October 6, 2000    
This Date's Issues: 4563 • 4564 • 

Johnson's Russia List
#4564
6 October 2000
davidjohnson@erols.com


[Note from David Johnson:
1. Interfax: YELTSIN HAILS RUSSIA'S ACHIEVEMENTS AND PUTIN.
2. Reuters: Summers says Russia needs rule of law, fiscal control.
3. Moscow Times: Gregory Feifer, Reporting Truth, Even in War.
(Chechnya)
4. Moscow Helsinki Group: The Human Rights Situation in the Russian 
Federation, 1999.
5.Wall Street Journal: Andrew Higgens, A Russian Banker Rebounds By 
Outfoxing His Creditors. (Alexander Smolensky)] 


*******


#1
YELTSIN HAILS RUSSIA'S ACHIEVEMENTS AND PUTIN
Interfax


Moscow, 5th October: Boris Yeltsin, Russia's first president, has said he
views the country's presidential elections this year as the most important
event of the 20th century. 


"Here we are not talking about personalities, the main thing is that a
person who came to power through the democratic elections will never be
able to turn the country back, to make us forget the provisions of the
constitution, to rob people of their basic rights and liberties, including
the right to private property," Yeltsin said in an interview with the
weekly magazine `Ogonek'... 


The former Russian leader said he believes that "in the near future the
2000 presidential election will be referred to as the most important event
of the 20th century." His own voluntary resignation was also "a great
historical step" he said, adding that he is convinced that democracy which
has won in Russia will not become "a trampoline for dictatorship". 


In his opinion, Yeltsin went on, no alternative to Putin as "a young,
energetic and strong politician, who practically proved his adherence to
democracy and market reforms and simultaneously his adherence to the
state-patriotic tradition" existed in Russia both at the time of the
presidential elections in 2000 or exists now. 


The first president spoke of the "active character" of Putin, who became
prime minister "at the time that was the hardest for the country: the
aggression of the Chechen fighters, the explosions in Moscow, the panic
that had almost started in the country". "In a way, Putin saved the country
from this panic, from the threat of the collapse of the federation and
chaos of power," Yeltsin said. 


Noting this, Yeltsin said that he is "very proud" of Putin's "undisputed
victory" in the elections. The first president is "absolutely confident"
that "through the democratic elections, through political continuity and
the building up of a strong state, he [Putin] will lead the country to
prosperity and calm". 


Yeltsin went on to say that now that he is a pensioner he meets regularly
with Putin, Prime Minister Kasyanov, Defence Minister Igor Sergeyev and
Interior Minister Vladimir Rushaylo, among other prominent political
figures. At the same time, Yeltsin said, he has no influence on the
country's current life. "Today I am just an interlocutor. Including for the
current president, an interlocutor, who, so to speak, knows a lot," he
said... 


Yeltsin's new book will first be published in Russia, and in a week it will
be available in the US, England, France, Germany, and other countries in
several languages. 


******


#2
Summers says Russia needs rule of law, fiscal control

BOSTON, Oct 5 (Reuters) - Russia must redouble efforts to establish the rule 
of law and rein in fiscal spending to ensure recent economic improvements 
translate into lasting prosperity gains, U.S. Treasury Secretary Lawrence 
Summers said Thursday. 


In taped remarks to a U.S.-Russian investment conference, Summers cautioned 
Moscow not to rely on rising oil prices and a devalued currency to prop up 
its vast economy. 


"Ultimately, prosperity doesn't come from the outside, it doesn't come from a 
commodity price, doesn't come from an exchange rate valuation -- it comes 
from the quality and strength of an economy's institutions," he said. 


Summers laid out five priorities for Russia: 


-- Establishing fiscal control. "A government that seeks on a consistent 
basis, in excess of its capacity, to mobilize resources to run excessive, 
chronic budget deficits, tempts high levels of inflation, low levels of 
private investment, economic instability and weakness," he said. 


Russia plans to balance its budget -- traditionally dependent on 
international oil and other commodity prices -- next year, even though the 
government expects it will still need to borrow from abroad to meet foreign 
debt obligations. 


The government expects economic growth of some five percent this year, up 
from 3.2 percent in 1999. The revival follows a steep devaluation of the 
rouble currency in August 1998, which helped domestic manufacturers squeeze 
out imported goods. 


-- Strengthening the rule of law. "No challenge in Russia today seems to me 
greater than the establishment...of property rights, of contract enforcement, 
of well functioning financial markets," Summers said, adding that those steps 
were "crucial to avoiding corruption". 


-- Allocating resources to key industries. 


-- Investing in education and protecting the environment. 


-- Trade and openness toward the world economy. "It is essential to integrate 
with the global economy," Summers said. 


******


#3
Moscow Times
October 5, 2000 
Reporting Truth, Even in War 
By Gregory Feifer
Gregory Feifer is a Moscow-based fellow at the Institute of Current World 
Affairs. He contributed this comment to The Moscow Times. 


That there are two sides to every story is doubly relevant in time of war. 
Western media outlets running stories about Russia's second war in Chechnya 
are no less guilty than others of falling into a general pattern set out in 
Phillip Knightley's "The First Casualty" (the new edition of which includes 
analysis of colossal travesties in reporting during NATO's bombing in 
Yugoslavia last year). In conducting research for this book, Knightley writes 
that he found that, in conflicts since the Crimean War, "what the war 
correspondents had written at the time bore little or no relation to what had 
really happened." Many war correspondents, he concludes, go along with lies 
"out of patriotism, personal conviction or ambition." And, he adds, "although 
all the right is seldom on one side, the media will present the war in stark 
terms of good and evil." 


Anatol Lieven, writing in the October issue of Current History, points out 
that this kind of criticism should also be extended to Western reporting of 
Russia's second war in Chechnya. But in light of such an argument, I feel it 
necessary to restate criticism of Moscow's actions during the conflict f at 
the risk of appearing to condone bad reporting and ignore Chechen crimes 
committed during the period between the two wars. 


