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East: High-Level Fraud Prevalent In Russia, Former Soviet Bloc

  • Askold Krushelnycky

Earlier in our series on the pervasive corruption in post-communist nations, we examined the small time bribery and fraud that are part of these countries' daily life. In this part, RFE/RL correspondent Askold Krushelnycky looks at some of the biggest money-making schemes devised in the post-Communist countries.

Prague, 4 September 2000 (RFE/RL) -- Countries with authoritarian leaders and under rigid state control provide the best breeding grounds for large-scale corruption that ends up in criminalizing government. States fitting this model include Russia, Ukraine, Belarus, and some Central Asian nations. These are countries where a head of state can at best dictate the law and at worst considers himself above the law.

In such countries, the president -- or those close to him -- can decide who acquires state assets at give-away prices, who gets permission to import or export goods, who controls gas and oil production or supply, who can set up a bank. The deciders can distribute favors worth billions of dollars. They are often rewarded, in money or in kind, for their favors.

Peter Reddaway, a Washington-based Russia affairs specialist, is the author of a forthcoming book on corruption titled, "The Tragedy of Russian Reforms: Market Bolshevism Against Democracy." He believes that the corruption of Russias top political leadership occurred very early during the rule of President Boris Yeltsin.

"One of the themes that [the book looks] at over the 10 years of the Yeltsin regime is how leaders of the regime were corrupted by, in particular, the so-called oligarchs -- the business leaders who were skillfully manipulating the political system and corrupting politicians, and in that way getting enormous financial favors [for] themselves from the government -- and at the same time [had] also a very significant influence on the making of government policy."

Reddaway says flatly that the Yeltsin family was corrupted by Boris Berezovsky, working on behalf of himself and other oligarchs, by accepting money and expensive gifts that placed the family in Berezovskys grip for fear he might reveal the corruption. That, Reddaway says, paved the way for massively corrupt purchases of state-owned assets at cheap prices in rigged auctions.

The privatization of the energy sector -- oil, gas and their transportation and supply -- occurred in 1994 and 1995. At the time the giant natural gas monopoly, Gazprom, was valued by Western experts at more than $250 billion. The official Russian valuation before its sell-off was only $298 million. Similarly, the huge Norilsk Nickel company, which deals in valuable metals, was drastically undervalued.

In 1996, when Yeltsin was in danger of losing that year's presidential elections, he received huge amounts of financial and other forms of support from the oligarchs. They were rewarded in loans-for-shares deals, under which bankers and oligarchs ostensibly made loans to the state in return for shares in state-owned enterprises bought far more cheaply than their real value

Another specialist in Russian affairs, Victor Yassman of he American Foreign Policy Council, also blames Yeltsin and his entourage for the corrupt selloffs of Russia's valuable natural resources.

"In the last year of the Yeltsin regime, Yeltsin and the Kremlin and his entourage cared more about their political power than [anything] else. [There were] no, actually, efforts to challenge corruption."

Corruption scandals from the Yeltsin era today continue to dog his successor, President Vladimir Putin. The biggest of them involves allegations that most of a $4.8 billion loan made by the International Monetary Fund (IMF) to Russia two years ago was used by Moscow's Central Bank to save oligarchs and other favored individuals or companies from the looming financial crash that devalued the ruble.

There is evidence that most of the IMF loan never reached Russia and that much of the cash went straight into the foreign accounts of the lucky few. Much of the money probably made up some of the $7 billion of cash from Russia revealed last year to have been laundered through the Bank of New York. There were allegations, too, that Russias central bank -- in related affair called the Fimaco scandal -- transferred large amounts of IMF money abroad and used it for speculation.

Another scandal left over from the Yeltsin years involves Kremlin officials who allegedly received big kickbacks from a Swiss-registered company they employed to carry out hundreds of millions of dollars worth of repairs on Kremlin and other state-owned property. Swiss authorities have issued an arrest warrant for a close associate of Yeltsin, Pavel Borodin, who was in charge of negotiating the lucrative repair contracts.

Analyst Reddaway says that Western governments and financial institutions like the IMF were aware of rampant corruption at the highest levels of the Yeltsin administration, But he says the West ignored the evidence because it chose to believe Yeltsins warnings that he was the only alternative to a resurgence of communism not only in Russia but throughout the region.

"It became a top priority of the West to keep Mr. Yeltsin in power at any cost. Once you get that mind-set, that policy, it's not surprising you want to turn a blind eye to evidence of corruption."

Reddaway notes that international loans are fungible, meaning they are not traceable.

"The trouble with money loaned the way the IMF does it is that that money is completely fungible, to use the semi-technical term. Once the Russian government has got its hands on it there is ultimately no check on how it is used."

Viktor Gitin, a long-time member of the democratic Yabloko Party -- and former head of the State Duma's budget and finance committee -- said it will be impossible to prove that the IMF loan was corruptly used.

"You'll never be able to prove this. You know why? Because money is like water. You have a pool and several tubes are dripping water into that pool. When water drips into that pool and then drips out through some tap -- the [drops] of water are mixed with the rest. So to prove that it's precisely that dollar (and not another) that left Washington and then ended up in some off-shore zone, is very difficult."

Gitin said that the Kremlin kickbacks scandal was a dramatic version of a common method used by people in influential positions to steal money from the taxpayer and government. He says this is how it works: First, a foreign-registered company bidding for the contract with the government agrees to inflate its estimates for the cost of work or equipment, and share the profits with the person in charge of placing the contract. Then, the money for the work is provided by a foreign bank as a loan to the Russian government, which is in principle obliged to repay the loan eventually.

But most of the money from the foreign credit line never even enters Russia. That's because the corrupt partners place in overseas accounts a sum equal to the difference between the prices stated in the contract and the real cost of the work.

Another method used by some of the most successful new post-communist businessmen is that of hidden privatization schemes, common in most transition economies since their transformation to a free market began. In brief, this form of corruption can be described as the uncontrolled privatization of a state firm's profitable activities by members of the ruling elite themselves.

Here's how this scheme works: Well-connected managers of state firms either start their own private companies or establish links with other private interests to take over the more lucrative trade operations of a state firm. These private trading companies profit by selling raw materials at high prices to the state firms. They also sell the state firm's finished products at a hefty markup.

Meanwhile, the state companies continue to register losses, and receive little investment capital to increase productivity or the salaries of workers. Without efficient bankruptcy mechanisms, these ailing state firms then simply pass their losses along to the state budget. That means budget funds that could be used for social programs, or to pay pensions and teachers' salaries, instead keep corruption schemes afloat.

In Bulgaria during the mid-1990s, this problem was so severe that it brought the country's economy to the brink of collapse. But despite the clear lessons of the Bulgarian example, hidden privatization schemes continue in other parts of Eastern Europe.

Belarus is a prime example. Authorities there are investigating the apparent contract killing last month (August) of Vladimir Zapolsky, director general of the state-run glass factory Gomelsteklo. Investigators say the murder may have been ordered by those trying to retain undercover control of Gomelsteklo's trade operations.

Since Zapolsky took the management post in 1998, he reportedly tried to bring an end to the high prices the firm was paying to private firms for raw materials. He also tried to stop the sale of Gomelsteklo's finished products by intermediaries, who take the lion's share of profits from exports while the company itself struggles to repay its loans.

In the next part of our series, we look at possibly the most dangerous form of post-communist corruption: when ambitious businessmen, criminals, and senior politicians combine to profit from their own country.

(Moscow correspondent Sophie Lambroschini and RFE/RL's Ron Synowitz contributed to this report.)