11 L/ 

1

:7-;// e //6 ; R '7 d/ :;;/Pr, 2-JI 

U.S. POLICY TOW ARD RUSSIA, PART II: 

CORRUPTION IN THE RUSSIAN GOVERNMENT 

HEARING 

BEFORE THE 

COMMITTEE ON 

INTERNATIONAL .RELATIONS 

-HOUSE OF REPRESENTATIVES 

ONE HUNDRED SIXTH CONGRESS 

FIRST SESSION 

-,THURSDAY, OCTOBER 7, 1999 

Serial No. 106-76 

Printed for_ -the use of the Committee on International Relations 

62-963 cc 

MEMORIALllB 

DEPOSITO 

APR 2 8 2000 

ITEM # 1617--lf-tJ 1 

SUNY CORTLAND 

U.S. GOVERNMENT PRINTING OFFiCE 

WASHINGTON : 2000 

For sale by the U.S. Government Printing Office 

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 

ISBN 0-16-060417-6 
COMMITTEE ON INTERNATIONAL RELATIONS 

BENJAMIN A. GILMAN, New York, Chairman 

WILLIAM F. GOODLING, Pennsylvania SAM GEJDENSON, Connecticut 

JAMES A. LEACH, Iowa TOM LANTOS, California 

HENRY J. HYDE, Illinois HOWARD L. BERMAN, California 

DOUG BEREUTER, Nebraska GARY L. ACKERMAN, New York 

CHRISTOPHER H. SMITH, New Jersey ENI F.H. FALEOMAVAEGA, American 

DAN BURTON, Indiana Samoa 

ELTON GALLEGLY, California MATTHEW G. MARTINEZ, California 

ILEANA ROS-LEHTINEN, Florida DONALD M. PAYNE, New Jersey 

CASS BALLENGER, North Carolina ROBERT MENENDEZ, New Jersey 

DANA ROHRABACHER, California SHERROD BROWN, Ohio 

DONALD A. MANZULLO, Illinois CYNTHIA A McKINNEY, Georgia 

EDWARD R. ROYCE, California ALCEE L. HASTINGS, Florida 

PETER T. KING, New York PAT DANNER, Missouri 

STEVE CHABOT, Ohio EARL F. HILLIARD, Alabama 

MARSHALL "MARK" SANFORD, South BRAD SHERMAN, California 

Carolina ROBERT WEXLER, Florida 

MATT SALMON, Arizona STEVEN R. ROTHMAN, New Jersey 

AMO HOUGHTON, New York JIM DAVIS, Florida , 

TOM CAMPBELL, California EARL POMEROY, North Dakota 

JOHN M. McHUGH, New York WILLIAM D. DELAHUNT, Massachusetts 

KEVIN BRADY, Texas GREGORY W. MEEKS, New York 

RICHARD BURR, North Carolina BARBARA LEE, California 

PAUL E. GILLMOR, Ohio JOSEPH CROWLEY, New York 

GEORGE RADANOVICH, California JOSEPH M. HOEFFEL, Pennsylvania 

JOHN COOKSEY, Louisiana 

THOMAS G. TANCREDO, Colorado 

RICHARD J. GARON, Chief of Staff 

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff 

MARK GAGE, Professional Staff Member 

JILL N. QUINN, Staff Associate 

,: ', i I, 

': ;', ..,., ,t 

(II) 
CONTENTS 

WITNESSES 

Mr. Richard Palmer, President, Cachet International, Inc., U.S. Central Intelligence Agency, Retired ....................................................................................... . Mr. Keith Henderson, Co-Director, Trans-National Crime and Corruption 

Center, American University, Former Senior Adviser on Rule of Law, 

Crime, and Corn1ption, U.S. Agency for International Development ............. . Mr. David Satter, Visiting Scholar, Johns Hopkins School for Advanced International Studies, Senior Fellow, The Hudson Institute ................................... . Mr. Matthew Murray, President, Sovereign Ventures, Inc ................................. . The Honorable Konstantin Borovoi, Deputy, Russian State Duma, Chairman, 

Economic Freedom Party .................................................................................... . 

APPENDIX 

Prepared statements: 

The Honorable Benjamin A. Gilman, a Representative in Congress from New 

York and Chairman, Committee on International Relations .......................... . 

· ThNe!°.J~~!~1(Incl=~f~;;e!!~~1:i~.' ... ~ .. ~.~~~~.~~~~~~~ .. ~ .. ~~~~~~.~ .. ~~ Mr. Richard Palmer ................................................................................................ . Mr. Keith Henderson .............................................................................................. . Mr. David Satter ..................................................................................................... . 

~!i>!l;~~':t!1:I:tlo;;;;~i·::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: 

Additional .material submitted for the record: 

Statement by Professor Lynn Nelson of Virginia Commonwealth University, 

E:~*it::C~Yn!~).fi~~!i~~~~~~~;;··~r·o~-i;,1;~;··a:··1999:··;iih··;;r: 

erenced e-mail attached, submitted by Representative Campbell .................. . 

(III) 

Page 

4 

7 

11 

14 

17 

34 

94 

36 

49 

72 

75 

83 

87 

92 

U.S. POLICY TOWARD RUSSIA, PART II: 

CORRUPTION IN THE RUSSIAN GOVERNMENT 

Thursday, October 7, 1999 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON INTERNATIONAL RELATIONS, 

Washington, D.C. 

The Committee met, pursuant to call, at 10:15 a.m., in Room 

2172, Rayburn House Office Building, Hon. Benjamin A Gilman 

(Chairman of the Committee) presiding. 

Chairman GILMAN. The Committee will come to order. 

I have no doubt that the corruption within the Yeltsin government and within Russia is extensive. Our hearing this morning will 

seek to assess just how widespread that corruption is, and how 

high it goes. I suspect that it goes to the top of the Russian government. I will cite just a few cases and reports that would lead one 

to that conclusion: · The Swiss investigation into the financial links between top 

Kremlin staff and President Yeltsin's · family and a little-known 

Swiss company called Mabetex. 

The Swiss investigation into links between the Russian airline 

Aeroflot, whose vice president is President Yeltsin's son-in-law, and 

Swiss companies set up by Russian tycoon Boris Berezovsky, to 

which Aeroflot's hard currency revenues have been diverted. 

A decree issued by Mr. Yeltsin in the early 1990's granting a 

sports foundation set up by a close friend an exemption from export 

and import taxes that, in turn, allowed that foundation to retain 

an estimated $4 billion or more that would otherwise have gone to 

the government in tax revenues. 

As reported in a comprehensive review by U.S. News and World 

Report magazine, an investigation was begun by our FBI in 1994 

into the activities of a company called Golden AD.A, which was 

set up by a top official and a close associate of President Yeltsin's 

in San Francisco. After its establishment, that company shipped 

tens of millions of dollars worth of diamonds, gold, and antiquities 

out of the so-called "Kremlin vaults" and sold them, with the 

money allegedly disappearing into high-priced real estate and foreign bank accounts. 

The 1996 arrest of a top aide in Yeltsin's re-election campaign 

who was caught leaving the Russian Government House in the 

company of a reputed Moscow Mafia figure and holding half a million dollars in cash in a briefcase, an arrest that never resulted in 

any prosecution. 

Then the notorious "loans for shares" privatization program of 

1995 and 1996, under which the crown jewels of Russia's oil and 

(1) 
2 

metals companies, such as Sidanko and Norilsk Nickel, were sold 

to Russia's tycoons for a mere pittance. 

Then there were allegations linking a former Yeltsin government 

representative at the International Monetary Fund to the ongoing 

investigation into the possible · laundering of billions of dollars of 

Russian moneys through the Bank of New York. 

We have also learned recently of the use, by the Russian Central 

Bank's top officials, of an offshore company called FIMACO for financial purposes that may yet not be fully understood. 

Then the alleged massive corruption in the Russian military that 

cost the lives of, first, a young reporter and, second, a member of 

the Russian parliament, both of whom sought to bring that corruption to light. 

I should note that this is by no means a full or comprehensive 

list. 

But let me turn to another question we should be considering. In 

a hearing this Committee held yesterday, one of our witnesses, a 

former analyst for our intelligence community, stated his suspicion 

that there may be American partners having some self-interest to 

make certain that IMF moneys continue to flow to Russia, as Russian moneys are siphoned out of its government and economy and 

into western banks and accounts. That suspicion is something we 

should be looking at with great concern. 

As our Members may know, our Department of Justice is now investigating allegations that personnel of a top AID contractor in 

Russia, the managers and overseers of our U.S.-financed privatization program in that nation, engaged in personal investment activities while carrying out their work for our government in Russia. 

In 1996, before that Justice Department investigation began, I 

commissioned an investigation by the United States General Accounting Office into the work of those managers in Russia out of 

concern that the Administration may have channeled $40 million 

in noncompetitive grants to them. As the Justice Department's investigation was beginning, we also asked the GAO to look into the 

activities in a key subgroup of the Gore-Chernomyrdin Commission 

of one of those allegedly under investigation by AID and Justice. 

At the request of the Justice Department, however, we later suspended that GAO investigation. 

I now note, however, that press reports have alleged that another 

American under investigation in this matter by Justice has been 

named in a lawsuit that alleges that a pricing conspiracy was organized to siphon off millions of dollars from a Russian company into 

offshore accounts. 

I mention this matter today because I believe we should be interested and willing to learn whether we have not just a Russian corruption problem, but whether, in fact, there may be something of 

an American problem as well. 

As one Russian analyst has stated, it is interesting that one 

American firm managed to obtain over 10 percent of the vouchers 

that were issued under the Russian privatization program set up 

with American assistance in the early 1990's. The question is how 

such things have come to pass. 

[Prepared statement of Chairman Gilman appears in the appendix.] 
3 

Before I recognize our Ranking Minority Member, Mr. Gejdenson, for any opening remarks he might like, to make, I would like -to briefly introduce our dist_inguished panel of witnesses. 

First, we will be hearing from Mr. Richard Palmer, who is retired 

from the U.S. Central Intelligence Agency Operations Directorate. 

His last assignments for the agency were in the region of the 

former Soviet Union. 

Our next witness, Mr. Keith Henderson, is Co-Director of American ·University's Transnational Crime and Corruption Center, and 

served as the U.S.- Agency for International Development's Senior 

Adviser on Rule of Law, Crime and Corruption, with the Agency's 

Bureau on Europe and the. Independent States. 

Our third witness, Mr. David Satter, is a-visiting scholar at the 

Johns Hopkins School- for Advanced International Studies, Senior 

Fellow at the Hudson Institute, and has written extensively on the 

issue of corruption in Russia. \ 

Our next witness, .Mr. Matthew Murray, is the President of the 

firm Sovereign Ventures, which has offices in Washington, DC and 

St. Petersburg, Russia. 

Finally, our last witness, Mr. Konstantin Borovoi, is a member 

of the Russian. parliament whom I am pleased is able to be here 

with us today to·give ·us a Russian perspective on this issue, which 

is important not just for Russia, but for America as well. 

I now recognize our Ranking Minority Member, Mr. Gejdenson, 

for any opening remarks he might like to make. 

Mr. GEJDENSON. I think it. is clear that there is no surprise that 

a society which, for. 50 years, lived under a totalitarian regime has 

had serious adjustment .problems in trying to develop a civil society 

and democratic institutions with transparent laws dealing with accountability. 

We have some of those problems in our own country, of course. 

A citizen of my State just left with $200 million of investors' money 

and -ended up in, I think, Germany for a short stay before our government convinced him to come back. 

If you talk about losses-I forget the name of the company, again 

not in my district -in Connecticut but in the western part of the 

state--there was a hedge fund that. seemed to have lost somewhere 

to the tune of $3 billion. So the fact that there is crime, corruption, 

and thievery in a society that has gone through the transitions that 

Russia has gone through shouldn't shock us. 

Given that, and I will do something I generally don't do, I am 

going to quote something from a former Se,cretary of State, James 

Baker, who said that it clearly follows that engagement with Russia is the only sensible approach in dealing with the problems she 

faces and the strains in our. relationships. A peaceful, democratic, 

and prosperous Russia is strongly in our national interest, and it 

is clear we need to continue to -work on the numerous initiatives 

that we have begun. 

We need to make sure that when there are assistance programs, 

that the money really goes where it is intended to go. We need to 

make sure that the Russians set up a law enforcement system that 

functions with the kind of judicial code and criminal code that most . of the civilized world-functions in. We need to make sure that de-
4 

velopment occurs not just by who is politically connected, but by 

who has the best chance economically. . Russian corruption is a serious problem. We cannot minimize it, 

but I certainly hope that the hearings that this Committee and the 

Banking Committee are holding are not some attempt to politicize 

what is an obviously difficult transition that no one should be surprised would occur. · We have important issues at stake here. We want to make sure 

we stay engaged. We want to make sure that, like many of the 

things done in the Gore-Chernomyrdin meetings, we deal with the 

issues of setting up bureaucracies that are responsible, that follow 

the law, and that carry out the interests of the Russian people. We 

are better off with a Russia that works than one that doesn't work, 

and I hope we will learn, from these hearings, more of what we can 

do to be helpful. 

Chairman GILMAN. Thank you, Mr. Gejdenson. 

Do any other Members seek recognition? 

If not, we will proceed with the testimony. 

Before we begin with our testimony, I ask unanimous consent 

that a written statement on the issue of corruption in Russia, submitted by Professor Lynn Nelson of Virginia Commonwealth University, be inserted in the record at the end of our witnesses' testimony. Without objection. Professor Nelson has written extensively 

on the subject; but-was unable to appear before the Committee this 

morning. 

Chairman GILMAN. We will now hear from our witnesses. 

Mr. Richard Palmer holds a Master's Degree in international relations from the University of Southern California. He served over 

5 years with the U.S. Army, including service as an infantry officer 

in Vietnam, and then served with the U.S. Central Intelligence 

Agency's Operations Directorate for 20 years, with his last assignments with the agency focusing on the former Soviet Union. Mr. 

Palmer now heads up an investigative firm specializing in asset recovery, business intelligence, and due diligence work. 

Welcome, Mr. Palmer. You may summarize your written statement, which, without objection, will be inserted in the record. 

Please proceed. 

STATEMENT OF RICHARD PALMER, PRESIDENT, CACHET 

INTERNATIONAL, INC., U.S. CENTRAL INTELLIGENCE AGENCY, RETIRED . 

Mr. PALMER. Thank you, Mr. Chaimian, and other Members of 

the Committee. I welcome the opportunity to address this Committee on a subject that presents serious threats to Western nations, as well as involving the use of U.S. taxpayers' funds to continue the looting of the Russian state. 

After 25 years' government service, I retired from the CIA in 

1994 and I then spent another 21⁄2 years in the former Soviet 

Union. I felt that the subject of Russian organized crime, official 

corruption, and the peculiarities of their developing financial system deserved more attention, and we needed more information on 

it. Therefore, I spent 2 1⁄2 years researching that. 