Western coverage during the second conflict has been largely anti-Russian 
because it seemed clear that Moscow was carrying out ruinous decisions hailed 
as righteous by the populace f the very subjects these decisions would hurt. 
In the face of the government's propaganda, conveyed almost wholesale by the 
Russian media, any call for a "political solution," even without an offer of 
what that might be, was to be commended. 


Moscow claimed to be waging a war against international terrorism. On the 
basis of this absurd argument alone f however justified the stated aim f 
engaging in conflict in Chechnya was the last thing Moscow should have done. 
By forcing hundreds of thousands to flee, by plunging the region into an i 
ntractable situation where soldiers rape, torture and kill civilians, Moscow 
has only further reinforced the conditions for terrorism for decades to come. 
This is not to excuse Chechen crimes of kidnapping, torture and murder, among 
many others. But war is not the means for solving those problems. 


Furthermore, judging by then-Interior Minister Sergei Stepashin's angry 
fist-waving in early 1999, among other signs, it seemed clear that Moscow's 
intent was to undermine Chechen President Aslan Maskhadov's legitimacy with 
the claim that he was a "terrorist" with whom Moscow would not negotiate. For 
those urging a political solution, it was evident that the first step in that 
direction was to engage Maskhadov, however weak his control over the lawless 
region. Moscow did just the opposite. 


Instead of trying to work toward a solution considering the interests of 
those living in Chechnya, the government submitted to a growing nationalism 
and society's collective desire, after a decade of looking with envy to the 
West for advice, to show that Russia was still strong and could handle its 
own affairs f and at the risk of becoming engaged in an ongoing, unwinnable 
conflict in mountainous territory. 


Egging on the government, Russian generals wanted to exact their revenge on 
Chechen rebels and to show the West they could carry out their own military 
offensive in the wake of NATO's bombing in Yugoslavia. The opening of 
hostilities did the trick. It was a tremendous morale booster when even 
independent NTV television broadcast reportage by correspondents sitting on 
armored personnel carriers zooming toward Grozny in the first stages of the 
war. 


Conveniently for the Kremlin, the war turned out to be the chief factor for 
boosting then-Prime Minister Vladimir Putin's popularity ratings and 
transforming him from an obscure former KGB operative into a wildly popular 
president. 


But let's not ignore history, which is, as Lieven rightly points out, usually 
misused by editors and publishers. Most Western papers and magazines only 
print stories they think their readers will like f then jiggle reports to 
present players as good or bad, communist or capitalist, ignoring 
all-important nuances and patterns. But critics must be aware that the 
academic study of Russian history is fraught with equal amounts of 
myth-spinning. 


The chief mistake in the study of Russian history is to look to policy and 
institutions to explain politicians' motives, when they often serve to 
obscure ascendant factors f the informal networks and conspiratorial rule 
that has characterized Russian politics since the rise of Muscovy. And while 
it is fine for arguments to rage in the halls of Western academia, failure to 
understand myths is a real danger in Russia. In looking to history with a 
utopian nostalgia, Moscow's political elite have taken images and symbols 
from Soviet and tsarist history and used them ad hoc to assemble the language 
of a new nationalism, ignoring the symbols' previous significance and thereby 
the country's political and cultural history. Russia is fast forgetting the 
worst atrocities of the Soviet regime. The conflict in Chechnya served that 
aim well. I am reminded here of the Austrian novelist and playwright Peter 
Handke, who traveled to Serbia in 1995 to puncture the Western media's 
propaganda in the Bosnian conflict, only to essentially become a mouthpiece 
for the regime of Slobodan Milosevic. 


Meanwhile, one of Moscow's aims in the Caucasus has been to create 
instability among local elites in order to impose its own rule. Another aim 
has been the desire to co-opt local elites into the Russian hierarchy. When 
troops pulled out of Chechnya after 1991, they left caches of ammunition to 
fuel infighting between local clans. Of course, there would be no negotiating 
with Maskhadov, just as there was none with Dzhokhar Dudayev. 


Appeals to comparative theories of empire-building aid little in coming to a 
political solution. Suffice it to say that, in its 1994 post-Soviet 
incarnation, Russia was not willing to risk a potential threat to the 
integrity of its national borders and the breakup of the federal structure. 
That may have been a natural response during those politically uncertain 
times. Moscow proved its point to any other potentially secessionist regions: 
that it was not willing to let a region go without a desperate fight. But 
Russia could not accomplish its task at hand f subduing the region f and in 
the second conflict, it was clear that Moscow could not win a war in Chechnya 
outright. It hasn't yet. 


In an age in which institutions such as the European Union, the United 
Nations and others are trying to create momentum for international 
policy-making and implementation, Russia's self-serving and retrograde 
arguments about the inviolability of national borders are dangerous. In the 
face of economic ruin, social instability and political opportunism, military 
displays and demonization of an entire people f however despicable their 
leaders f are used for a breast-beating that comes as a last resort, 
manipulated by a political elite interested in covering up public policy 
failures and corruption to stay in power. 


In discussing the Chechen conflict, it is the duty of observers such as 
Lieven to criticize the Western media for bad reporting. Indeed, one of the 
things that must be done to combat distorted reporting, Knightley says, is to 
"encourage a sense of skepticism in readers and viewers, get them to realize 
that just because something is in print or on the TV screen, or the 
government says it, it is not necessarily true." 


But in attacking the press, critics must be careful in presenting their own 
interpretations as ascendant, couched in appeals to a list of great books and 
comparative scholarship. Those are just as often fraught with bad reporting. 


