

Americans and Russians have common interests and common dreams. We are on

the side of the Russian people. We want you to succeed.




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