I worked briefly in training, as a training director for a Russian 

bank-nothing to do with accounts, nothing to do with their busi-
5 

ness-and then I worked on behalf of some .Russian-European 

banks in the former Soviet Union. 

I can say that during that period of 1994 until I returned to the 

United States at the end of 1996, finding information about -Russian organized crime was not difficult. Indeed, I gathered hundreds 

of pounds of documents. Now, this was outside of any official capacity after my retirement, as basically a normal businessman, a normal person. What I am saying is the information was there if anyone wanted to look. 

You must remember that· when I returned to the United States, 

I felt that I had something particularly valuable because I had direct insight into· corruption, not only in Russia, but some of the 

former republics, and I had some detailed knowledge of how Russian organized crime worked. and also how Russian organized crime 

worked in moving not ·only funds to the United States but creating 

companies in the United States through which to transfer their 

funds back to Russia. 

Now, I am speaking here of-only ·a small amount of funds. There · ·is·- a -gentleman at-' Brookings .Institute who has done a thorough , study of money laundering and capital flight; and he agrees with 

my findings-,-although he ·has done much more research-that an 

.extremely small· percentage·· ever goes back to the country that it · left. He asked a. Russian ·official once does any of this money ever 

come back, and the Russian official immediately answered nyet, 0

nyet .. Then he thought a moment and he said, well, there was one 

idiot-. who brought 'Some. money back to buy GKOs, but very small · amounts. 

· When we· talk-.about some ·of the American investment in Russia, 

sometimes we ·are talking . .about · Russian organized crime funds . that-are going .. back under ·the guise of the U.S. corporations, which 

is then looked at as U.S. investment and also as, then, a responsi- .. bilityfor the U.S. Government to protect. . ' There-.,has been very little research in~o that area. In 1996, when .J' 

I ·returned, I offered to talk to U.S. intelligence agencies, U.S. law 

enforcement agencies, and I was toJd that this was not a problem, .. there had· been corruptio11:, but the problem had been basically_ · solved and that, ·boy, if you had come in 1992, this would have been 

interesting; Now, .the prob~em is so~ved. We would not be· here 

today if the-problem were solved .. · Very quickly, this is a current problem that is going to go on irito 

the future. The idea that this is like Chicago in the 1920's, and this 

will also evolve into .good legitimate money like our robber barons 

is. nonsense. As I mentioned in detail in my testimony before :the 

.House Banking and Financial Services Committee, this would be as 

if they controlled the entire government, the. Federal ___ Reserve, all 

the police, the Congress. Why should they change? . , · I can tell you that th~y are no_t. o_nly not going away, if we look· 

at_ the subject of spept .nuclear fuel for which the United States has 

set aside hundreds of millions of dollars, there are Russian orga-. 

nized crime-connected groups, companies, right now, who are getting ready to bid for that .,money. They are look4ig to the future. 

Unfortunately, we have not been as far-seeing a~, them. 

In watching the recent television . hearings-8:nd I must say I 

don't vote regularly, _ and this is not a partisan hearing-but I was 
6 

watching the TV show about the biography of President Reagan, 

and he kept referring to this term of ''trust but verify," and I think 

we have lost track of that. We have not verified where the funds 

have gone. We have not tied our funds to a quid pro quo. We don't 

even have a treaty to protect U.S. investors at a time the government is still promoting U.S. investment iii Russia and the former 

Soviet Union. The European Union has one, because they said you 

don't get investment from us until we have the treaty. 

As you are aware, there has been no movement on a money laundering law in Russia. In fact, the last two attempts have been vetoed by President Yeltsin. I am rather reliably informed that there 

has been a decision in Russia that, following the scandal of the 

Bank of New York and money laundering in the United States, you 

will see a watered-down money laundering bill before the ~nd of 

this year. There is a cause-and-effect relationship here. 

The Russians have a phrase that says, the guy who pays for dinner picks the meal. I think we should be able to put some requirements on this. Like our food assistance program, the Administration did everything possible to make sure that that food was not 

traced. Frankly, large amounts of that are going to go for graft, and 

that is very easily shown. 

The last thing I want to say is that we now see a government 

that, I think, Yeltsin and the circle around him, it is rather well 

documented, the level of corruption. You have the new Prime Minister, Putin, who allegedly left the KGB a few months after the 

KGB issued a directive asking its officers to go out and found companies to move money. 

One of a few ways of moving money was the sale of what they 

call tolling, using intermediary firms to buy Russian resources, particularly nonferrous metals. Mr. Putin's first job was giving permits 

to sell nonferrous metals. After that he worked for Mr. Borodin, 

which was the office iri charge which had the contracts with 

Mabetex. I believe he was chosen because if any of those areas are 

prosecuted he also is in danger. · What I am saying is that the ·corruption is rampant through the 

government. It has been obvious for a long time. I hope we will 

focus on it. I am .not calling for disengagement. Russia is too large, 

it is too important. But we have to take a closer look. We have to 

be honest, and we have to be objective. 

Corporate America has tried to look the other way as well. Corporate America has also said, well, we can assume that we can continue to make 200 percent a year on GKO bonds and, if anything 

happens, IMF funds will bail us out, so it is a protected investment. I am afraid that there has to be an investment site like any 

other. We have to be more realistic and depersonalize this. This is 

not a matter of a few officials on the other side having a personal 

relationship. This is something where our Congress should literally 

have more direct contact with their government. We have to work 

together with them. 

The last point I want to make is, when we consider Russia, we 

must also remember that not all of the former republics became instant democracies overnight. In fact, some of the former republics 

are literally more corrupt than Russia. While we are on this downhill race to bring these people into the European Union and to 
7 

bring them into NATO, I think that we 'should seriously stand back 

and look and see if we should not ask for more development in 

these countries, and more proof that they are on a democratic path 

before we bring them into organizations they can weaken or dilute. 

I thank you 'very much for allowing me to- make these· comments 

today. 

Chairman GILMAN. Thank you Mr. Palmer. 

[The prepared statement of Mr. Palmer appears in the appendix.] 

Chairman GILMAN. Our next witness is Mr. Keith Henderson, 

co..:Director of American University's Transnational Crime and Corruption Center. He served as the U.S. Agency for International Development's Senior Advisor on Rule of Law, Crime and Corruption 

in the Agency's Bureau for Europe and the New Independent 

States. Mr. Henderson has also particip~ted in the State Department's Policy Working Group on Corruption, he has written on corruption, and is a member of the United Nations' Expert Group on 

Corruption. 

Mr. Henderson, you may summarize your written statement 

which, without objection, will be inserted in the record. You may 

proceed. 

STATEMENT -OF KEITH HENDERSON, FORMER SENIOR ADVISER ON RULE OF LAW, CRIME, AND CORRUPTION, U.S. 

AGENCY FOR INTERNATIONAL DEVELOPMENT, CO-Om.ECTOR, TRANS-NATIONAL CRIME AND CORRUPTION CENTER, 

AMERICAN UNIVERSITY . 

Mr. HENDERSON. Thank you, Mr. Chairman, and Members of the 

Committee. 

I first want to apologize. Our computer system crashed yesterday 

at American University, and I was unable to provide some final 

edits to the testimony. I notice some grammatical errors, and it arrived late. Again, apologies, but we will make those changes. The 

good news-is that there were too many students on-line, but some 

of us are wondering exactly what those students were doing online~ 

But I am very pleased to be here today. I will try my best to 

share my candid thoughts and reflections on my past and current 

anticorruption work, and welcome your questions. 

My main -interest' is in advancing the global and Russian 

anticorruption agenda, and in sharing lessons learned_ during my 

tenure at USAID and my current _activities at American University. 

You may know that our center is the brainchild of my esteemed 

colleague, Professor Louise Shelley, who formed. the center in 1995 

with seed money from the MacArthur Foundation. Our main objective is to undertake academic and applied research on global crime 

and corruption problems through creative multidisciplinary partnerships with scholars and practitioners in· targeted -countries. 

With support from the U.S. Department of Justice .and others, we 

-have now established four centers in Russia and one in Ukraine. 

With the Chairman's permission, I will now summarize my testimony as requested. 

In 1997, Elena Bonner, former dissident, human rights activist, 

and widow of the Nobel· Peace Prize laureate, Andrei Sakharov, 

made an observation that I believe sums up the current general 
8 

state of affairs in Russia: "The intelligentsia seems to have abandoned its historic calling of compassion and assistance in the favor 

of grabbing crumbs dropped by the corrupt and powerful." 

She noted that while considerable freedoms had been achieved in 

a relatively short period of time, the collapse of the education and 

health care systems, forced military conscription, unconstitutional 

predetention law enforcement policies, abominable prison conditions, and substandard living conditions made many of the former 

concerns of dissidents look trivial. She called upon the international community and the Russian leadership to refocus its attention on core societal values and goals such as freedom of the 

press and rooting out corruption. I believe her comments set the 

stage, not only for today's discussion, but they also argue for a 

global and anticorruption summit and raise several important questions. 

First, is corruption both a Russian and international problem 

that requires global solutions? 

I know this Committee believes that it is, but a historical comment on corruption in Russia. I was at an old bookstore on Capitol 

Hill a couple of years ago and was delighted to find a book that 

outlined many of the reforms that were being undertaken by Czar 

Alexander II in the 1860's, and I think this speaks volumes. 

Over 130 years ago, during the early reform era, Czar Alexander 

defined Russian corruption as a centuries-old problem that was a 

major deterrent to Russia's integration with the West. The historian observed that the causes of corruption that existed then remained applicable today. He wrote this in 1896: First, it is a society ruled by men not laws; second, a secretive, restrictive bureaucracy that stifles justice and the press, and the development of 

strong state institutions; third, weak civil society unable to_ check 

government action; and fourth, a disdainful citizenry. These are the 

same core problems facing Russia today. 

The political, economic, and social problems facing Russia, the 

U.S., and the global financial system stem in large part from our 

collective failure to fully acknowledge, understand, or respond to 

what is now recognized as one of the biggest threats to global economic growth and political stability-public and private "grand" 

corruption. This phenomenon has greatly limited the power of the 

Russian State and others to play a positive role in developing society in countries around the world. 

While the effects of grand or high-level corruption have economic 

and political consequences on all countries, including the U.S., they 

have a disproportionate impact on developing and transition countries, and any subsequently emerging middle-class. Indeed, many 

CEOs and policymakers now believe that systemic corruption in developing transition countries such as Russia makes long-term sustainable economic and political development virtually unachievable. 

However, most people in positions of power around the world, 

whether in the public or private sector, have chosen to treat grand 

corruption much like the global AIDS/HIV epidemic, either under 

a cloak of silence, or with rhetoric. There are still no serious concerted holistic efforts under way to address this problem. From my 

perspective, most in the international -business community, the 

family of multilaterals and donors as well as most public officials, 
9 

including U.S. officials, are moving too .slowly and are behind the 

learning curve. 

In the interest of time I will now turn to· the question of when 

could it be said that we fi~st knew that corruption in Russia was 

a serious problem. Whil~_ I think reasonable people can disagree on 

·this fact; I think your summation at the beginning of your remarks 

outlined··many incidents that should have given people notice that · this is a vecy serious problem that we had to handle in a vecy serious way. However, I would point to several events that, in my 

mind, made me believe that we were not doing enough to address 

the problem. 

First, was the loans-for-shares scheme 'in 1995, and th~ 1994 

Yeltsin organized crime decree .. In hindsight, most analysts now 

identify the 1995 loans-for-shares. scheme. as a clear indication that · some of the reformers were working closely with, and had ulterior, 

self-interested motives. That event, coupled with the -1994 Yeltsin 

decree, which gave the Ministcy of Interior almost limitless powers 

to arrest and '-prosecute individuals outside the scope of the new 

Russian constitution, should have sent important signals to all that 

organized crime and corruption were·. occurring at vecy high levels 

within the Russian government. 

I do not pretend to be- an expert on the loans-for-shares scheme 

and I don't know- all the facts intimately. Indeed, I was working in 

another office at the time at USAID but was watching closely. 

However, I would like to quote Anders Aslund at Carnegie, who is -a well-known and highly respected former Chubais protege and 

long~time Russia watcher,. who said that this scandal ''blemished", 

both Chubais and large-scale privatization in general. 

In a recent 1999 Foreign Affairs article, Aslund ·notes that a few 

banks were allowed to privatize some enterprises at auctions that 

they themselves controlled. Many lawsuits .. and volatile wars among . bankers and managers of these enterprises occurred, both during 

and after the process. 

Ashmd then goes on to observe that the barrier to reforming 

Russia has never been the workers or the people, who have been · exceedingly complacent. Rather, the -threat has always come from 

·elites who ··want to ·live on corruption. I concur :with this analysis 

and conclude, like· he does, that the best -way to control these kinds 

of forces is through effective democracy. 

Another· telltale point, I believe, is the congressional testimony 

before this vecy Committee in ApriL 1996. During that testimony, 

my colleague Louise Shelley; as well as the, Director of the FBI, 

Louis. Freeh; Eric Seidel, the Deputy Attorney General of New 

York;· and John-.Deutch, ·the Director of the Central Intelligence 

Agency; among others; were among the first to sound the political 

alarm call that crime and corruption was a vecy serious issue in 

Russia . .Director Deutch noted that: "A link existed· between the government elite and the criminal elements that was- impeding the ability 

of the Russian Government to meet the population's expectations 

of social justice, a quality Qf opportunity, and improved living conditions." 

Chairman GILMAN. Mr. Henderson, if I might interrupt, we are 

in the midst of a vote in the House, and I am going to explain to 
10 

my colleagues that we will continue with the hearing right through 

the vote. I have asked some of our Members to go ahead and vote 

and come back so that we don't have to interrupt the testimony. 

Thank you-Mr. Henderson. 

Mr. HENDERSON. Thank you. 

He also noted that the law enforcement forces were understaffed, 

underfunded, and plagued with corruption. Professor Shelley, Director Deutch, and New York Deputy Attorney General Seidel also 

testified that organized crime's hold on the Russian banking community was a serious problem that had to be addressed. 

Finally, several noted that Russian organized crime was estimated to control up to 40 percent 6f the Russian economy. 

I would say that an awful lot of discussion ensued after I authored a white paper in 1997 that was widely circulated within the 

U.S. Government that attempted to outline the causes of the problem, and to propose some programmatic solutions. Since that time, 

as you know, several international conferences have occurred, and 

many organizations are now involved in this effort. 

Finally, I would like to conclude with a few of the lessons I think 

we have learned from our experience in Russia, which incorporated 

some comments on the Harvard scandal which you mentioned, and 

the Bank of New York case. 

First, do not attempt to create big or little czars. Putting all of 

your reform eggs in one basket without broad public participation, 

support, and oversight is a recipe for failure. It also undercuts fundamental democratic principles and opens up the process to corruption. 