******


#4
Date: Thu, 05 Oct 2000
From: Nickolai Butkevich <nbutkevich@ucsj.com>
Subject: JRL #4563 Moscow Helsinki Group report on-line


Dear David,
The English language version of the Moscow Helsinki Group report mentioned
in JRL #4563 (#3 HUMAN RIGHTS VIOLATED THROUGHOUT RUSSIA - HELSINKI GROUP
REPORT) is available on-line at:
http://www.fsumonitor.com/MHG_99/MHG_cover.shtml


Copies of the full Russian text of the 60 regional reports (1,000+ pages)
can be ordered by writing to ucsj@online.ru
Sincerely,
Nickolai Butkevich
Research and Advocacy Director
Union of Councils for Soviet Jews
1819 H. St. NW, Suite 230
Washington, DC 20006
Telephone: (202) 775-9770 x107
Fax: (202) 775-9776
nbutkevich@ucsj.com
http://www.fsumonitor.com
Daily Updates on Antisemitism in the FSU 



Excerpt
The Human Rights Situation in the Russian Federation, 1999 
Annual Report 
September 2000
This report, made possible by a USAID grant to which UCSJ is a sub-grant 
recipient, was written by the Moscow Helsinki Group and covers human rights 
in 60 of Russia's 89 regions. 


FOREWORD


This report marks the second year of the project "Monitoring of Human Rights 
in Russia" jointly run by the Moscow Helsinki Group and regional human rights 
organizations. The number of this year's participants has doubled since last 
year, growing from 30 to 60.


Prior to the fall of 1998, no large-scale surveys of human rights violations 
had been conducted in Russia. Admittedly, the monitoring strategy is not 
something new for Russian human rights activists who have been involved for 
more than three decades in accumulating an impressive body of documentation. 
However, systemic monitoring across the Russian Federation had not been 
achievable until quite recently. Only recently have surveys been conducted 
that address specific human rights issues: police abuses, treatment of 
convicts, the human rights situation in the military and juvenile correction 
facilities, etc.


No public organization is equipped to conduct surveys that would allow a 
uniform level of assessment of these issues in all 89 Russian regions. The 
country is too vast; each region is similar in size to an average European 
country. It is not surprising, therefore, that regional disparities in the 
availability of information on human rights activity have on occasion been 
striking.


Country-wide monitoring of human rights has been achieved through a strategy 
suggested by the Moscow Helsinki Group (MHG), the longest standing Russian 
human rights organization. Information has been gathered jointly by several 
Moscow based organizations and numerous regionally located human rights 
organizations. Moscow based organizations acted as facilitator, developer of 
the common monitoring methodology, and compiler of the comprehensive reports 
on the human rights situation across the country. Local organizations 
conducted the surveys and compiled regional reports assessing the status of 
observation of human rights in their area.


Conditions conducive to building up a functional human rights network have 
only existed since 1998, when human rights organizations appeared in all 
Russian regions. Now solid links are being forged among them.


Since 1996, the main thrust of the Moscow Helsinki Group has been to provide 
full support to regional human rights organizations. To date, the total 
number of regional organizations that the Moscow Helsinki Group deals with 
has reached over 1 600. It was the Moscow Helsinki Group that had suggested 
that regional organizations join in a cooperative effort to conduct a human 
rights monitoring survey. The idea gained solid support. The Moscow Bureau of 
the Human Rights Watch cooperated in developing the common monitoring 
methodology and the United States Agency for International Development 
(USAID) provided financing for this project.


The 1998 survey was conducted in 30 Russian regions. This effort resulted in 
a collection of regional reports and the All-Russian Report "On the Situation 
with Human Rights in the Territory of the Russian Federation for the Year 
1998." This was the biggest joint project ever undertaken by Russian human 
rights workers during the entire history of the human rights movement in 
Russia.


As many as 60 regional organizations participated in the survey of the human 
rights situation in 1999, the findings of which are being made available in 
this publication. Beginning September 2000, human rights situation will be 
monitored across all 89 regions of Russia by 89 regional human rights 
organizations.


The All-Russian Report and regional reports will be distributed through 
local, national, and international media outlets; forwarded to regional and 
federal authorities; and dispatched to Russia's partners within the framework 
of the Organization for Security and Cooperation in Europe (OSCE) and Council 
of Europe. In addition, the reports will be distributed to libraries, 
research centers, educational institutions and public organizations that take 
an interest in human rights issues.


Monitoring surveys not only allow the identification of isolated human rights 
problems but also provide a rather complete picture of the general 
environment. Unfortunately, the All-Russian Report and regional reports 
indicate that glaring discrepancies exist between constitutional guarantees 
and Russia's international commitments, on the one hand, and daily reality, 
on the other.


The accurate and unbiased documentation of this disparity collected by human 
rights activists marks the first step towards making the international 
community and the Russian power structures comprehend the true state of 
affairs. At any rate, the problem is unlikely to be remedied unless it is 
first fully understood.


The Russian Parliament, elected at the close of 1999, and the new President, 
elected in 2000, have declared their commitments to the Constitution and the 
rule of law. President Putin intends to insure that federal legislation, 
first and foremost the Constitution, is honored by regional leaders. 
Documentation of the ongoing violations of constitutional guarantees of human 
rights and civil liberties (extensively discussed in the regional reports) 
provides compelling reasons for having relevant regional heads removed from 
power by presidential decree and tried in the courts. This authority has been 
granted to the Office of the President in new legislation recently passed by 
the Federal Assembly. Use of that legislation to protect human rights and 
civil liberties would provide the best evidence of President Putin's 
commitment to the Constitution and the rule of law.


INTRODUCTION


Aside from having a new president, Russia saw a shift in political 
orientation and, in its wake, a change in many peoples' political priorities 
during the last year. Unfortunately, one cannot but notice that this change 
has not been favorable for the cause of furthering human rights and civil 
liberties.


In 1999, Vladimir Putin was presented by President Yeltsin as the most 
desirable successor to the presidential office. Presently, President Putin 
advocates "order," "strong authority" and "social unity" and also indulges in 
militaristic rhetoric. Importance of liberal, democratic values has not been 
openly denied, yet, but they are no longer among the priorities. 
Unfortunately, the historically brief experience Russian citizens had in 
living under a national and worldwide order which was new to them has proved 
to be insufficient for those values to become firmly rooted in the public's 
mentality. The dramatic events of the second half of 1999, brought about a 
change in that mentality that induced it to accept the federal authorities' 
political priorities. The unexpected and truly unbelievable soaring of 
Putin's popularity (and his resulting election to the presidency in the Year 
2000) was but a symptom of that shift in public sentiments.


