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1999 In Review: Corruption Issue Fades

Corruption in Russia is an old story. What was new during the past year was the suspected laundering of Russian money through a U.S. bank and a criminal probe that included Russian President Boris Yeltsin. RFE/RL economics correspondent Andrew Tully looks at these two developments.

Washington, 30 December 1999 (RFE/RL) -- When the scandal surrounding suspected Russian money-laundering broke in August, the Western world took notice.

Because the revelations involved the Bank of New York, the U.S. Congress decided to investigate. Committees heard from senior U.S. government officials, members of the Russian Duma and experts. But since late October, the subject seems to have been forgotten.

The scandal came to public notice on August 19 when The New York Times reported that about $4.2 billion was "laundered" through the Bank of New York from October 1998 through March 1999. Since then, the amount has been widely estimated at between $10 billion and $15 billion.

There is even suspicion that money loaned to Russia's Central Bank was stolen and laundered. But there is yet no evidence of this. It also remains unclear how much money was actually laundered, and how much was only transferred to avoid payment of taxes in Russia. That is different than money laundering, which is the criminal transfer of illegally earned funds through many bank accounts until its source appears legitimate.

Yeltsin himself is not directly implicated in any suspected money-laundering, but is suspected of unrelated financial wrongdoing. Prosecutors in Switzerland are investigating whether he received about $1 million from the Swiss construction company Mabetex, which won a rich contract to renovate the Kremlin and other government buildings. One of his daughters, Tatyana Dyachenko, and her husband also have been mentioned in the investigation. Yeltsin has denounced the reports as being generated by political opponents.

The growing interest in corruption in Russia has put the administration of U.S. President Bill Clinton on the defensive. Clinton has sought to take the positive approach of "engagement" with Russia.

The issue is particularly sensitive for U.S. Vice President Al Gore, who is campaigning to be elected president in 2000. Gore has been closely involved in developing U.S.-Russia policy and is a co-chairmen of the U.S.-Russia Bilateral Commission. His political opponents accuse the vice president of ignoring the corruption issue.

Strobe Talbott is the U.S. State Department's leading authority on Russian affairs. In September, he told a hearing of the U.S. Senate's Foreign Relations Committee that the administration is not ignoring corruption, and he advocated further engagement with Moscow.

"The issue of corruption has been very much on the agenda of U.S.-Russian relations at all levels, including at the level of President Clinton with President Yeltsin, and certainly [former Russian Prime Minister Viktor] Chernomyrdin, for quite a number of years."

The chairman of the committee, Senator Jesse Helms, an outspoken critic of the president, spoke out at another hearing where Talbott appeared. Helms, a member of the Republican Party, accused the administration of distorting the options of how to help Russia.

"The administration's defense is [that the] alternative to looking the other way was to abandon our policy of engagement with Russia. I contend that the opposite is true. By not pressuring Russia's leaders to expunge corruption, the United States has led the Russian people to lose faith in market economies and democracy."

The debates raged, but abruptly vanished by late October. Perhaps the attention of Congress was diverted by the effort to draft a budget, or by Russia's military campaign against Chechnya.

Or perhaps the issue of Russian corruption had exhausted itself. Since mid-September, there has been little new information on the subject. Until new details emerge, interest in corruption likely will remain dormant, at least in the U.S.

But Robert Dunn, a professor of economics at George Washington University in Washington, says the topic will remain important where it matters most -- in Russia itself. And he says the U.S. Congress is not the body where the issue should be investigated.

"No, I don't think it's the correct one. I would hope that the executive boards of the IMF and the World Bank would be where you would start. And you'd do this quietly and inside; you don't do it in public and embarrass a lot of people, some of whom may in fact turn out to be innocent."

Dunn says it is up to the IMF and World Bank to carefully monitor the money they loan to Russia. Such loans must be paid back eventually, whether the money is used properly or stolen. Therefore the real losers, he says, will be the Russian people themselves.

The current manifestations of corruption in Russia was the subject of testimony by Fritz Ermarth, a former official of the U.S. Central Intelligence Agency who also has served on the White House's National Security Council. He testified in early October before the Banking Committee of the U.S. House of Representatives.

"What we call economic reform in Russia has really not created the market economy or capitalism that most hoped for. Rather, it created a kind of crony capitalism without much capitalism, or I'd call it 'phony crony capitalism,' where insider privatization in alliance with corrupt officialdom has produced a system dominated by a few powerful individuals or entities who strip wealth out of the country and send it abroad, rather than investing to create wealth and prosperity at home."

Ermarth is far from alone in holding the view that corruption in Russia is prevalent. Many analysts are arguing that this is turn is damaging both Russia's economy and its young democracy.