Second, insist on transparency within the donor community. On 

the giving end, the.public has a right to know how their money is 

being spent, and on the receiving end the public has a right to participate in the decisionmaking process and monitoring of this 

money. 

Third, advance an international global anticorruption treaty and 

minimum terms of conditionality such as my colleague Mr. Palmer 

mentioned. Donors cannot make specified kinds of loans or participate in certain reforms unless these minimum terms are agreed to 

in full. Further, adequate support for an independent judiciary, 

media, and civil society, as well as health and education programs, 

must be part of this conditionality package. 

Fourth, give the OECD antibribery treaty and the OAS 

anticorruption treaty some impetus and teeth. More intensive, creative monitoring mechanisms that include civil society and business community oversight should be part of this package. In addition, international corporations should be held legally accountable 

for corrupt complicity. Strengthening key multilateral institutions 

and enhancing U.S. diplomacy and capacity to implement foreign 

policy is an essential step in this new world order. 

Fifth, enhance international law enforcement cooperation and 

communication through informal and formal structures and procedures. More regional sector-focused interdisciplinary training programs that are tied to short- and long-term reforms and strategies 

are needed. 

Sixth, promote the flow of corruption information among donors 

and between donors in the law enforcement community. 
11 

Seventh, promote more competition in the public procurement 

process and the international best practices in good -government 

principles in both the public and private sectors. 

Eightth, promote more long-term institution building and reforms related to entities that can provide a check on governmental 

action. 

Nineth, promote policies that promote more cooperation between 

the executive and parliamentary branches, and more interagency 

coordination. 

Tenth, promote more academic and applied research related to 

understanding the causes and costs of corruption. 

And, eleven, enhance communication engagement within the 

global and intelligence communities. 

Thank you for the opportunity to speak here today, Mr. Chairman. 

Chairman GILMAN. Thank you very much, Mr. Henderson. 

[The prepared statement of Mr. Henderson appears in the appendix.] 

Chairman GILMAN. Our next witness, Mr. David Satter, graduated from the University of Chicago. f[e was a Rhodes Scholar at 

Oxford University, and is currently a Senior Fellow at the Foreign 

Policy Research Institute in Philadelphia. 

Ik'is also a visiting scholar at the Johns Hopkins School of Advanced International Studies, and a Senior Fellow at the Hudson 

Institute. 

Mr. Satter served in Moscow from 1976 to 1982 as a correspondent for The Financial Times, and has written extensively 

on corruption in Russia, and other-issues, for the Wall Street Journal and other leading publications. 

Welcome, Mr. Satter. You may .summarize your written testimony which, without objection, will be inserted in the full record. 

Please proceed. 

STATEMENT OF DAVID SATTER, VISITING· SCHOLAR, JOHNS 

HOPKINS SCHOOL FOR ADVANCED INTERNATIONAL STUDIES, SENIOR FELLOW, THE HUDSON INSTITUTE 

Mr. SATTER. Thank you, Mr. Chairman. 

The reports of massive Russian money laundering through the 

Bank of New York have awakened Americans to the victimization 

of the Russian people by their leaders and the possible consequences for the United States if corruption leads to Russia's social and political disintegration. This new-found awareness, however, .raises a disturbing question: How was it possible for the Administration to depict the looting of Russia for so long as the 

progress of democracy, and to back a coterie of corrupt Russian 

leaders whose actions were actually antithetical to reform? 

The answer, I think, lies in the failure to understand that, in the 

wake of communism, Russia's greatest need was not a correct set 

of economic policies, but rather the restoration of moral values 

which was only possible under-conditions of the rule of law. By ignoring moral criteria and giving our uncritical backing. to a group 

of -leaders whom we identified as reformers, we did not contribute 

to the welfare of Russia but only to its complete criminalization. 
12 

The following is a p~ial list of the events which should have 

alerted American policymakers that Russian reform was being carried out in a moral vacuum, and the necessary role of the United 

States was to defend the rule of law. 

First, in January, 1992, prices in Russia were freed, but no effort 

was made to index savings. The result was that in a few months, 

99 percent of the savings of the Russian population disappeared. 

Persons who had put money aside to buy a car or apartment, or 

to pay for a wedding or funeral, were left with nothing. Persons 

who had worked in remote areas of the country where a differential 

was paid on salaries were now stranded there, in many cases for 

the rest of their lives. 

Second, as the rate of inflation reached 2,500 percent, fraudulent 

commercial banks and investment companies inundated Russians 

with advertising offering enormous returns on investment. The government made no effort to limit this advertising or to check on the 

firms which, in almost all cases, were pyramid schemes, with the 

result that millions of people with no experience of deceptive advertising or capitalist investment lost their savings a second time. 

Third, the government began to allow anyone to export who could 

get a license. Because Russian raw materials were bought for rubles and sold abroad for dollars, , export licenses were akin to permission to print money. In Moscow, they were issued by the Ministry of Foreign Economic Ties which functions like a market, 

granting the licenses in return for bribes, with the fee for the license insignificant by comparison with the size of the bribe. 

Fourth, in a move described as "people's capitalism," the government gave each Russian the right to acquire a voucher which was 

redeemable for a share in Russian industry. The vouchers, however, were useful only for those who could acquire them in great 

numbers, and criminal structures began to buy them up on the 

street, and used them to purchase the most desirable factories, 

often at giveaway prices. 

Fifth, gangsters, businessmen, and corrupt officials in Russia 

began to work together, in many cases becoming part of a single 

economic unit. 

Sixth, in 1993, President Yeltsin illegally dissolved the Supreme 

Soviet and, in the wake of a massacre outside the Ostankino television tower, which he may have provoked, persuaded the Defense 

Minister to authorize the shelling of the deputies who were still 

holed up in the parliament building. In a vote which is now believed to be falsified~ a new constitution was adopted that emasculated parliament and provided for the creation of a new, authoritarian presidential regime. 

Seventh, the government began to sell off Russia's enterprises for 

cash in rigged auctions. If in a rare case there was true competitive 

bidding and a powerful group was outbid by an insistent competitor, the successful bidder could easily pay for his tenacity with his 

life. 

Eighth, the government launched an invasion of the self-proclaimed independent republic of Chechnya in hopes of having a 

short, victorious war. Unable to defeat the Chechen resistance on 

the ground, the regime began the carpet bombing of civilian areas, 

resulting in the massive loss of innocent life. At the same time, 
13 

more than 1,500 Chechen civilians were picked up by Russian interior ministry troops, taken to. filtration camps and never heard 

from again. 

Ninth, in 1993 to 1994, the government ceased paying for state 

orders and began delaying payments on pensions and salaries for 

state employees, initiating the nonpayment crisis which became 

Russia's leading source of social tension. 

Finally, the government, in the loans-for-shares scheme, began to 

borrow money from commercial banks in return for shares in desirable, nonprivati.zed enterprises. The bidding was supposed to be 

competitive, but, in reality, the shares went to the banks with the 

closest informal ties to government officials. When the government 

failed to pay back the loans, which was always the case, it was up 

to the bank holding the mortgage to organize the sale of the enterprise. In every case, the enterprise then became the property of the 

bank providing the original loan. In this way, the crown jewels of 

Russian.industry were acquired for a song. 

The attempt to transform Russian society without the· benefit of 

either moral criteria or the rule of law led to one of the gravest crises in Russian history. In the resulting atmosphere of moral anarchy, the country was looted. The gross domestic product was cut by 

half, which did not occur under Nazi occupation. 

Russia suffered a demographic catastrophe in the period since 

1990-. 

Chairman GILMAN.- Mr. Satter, I am going' to have to interrupt 

you for a moment. We have only a few minutes .left for the vote 

now under way in the House. As soon as one of our Members returns, we will continue, but at this point I am going to call for a 

brief recess. 

[Recess.] 

Mr. BEREUTER. [presiding] The Chairman has asked me to resume the sitting of the Committee. 

Mr. BEREUTER. Mr. Satter, please continue. 

Mr. SATTER. In this situation, there was a historic role for the 

United States. With the fall of communism, the United States had 

overwhelming moral authority in Russia and could have insisted on 

moral practices and the strict rule of law, using political pressure 

and our influence over international loans. Instead, we used our 

power, not to advance the rule of law, but to promote the interests 

of a specific group. 

It is often argued that the United .States had no choice but to 

help Yeltsin, and that the only alternative was to help the communists and nationalists. In fact, . howevet, insisting on honesty 

and fair dealings from the reformers would have been the greatest 

favor that anyone could have done for them. The reformers lost 

popularity in Russia not because they backed democracy but because they facilitated the criminalization of the whole country. 

The ·answer now is rethinking our entire approach to Russia, 

which must begin with an understanding of the moral vacuum that 

communism left in its wake. Only by recognizing that Russia's first 

requirement is a structure of law and morality valid for everyoμe 

do we have the possibility to lay the framework for real economic 

reforms capable of saving Russia from its present desperate situation. 

62-963 00-2 
14 

If we· continue, however, to pretend that Russia is on the path 

to reform and Yeltsin and his confederates are the ·embodiment of 

democracy we may soon find that the growing desperation in Russia will produce a reaction capable of affecting not just Russia, but 

also the rest of the world. 

Thank you. That is the conclusion. 

Mr. BEREUTER. Mr. Satter, thank you very much. 

[The prepared statement of Mr. Satter appears in the appendix.] 

Mr. BEREUTER. Next, we will hear from Mr. Matthew Murray. 

He served as Legislative Assistant to Senator Edward Kennedy 

from 1982 to 1984, working on national security issues, and later 

worked·with the law firm of Baker & McKensie from 1988 to 1991. 

I 1991 he founded the firm Sovereign Ventures Incorporated, which 

has offices in Washington,· DC and St. Petersburg. 

Mr. Murray, your entire statement will be made a part of the 

record. You may summarize as you wish. 

STATEMENT OF MATTHEW MURRAY, PRESIDENT, SOVEREIGN 

VENTURES, INC. 

Mr. MURRAY. Thank you very much, Congressman. 

Let me start by saying that I think the reaso;n I have been invited here today is that I have been conducting small business in 

St. Petersburg for the last 10 years. I lived in St. Petersburg between 1992 and 1998, conducting different types of business; and 

in the process, because I have insisted on doing business legally 

and ethically, I have developed a great appreciation for what are 

the cultural barriers to small business in Russia. 

I am also here today to share with you the knowledge that the 

Russian people have already found the answer to combating corruption, and the answer is the profit motive. It is a powerful motive, and it is particularly powerful when you combine it with the 

desire to feel good about what you are doing. Many Russian small 

businesses are gravitating to the idea that conducting business legally and ethically for profit is much more interesting and stable 

than the alternative. 

While it is a potentially powerful force, it also faces huge cultural 

barriers, as I mentioned. One of the main problems is that the Russian people must learn to be dependent on each other, as opposed 

to being dependent on the government. The United States can play 

a vital role in the future by staying engaged and reinforcing the desire of Russian small businessmen and women to get organized and 

fight to develop accountable government institutions. The U.S. can 

provide a combination of small grants and ethical business knowhow that can help unleash the powerful democratic force that is 

provided by small business. 

Perhaps a useful way of dramatizing this point is to start by 

comparing Russia with Poland and the Czech Republic. Poland and 

the Czech Republic have been very successful in removing barriers 

to small business in the past 10 years. By contrast, during Russia's 

transition small business has been severely regulated. The most 

mundane activities are subject to licensing and reporting requirements. Taxes are imposed not simply on profits but also on revenues and the mere movement of capital and goods. A small busi-
15 

ness that challenges government authority risks sanctions and 

state interference. · · The main element in Russian culture stifling entrepreneu:r:s is 

the unrestrained role of government, not only in regulating · the 

economy but also in profiting from the economy. Many officials in 

Russia have an expectation of financial reward for serving in public 

office. Many government positions are for sale, and votes on legislation have an established market price. 

During Russia's transition to capitalism this expectation of reward has led to what economists call "rent-seeking." Rent-seeking 

is conducted by political elites in transitional economies who use 

their access to power to privatize state property spontaneously at 

nominal prices and turn state 'assets into cash by renting them to 

business. At times rent-seeking takes the form of demand for a 

bribe or extortion. Often, however, rent-seeking is quasi-legal, making it harder to detect. 

The use of public position for private gain didn't start with 

Perestroika or privatization, nor can it be explained simply by Russia's low government salaries. To comprehend the phenomenon you 

must first examine Russian history. Due to the absence of a strong 

idea of the state, government officials have traditionally been inclined and permitted to take care of their personal jnterests first. 

The czar's provincial representatives were expected to: "feed themselves from official business." Under Soviet central planning, state 

resources were exploited by those with access to power, the members of the communist party, whose positions were bought and sold 

like commodities. 

This government behavior takes place against a backdrop of public tolerance and weakened institutions. Traditionally, the Russian 

people have shown extreme dependency on the government and 

have been reluctant to hold officials accountable. '-

Currently, the Russian constitution provides Duma members 

with immunity from prosecution. Russia lacks an independent judiciary capable of prosecuting government officials, or an independent press capable of protecting investigative journalists. While 

Russia engages in privatization and other market reforms, official 

corruption adds a layer of rent on economic activity. Official corrup- . tion increases transaction costs for small business and the · price of 

-goods and services for consumers. 

By imposing an enormous number of different taxes and collecting them arbitrarily, the Russian· government extracts additional rent from small business. · At this time in the debate over aid to Russia there is a consensus 

that the introduction of capitalism needs to be accompanied by the . rule of law, but the motivation for legal reform will not come from 

the Russian government. Historically, Russia's public officials have 

not 'relinquished their unilateral powers of interpretation and enforcement: Due to lack of resources and political will, currently the 

government is unable- to enforce, existing laws or adopt new legislation to protect. small business· and private property. Instead, it 

should be clear that small business itself is the most effective agent 

for, the type of social,. legal, and political reform sought in Russia. 

To date, Russia's market reforms have failed to produce a middle 

class. Only small business can fill the missing middle by producing 
16 

independent entrepreneurs with a vested interest in a stable and 

transparent legal system and the determination to hold government officials accountable. 

I am pleased, therefore, to have the opportunity to appear before 

the House Committee on International Relations at this stage. 

To reduce official corruption and otherwise sustain market reform in Russia, the Russian people must be empowered to remove 

all barriers to small business. Russia doesn't need western financial capital as much as it needs social capital-that is, the trust 

and shared values among individuals, businesses, and government 

officials which are the very foundation of a market economy. Social 

capital accrues at the grassroots level through the creation of voluntary organizations such as business, trade, and professional associations, rotary clubs, church grm.\ps, charities and nongovernmental organizations. As small bu~iness must work together to 

break down market barriers, they ar, a natural catalyst for the formation of such voluntary organizations. 