The political situation in Russia, and the human rights situation in 
particular, was especially strongly influenced by four events that took place 
in 1999:


the invasion of Dagestan (an area bordering on Chechnya) by units of Chechen 
fighters (August 1999); 
a series of bomb attacks on apartment buildings in Moscow and other Russian 
cities which resulted in a vast loss of life; 
the spread of hostilities that started in Dagestan moved to Chechnya 
(officially referred to as an "anti-terrorist operation"); 
elections to the State Duma of the Russian Federation.
The invasion of Dagestan by Chechen units inspired a track of thoughts rather 
typical of the Russian mind: there has been an unexpected, utterly unprovoked 
attack – it should be repulsed – the war should be brought to a
victorious 
end. During the Dagestan campaign, the mass media spoke a lot about the 
support given to the federal troops by the local population. Chechen 
fighters' retreat as a result of the Russian army's retaliatory actions 
caused a soar of nationalist sentiments; the troops' success was seen with 
satisfaction as an instance of successful revenge for the defeats suffered by 
the army during the first campaign in Chechnya. The operation, whose initial 
aim was to clear Chechen fighters from the territory of Daghestan, gradually 
developed into a new campaign against Chechnya.


The Russian media and public opinion attributed the bomb explosions in 
Russian cities (whose perpetrators have not been found) to Chechens (as acts 
of revenge for the forcing of Chechen fighters out of Dagestan and for the 
invasion of Chechnya by the Russian federal army). Though dubbed as an 
"antiterrorist operation," the campaign against Chechen separatists came to 
be seen as a "just war." The Russian army and Vladimir Putin (seen by his 
electors as a tough leader capable of bringing about the much-desired order) 
came to enjoy almost unanimous support by the public.


With the situation being so favorable for the Russian army, the hostilities 
developed into mass terror against the entire population of Chechnya. Actions 
by the Russian authorities and the Federal Armed Forces Command in blocking 
access to independent information on the developments in Chechnya were, in 
fact, conducive to such mass terror. Military censorship would prevent 
publication not only of information on mass atrocities committed by the 
federal troops, but also the true figures concerning the federal troops' 
losses. The Russian media did not make any noticeable protest against being 
illegally deprived of access to information and of the right to spread 
information on developments in Chechnya (and on certain developments 
elsewhere). Moreover, many Russian mass media bodies clearly introduced 
stricter self-censorship. Even pro-democratic political parties, such as the 
"Union of the Right Forces" (SPS), expressed their support of the federal 
troops' actions, though with some reservations.


Many a region in Russia saw the soaring of anti-democratic trends. That 
process became particularly obvious during the elections to the State Duma, 
with regional leaders openly supporting certain candidates (which is 
forbidden under the law). Regional leaders showed their endorsement by giving 
administrative support to their candidates, blocking their rivals' campaigns, 
"persuading" election commissions to deny registration to some of the 
candidates or de-register those registered at an earlier date, and ignoring 
breaches of election laws made by candidates that were to their liking.


The press was subjected by the authorities to even heavier pressure than 
before (which is hardly surprising considering the very important role that 
the media play in election campaigns today). The media controlled by the 
authorities became less free in expressing their opinion. Quite a few 
independent mass media bodies were put under control or destroyed by 
administrative and financial means.


Also illustrative of the anti-democratic trends was the imposition of even 
stricter (and even less lawful) requirements for compulsory registration of 
tenants and temporary guests, especially in Moscow (a measure used against 
Chechens and other persons coming from the Caucasus). Notably, that move 
caused further expansion of corruption among officers of law enforcement 
organs and local authorities.


Throughout 1999, a tacit, yet, quite purposeful onslaught on various 
non-governmental organizations, in particular, ecological, human rights and 
religious, was observed. Because the activity was similar throughout Russia, 
it seemed to be a systematic campaign. Ever more non-governmental 
organizations failed to qualify for registration or were re-registered. 
Formal, bureaucratic mistakes would be discovered in such organizations' 
documents and the local justice departments would do nothing to help correct 
these. It is also notable that, clearly on purpose, the organizations would 
be informed of having been denied re-registration just before the deadline 
set for re-registration, so the mistakes in the relevant documentation could 
not be corrected on time. Besides, organizations were advised to exclude the 
words "human rights" from their names and "protection of human rights" from 
descriptions of their lines of activity. The authorities' aim was clearly to 
reduce the number of independent organizations so as to free themselves from 
public control and impede the formation of a civic society (the growth of 
which was gained momentum).


The Year 1999 also saw intensified encroachments by law enforcement organs, 
especially of prosecutors' offices and the Federal Security Service, on the 
freedom of conviction and the right to spread information. Particularly 
illustrative in this respect were the cases charge with espionage. After 
dismissal of such cases against active environmentalists (the Alexander 
Nikitin case in St. Petersburg; the cases of Grigori Pasko and Vladimir 
Soifer cases in Vladivostok), the Federal Security Service tried to initiate 
similar proceedings against persons active in other spheres. In particular, 
in October 1999, arms control expert Igor Sutyagin was arrested in Obninsk 
(Kaluga region), on charges of having leaked classified information (in 
reality, he had had no access to the information in question). That same 
month, human rights and anti-militarist activist Dmitri Neverovski was 
arrested, also in Obninsk, on charges of draft dodging. (In reality, he had 
duly reported to the draft office. He did apply for being assigned to 
alternative service instead of service in the armed forces, but he had the 
perfect right to do so under provisions of Article 59 of the Constitution of 
the Russian Federation.)


