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13 September 1999updated 30 Aug 2021 7:45am

Boris, blondes and big, big bucks

Don't ignore the corruption in Russia, advises Anne Applebaum.

By Anne Applebaum

In the past few weeks, you probably haven’t read much about corruption in Russia. Unless you are especially keen on the foreign sections of the newspapers (good piece on page 14 of the Times last week), you might not have noticed that the solid and respectable Bank of New York is accused of laundering $10 billion of Russian criminal money; that the Russian Central Bank is now believed to have been speculating with even more billions of Russian government and IMF loan money; or that Boris Yeltsin and his family stand accused of taking bribes from another Swiss-based company owned by an Albanian. Among other things, the aforementioned Albanian is alleged to have paid the credit card bill of Tatyana Dyachenko, the president’s daughter, during a recent visit to Budapest. The bill ran to tens of thousands of dollars.

As I say, you probably haven’t noticed any of this because, being British, you aren’t very surprised by any of it, your newspapers aren’t making much of it, and besides, you don’t think it has anything to do with you. The things those foreigners get up to, you say, shaking your head disapprovingly. But if the words “Russian corruption” sound exotic to you, if they make you think of slick “biznismen” driving top-of-the-range Mercedes, Georgian bodyguards with shaved heads and Versace shirts, or dyed-blonde women tipping waiters with $100 bills in Riviera resorts, then think again. Go and look in the mirror: many of the people responsible for corruption in Russia look quite a lot like you.

To begin with, quite a lot of them work near you, here in the west, since quite a lot of that corruption actually takes place in the west, using our loopholes, our tax havens, our shell companies. The Russian Central Bank was speculating with the Russian state foreign reserves – and possibly IMF money as well – via a company called Fimaco, based in the Channel Islands. A Russian businessman, Semyon Mogilevich, was shuffling money of suspicious origin – upwards of $10 billion, possibly also including IMF money – through the Bank of New York, partly using its London office, apparently without anyone noticing. And since the FBI began investigating, the Bank of New York has suspended two of its employees: both women, both top bank executives, both married to Russians. One, Natasha Kagalovsky, is the wife of Konstantin Kagalovsky, former Russian delegate to the IMF. The other, Lucy Edwards is married to the Russian director of Benex International, a London-based company connected to Mogilevich. Ms Edwards works – or worked (she has been sacked for “gross misconduct”) – in distant, faraway Canary Wharf. British solicitors have been arrested. British bank accounts have been frozen.

More interestingly, at least a chunk of the money being spirited out of Russia is, one way or another, our money. Since 1992, the IMF, an institution funded by western governments, has lent Russia $21 billion, of which about $16 billion remains unpaid. Even if that $16 billion didn’t all disappear directly into offshore bank accounts, figuratively it did. For example: in 1996, the IMF made a payment of $3.5 billion to Russia that arrived magically in the middle of the presidential election campaign. The money went straight into the federal budget, which was deeply in deficit because Russian billionaires don’t pay taxes, preferring to keep their money in places like the Channel Islands. Thus was the government able to pay back-wages in the months leading up to the election. Thus did Boris Yeltsin win the election campaign.

Then there is the small matter of food aid, an extremely expensive mistake that we made not once, but twice. In 1991 and 1992 we sent grain to Russia, and were shocked and horrified to discover that much of the grain didn’t feed starving people, and much of the money went missing. Then, last year, with eyes wide open we did it again: this time the $1.1 billion of aid was distributed by “private companies”, which in Russia means sluggish, semi-private companies stuffed with former Agriculture Ministry bureaucrats. Now an audit has shown that revenues have gone missing: surprise! If we knowingly give aid in a way that we are certain will produce corruption, aren’t we jointly responsible for that corruption, too?

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But then, such things have happened before. Since Russia’s economic reforms began in 1992, western governments, western financial institutions and western advisers have been involved at every stage. And at every stage, special exceptions have been made for the Russian case: rules have been bent, heads have been turned, eyes have looked the other way. Leave aside the extremely interesting question of whether our advice was any good: look, for the moment, at how it was treated. Speaking to the Russian parliament in January 1992, Yegor Gaidar – now fondly remembered as the most pro-western of all the post-communist finance ministers – complained that the IMF’s financial targets would be “cruel and inhuman” to meet. Later, in April, Yeltsin also complained that the IMF’s requirements were too strenuous: “This is normal credit and you cannot force us to our knees,” he told journalists. “Russia is a great country and we will not permit such a thing.”