Due to the special value Americans attach to small business and 

the rule of law, the United States has already been acting to create 

social capital in Russia by helping to build voluntary organizations, 

to reinforce traditional Russian ethics, and to shape government institutions which are accountable. For example, in September 1998, 

the Eurasia Foundation, a nongovernmental foundation funded by 

AID, provided Sovereign Ventures an $88,000 grant to begin a private sector initiative to promote business ethics. 

The grant helped St. Petersburg small businesses create the Declaration of Integrity in Business Conduct, a voluntary statement of 

international business principles and practices. Between June and 

September 1999, over 100 businesses voluntarily signed the declaration. All the major business associations in the city, which have 

a combined membership of over 1,200 companies, have supported the declaration and have presented it to their memberships for signature. By adopting the declaration, each company takes a no-bribery pledge, and must implement a code of business ethics. 

After a decade of rent-seeking capitalism, Russians are beginning 

to accept the fact that government corruption is endemic, a historical burden on economic and political modernization. Russians are 

beginning to find their own path to root out corruption using a 

multitude of positive values and ethical traditions found in Russian 

culture. The St. Petersburg Declaration of Integrity is one example 

of a process whereby Russians are creating social capital by integrating their strong moral traditions with international standards 

of business ethics. 

Faced with the evidence of endemic corruption in Russia, many 

in the United States are shouting, "let's call the game," as though 

punishing or sanctioning this powerful nation will enable it to 

throw off a complex history, as though many other nations are not 

similarly infected by crony capitalism. 

Instead, we should recognize that the process of rooting out corruption is long-term, and that Russians must find their own path 

toward this objective. Under these circumstances it would be a mistake to isolate further the Russian people by depriving them of 

U.S. support and know-how .and moral leadership. On the contrary, 

the United States should seize upon the evidence of endemic cor-
17 

_ruption in government to increase aid directly to small business 

and microenterprises and the nongovernmental organizations and 

business associations which are needed to lobby their interests. In 

the process, the U.S. can help Russian citizens prosper and form 

the social capital needed to protect individual private property from 

.rent"'.seeking capitalists. 

Thank you very much. 

Mr. BEREUTER. Thank you, Mr. Murray. 

[The prepared statement of Mr. Murray appears in the appendix.] 

Mr. BEREUTER;· Next, we would like to hear from Mr. Konstantin 

Borovoi, who is able to join us today. He is a member of Russia's 

parliament, the Duma, to which he won election in 1995. He holds 

a degree from the Mechanical Mathematical Faculty of Moscow . State University, and began a .career in business as the (ormer Soviet Union began_ to allow the creation of some -private businesses 

in .. the late 1980's. In 1992, he established the Economic Freedom 

Party. 

Welcome, Mr. Borovoi. We look forward to your testimony. 

STATEMENT OF KONSTANTIN BOROVOI, DEPUTY, RUSSIAN . _ STATE DUMA, CHAIRMAN, ECONOMIC FREEDOM PARTY 

[The -following testimony was presented with the .assistance of an 

interpreter.] 

Mr. BOROVOI. Thank you, Mr. Chairman, for giving me an opportunity to speak to you. 

It is actually one of the-problems and one of the issues I work 

on in Moscow, the problem of criminalization of political power and 

the economy, and it is actually the main motive of my statements 

in Moscow, my press conferences and legislative requests that I 

make. 

I would like to touch on a few issues that I think are important 

for me to make a point of here. Corruption in Russia is a part of 

a more complex problem, the problem of loss of direction of democratization in our country. What we call uncontrollable growth and 

expansion of corruption is more characteristic of what we had in 

1995 and 1996. Today, we have a new phase of growth of corruption, where corruption now is an integral part of the government. 

At the same time, this current status of corruption is very convenient for the current rulers of Russia, and they are very happy with 

it. 

Today's corruption and criminalization of power structures in 

government in Russia is influencing not only its domestic and economic policy but also its international foreign policy. The testimony 

of this process is the current events in the Caucasus and 

Chechnya, as well as the position of animosity toward NATO, toward the United States, and as well as a number of other initiatives taken on the international arena and also the support for the 

different rogue regimes in different parts of the world. 

In 1991, good conditions were created for the forms of democratic 

Russia, but not all the government and economic structures were 

abolished, and it was clear for us already in 1992 when we met 

with the American policymakers and explained to them these negative trends and dangers in Russia. Actually, at a place not far from 
18 

here at the State Department I was attempting to convince the officials there that there is a danger of uncontrollable development of 

corruption in Russia, as well as serious threat to development of 

democratic principles. But they actually accepted a concept of selfpropelled, independent process of democratization of Russia, and 

this process created a paradoxical situation in Russia and a paradoxical situation in the relations between Russia and the United 

States. 

As a matter of fact, American taxpayers are financing projects 

that are implemented in Cuba, Iraq, Iran, and in Belgrade; and, as 

a matter of fact, right now Russia is not a friendly country toward 

the United States. 

As a matter of fact, the American taxpayers' money is now spent 

on organizing of anti-American, anti-NATO propagandist campaigns. As a result of this anti-American propaganda campaign led 

by the Russian government, almost 85 percent of the Russian population was willing to support sending Russian volunteers and weapons systems, even advanced anti-aircraft missile systems, to 

Milosevic. 

Unfortunately, humanitarian and even food product assistance 

for Russia is also a matter of increased corruption in Russia, and 

I think that the following steps are necessary in order to stop the 

development of this dangerous situation: 

First of all, we need to say good-bye to the illusions about democratic development of Russia. Right now the only direction of development I see in Russia is the development toward forming of a 

small evil empire, adversarial to the rest of the democratic world; 

and I think in order to understand the process we need to have 

good professional expertise. 

Unfortunately, here in the United States I frequently encounter 

very naive views on the situation and process that is happening in 

Russia. I think that all the programs of support, including the financial support and cooperation progresses, should be halted or 

stopped, and there should be a coordination between this type of 

assistance and the political process. Otherwise, the United States 

can find itself in the situation as it evolved when it will closely resemble what was happening in the events preceding to the tragedy 

at Pearl Harbor. 

Also, I think it is important not to lose the hold of the pulse of 

Russia. I think it is necessary to keep and expand the forms of 

work that promote further democratization of Russia. 

Thank you. 

Mr. BEREUTER. Deputy Borovoi, thank you very much for your 

testimony and for the disturbing information that you give to us. 

We are very pleased, however, that you took the time to participate 

with this panel. 

[The prepared statement of Mr. Borovoi appears in the appendix.] 

[The prepared statement of Professor Lynn Nelson appears in the 

appendix.] 

Mr. BEREUTER. We will now move to the question period under 

the Committee's 5-minute rule. 

I will begin by mentioning that, in the course of the comments 

from Mr. Murray, I heard a degree of optimism-selective, of 
19 

course-and, at any time, I would like any of you to comment upon 

his orientation and his comments. 

I would like to focus in, Mr. Palmer, on you first. Any other persons are welcome to make a contribution as well. 

We have heard.comments in the past-perhaps other Members 

of the Committee will pursue this-that U.S. policymakers were 

discouraged from presenting information which suggested the various U.S. programs were being subjected to corruption; and, in fact, 

information, therefore, was suppressed. Have you seen any evidence of corruption during the course of your time as a U.S. official, 

or after that point? 

Mr. PALMER. I can only say that I cannot really discuss my time 

when I worked for the CIA. I think the fact that I took retirement 

from what had been a very rewarding career and went on to devote 

21⁄2 years of my life to studying this onsite shows that I believed 

that there was much more that could be done in looking at the 

problem. 

I do know, from some of the programs I saw after retirement, 

that U.S .. officials -were constantly told that they had to show 

progress, that negative comments would only reflect poorly upon 

the U.S. facilities involved, and that they would only serve to restrain democracy. And so that was a general thread. · Mr. BEREUTER. How did you pick up that kind of sentiment? 

Mr. PALMER. Simply in talking to some of the U.S. officials also 

involved in USAID projects after I retired, and these were just personal comments that they made to me, that they had gotten the - word from the country team meetings that there was only room for 

good news. 

Mr. BEREUTER. Would you encourage us to ask you to come to 

an executive session or is that-. 

Mr. PALMER. That could become problematic, actually, sir. But 

you do have some very good witnesses from State ·Department officers, Mr. Wayne Merry and Mr. Tom Graham, who both can speak 

to ·that with no legal difficulties, and they can speak in open ses- . sion. I think you might find it more useful. 

Mr. BEREUTER. · The former has spoken to one of our Committees. 

I have forgotten which Committee that I heard him on. 

The Duma was removed in 1993 by President Yeltsin. Some · would say that he substantially reduced the Duma's authority to 

conduct oversight on the revenues and expenditures of the Russian 

government, and I would like to ask the Americans here as well 

as the Russian Duma delegate if, in fact, they believe that today 

the Russian parliament is in a -position to reassert its oversight 

over the government budget. That would be my last question. I 

would like to ask any of the gentlemen if they would care to respond, and then I would turn to the Deputy. 

Mr. PALMER. IfI could just say one thing, ·and you have more expertise sitting here than myself, but the Duma is riddled with corruption to the ·point that organized crime members are now running for the Duma. Frequently, members of organized crime will 

pay Duma members large amounts ·of money so they can be named 

as· staff members for .the Duma so they can't be stopped by the police and they can't be searched for -weapons. 
20 

That said, there are honest members of the Duma, and I think 

we have to encourage that, and we have to work with them. Trying 

to focus all of our attention only on the presidency of the country 

is, I think, going in the wrong direction. That is putting all of our 

eggs in one basket. 

Mr. BEREUTER. Thank you. We hear that frequently, and we 

have an advocate in the person of Mr. Weldon of Pennsylvania. · Who would like to comment on the Duma's ability to conduct 

oversight on government affairs? Deputy Borovoi? 

Mr. B0R0V0I. I absolutely agree with the statement of the gentleman that corruption is an integral element in the work of the 

Russian parliament. Actually, I had one press conference on the illegal way of lobbying in the Russian parliament, and the theme of 

this press conference was the state Duma as a private joint stock 

company. The issues of corruption were raised at the sessions of 

the joint Duma-Congress commission; and, unfortunately, the majority of the Russian members of the parliament took the formal 

position that these allegations have nothing to do with reality. It 

is just the allegation and pretext for some accusation. 

I don't think· that cooperation with the Russian parliament can 

be an effective or efficient tool in fighting corruption in Russia. 

Chairman GILMAN. [presiding.] Mr. Sherman? 

Mr. SHERMAN. Thank you, Mr. Chairman. 

One preliminary comment, and Mr. Bereuter's comment brought 

this up. I am disturbed that it is difficult for this Committee to get 

testimony in executive session from CIA agents and former CIA 

agents, and that while we are concerned about the transparency 

and honesty of the Russian government here in these hearings we 

should never spare effort to assure the honesty of the U.S. Government. Perhaps whatever we could do to get clear and honest executive sessiop. testimony from former CIA agents would be a step in 

that direction. 

Deputy Borovoi, it is indeed shocking to hear your comments. I 

wouldn't be shocked if any of these other gentlemen said them, but 

you are an official of the Russian government and even the Chairman of a party. How many seats in the Duma does your party 

have, and do you think that your comments reflect the views of a 

few other parties in the Duma as well? 

Mr. B0R0V0I. My party has two seats in the Duma. Fifty percent 

of the state Duma members are communists. For you to better understand the balance of forces in the state Duma, I can give you 

the results of the vote on the resolution of support, political and 

military support, of President Milosevic that was taken in the Russian Duma-372 votes in favor, against 1. 

Mr. SHERMAN. I understand. I don't know if the vote for 

Milosevic just reflects misplaced nationalism or whether it reflects 

corruption. I do know here in the United States we will get criti--

cism for voting. for aid for Russia or, frankly, for any foreign aid. 

I am convinced that at least half of what we send to Russia is 

wasted, and I am convinced that it is the most important thing we 

could possibly do with our dollars, to send aid to Russia, if even 

half of those dollars are used effectively, because I think the peace 

of the world depends upon many things which are easy to predict, 
21 

and one thing which we cannot predict, and that is the future of 

Russia. · Corruption is not unknown here in the United States, and we 

have adopted a number of laws, techniques, and procedures to try 

to control corruption. These are costly both in terms of dollars and 

in te!ffis of flexibility. I wonder if the Deputy and perhaps some 

others could comment on whether Russia has studied, or even implemented American or Western European laws in the following 

areas: competitive bidding on outside contracts; independent audits 

of government agencies; civil service protection for the vast majority of government employees; a public documents act to require 

that any citizen can obtain a copy of public documents for only the 

copying charge; and, finally, an independent judiciary. 

I• realize that changing the law does not necessarily change culture, but it can be helpful, and I wonder whether there has been 

adequate attention in those areas.· · I would like to hear from the Deputy first. 

Mr. BOROVOI. Unfortunately, the entire theme of the fight 

against corruption is a political theme. I have a very simple example. 

Mr. Stepashin was Prime Minister of Russia around 3 months 

• ago, and now he is the head of the anticorruption commission. He 

talks ·of-things during his Prime Minister activity, a lot of things 

that cannot be in Russian government now, any form of corruption. · He is maybe the ;most active fighter against corruption. It is nonsense. Sometimes some vehicles, some discussions about corruption 

in Russia can be used for the purpose of corruption. I· spoke before 

that it is an element, a structural element-corruption is a structural element of Russian power. It is maybe the most dangerous 

thing we faced since the beginning of democratization in Russia. 

L have a lot· of experience, European experience. We have some 

laws- adopted now, but they are on the subject of political fighting 

against communists and democrats. . Mr. HENDERSON. A comment. I would say that all the laws that 

you mentioned· are extremely important. In fact, I tried to highlight 

some of them in my written testimony. 

In response to your question, only one of these laws to my knowledge exists and it exists by decree, not through legislation which, 

of course, is a large part of the problem in Russia. Many of the 

laws are issued by decree, and they are never implemented. 

That really leads to my last and most important point. All of 

these laws are under consideration. I know that, for example, a 

Russian Freedom of Information Act law has been under debate for 

many years. There still seems to be no hope of passing it, according 

to people I know involved with it. 

So the short answer really is that even .if all of these laws were 

passed, none of them would be implemented in today's environment. There. is no political will to implement any of these kinds of 

laws. I think that is a serious problem. · I did want to go back to one of the initial questions asked-in 

response to the question as to is there any evidence of the U.S. 

Government failing to correct problems and procedures that might 

lead to corruption. I think that might be the way I would ask the 

question. I would point to the HLID scandal as an example of a sit-
22 

uation where I know that there was collusion within the U.S. Government not to properly oversee the way that very sensitive, important program was being implemented. 

I talked to virtually everyone involved with that program during 

the time I was at AID because I was floored that there was very 

little government oversight, and I was finally told that that was intentional by people who know. And that, of course, is what led to 

the GAO investigation as requested by this Committee. 