1999 also brought with it suspension of all effort to carry out the proposed 
judiciary reform (which is vital to establishment of a legal state in 
Russia). Moreover, in the same period, several judges known for their 
outstanding expertise and strict adherence to the Constitution of the Russian 
Federation and the rule of law in general, were banished from the judiciary 
corps, in particular, Judge Olga Strelnik in the Krasnodar region and Judge 
Viktor Mironov in Moscow. There was also an unsuccessful attempt to do the 
same to Judge Sergei Pashin, a brilliant lawyer and co-author of the 
judiciary reform draft.


It is to be noted that in spite of an extremely adverse situation, the human 
rights movement continued to grow fast in 1999. All over the country, new 
human rights organizations sprang up, while the existing ones saw their 
membership grow. Human rights organizations were the most independent and 
unbiased providers of information about mass-scale violation of human rights 
in Chechnya and flagrant contravention of the rights of refugees from that 
region. It was also in 1999 that consolidated Russian human rights movement 
was formed of previously unconnected organizations. Human rights 
organizations from 70 regions of the Russian Federation jointly monitored the 
election to the State Duma. This illustrates the existence in Russia of a 
national network of human rights organizations capable of successful joining 
of their efforts to safeguard Russian citizens' constitutional rights and 
freedoms.


******


#5
Wall Street Journal
October 4, 2000 
[for personal use only] 
A Russian Banker Rebounds By Outfoxing His Creditors
By ANDREW HIGGINS (andrew.higgins@wsj.com)
Staff Reporter of THE WALL STREET JOURNAL


MOSCOW -- As storm clouds gathered over Moscow markets in the summer of
1998, Russia's largest private retail bank, SBS-Agro, made a desperate
telephone call to Goldman Sachs International in London. It wanted to
unload its entire book of dollar-denominated Russian government bonds, with
a face value of $1.2 billion.
Two senior Goldman bond traders rushed to Moscow for secret talks in
Alexander House, a grand riverside mansion lavishly restored for Alexander
Smolensky, a typesetter-turned-Russian banking tycoon. By four in the
morning on Aug. 6, they had a deal to buy the bonds for about $500 million.
"It was probably the most unusual transaction I've ever seen," says the
trader who sealed the deal for the Goldman Sachs Group Inc. unit.


What made it particularly unusual was that SBS-Agro hadn't mentioned an
important detail: It didn't have clear title to the bonds. They had been
pledged to foreign lenders scattered across the globe in so-called
repo-deals. The discovery didn't ruin Goldman's arrangement -- the firm
simply settled with foreign counterparties instead -- but it did reveal the
now-you-see-it-now-you-don't world of Russian banking.


Little involving Mr. Smolensky is ever quite what it seems. Within weeks of
the Goldman deal, which helped nudge already-jittery markets into a nose
dive, Mr. Smolensky seemed a ruined man. The ruble had collapsed, the
government had defaulted on domestic treasury bills, and an insolvent
SBS-Agro, with more than a million depositors and nearly 1,500 branches,
staggered toward oblivion. Besieged by jilted customers and foreign
creditors, Mr. Smolensky retreated behind the high brick walls of his dacha
outside Moscow.


In reality, though, SBS-Agro didn't perish. It merely mutated. "I simply
rearranged everything, that's all," says the 46-year-old tycoon, languidly
puffing on a Camel cigarette in an ornate Moscow office stuffed with
sculpted elephants.


'Dead Donkey Ears'


Thanks to asset shuffles, political muscle and lax supervision, he has
quietly reassembled a big chunk of his former domain into a new empire. He
today says he is "the brains" behind a cluster of "new" banks stretching
from St. Petersburg to Vladivostok, nine time zones away, and linked
together by a state-of-the-art Moscow computer complex funded in part by
the World Bank. As for SBS-Agro's foreign creditors, who lost more than $1
billion, he declares they deserve only "dead donkey ears."


Mr. Smolensky's resurrection points to a big problem. Behind shiny
statistics showing a robust postcrash economic recovery in Russia stands a
banking system bereft of trust, focused on short-term fiddles and largely
incapable of mobilizing capital for real investment.


Despite Russia's rocketing oil revenue, nearly 5% annual economic growth
and a nearly balanced budget, its sickly banks are once again "an accident
waiting to happen," says a confidential International Monetary Fund and
World Bank report dated July 28. They jeopardize long-term recovery and
"remain extremely vulnerable to another crisis." Most Russians keep their
money at home. As Prime Minister Mikhail Kasyanov put it recently: "There
have not been banks in the classical sense of the word."


Free Ice Cream


Mr. Smolensky used to sell himself as a man who would create them. And,
until the August 1998 debacle, many foreigners believed him. They scrambled
to lend money to SBS-Agro, formed in 1996 when Stolichny Bank of Savings
took over state-owned Agroprombank. At the end of 1997 -- after a $55
million syndicated loan led by West Merchant Bank Ltd., a $113 million deal
arranged by Chase Manhattan Corp. and a $250 million Eurobond lead-managed
by J.P. Morgan & Co. -- SBS-Agro published its first, and last, glossy
annual report. It boasted of its "benevolent aims" -- free ice cream for
children and lavish donations to the Orthodox church -- and of the "great
trust placed in SBS-Agro by international investors."


Today, Mr. Smolensky derides these same partners as "suffocated by greed."
The state-run Agency for Restructuring Credit Organizations, or Arco, which
is winding down SBS-Agro's affairs, recently told foreign creditors to
expect one cent on the dollar.


Foreign banks never expected all their money, but 10 months of negotiations
with SBS-Agro on pain-sharing produced only acrimony -- and a heap of
unpaid bills to financial advisers, lawyers and accountants. Brunswick UBS
Warburg, hired by SBS-Agro to devise a restructuring plan, quit. The firm,
a Moscow affiliate of Swiss-based UBS AG, is still waiting to get paid in
full.