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Thus was a special type of loan invented for Russia: the “systemic transformation facility” was a programme that enabled the Fund to lend money to countries unable to stick to the usual rules. Normally, the Fund’s Moscow representative told me in 1993, “you can’t count on the assistance of the international community unless you try harder” to reduce inflation and cut subsidies, but in the case of Russia, “a commitment to continue with market reforms” would be considered good enough.

But it’s hard to blame everything on the poor old IMF. For behind all of the IMF’s financial decisions were politicians who ought to have known better. Or perhaps did know better. It depends how you interpret their actions.

Consider, for example, the history of the Gore-Chernomyrdin commission, an interesting extra-governmental body set up by the vice-president of the United States and the man who was then Russia’s prime minister. Intended to demonstrate the vice-president’s foreign policy expertise, it mostly gave itself over to pompous press conferences; watching one, a friend of mine commented, was like “watching Gore beg Chernomyrdin for a job”, so fulsome was Gore’s praise. And Gore stuck by his friend. Never mind that Chernomyrdin was well known in Russia as the front man for Gazprom, the company miraculously created out of what used to be the Soviet Ministry of Gas; never mind that he, too, is suspected of stashing billions into Swiss banks; never mind that the CIA was at that time producing reports linking Chernomyrdin to other forms of corruption. On receiving one such report, the vice-president is alleged to have scrawled what Americans call a “barnyard epithet” on the top (“bullshit”) and sent it back.

Or consider another anecdote, repeated last week in the Washington Post. From 1993, the CIA had been watching a Russian businessman, and monitoring the affairs of his Vienna-based company, suspected of money-laundering. Imagine, then, the surprise of James Woolsey, CIA director, when he saw a photograph of said businessman shaking hands at a fundraiser with President Clinton. Imagine how much greater was Woolsey’s surprise when he found that, despite warnings to the president’s advisers, the man was invited to another fundraiser in 1995. Alas, the State Department refused him a visa, so his attempt to contribute to the Democratic presidential campaign was thwarted.

We watched and nurtured “reform” in Russia. We knew that state companies were being taken over – stolen, rather – by a small group of well-connected businessmen: we called this “nomenklatura capitalism”, and said, sagely, that it represented a logical transfer of funds from the state to the private sector. We knew that Yeltsin and his entourage were condoning this theft, even when not directly involved themselves. Yet we continued to embrace Yeltsin as a democrat, his corrupt henchmen were labelled “young reformers”, and we offered him moral and financial support, billions of dollars’ worth.

All of this went on at a time when any ordinary, untrained observer could see that, despite the rhetoric, things weren’t happening the way they were supposed to be happening. I am not an economist, not a “Russian expert”, not even a Moscow correspondent, just an occasional visitor to Russia who talks to ordinary people there. And ordinary people – businessmen, shopkeepers, the proverbial taxi-drivers – knew that the system being created in the wake of the collapse of the Soviet Union did not resemble western capitalism, that large quantities of money were being stolen all of the time from state enterprises both large and small, that Chernomyrdin, Boris Berezovsky, one of Yeltsin’s closest advisers, the lot of them were not businessmen in the ordinary sense of the word. Ordinary people knew that. I knew that. Why didn’t Al Gore, Bill Clinton, John Major and Helmut Kohl know it?

Naivety is one explanation: the Russian leaders said they were “reformers”, our leaders believed them. Poor information is another: if the president talks only to his ambassador and his ambassador talks only to Yeltsin, then the president might not receive the most accurate picture of events. Blackmail is yet another, more plausible explanation. Even in public, the Russians sometimes use vaguely threatening language, implying crisis, chaos, nuclear Armageddon if they don’t get their money.

Then there are the conspiracy theories, multiplying thick and fast on the ground in Moscow. A former central European ambassador to Moscow estimates that Yeltsin and his entourage have exported $50 billion out of Russia in the past decade. As this man is a former communist, he might be expected to know. If this is true – and other estimates put total capital flight much higher – then there is quite a lot of money sloshing about the world, quite a lot of money to launder, quite a lot of money to use, say, to make campaign contributions.

Where did it all go? And do you live next door to someone who got a slice of it?

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