As far as the parliament is concerned, I am glad that issue was 

raised because the current Russian constitution, at least as seen by 

many analysts who have been studying this, Russian politics and 

the development of the law for many years, is fatally flawed. It 

gives the presidency too much power. The 1993 constitution really 

decapitated the role of parliament, and it is now not able to serve 

an effective monitoring function within the Russian government. 

For more on this subject there are several new books that have 

just come out, one by Eugene Huskey at the University of Virginia, 

and another by Robert Charlotte at Union College. They are longtime Russia watchers, real legal scholars. One has been following 

developments in the presidency and the parliament for many years, 

and I would encourage anyone to read them who is interested in 

this subject. 

Chairman GILMAN. Thank you, Mr. Sherman. 

Dr. Cooksey. 

DD. COOKSEY. Thank you, Mr. Chairman. 

Mr. Palmer, I would like to direct these questions at you. 

I had a friend that had done some work over there some years 

ago, and had gone back and forth, and it was something for the 

Russian people, not a business deal, just trying to help them out. 

But he reached the point that he said he was told that he would 

not be safe because he was not giving a portion of the goods that 

he was giving to these people, donated goods, to the Mafia people 

or whatever the underworld people were called. 

How safe are Americans over there today in Moscow and St. Petersburg, or in the outlying areas like Ekaterinburg, for example? 

Mr. PALMER. If we leave the Caucasus areas out of the obvious 

danger areas, and we talk about the major cities, largely, Americans are rather safe. 

I recently did a study for a U.S. corporation on how much risk 

was involved in trying to collect debts from Russian firms even 

with direct organized crime ownership, which you would think 

would be one of the most dangerous things you could become involved in. What we found was that there really had not been a recorded case,. at the time of the report, that any American had been 

killed or even injured because he tried to exercise his legal rights. 

So far this year, there were, I think, four Americans who died. 

One was a T-shirt salesman. The only businessman was a used car 

salesman. I am saying it is not like any executives or anything of 

this because of their work. 

The one case that everyone will point to is the case of Paul 

Tatum, who owned the Radisson Hotel and had the dispute with 

the city of Moscow, Mayor Luzhkov's office, one of the front runners for the next president. You can argue that he brought some 

of the difficulties on himself because he tried to imitate some of the 
23 

business techniques of organized crime. So it was danger to himself. 

I suspect that there is normal street crime that you would have 

in a city like New York. Other than that, I have not seen any more 

serious risks to Americans. 

Mr. COOKSEY. Good. That answers my question. 

For several years there have been some allegations that some of 

the top people in the Russian military have been involved in some 

of the massive corruption and theft of the government funds, including Yeltsin's First Minister of Defense Grachev. There are also 

reports that a young reporter that was killed in October 1994-

1998 was also linked to this type of corruption. 

Do you have any views about these allegations that you can 

share with us in an open session? I mean, do you think that, in 

fact, people in the military are involved in this corruption and the 

killings? 

Mr. PALMER. Graham Turbeville, who works at the National Defense College, wrote an excellent 50-page paper detailing the corruption in the military. It is widespread. · I cannot spe~ to the case of the journalist who was killed. There 

have been other journalists who were killed by nonmilitary. I 

would say that probably the stories are true. 

What we do know, and I can tell you I know for a fact, is that 

almost every·· Russian .soldier has to give a percentage of his salary 

to his commanding officer. It works its way up. They rarely ever 

get the rations· they are supposed to. They frequently ~ell off weapons. I watched as the Russian army. was pulling out of the former 

Soviet Urtion and they would come up and offer you AK-47s, grenades, and even anti-aircraft missil~s offered to me after I retired. 

What I am saying is it is a very common thing. . The other thing I should tell ·you is that you will notice that 

Spetsnaz, the Russian special forces, which are involved in more 

assassination and sabotage than the type of our special forces are 

involved in, are reported very reliably to have started training Russian organized crime hit men about 3 years ago as a way to make 

extra money, and they are now one of the leading employers of exSpetsnaz people. That is why when they kill people they don't blow 

up city blocks, they are more likely to get the right guy. That is 

a leading indicator that, indeed, the military is corrupt. 

Mr. COOKSEY. There is a Russian analyst named Glakena who 

reported that 13 percent of all the vouchers issued under the U.S._-

financed privatization program in Russia ended up in the possession· of one American firm. Do you know anything about this allegation, and do you believe that. such accumulation of vouchers could 

have indeed been carried out by one American firm? Do you know 

who the firm is? 

Mr. PALMER. I have read the same articles. I am familiar with 

the background on the firm. I do not have d~rect knowledge of it. 

I do know that a Russian government study said that a minimum 

of 85 percent of all the privatization shares came into the possession of organized crime. Whether they would deal with an American firm, I would say that is not even a serious question. Of course 

they would. The American firm would not necessarily have to 

know, in a legal sense, that they were dealing with organized 
24 

crime, but that is the only way that you could control such a large 

amount of vouchers. . Mr. COOKSEY. Mr. Satter from Johns Hopkins, it is reported that 

a Russian tycoon, Vladimir Pontanin, sold an oil company called 

Sidanko for $2 million in 1996, and later sold 10 percent to BP for 

$570 million. It has also been reported that the Russian automobile 

company Vaz was sold at voucher privatization auction for an esti- , mated $45 million even though Fiat had offered $2 billion for it in 

1991. Do you feel that some of these industries have indeed been 

sold for less than what they are really valued at? 

Mr. SATTER. Unquestionably. The examples that you cite are two 

among many of the way in which the most valuable enterprises in 

Russia were practically given away, and they were given away 

through a variety of means. One of them was the voucher privatization that we just talked about. 

When I was living in Moscow in late 1992 and early 1993, voucher privatization was at its height. At every metro station and at 

many bus stops, there were people with signs reading, "I will buy 

a voucher." These persons bought vouchers for a few U.S. dollars 

or for a bottle of vodka from alcoholics and other persons who 

didn't know what the vouchers potentially meant. Then the vouchers were used to purchase enterprises at fire sale prices. 

Another reason why this was possible was because once the 

voucher privatization had ended and money privatization began, 

the auctions at which enterprises were sold were rigged. The victor 

in the auction was determined in advance. In some cases there 

never was an auction. It took place only on paper. In situations 

where an auction was held, if someone was brave enough to bid 

against the pre-determined winner, he was putting his life in danger. This is the reason for those low prices. 

Mr. COOKSEY. I will give you my opinion. I assume there is someone here from the Russian Embassy. You can send this message 

back from the Fifth Congressional District in Louisiana. I was in 

the military 30 years and a month ago. We have people in my district and districts across the United States that are paying taxes. 

I still have confidence in the goodness of a lot of the Russian people, but we do not want to pay taxes to this government, to our 

government, our own government and then have it given to the 

Russian people and squandered or taken by outright theft. 

Yesterday, in a hearing on this same subject, we were advised 

that approximately $200 billion has been spirited out of Russia in 

the last several years. I am sure some of that was American taxpayer dollars and, if we had that, we could have balanced the budget and been home 2 weeks ago. That is a concern that I have no 

matter what my district is. 

My concern about this Administration, if there is anyone here 

from the State Department, is that at times you get the feeling 

that there is-well, to their credit, I think some people in the State 

Department are stronger than the people over in their boss's office-but they just want to try to make everybody feel good. If they 

go have a meeting and drink a little vodka, we will give them everything and throw in the kitchen sink. But still, that is American 

taxpayers' dollars, and we just don't want to continue doing that. 

That is my personal opinion. 
25 

Mr. SATTER. I just want to make one observation. The Russians 

are very smart people and do not.need to be taught by the United 

States how to invent the wheel. The problem with the truthful revelations about corruption in Russia is that they may turn public 

opinion against any aid for Russia, and Russia right now is in a 

desperate situation. 

While I was completing a book that I wrote about the fall of the 

Soviet Union, I did a little bit of work for Reader's Digest. One of 

the articles I had to write was about kids who die in Russia because they don't get timely heart surgery. They have defects that 

are easily correctable over here. The reason these ·children are not 

-operated on is that, although there are talented surgeons in Russia, Russian hospitals don't have the necessary equipment. 

If we had only had the wit at the beginning of this process to orient our aid toward genuine humanitarian needs in Russia and not 

toward te·aching the Russians how to be ·capitalists-a process 

which enriched our own consultants· and· led us·-to cooperate with 

a lot-•of-people who- spoke English very. well and made a good impression on us but turned out to be· totally corrupt-we could have 

done some good there. " · · In the reaction now to what we did do and what, of course, the 

Russians did for themselves-:--! mean, after all they are adults-we 

may tum against.the idea of helping Russians in any way, even in 

those situations where we can help and where our help is badly 

needed. · Mr. COOKSEY. There is no question that we could reach that 

point, and I think that is unfortunate. I . am a surgeon, and there 

are some similar talented, bright people in Russia, good physicians, 

good surgeons. 

Anyway, it gets back to the same problem that is a problem the 

world over. Sometimes you don't always have the best and the 

brightest in government. There are a lot of bright, capable people-, 

particularly the Chairman and myself. I am. being facetious. He is, 

for sure. But then you get people that just don't do the right thing, 

and it is a problem. It is a problem in Russia, and I hope that they 

can evolve to an era where they will have .. more integrity and do 

the right thing for their people instead of for themselves. 

Mr. PALMER. Briefly, but it supports some of your. earlier comments, the Russian Ministry of Interior did a study and, as of the 

end of 1998, from 1991 to today they estimated that total theft out 

of Russia had been over $300 billion, and Interpol agreed with 

those figures. That may be a low figure. 

Chairman GILMAN. Is that with a "B," billion? 

Mr. PALMER. That is with a B, billion, sir" .. Mr. COOKSEY. So that is $100 billion more than we were told yesterday. 

Mr. PALMER. Those are-Russian Ministry of Interior figures, and 

Interpol supported them. Other estimates run higher. 

The argument is made, well, there were not that many dollars 

in Russia. I would make two comments. This also includes Russian 

resources that go out at low prices for high profit on the outside. 

And, second, I would remind you that, through 1996, we had weekly planes going to Russia, 7 4 7 cargo aircraft carrying $100 dollar 
I 

26-

bills. At one time, Russia had more U.S. $100 bills in circulation 

than the United States. 

Mr. COOKSEY. I have heard that. Is that a correct statement? 

Mr. PALMER. That is correct, and one could assume that those 

dollars didn't stay in Russia. That is the loss. 

But in 1998, prior to that last IMF tranche going to Russia, I 

was at a discussion group here in Washington and we were talking 

to the Russian desk officer and some of the administrators, and we 

said why are we sending this money? It will disappear. And they 

said absolutely not. Corruption has really been beaten. On top of 

that, they have a new tax collector and he is going to increase tax 

collections. So, actually, in 2 years time they will have a surplus. 

Well, everyone there had a laugh about that, but there was no 

stopping the money. It was going to go. That money went and is 

gone, and ·now we are going to replace it. The point is this: The 

taxes that they do not collect are being made up by money that 

comes from the U.S. taxpayers. They are stealing that, moving it 

out for personal gain. We are making up the difference. I think 

something is wrong with that picture, and I think the average 

American taxpayer will see it that way too. 

On the other hand, Mr. Satter said, we cannot shut everything 

off in our dealing with them, but we have to have more control. It 

has not come from the Administration thus far. I think it has to 

come from Congress. 

Thank you, sir. 

Mr. COOKSEY. One question for Mr. Borovoi. It has been alleged 

that Russia's Chief Prosecutor, Yuri Skurotov, that the Yeltsin administration had tried to remove from that position, that the government recently brought the investigation in connection between 

the Kremlin and the Mabetex Construction Company in Switzerland. Is this true? This was in the paper about 60 days ago. I remember seeing it, that there was an allegation that there was a 

connection between perhaps Yeltsin's entourage and the Mabetex 

Construction Company that had paid some of his credit card bills. 

Is that true? Have you heard about that? Are you familiar with 

that? 

Mr. BOROVOI. I am familiar with this situation. I have no doubt 

that Pavel Borodin profited from construction and restoration work 

contracts in Moscow. 

But I would like to go back to the problem that I have pointed 

out about the competent professional expertise about the situation 

in Moscow. 

The resignation of the chief prosecutor-general prosecutor happened when Mr. Primakov was Prime Minister in Russia. As a 

matter of fact, that event was the result of a fight between the entourage of Mr. Primakov, which we call the KGB group, with the 

entourage of Mr. Yeltsin. The process is much more complicated or 

complex than it is seen from here. 

Dr. COOKSEY. Thank you. 

Chairman GILMAN. Thank you, Dr. Cooksey. ,,. I would like to address this question to all of our panelists. We 

all recognize that there is an extensive amount of corruption in 

Russia, but what do you recommend now? How should our policy 
27 

.toward Russia change or be revised in order to address this worsening situation? And let me start with Mr. Palmer. 

Mr. PALMER. Thank you, sir. 

It seems to me the first thing we have to do is depersonalize the 

foreign policy. There are some quarters in this town that believe 

that our relationship with Russia depends on good contacts between a. few officials on both sides. I think that has to be broadened. I think we have to deal with all aspects of the Russian political scene. That certainly includes the Duma. That means we cannot focus on only one group or one party: Everyone talks about 

this. I have seen no change in that. 

Second, we cannot support one group blindly. Imagine from the - American point of view if the Russians sent us 30 election experts 

to help run the 2000 elections and sent us several million dollars 

to·help organize them. I don't think that we would take that well, 

no matter which candidate won, and that is precisely what we did 

with Russia. We sent experts. We sent money. I.don't think we can 

do that. I think we have to· stand back a little farther from that. 

We cannot take sides quite so often. 

The next thing I think we have to do is make every bit of the 

not only aid, but loan money, a quid pro quo. That means, yes, we 

will support investments in Russia after you have come up with a 

bilateral U.S.-Russian investment treaty. This is a normal thing 

between states. If we are going to encourage investment, let's protect our investors. I think that -is not only prudent, I think it is responsible. 

I think that we should have audits. If we look at the food aid 

that ~s just gone to Russia, that food aid was meant to disappear. 

Marcy· Kaptur argued constantly' for more controls on that. They 

didn't happen. 

I looked into this with the Department of Agriculture, and they 

said, well, we are thinking about things, but when we hear something that we like :we will let you know. That is not how the government sets the pace. They paid the contractor to come up with 

the idea of let's distribute information about food delivery on the 

Internet so that peo:ele· could track them. The people that we are 

concerned about don t have enough money to eat. I am -sure they 

don't have computers at home and Internet. They do not have 

power. Let's be realistic in these things . . This food aid is an example. We purposely said we don't want to 

audit it. Right now we are completely dependent on the Russians -bringing us once a week statements that this food was delivered. 