Russians who entrusted SBS-Agro with their savings fared only a little
better. Those with deposits less than $750 have, after two years of begging
and legal action, gotten much of their money. Tens of thousands with more
in their accounts are still waiting. Mr. Smolensky says his "hair stood on
end" when he saw some had deposited more than $1 million. "They must be
idiots," he says.


But life for Mr. Smolensky is sweet. He cruises around Moscow in a BMW 750
and has a big apartment on Patriarch's Pond in central Moscow as well as
his dacha. He travels between Russia and Europe, flying off to see his
wife, who lives in Austria, and his teenage son, who studied at a private
school in Britain and recently moved into a big house near the London
graveyard where Karl Marx is buried. "Are they supposed to live in the
railway station?" asks Mr. Smolensky.


The prosecutor general and an investigator who last year sought Mr.
Smolensky's arrest in connection with an early 1990s fraud scandal have
both lost their jobs. The sacked prosecutor, Yuri Skuratov, says the
Kremlin told him to drop the case as a gesture of gratitude to Mr.
Smolensky for his help in bankrolling Boris Yeltsin's 1996 re-election
campaign. Kremlin officials have denied that the firing stemmed from
improper influence by Mr. Smolensky or anyone else. Mr. Smolensky says he
received an apology from authorities over the fraud probe.


This summer, a former SBS-Agro executive, Alexei Rasskazov, agreed to
testify on behalf of the European Bank for Reconstruction and Development.
At an arbitration hearing in London, he backed the EBRD in a $34 million
claim against Zoloto-Platina Bank, a key link in Mr. Smolensky's new chain.


An Alleged Beating


A few days after his return to Moscow, Mr. Rasskazov got called to a
meeting in a hotel near the Kremlin. Five beefy men rushed in claiming to
be law-enforcement officers. They beat him, stuffed a gun down his
trousers, threatened jail for illegal firearm possession and forced him to
swallow a white powder planted in his socks, he said in an affidavit
provided to Moscow prosecutors. One of the assailants accused him of being
"very dishonest to Mr. Smolensky," according to the affidavit, and said Mr.
Rasskazov "had forgotten that Mr. Smolensky is very powerful."


In an interview, Mr. Smolensky himself raises the plight of his former
employee -- which hasn't been made public. He denies any involvement and
says police are hunting for Mr. Rasskazov over an illegal gun. Mr.
Smolensky says his onetime colleague "betrayed himself" and is "running
around like an ant." He asks: "Where is Rasskazov and where am I?"


Mr. Rasskazov is now in hiding outside the country with his wife and
teenage daughter. He fled Moscow immediately after the attack, shaving off
his beard to try to disguise his identity. The EBRD, which arranged his
flight, has raised the case with Russia's prime minister. Mr. Rasskazov's
Russian lawyer says Russian law-enforcement officials have told him they
have no quarrel with his client.


An Elder Comrade


Mr. Smolensky, meanwhile, helps guide a financial archipelago extending the
length of Russia -- although exactly who owns the operation is virtually
impossible to establish. He says he doesn't have an ownership stake, and
won't reveal who does. But he makes it clear that he holds considerable
sway over the mostly young former SBS-Agro bankers who now hold the
executive titles at the new banks. "Naturally, they will listen to me … as
a consultant, as an elder comrade," he says, "because I made them myself
with my own hands. This is normal influence."


The most visible vehicle of Mr. Smolensky's resurrection is the First
Mutual & Credit Society, or Pervy OVK. It calls itself "Bank for the New
Millennium" -- a bold boast for an outfit that until last year specialized
in lending to often-bankrupt farms in southern Russia. It was then called
Samaraagrobank, a tiny subsidiary of SBS-Agro. After the 1998 crash, it
changed its name, ditched SBS-Agro as a shareholder, got permission from
the Central Bank to move to Moscow and began devouring its former parent.
It says its balance sheet mushroomed 15 times since last year.


About the only thing it hasn't gobbled up are SBS-Agro's debts.


Pervy OVK now has about 40 branches in Moscow, nearly all located in the
former premises of SBS-Agro, and is run by Mr. Smolensky's nephew, Alexei
Grigoriev, SBS-Agro's former management board chairman. It uses SBS-Agro's
Moscow network of ATM machines, has taken over many of SBS-Agro's big
Moscow clients and even wooed some of its foreign partners. DeltaCredit,
part of the U.S. government-funded U.S. Russia Investment Fund, moved a
small portfolio of mortgage loans it had with SBS-Agro to Pervy OVK.


No Need for Toilet Paper


SBS-Agro depositors are also welcome -- if they agree to forfeit much of
their money. Boris Kolosov, head of a committee of disgruntled depositors,
says he recently got a phone call from Pervy OVK offering a deal: The bank
will give him 15% of his money now on deposit with SBS-Agro if he accepts
Pervy OVK promissory notes for the rest. "I don't need extra toilet paper,"
he says. His committee holds regular protests, shouting "thieves" outside
Pervy OVK's head office -- formerly SBS-Agro's headquarters.


Across Russia the pattern is the same, as previously small regional banks
take over SBS-Agro branches and swell into local banking powerhouses. These
include Siberian OVK east of the Ural Mountains, Northwest OVK in St.
Petersburg, Povolzhskoe OVK in Saratov, Konekagroprombank in the Far East
and Zoloto-Platina Bank in Yekaterinburg. Mr. Grigoriev, Mr. Smolensky's
nephew, sits on their boards. Other former SBS-Agro executives dominate
their management.


Registration filings and other documents show more links. Pervy OVK and at
least five other banks in the new network masterminded by Mr. Smolensky
took on the same four Moscow-registered companies as shareholders: ZAO
Bleisi, ZAO Enfleid, ZAO Riel 2000 and ZAO Skald 99. Each of these
registered in June last year, named the same two obscure Muscovites as
directors, reported a single computer as its founding "capital" and then
issued shares that were promptly sold to four shell companies registered in
Cyprus. One of the directors couldn't be located, and another, who lives in
a run-down Moscow apartment guarded by a big dog, wasn't home.