I know for a fact some of these statements of food being delivered 

were signed in February and March although the first shipments 

didn't arrive until May. ' -What I am saying is, let's take a reasonable bipartisan look at 

this and try and do this government to government like we would 

anywhere else. · Thank you very much. 

Chairman GILMAN. Thank you. 

Mr. Henderson, would you comment? 

Mr .. HENDERSON .. Sure~ l concur with Mr. Palmer's comments but 

would say that one of the most important issues facing. the global 

community, is -the security of the world's financial system. I think 
28 

the Bank of New York case, again, only begins to illustrate that 

this is a very serious problem for not only the United States, but . for the international community. I know there are separation hearings under way on that matter, and there are a lot of discussions 

that need to be held. 

But on that point, I think whether you are talking about the 

banks, private banks, or the World Bank, or the IMF, or USAID, 

or even corporations, private corporations, much more emphasis 

needs to be placed on know your customer rules and know your 

employee rules and when is an employee obligated to report on suspicious, corrupt transactions? Until this culture of silence is broken 

within the corporate community and within the multilateral donor 

community and at other donor agencies around the world, I think 

you are going to see very little progress on any of these fronts. 

Right now, no one is really reporting on corrupt, suspicious transactions. It is questionable how well written the bank's rules and 

regulations are in this regard-that is private banks. So this is a 

very serious issue that must be addressed very promptly. 

I think, again, the other thing that we could do, as Mr. Palmer 

was mentioning, is to get our own house in order. We who have 

been studying the corruption problem for some time see an awful 

lot of corp·orate complicity in the corruption process. Everyone 

knows that it takes two to tango, and it doesn't appear as though 

the. laws that we have on the books, not only the U.S. but in other 

countries, are properly being enforced. The OECD antibribery treaty is going to have little meaning unless we find ways to enhance 

the way that it is implemented. 

The last and maybe most important point in my mind is that you 

hear a lot of rhetoric now about the need to work more with civil 

society and small business associations and the private sector. This 

is the kind of conversation going on now within the World Bank 

and within other donor agencies, including AID. But the reality is 

that most of these institutions don't have the mechanisms or policies in place to begin to work with civil society. Until civil society 

becomes more involved in corruption oversight, if you will, and providing a real check on governmental action, again, I think you will 

see little progress on this front. 

Chairman GILMAN. Thank you, Mr. Henderson. 

Mr. Satter? 

Mr. SATTER. Policy must be based on principles, not personalities. Russia is a country which has suffered a 70 year assault 

against its moral sensibility. Therefore, what the country needs 

and what it is often incapable of generating internally is an appreciation of right and wrong and a sense of fidelity to law. 

If we enter the Russian 'situation and, irrespective of the morality of its actions, back the political faction that we consider to be 

progressive, we actually further undermine the moral fabric of society. We did this many times. We did it over the war in Chechnya. 

We did it at the time of the forcible dispersal of the Russian parliament in 1993. We continue to do it when we close our eyes to 

the corruption in Russia and the way in which organized crime is 

terrorizing the ordinary Russian citizen. 

Russians were inculcated for 70 years with the idea that capitalism and criminality are more or less the same thing. Now they 
29 

are living in a state which is largely run by criminals to whom we 

give our -rhetorical . support. Therefore, we confirm them in t;hefr 

preyious prejudices. . . ·· . . ·. The first thing we have to do is sever . .the link _in the mind's of 

the· Russian people between capitalism and crime, and to do that, 

we need to insist ·on fidelity to law and fidelity to ordinary. moral 

principles and stop making excuses for the people that we 4escribe 

as "progressive" and who, in fact, are not progressive. · .To implement this idea further, there are a couple of concrete 

steps -that we can ta:ke. First of' all, we should take care wit}:_l our 

:rhetoric. We should not say that Pres_ident Yelt~in,-when he-is authorizing· the carpet bombing of civilian areas in Chechnya, is comparable .to President' Li~coln defending the American union.· ·we 

should not endorse the forcible and illegal dispersion of the Russian 

parliament. We also shou_ld no~ try to interfere in the Russian elections. · _ 

But, beyond this, we can make: it clear that people who have obvious ties to organized crime figures are not welcome in the United 

States and that the organized crime figures also are not welcome 

here. Since these two categories include many of the leading people 

in government, such action will have psychological significance 

both for the government and for the Russian population. 

In general, rhetorically and with our influence over international 

loans we need to, in every concrete situation, back crime-fighting 

techniques, back institutions ·~hich will be resistant to crime and 

end the previous tolerance that we have shown over the. last 7 

years for those people who·believe an economy is organized stealing 

and behave accordingly. 

Chairman-GILMAN. Thank you, Mr. Satter: 

Mr. Murray? 

Mr. MURRAY. Yes, Chairman Gilman. 

In my view the best way to both- combat corruption and otherwise sustain market reform in Russia is to reduce the barriers to 

small business. To date, -this has not happened.· As I indicated in 

my earlier testimony, in fact, the barriers to small businesses have 

increased -over.-the last 10 years .due to _rent-seeking behavior on 

the part of the government. 

If barriers to small business are reduced, we will see the creative 

business potential• of . the.· Russian people unleashed for the first 

time .. We haven't witnessed that yet. Small businessm~n.have not 

been allowed to create wealth and to create a middle-class without 

being extorted or preyed upon by the tax authorities. 

The best way to. help them do this is not by simply throwing 

money at Russia, of course, but rather by_ helping the emerging 

small business comm:unity create what is called "social capital" 

which is to -say the values and the mores that are needed to run 

businesses honestly. · · 

Earlier, Congressman Bereuter commented that I sounded very 

optimistic ~d that it was unusual. The reason I am optimistic is 

that, to date, business and moral aspirations have been: kept in 

quite separate categories during this reform period in Russia. They 

are treated as being two separate endeavors. In this project we 

have conducted on behalf of the Eurasia Foundation to create the 

Declaration of Integrity in St. Petersburg, we have found that 

62-963 00-3 
30 

when moral aspirations and business are combined, there is a new 

level of enthusiasm and determination to conduct business on the 

part of the average citizen. I believe that once the barriers to small 

business are broken down you will see people with the profit motive take care .of this ·corruption problem efficiently, more efficiently 

than it has been addressed to date. - Chairman GILMAN. Thank you, Mr. Murray. 

Mr. Borovoi. · . Mr. BOROVOI. First ·of all, it seems dangerous to me, the trend 

of stepping back from involvement in the political process-.in Russia 

or being bystanders and_ just observing what· is going on. If this 

point -~f view was ·prevalent in 1948, then 70 percent of German 

parliament would consist of N a:zis. I think that the major· highlights of democratization of Russia are programs targeted for development of education and democratization. I think that the $600 

million. that was spent on .the procurement of food products would 

much better be spent on purchasing mass media and providing programs for education and enlightenment of the Russian population 

on economics and democracy; free market economy. 

Chairman GIL¥AN,. Thank you. - Mr. Campbell. - Mr. CAMPBELL. Thank you, Mr. Chairman. 

I would like a member of our staff to give this to Mr. Henderson 

if you could, kindly. I am telling you what this is. . _ At yesterday's hearings on the same subject, Dr. Michael Waller,. 

Vice President of the American Foreign Policy Council testified. He 

put into the record this e-mail-and I am going to· r~ad to• y9u what 

he said about it-you were in the e-mail, b\lt I am going to take 

a second and explain it. _ The suggestion is that the. principal contractor for USAID for the 

rule of law project, ARD-Checchi-and I am_ quoting _.from Mr. 

Wallet's testimony-"-tried to suppress a noted expert in Russian 

crime and:corruption from voicing concerns about the USAID-sponsored privatization program. That expert, Professor Louise Shelley 

of the American University, and a colleague of Dr. Waller's at 

Demokratizatsiya journal, had early evidence that organized criminal· elements had exploited the U.S.-backed privatization program. 

In June; 1994, ARD-Checchi rule of law project director David 

Bronheim s~nt an e-mail notice to offices in Moscow, Kiev and else-: 

where with a warning about Dr. Shelley that appears to be· intended to suppress and discredit her, and he then quotes the email,'a copy of which I have given to Mr. Henderson. · "Professor Shelley. Please treat this with enormous ,care. If I had 

known what ·shelley was up to I would have resisted Henderson's 

instruction to put her on the consulting contract. She is a bomb 

with a lit fuse. Her hobby horse is that the AID. privatization program has been exploited by organized crime. - "The privatization program is the showpiece, the flagship, et 

cetera, of the AID program in Russia. Shelley, without understanding what she is doing, is trying to· sink the flagship. Under 

no circumstances can we be seen as helping that effort. We have 

no interest whatsoever in damaging the centerpiece of the AID program in Russia." end quote of the e-mail. · 
31 

I continue with Dr: Waller's 'testimony: "there you have it, as 

frank an admission as possible that experts concerned with corruption of U;S. assistance programs. were ~imply not welcome. A copy of-the e-mail is attached."·. . ·.. ·_ ·. ... - · 

~ That copy is what I have ju~t supplied to l\4r. He:riderso:~1. 

[The information referred to appe~rs in the appendix.]· . Mr .. CAMPBELL. As you might guess,.. I am interested-::-knqwing 

that yoμ were on the witness list today, .I brought this-I a,n i11:terested in your advice to us as. ~o whether, m~¢h more importantly 

AID,. but not trivially, whether a contr~ctor. of AID actually. tried 

to suppress an. expert.as was μescribed by .D.r. w3:1ier iI,1 his testimony. , . .. . . , Mr. HENDERSON. Thank you. I. am familiar with this situation, 

and I would prov:i~e by· way .of background a note .that this memo 

was writte~ in response to internal memos at AID .-by .some in th~ 

privatization office. They were concerneq that Professor Shelley, as 

well as myself, were beginning to ;raise some questions about their 

privatization program. David Bro:Q.heim,. who .is a prilliant. analyst, 

a former AID employee, and he is now. deceased-he was actually 

killed in a car wreck in Georgia working on ~ AID .program-was, 

I think, mainly trying tc:> respond to this concern ·within the privatization office at AID that its centerpiece program .was going to be 

called into question by folks. They were not at. all happy with the 

fact that people like myself and the democracy and· governance · office were giving her the opportunity to, at least, express her opin- ion. · 

I did not know at the time, to be honest with you, whether the 

information she was provided was completely accurate or not, but 

I felt like, as did some others at AID,-that this was an issue that 

needed to be openly discussed, and encouraged her to provide testimony to Congress when called to do so. 

I guess the good news is that she was retained for a limited 

amount of time, even after this occurred, that the contractor's opinion had no impact on her employment or her ability to speak out 

on this issue. But this memo and in particular, the memos that I 

saw that were circulated by people in the privatization office were · of great concern to me because they were clearly trying to stifle any 

discussion of this issue. · Mr. CAMPBELL. Then let me ask the most important question, to 

me at least; and I am going to put it in a way that sounds leading, 

but you are an intelligent person, able to address it, so don't say 

anything you wouldn't otherwise. But I take your testimony to be 

that, to the best of your knowledge; USAID did not attempt to suppress research indicating corruption of the privatization program; 

is that correct? 

Mr. HENDERSON. I was trying to say that some employees within 

AID were, in fact, trying to suppress research and open discussion 

on this issue. I am referring to discussion that occurred at the programmatic level. I know of no intervention on the part of high-level 

AID or State Department employees. These were people operating 

more at a senior programmatic implementation level. 

Mr. CAMPBELL. Thank you. 

I have one last question for Deputy Borovoi.-. I would like to ask 

what the prospects are for the Economic Freedom Party and other 
32 

members of the Duma who believe, as you do, in the upcoming elections? ; · . 

Mr. BOROVOI. Unfortunately, Russian politics today is dominated 

by nationalistic and isolationist forces. In the current composition 

of the Duma there are about 50 percent of these forces. I think that 

after the next election there will be about 80 percent of them. This 

is the result of a very powerful, mighty antiwestern campaign that 

was modeled after Soviet-style propaganda campaigns trying topicture western community as an enemy. The examples of these campaigns, there was a campaign of support for Iraq and a campaign 

of support of Milosevic and a campaign against NATO expansion. 

So, if this trend is going to continue, I don't think there are any 

prospects of any democratically inclined parties in Russia. 

Chairman ·GILMAN. I think we have overstayed the patience of 

our e~perts. We want to thank our witnesses for their participation · in the hearing today. I am certain that your thoughts and your 

comments will assist the Members of our Committee as we seek to· 

better understand developments in Russia today and as we make 

recommendations for the direction of U.S. policy toward that important country in the future. 

This hearing of the Committee on International Relations is now 

adjourned. 

[Whereupon, at 12:25 p.m., the Committee was adjourned.] 
. AP PE N~D IX .. 

0cTOBER 7, 1999 

. (83) 
34 

NEWS ~flt International 

Relations 

Committee 

U.S. House of Representatives • Benjamin A. GIiman, Chairman • 2170 RHOB • Washington, D.C. 20515 

DATE: October 7, 1999 FOR RELEASE: Immediate 1099-9 

CONTACT: uster Manson, Communications Director, 202-225-8097, Fax 202-225-2035 

Gll.MAN ON RUSSIAN CORRUPTION: "I SUSPECT IT GOES TO THE TOP" 

WASHINGTON (October 7) - U.S. R'1- Benjamin A. Gilman (201h•NY), Chairman of the House 

International Relations Committee, released the following statement from today's committee hearing on 

"U.S. Policy Toward Russia, Part II: Com1ption ln the Russian Government'': 

"I have no doubt that the corruption within the Yeltsin government in Russia is extensive. Our hearing 

this morning will seek to assess just how widespread the conuption is - and just how high it does go. I suspect 

1hat it goes to the top of the Russian government. I will cite just a few cases and reports that have led me to this 

conclusion. 

'The Swiss investigation into financial links between the top .Krem1in staff and members of President 

Yeltsin's family and a little-known Swiss company called Mabetex. -

"The Swiss investigation into the links between the Russian airline Aeroflot - whose Vice Pfesident is 

President Yeltsin's son-in-law - and Swiss companies set up by Russian tycoon Boris Berezovskyto which 

Aeroflot's hard currency revenues have been diverted.- _ 

"A decree issued by Mr. Yeltsin in the early 1990s granting a Sports Foundation set up by a close friend 

an exemption from export and import taxes that in tum allowed that 'foundation' to retain an estimated $4 

billion or more that would otherwise have gone to the government in tax revenues. 

"As reported in a comprehensive review by U.S. News and World Report magazine- an investigation 

begun by the FBI in 1994 into the activities ofa company called Golden A.D.A., set up by a top official and 

close associate of President Yeltsin's in San Francisco. 

"After its establishment, that company shipped tens of millions of dollars of diamonds, gold and 

antiquities out of the so-called Kremlin vaults and sold them, with the money allegedly disappearing into highpriced real estate and foreign bank accounts. 