Modest Quarters


Despite holding large chunks of a sprawling banking empire, the Moscow
companies have uncommonly modest quarters. Three list their address as the
same grubby back-street office of a company that makes stamps. The fourth
is located in an empty brick shack that used to sell vegetables.


Mr. Smolensky denies knowledge of the Moscow or Cyprus shell companies, but
then says he "recommended" the use of such vehicles -- to whom he didn't
say -- because banks "shouldn't have a face. Everything should be quiet,
calm. Money is silent."


In this silence, say creditors, much of SBS-Agro's value has been spirited
away. Assets valued by the World Bank at between 17.59 billion and 20.16
billion rubles, or between $1.1 billion and $1.26 billion, just after the
August 1998 devaluation have since shrunk to around six billion rubles, or
$222 million, according to Arco, the restructuring agency.


Instead of husbanding its cash, SBS-Agro poured money into various
affiliates that have since spun away from the mother bank. "Administrative
expenses" -- largely payments to subsidiaries for property, communications,
security and other services -- more than quadrupled between 1997 and 1998.
So, too, did loans to subsidiaries and other related parties, according to
a report by Arthur Andersen presented to creditors last year.


When Arco finally took control of SBS-Agro late last year, the bank was
still paying millions to former affiliates that, after the crash, had
mutated into separate organizations. Lyudmila Davydova, Arco's deputy
director, says SBS-Agro had an agreement with one of these requiring
quarterly payments of $750,000 for computer data. "There have been many
surprises, very many surprises," she says.


J.P. Morgan Lends a Hand


Everything looked a lot more straightforward back in 1997, when J.P. Morgan
helped SBS-Agro float its Eurobond and prepared a lengthy prospectus
presenting a sleek, forward-looking bank with offices in Amsterdam, Vienna,
Madrid, Dubai and Macedonia, as well as branches across Russia, and even
its own $5 million collection of fine art. A diagram showed SBS-Agro as a
firm center anchoring a plethora of satellites. Solid arrows designated
majority or, in most cases, total ownership.


These arrows have all since snapped. "The bank doesn't directly own many of
its subsidiaries," explained Arthur Andersen in last year's report. "These
subsidiaries are owned by third parties connected with the principal
shareholders." As is often the case in Russian business, it is very
difficult to establish who owns what. Foreign creditors hired private
detectives and made little headway, having been unable to draw any direct
line to Mr. Smolensky.


SBS-Agro Managing Co., set up by the bank in 1996 with the stated aim of
imposing unity on a diverse group, renamed itself Soyuz after the 1998
blowout and began hacking away at links between SBS-Agro and its offspring.
This was easily done: Creditors discovered to their dismay that SBS-Agro
Managing, registered in Kalmykia, a Russian region notorious for lax
supervision, had an option agreement to control all voting shares of each
affiliate at a nominal price.


Scraping the Bones


What had been a compact mass exploded into a mist of independent units. SBS
Property Agency, a subsidiary to which most of the bank's buildings had
been transferred, bolted and last December renamed itself Property, Capital
and Integration Agency. Even the art collection slipped away: "They sold it
to themselves," says Arco official Alexander Voznesensky. Mr. Smolensky
says SBS-Agro didn't truly own any of the property now on the books of
subsidiaries that have since spun off.


"First they took all the meat. Then they scraped off the bones," says Yuri
Parfilov, a retired military scientist who says he has more than $20,000
stuck in frozen ruble and dollar accounts at SBS-Agro. "We get what's left."


Mr. Smolensky's most important asset has been his political clout. In his
office, he displays a framed certificate signed by Mr. Yeltsin thanking him
for his support during the 1996 election campaign. He also won gratitude
from fellow "oligarchs" during Russia's sell-off of state assets. SBS-Agro
acted as financial midwife during the birth of AO Sibneft, a big private
oil company whose big shareholders have included Boris Berezovsky, Russia's
best-known tycoon, and Roman Abramovich, a potent player under both Mr.
Yeltsin and Russia's current president, Vladimir Putin.


When authorities tried to install a temporary administrator to take charge
of SBS-Agro in late August 1998, Mr. Smolensky and Mr. Berezovsky both said
they would lobby to get the order reversed. Sergei Dubinin, then chairman
of the Central Bank, says Mr. Berezovsky bluntly told him to back off. Mr.
Dubinin, a man with many influential critics, was fired shortly afterward.
The temporary administrator, who'd spent his first day of duty shivering in
the rain outside SBS-Agro's locked doors, was removed. Mr. Berezovsky
didn't respond to a telephone call and facsimile seeking comment.


When the central bank then issued an order freezing all SBS-Agro's
operations, Mr. Smolensky again prevailed: The head of the Moscow arm of
the Central Bank revoked the instruction.


Free of outside supervision, SBS-Agro executives set about preparing for
the future. In September 1998, for example, SBS-Agro shifted a valuable
chunk of its loan portfolio to its then-tiny Yekaterinburg affiliate,
Zoloto-Platina bank, Central Bank records show. Zoloto-Platina's books,
previously dominated by modest credits to local industry, suddenly swelled
with the arrival of what had been SBS-Agro loans to AO Sibneft and seven of
its petroleum-related affiliates. It is unclear what SBS-Agro got in return
for these assets, which, including penalties and interest, were at the time
worth more than $100 million. Mr. Smolensky says no loans were moved to
Yekaterinburg and that Central Bank data are incorrect.


Missing Documents


Creditors complain that the Central Bank could have halted the hemorrhage
by swiftly taking control of SBS-Agro from Mr. Smolensky. Instead, it
poured in money, providing him with emergency "stabilization loans" and
other facilities worth more than $450 million. Mr. Smolensky says the money
was used to pay depositors. But while on life-support from the state, say
Arco officials, SBS-Agro continued to play shell games.


On Dec. 31, 1998, loan documents show, SBS-Agro gave its moribund
agricultural-lending arm, Agroprombank, a $750 million "credit." In
reality, says Arco, no money changed hands: The credit was a bookkeeping
ruse to cover SBS-Agro's own gaping financial hole and thus deter
authorities from taking action. SBS-Agro then initiated bankruptcy
proceedings against Agroprombank -- after shifting most of the unit's
buildings to a separate real-estate firm. The liquidator, Vladimir Limonov,
says he can't work out what happened: Too many documents are missing.


By the time the Central Bank finally put Arco in charge of SBS-Agro late
last year, Mr. Smolensky had shifted his energies to new ventures.
Nonetheless, Arco still had trouble getting a grip: Many of Mr. Smolensky's
executives stayed behind. It didn't get its own people in place until early
this year and only recently got access to SBS-Agro's files.


And even now, more than two years after the 1998 debacle, Mr. Smolensky
still holds the key that Arco officials say could unlock details of how
Russia's biggest private retail bank wasted away: He controls all the
computer records of SBS-Agro's past transactions.


"We've got an agreement that this information will be provided," says
Valery Miroshnikov, the Arco official now in charge of SBS-Agro as it
staggers toward liquidation. "But, of course, it is not 100% certain that
this information will be, first of all, complete and, secondly, reliable.
No certainty at all."


Inside 'the Bunker'


At the heart of Mr. Smolensky's new empire stands a walled, tightly guarded
complex with a satellite dish on the roof in northern Moscow. Dubbed "the
bunker," it houses the computers, software and brains that knit Mr.
Smolensky's new nationwide network together.


"Technologically, we have a five-year head start," says Mr. Smolensky. It's
not an idle boast: Pervy OVK and other new banks now provide 24-hour
banking and possess state-of-the art equipment. But much of this
infrastructure used to belong to SBS-Agro. And many of the companies that
provided it haven't been paid.


International Business Machines Corp. sold SBS-Agro seven AS/400 computers
and nearly 900 ATM machines. Midas-Kapiti International, a British
banking-software company, provided it with a sophisticated system to
process transactions across the country. Nortel Networks Corp. of Canada
signed a $25 million contract for communications gear. The Canadian
government's Export Development Corp. granted a $10 million credit. The
World Bank gave its own loans worth more than $7 million to help SBS-Agro
develop its technical infrastructure.


This high-tech rapture has since become an agony of low blows. After the
1998 crash, SBS-Agro reneged on payment guarantees. SBS-Leasing, a
subsidiary that signed many of the contracts, morphed into a separate
organization. A sign outside the computer complex marking a branch of
SBS-Agro vanished, replaced by big red letters reading Pervy OVK. Inside,
names also changed. What had been SBS-Agro's processing system mutated into
the United Settlement System, or USS.


Zhana Alexandrova, USS's deputy director, says "there are certain
parallels" with SBS-Agro, but "this is a new company" that has only had a
license for a year. In many ways, though, USS is merely the new guise for
what SBS-Agro left behind. Rental agreements show that USS rents the
massive computer complex from SBS-Agro's former property agency. USS is
controlled by STB-Card, SBS-Agro's former credit-card processing company.
STB-Card, in turn, now has four of Mr. Smolensky's "new" banks as its main
shareholders, says Valery Pershin, who runs the card company. Presiding
over this structure as STB-Card's chairman is none other than Mr. Smolensky.


IBM and Nortel, who helped equip the computer complex, are still struggling
to get many of their bills paid. Software provider Midas-Kapiti hasn't
received its annual license fee for three years. Canada's EDC has joined
the queue of more than two dozen jilted creditors hoping for some payment,
including Chase Manhattan Bank, Deutsche Bank, Banque Societe Generale,
Bank of America Corp., Lehman Brothers Holdings Inc. and the EBRD. Mr.
Smolensky says that the debts aren't his responsibility, and that creditors
owed money by SBS-Agro should take their complaints to the Russian
government, which he says created the 1998 financial crisis.


Western banks grumble bitterly in private but, exhausted and embarrassed by
the SBS-Agro fiasco, shun public complaints. Says one banker: "It's like
being a Nazi hunter: You have to dedicate your whole life to it. Life's too
short."


A raw, self-made man who, in the twilight of the Soviet Union, moved from
printing to construction and then into banking, Mr. Smolensky has
repeatedly outfoxed his foes. Any creditor who tries to press its claim
against Pervy OVK or other parts of his new domain will "get bashed around
the ears automatically," he says: "We'll take care of them … I don't mean
physically, though this tends to be easier, but we'll deal with them in
court."


The government, meanwhile, acknowledges that Russia's banks are a mess and
pledges action. An economic-policy blueprint drafted by a think tank
closely linked to the government and endorsed by President Putin sets
banking reform as an urgent priority and calls for legislation to "enhance
the personal responsibility" of managers and owners for the "financial
status of their banks."


The think tank's choice of office space, however, has raised skeptical
eyebrows. It does its thinking in Alexander House, the SBS-Agro building
where Goldman Sachs negotiated the August 1998 bond deal.


Like most of the bank's properties, it now has murky new owners. Arco says
the building, tossed between various subsidiaries in convoluted deals, has
been owned at various times by SBS-Agro in Moscow, its property agency and
its subsidiary in Macedonia, which was recently itself sold to unnamed
"minority shareholders" registered in Cyprus and elsewhere.


Arco officials say they've lost track of who owns Alexander House now.


Before the think tank moved in, Alexander House boasted an even more
distinguished tenant: Mr. Putin's campaign staff. On election night in
March, Mr. Putin appeared there to celebrate his victory. There is no
evidence that Mr. Smolensky enjoys close relations to Mr. Putin's Kremlin,
and campaign staffers have said they paid a market rent on the building.
Still, Mr. Smolensky crows about the episode. "I supported Putin. He went
to the Kremlin from my building," he says. "I don't owe anybody anything. I
can now do what I want to do. Finally, I'm free."


******