"l'he 1996 arrest of a top aide in Ycltsin's re-election campaign who was caught leaving the Russian 

'Government House' in the company of a reputed Mosco~ mafia figure and holding a half million dollars in 

cash in a briefcase -- a arrest that never teSU!ted in any prosecution. 

"And then the notorious 'loans for shares' privatization program of 1995 and 1 ?96, under which the 

crown jewels of Russia's oil and metals companies -such as Sidanko and Norilsk Nickel - were sold to 

Russia's new tycoons for a mere pittance. 
35 

''Then there were allegati<:ms linking a fonner Yeltsi_n government representative at the International 

Monetary Fund to the on-going investigation into the possible _laundering of billions of dollars in Russian 

monies through the Bank of New York. 

''Use by the Russian Central Bank's top officials of an off-shore company -·:'FIMACO - for financial 

purposes that may yet not be fully understood. 

"Then the alleged massive corruption in the Russian military that cost the lives of, first, a young reponcr, 

and second, a Member of the Russian parliament, bpth of wh~m sought to bring that corruption to light. 

''I should note that this is by"'? means a fuJl,or comprehensive list. 

''But let me turn to another question we ·should be considering. At a hearing this Committee held 

yesterday, one of our witnesses, a fonner an.~lyst for our intellige~ community, stated his suspicion that there 

. may be American partners having some self-interest to ensure that IMF monies continue to flow to Russia as 

Russian monies are siphoned out of its government and economy and into Western banks and ~ccounts. 

"That suspicion is somethin_g we need to look at with great concern. As our Members may know, our 

Department of Justice is now investigat~g allegations that personnel of a top AID contractor in Russia - the 

managers and overseers of our US-tinariced privatization program in that nation - engaged in personal 

investment activities wt.le carrying out their work for our government in Russia. 

"In 199.6, before that Justice _Department investigation began, I co~ssion~ an investigation by our 

United States General Acco1:111ting'Office i~to the work of those managers in Russia out of concern that the 

A~nistration had channeled $40 imllion in non-competitive grants to them. 

"As the Justice investigation was beginning, we asked the GAO to look into the activities in a key subgroup of the Gon>Chemomyrdin Commissio~ of one of those allegedly under investigation by AID and Justice. 

At the request of the Justice Department, we later suspended that GAO investigation. 

"I now note, however, that press reports have a11eged that another Ameri~an under investigation in this 

mat~er.by Justice has been named in a law suit that aJlegcs that a pricing_ conspiracy was organized to sip}ion off 

millions of dollars from a Russian company into off-shore a<;counts. 

"I mention this matter today ~u~ I. believe.that ~e $~uld be.interested and willing to~ whet~· 

we have not just a Russian corruption problem -.but, whether, in fact, we may have something of an American . 

· problem ·as w~IL . 

"As one Russian' analyst ·has stated, it is interesting that one American Jinn managed ~ obtain over 10% 

of the vouchers that were issued under the Russian privatization pro~ set up with Amcri~.assistancc in 

the early 1990s. The questio~ is how such things came to pass." 

Witnesses a_t the hearing incl,ukd: Mr. Richard Palmer, Presidenl, Cachet International, Inc., U.S. 

Central lnrelligence Agency, Retired; Mr. Keith Hentkrson, Former Senior Adviser on Rule of Law, Crime, 

and Corruption, U.S. Agency for International Development, Co-Directpr, Tr:ans-Nalional Crime and 

Corruption Center, American University; Mr. David Satter, Visiting Scholar, Johns Hopkins Schooi for 

Advanced lnternationa( Studies, Senior Fellow, The Hudson Institute; The Honorable Konstantin Borovoi, 

Deputy, Russian Suae Duma, Chairman, Economic Freedom Party,· and Mr. Malthew Mumzy;Pllsident, 

Sovereign. Venrures, Inc; · · 

J,'• 
·36 

U.S. House of Representatives 

Committee on International Relations 

October 7, 1999 

Hearing on Corruption in the Russian Government 

Richard L. Palmer · 

Cachet International, Inc. 

Mr. Chairman and Members of the Committee, it is an honc:>r to be asked to testify today 

on this important subject. 

As was . the. ~.ase in iny testimony before the House BankiI_ig and Financial Services 

Commitiee on September 21, 1999, I wilt.once again attempt to provide even more 

document_ation to prove. that there has long been pub_licly available, detailed information 

concerning the level and dimensions of corruption in the Russian government and 

business sector. Further, I will also show that this information was already easily 

available as early as 1994 through 1996. 

The problems of official corruption, organized crime and powerful extra-governmental 

structures in Russia have long been the subject of readily available public media reports 

and academic studies - as ·well as one hopes more detailed US government ·studies and 

•rep.orting. Since at least 1992, it has been ~idely recognized that there is •widespread 

official corruption in the former USSR; that organized crime groups have corrupted · 

many public officials and business people; large Financial lndμstrial· Groups (FIG's) are . 

apparently above the law; and, that former officers of the KGB are frequently involved in 

dubious businesses, sometimes with ties to .organized crime. It is this new "oligarchy" 

that holds power in Russia today. In spite of all of the various studies that have been 

done, the ac.tual development of this oligarchy and its participants is not well understood. 

Worse yet, the fact that-these elements controlled the majority of the Russian government. 

and busi:11ess enterprises was ignored. 

In fact, the power and· w~alt}:l in ··the 'Russian government as ·weli as some. of the 

governments of the former republics· have been taken· over by former members of the 

"nomenklatura" and other bureaucrats, Party leaders, KGB officers and organized crime 

groups, They continue to increase their control, wealth and influence not only in these 

countri~s. but in the West as well. This was the result of a deliberate program by the 

former top members of the Communist Party to maintain their power, wealth and 

privileges. Concurrently, the influence of the Mafiya became even greater during this 

process. This conglomerate, the "new Russian oligarchy", is made up of a loose coalition 

of the former nomenklatura, KGB officers, Military Industrial Complex (MIC) and 

Russian organized crime .groups. The oligarchy was successful in gaining a near 

monopoly on the funds, property and power of the former Soviet State. It continues to 

hold a virtual monopoly on key Russian resources controlling enormous material and 

financial wealth. The oligarchy has vast political power and uses both the Russian 

bureaucracy and weak legal system to inhibit the emergence of a genuinely "free market" 

and the growth of "capitalism". This presents clear dangers to Western countries. There 
37 

is convincing evidence that it was not a matter of these. criminal groups corrupting the 

Russian nomenklatura and infrastructure, but rather .. that nomenklatura utilized the 

criminal groups and KGB to retain a measure of their. power,_ wealth and leverage over 

property and raw material resources following the dissolution of the USSR and its 

· command-administrative system. Further, the term "organized crime" . is equally 

applicable to the structures of the former nomenklatura as it is to the Russian Mafiya. 

Actually, the nomenklatura' make up about 85 % of what is known as "organized crime" 

in Russia· and only about 15 % con~ists_of the criminal .groups· commonly known as 

Mafiya. Finally, all of these structures have increasingly influence and direct authority in 

the curren~ Russian government as well as inteniatio:tially. 

In testi~ony b~fore the US Congress in 1994, then CIA Director James·wooisey summed 

up this relationship as follows: "Organized crim'e is not' a new phenomenon in Russia or 

Soviet history. During the Soviet era, criminal groups and the black market- often 

functioned as an extension of the Communist p·arty and the KGB. In fact, the Communist 

party and KGB used criminal groups and the black market as a second, parallel economy 

to further their own goals and enrich their own organizations. They had their own codes, 

traditions, and loyalties .. · ... In the late 1980's, we saw strong indications that state control 

had begun to· wane. Many of these criminal organizations outlived the state which 

fostered them and took on a life of their own. This · old guard,' · however,. has, been 

severely challenged by a surge of upstarts .. ; ... Since the breakup of the Soviet Union, we 

have seen a dramatic rise in· new .criminal groups that operate· independently without 

regard for whatever ground rules for criminal.activity that might have existed before. The 

'new Mafia,' as it if often referred to, does not abide by the old customs established by 

the traditional Russian underworld." 

In his June 1994 testimony.before the US House of Representatives: former CIADirector 

James Woolsey stated that: ''The Russian Ministry says there are rpughly 5,7QO organized 

crime groups in Russia, with an additional:1,'000 in the other former.republics. To keep 

this 'in perspective: ,I want to. point out that many of these organizations are_ actually small, 

locat·groups of.petty thieves. They would not fit the .Western definition of.organized 

crime. However, of the 5,700; approximately 200 are large, sophi_sticated criminal groups 

engaged in criminal activity throughout the former Soviet Union and in 29 other 

countries, including the United States .... 

• A (then) -~ecent ·.report prepared by President Yeltsin's staff concluded that 70 to '80 

· p~cent of privatized enterprises and commercial banks have beeri victims of 

' .. extortion [by organized•crime ... Russian 'criminal grpups are actively involved in the 

ill_egal transport and sale of narcotics: antiques, icons, raw materials, stolen vehicles, 

. . illegal immigrants, weapons, and some nuclear materials.... ' ' '. . ' 

• [T]hese groups have the resources with which to bribe nuclear weapons handlers or 

employees at facilities with weapons grade nuclear material. They also have 

es.tablished smuggling networks. that could be used to move such material out of the 

former Soviet Union ... Criminal groups·a're also targeting the financial sector where 

ec~nomic reforms pavded .to explosions in the-number of banks, in the complexity of 

their traruiact_ions, and in the ge6graph~c·scope of their activities... . ' .11 . ' \ 
38 

• [T]hese banks have become a particular target for money-laundering schemes. 

Indeed, links have been forged between Russian and Italian organized crime groups 

to move money through the Russian banking system. In addition to taking advantage 

of these banks, organized crime groups have set up front companies throughout 

eastern Europe and Russia. . .. · 

• The . power of Russian organized crime is largely due to their ties to corrupt 

government officials .... Criminal groups may be spending as much as 30 to 50 percent 

of their profits trying to buy off well-connected government officials, including 

Customs, militia, and police officials.· ... 

• The ramifications are enormous. For Russia itself there's a real threat that the surge in 

crime will sour the Russian people on President Yeltsin's reform program and drive 

them into the arms of Russia's hard-line political forces .... Beyond the threat to 

Russian reform, the growth of organized crime could seriously affect our efforts 

worldwide to combat international crime.". 1 

In October 1993, the Russian Ministry of Internal Affairs reported there were over 5,000 

organized crime groups operating in Russia. These groups were comprised of an 

estimated 100,000 members with a leadership of 18,000. The report also stated that 

although the Russian authorities have currently identified over 5,000 criminal groups in 

that country, Russian offi~ials believe that- only approximately 300 of those have some 

identifiable structure.2 Later reports from 1996 put this figure at over 150,000 fult'time 

personnel in Russia with over 150 senior "godfathers". As of July 1994, according to 

Russian MVD figures, there were •~recisely" 5,691 criminal groups; 3,000 criminal 

leaders; 279 high level leaders; 920 groups united into 155 criminal associations.3 

FINANCIAL RESOURCES 

In a December 1994 article in the Washingtcm Times, which they claimed based upon a 

leaked secret CIA report, it was stated that "more than half of Russia's largest 25 banks, 

including one with an office in Washington, are linked to Russian organized crime." The 

report went on to state that "senior Moscow officials believe that Menatep (Bank) 'is 

controlled by one of the most powerful clans in Moscow' and has been involved in 

violating international trade sanctions." The alleged CIA report added that these Mafiya 

linked banks were involved in bribing state officials for advance information on exchange 

rates, which allowed for windfall profits for tl}ese banks. Further, the report noted that 

the Mafiya maintains informers in Russian banks to advise the criminals when certain 

clients accumulated certain amounts of funds so that the criminals could move against 

these clients and their finns.4 (NOTE: Oddly enough, the Federal Reserve Bank was 

apparently unaware of this alleged report when they apparently accepted the reported · 

recommendation of the Bank of New York - in the person of Vice President Natasha 

Gurfinkel Kagalovsky - that the Russian Inkombank be allowed to open an office in New 

York. · 

In 1994, former CIA Director James Woolsey added that " .... Of the 2000 banks in Russia 

today, a majQrity are controlled by organized crime, according to the Ministry of Internal 

Affairs."5 In August 1995 the MVD All Russia Scientific Research Institute estimated 

that criminal groups control over 400 banks and 47 exchanges. Ah even more pessimistic 
. 39 

assessp:ieht ·was made by Professor Lydia ~favina, bead of the Institute: for Banking 

· and1

Financial Manage.rs~ who:·estimated thar-70 to.SO per-cent of private banks in Russia 

·_- are controlled by organized crime.~ . . . . - . 

According to a 1994 report prepared for Boris Yeltsin by the Analyticai' Cent~ fo~ Social 

· ·and Economic Policies; 75 percent :of Russia's-private enterprises .pay 10,percent to 20 

percent of what they earn to 'criminal organizations. 7 More recent estimates from 1996 

'-·and 1997 are 20 to 30 percent ofthe profits·must now lie paid to ·the Mafiya·- with·these 

. costs being passed on to ~ consumers. · , · , 

So~e 40,000 stirte ~d fri.vately. ~.n comfmp~. in~ludi~g mo~t of the count~• s banks, 

are contr~lled by 150 cnmmal syndicates. . - · 

Corruption aμiong' the poJice_js ~pant.-. Frequently, 'in Rus·sfa its :well 'as fociier 

repubiics li,ke: Latvia, vi~tini°s of qar' thef\. ~e· referred by the police to o~acized crime 

. groups who o~en will agree to return the yehicles· in exc~ge for paying half its origii)al 

. purchase price.-The'police often offer.to help the victims tQ contact the Mafiya. This kind 

of maneuver has become standard procedure; confirm other.-Russians.9 . Retired Russian 

police general Aleksandr Gurov noted ·what many Russians confide in private,-in that the 

Russian Mafiya now acts in place of several state -~gencies, such as the-;.police, court 

systems, etc:, and it' is to the Mafiya·that many businessmen are forced to.tum to obtain 

· payment on contracts; received paid for goods, etc; 10 : · , , . · . . . • 

FBI Director Louis Freeh stated before the us Congress that over 200'6:fRussfa;s 6,000-

odd- crime gangs operate with Am~rican counteq,arts in 17 U.S .. _ cities in. 14 states. 

According . to intelligence reports, members Qf criminal ·groups in Russia are sent to 

reinforce· and.consolidate links.between groups in Russia and. the United States. Russian 

organized crime· figures are ·also sent to this· country to perform a: service such as a 

gang~and murder or ext~J'.1ion. ., . . ~ 

The Moscow Criminal Police reported as·early as June-1991 that one third-ofthe-~al 

groups in- Russia were connected to th~ shadow'' ~r•second economy. 11 . . •: , . 

In April f994, -th~ Mafiya was ~tini~ted to have 5s'percerit of the finaticial capitah1:1d 80 

percent of the privatization shares' and VQUchers' in Russia:' As·a' resul~ they were able to 

control the. priva~tfon process; am1J1ge winning bids very much below market prices 

·and'_arra.n2e 'the··<>utcome·· of the' bidding· in at' least :7oj,ercent of the privatization 

auctions.1

:r · · · . . . 

-in"Api-i(1996,' a s~riior' officer 'of 'the· Federal iax Police Service ·was -~ed for 

. accepting a US$ 2·00,ooo·bribe from one:singte commercial company: This·was one of 

. 'the-fe\V such cases ever prosecuted:13 '. 1

: ,: • • ' ; '' • 

How~er, perhaps the best.recent ex~pl;:ofthe in$titutionalization of'official corruption 

is ·the case of several ~ussian'·officials arrested fu;coimection wiJh the Solntsevo Mafiya. . 

This is the same'trime'that w.as reported· to be worlring with former'ICFB employee Boris 

·•:eirsteyn to' latind~ US'$ 150:~llion. · Col~eFYevgeniy·Zhigarev, a·Higher ~olice 

··school'professor,·testified that btjbes:from the Solhtsevo··crime familY:were distributed as 

·: ;follows. •nie prison,·counselo~:p'assecl .orders 'and· "treasury ·mon~ to friends· in law 

· "enfo~ment. ~e frivestigafor coliected,'infoririliti01Hm the pertinent ·c~ cases, 

devised a plan to ~I them, and by ~eception ~tained the materials for examination 
.40 

• and falsification .. The professor found middlemen to pass· bribe~ _to investigators and 

judges .. There was a · precise fee structure: for changing, the •,measure t_o secure the 

appearance of the accused, for dismissing the case, for. lessening, the sentence. Freedom 

~ost $25,000 per person. 14 · _.. . 

Also in 199,6, the.Russian New~pap·e~ Truttr~~orted -that the number Qf reported·. ip.urders · 

in Russia rose from 15;500 in l990 to 32,000 in 19~5, adding tht,1t many of these murders 

are-the result of disputes over the division of the spoils. of the market economy. Related 

to these disputes, there were a reported 500 "contra~t" kiijings in .1995 of which 61 

assailants were arrested. Although 73 percent of the reported. murders in Russia are 

solved, only 40 percent are solved in Moscow. 15 . · . , . 

,.In .September 1996, K,omsomolskaya pravda reported tha~ regional political leaders _use 

Mafiya groups iri inter-ethnic disputes i'n order. to maintain• ~eir political power. The 

article pointed out that ~3!1-Y small busi_nesses were. _also being.set up by the Mafiya arid 

_that over 300 city officials in Moscow belonged to. criminal groups. In addition, the 

' estimated Maijya turn~~er in O4essa is equal to Jhe· city's ~fficfal ~_udget.16 · : 

-!HE RUSSIAN MAFIYA ·•·N T;HE us{ ; . According to, ,a 1996 report on Russian .organized Crime ·(ROC) by the Office of the 

Attorney General of California, the· following are a few ~•snapshots~• of the activities of 

various Russian_Mafiya groups in ~e US: .. ' ' .t ~~· ' • .. 

• According·to the U.S. Attorney in_Los Angeles, this group managed to avoid.paying 

- $3.6 million•·in taxes in just one year: .1994. By using .,tax-free additives and 

manipulation of the ownership:of their gasoline companies, the Russian Mafiya was 

able to retain 42-50 cents a gallon without paying any taxes .. 

• In Los Angeles, Russian organized crime figures have been involved . in \larious 

frauds ·that run the gamut from-staged·.auto accidents to _false ·billing schemes. In 

1991, in a case considered the largest of-its~kind,,the U.S. ···Attorney's Office in ~s 

_ Ang~les charged .13 defendants in a $1 billiop,.false medical billing scheμie that was 

, · headed by twQ · Russi~ emigre brothers,. ·Michael and David .. Smushicevich. The 

SmushkC?vi~h brothers' were -~spected 9f .being p~_of ~ loosely .organ,ized' ·soviet 

.crime syndicate operating. iri the Los A,ngeles. area,duririg theJate .1980s. 'and early ·199o•s:· , . ... . - . . ·: .•.· .· ··· .. : . · . 

.. • . Colombian .. cocaine distributors are believed to have formed . an. alliance with 

'.·o.~ganized ~e groups.in Riissia to _imp_~rt large .. q~antities-~f cocaine .int,o,.that 

country. These ties became ·evident after ii f. l-metric tori shipin~nt. __ of cocaine was 

seized in St_. Petersburg, Russia in February 1993. · · · · · • • • I ~, -~ ~• • .2. ' • ' • 1 ; • 

• OQ Septeip.Qer.8,. ~.9?3, several-R1;1s,si~.ctjm~ figμres _wer~ ~ested !n .St Augustine, 

Florida for ~onspiracy-and, inten~ to, iP,1port SQO kiJ9s, of cocaine .. ~ese subjc;cts were 

attempting .. to.· es~blish a drug -distribution route: from Florida to Detroit and ~ew 

. Yot:k_. . It is ,b_elieved groups of.R~i~- o~ganized; ~tjme fi~re,s in Los ;~gel~s and ... New.York were,p_art pf th!s •operation ... Tl)~ ~uss,i_;μi gro1:1p \Vas dealing~~-C~s.ta 

Rican drμg trafficlc~rs, .and had pl~~ .. to sm~gg!e. a large quantity of coc~1:1e fro~ 
41 

Colombia to Italy aboard a vessel. The Russian group was dealing with the Sicilian 

Mafia in this venture. 17 

According to the New York's Crime Task Force,-Russian organized criminals cheated the 

US government of $14.6 million only· during the period October 1991 and December 

1992 by setting up a series of dummy companies to sell gasoline without paying truces. 18 

In this case, this type of activity began in the late 1970's and allegedly resulted in the 

purchase of the sixth largest oil company in the US in 1985. Subsequently Getty Oil 

Company was the first US oil company charged with racketeering. 19 

The Russian Mafiya was "protected,, and assisted by the Italian Mafia for this series of 

operations, which were extremely lucrative for the Italian Mafia. The FBI learned in 

1983 that these two organizations were coofoerating in another operati<:>n to bilk the Las 

Vegas casinos out of millions of US dollars. 0 · , , 

This does not include the large scale money laundering operations run by these groups 

which frequently involve the use of US banks 'and "paper" firms operated in the US, 

making "investments" in the former USSR and around the world. 

WHAT DOES IT ALL MEAN? 

The ~vidence rather clearly illustrates· that the majority of the commercial activity in 

Russia is controlled by organized crime, if we accept the latest estimates of 80 percent. If 

we accept the "best case scenario'; of only 40 percent control by organized crime, the 

economy is still paralyzed in terms of actual free economic development At the very 

least, the following points are clear: 

• several powerful organized criminal groups exercise control over national economy; 

• the corrupt government and law enforcement agencies serve as tools for organized 

crime groups; and, the formal country leaders are unable and unwilling to fight 

organized crime and corruption; 

• there is still a severe shortage of democr~tic institutions and mechanisms, paralysis of 

the legal system; 

• the market mechanism$ are suppress'ed by organized crime; 

• as is illustrated by the figures sh~wn above, most informed observers agree that the 

criminal Mafiya groups account for only about 10 to 15 % of the makeup of 

organized crime, .with Russian officials, former officials and:.their ''newly created 

entrepreneurs" accounting for the other 85 to 90 %. In other words, the criminal 

Mafiya groups with ostentatious cars, bodyguards and flashy attire are only the most 

visible portion of Russian Organized Crime and are· possibly much less dangerous 

than the more hidden "official" members of organized crime - whom the West. 

consistently attempts not to see. 

Today, it is virtually impossible for a profitable business·in Russia to avoid control by the 

Mafia and extortion on a regular basis. Attempts at resistance to the Mafia is ruthlessly 

and effectively crushed by metho.ds that include kidnappings, assassinations, attacks on 

the 'family members, or-malicious persecution by corrupt government officials affiliated 

with the Mafia. If any doubts remain, consider that retired police general Gurov wrote 

62-963 00-4 
42 

that in the course of 1994, organized criminals killed over 600 bush,,~ssmen and bombed · 

or raided over 700 company offices. Investigative journalists, merr1:::ers of the Duma and 

even policemen are now killed on a regular basis. Over 300 bankers have been killed 

since 1991, including the chairman ofone large bank with known ties to the KGB. 

Having demonstrated its power to the entrepreneurs and to the naticn in whole, the Mafia 

in Russia now enjoys almost total power. The corruption reaches all the way to the top 

levels of the government, as the bribes for government officials nc,w cost the organized 

crime groups up to 50 % of their billions of dollars in profits. For the Russian 

government, it is much easier to control corrupt officials, which ca!1 be easily controlled 

against the threat of jail sentences "for corruption" should they disobey. Most 

government officials have become integrated with the major organized criminal groups, 

because such partnership is the most effective way for their officials to profit from their 

power and strengthen their personal positions. The oligarchy, for its part, has obtained 

control over the government, including the law enforcement agencies, thus increasing its 

own power, security, and income. 

The rights to private property in Russia may not even be consiciered as absolute, as 

control over property depends on the relative strength of the criminal group and other 

factors, not related tb the legal rights to own it. The oligarchy as a whole took the place 

formerly occupied by the Communist .Party which effectively owned all commercial 

entities and employed most of the country's population. Similar to how the Communist 

Party operated, the Mafia motivates its employees by threats and by financial means 

(salaries, bonuses, shares in the business). 

Today the 1'owner" of a private factory finds himself in the position, similar to the 

position of the manager of the same factory when it was government-owned in the Soviet 

Union. Neither of them was entitled to the profit of the business, but both were 

financially motivated. As long as their masters ( oligarchy and Communist Party 

respectively) were satisfied, both enjoyed the privileged living, carefully adjusted to the 

social status which their managerial positions secured them within the oligarchy or 

Communist system. If the managed business was profitable and important enough, then 

both the "owner" (under oligarchy), and the manager (under Communism), were entitled 

to a limousine, big apartment downtown, a luxury dacha in a prestigious suburb location, 

and high salary. . 

At the same time, Russia slides ever deeper into debt, without presenting a concrete plan 

to raise the funds to repay the old debts. As noted in this testimony, the influx of Western 

investment appears to be equal or slightly less than the total amount of capital flight. 

Consequently, the West is simply supporting a system of corruption which by nature, 

fails to have the desired effect of spreading economic reforms and democracy to the 

population. This information has been in the public domain since at least 1993, as this 

paper and my testimony before the House Banking and Financial Services Committee on 

September 21, 1999 have documented. 

All of this information has been in the public domain and, worse yet, has been presented 

to not only the media but also the entire administration. And yet, nothing has happened 

and no one has listened. 
43 

As the US continues to "search for answers", consider that the Russian press continues to 

do a praiseworthy job of publishing facts and. otherwise documenting corruption in 

Russia. While the W estem press rarely publishes this material in the West, you can be 

certain that the Russians know about their own corruption and corrupt leaders in great 

detail. Recognizing that a newspaper article is not evidence in a court, you must also 

recognize that many of the most famous cortuption investigations in the US were a result 

of published media reports. I - for one - do not believe that ~e US goverrupent -

including the State Department, FBIS and other government foreign policy agencies -

have quit reading the foreign press. Therefore, even if the US law enforcement _ and 

intelligence agencies had not been able to find any information or evidence of high-level 

and massive corruption in Russia - and I do not believe that - then we would have to 

believe that the US administration also does not read the foreign press. 

In my testimony before the House Banking and Financial Services Committee on 

, September 21, 1999, I included several documented, public examples of how Russian 

officials planned and executed the looting of their own state. I even included publicly 

available copies of Swiss bank statements of Russian officials who work directly for 

Russian President Yeltsin as well as proof that this same official gave the two most senior 

prosecutors in Russia apartments worth $ 500,000 each - in an apparent attempt to 

influence their official duties. 

For this testimony, I include a very recent Russian media article that simply and directly 

explains what happened to most of the$ 4.8 billion in IIMF funds that were transferred to 

the Russian government accounts on July 23, 1998, and who profited. While it is not 

evidence for the court, it seems as if it might be ap excellent starting point for the US 

Government. 
44 

DEFAULT·MEANS PUTTING ONESELF ABOVE SERVICE 

Article published by Novaya Gazeta in edition issued 

On September 27 - October 4, 1999 

We wel'8 right. The assumption made on 

•Haw 15 bill/an dollars could be stolen" has been confirmed by new facts. 

(Reference is made .to an article by Bulat Solyarov) 

In the 33rd edition, we have described the scheme that helped the senior 

executives of the financial sector to earn billions of dollars on the development 

and collapse of GKO pyramid. They have done it easily through associated 

companies that enjoyed access to insider's Information about decisions taken by 

the Cabinet. According to our version, the rubles that were made on GKO trading 

were used to buy dollars at the currency exchange market (the fact confirmed by 

stock exchange players). In order to secure a maximum amount of dollars (and 

the possibility to take them abroad) exchanged for the minimum amount of 

rubles, the same bureaucrats urged the IMF to disburse credits for ruble 

stabilization. Consequently, they got an opportunity to buy an unlimited amount 

of dollars provided by IMF at the exchange rate of one to six. 

We continue to examine our version and get convinced that an enormous 

number of new confirmations prove that we were right. Considering that Russia 

still does not have a mechanism of personal responsibility for financial decisions 

taken by the Government and the Central Bank, we can not put the blame on 

anyone in particular. However, it is common knowledge that decisions regarding 

GKO trading were taken by a narrow group of persons: Dubinin, Zadomov, 

Kirienko, Aleksashenko, Chubais and Gaidar. The country always knew its 

heroes. 

First, let us speak about unimportant. It does not surprise us any more that many 

things are conducted Illegally in our country. And still we have to state that first 

and foremost the people who decided to default on August 17, violated clauses 

31 O and 817 of the Civil Code which states that the State does not possess the 

right to change unilaterally the conditions of the debt Issued for circulation 

including GKO bonds. This action violated Article 35 of the Constitution which 

states that • nobody can be deprived of its property unless such decision Is 

taken by a court•, and that "creditors' claims to the Central Bank should be 

examined at the constitutional level. 11 These are the victims who were justified 

· by the objective set forward by establishing the financial swindle called GKO 

market. 

The objective is clear. We can define with precision the purpose of the domestic debt 

pyramid, which collapsed on August 17, 1998. Its only objective was to enrich the 

players of the Russian stock market who were always represented by the Central Bank 

and companies close to the well-known state officials. We believe that in the last years of 

its existence, the GKO system did not have anything in common with state interests. 

Above all, the profitability of state securities was insane and was unwarranted. While the 
45 

securities in industrialized~countries earn a return of not more than Spercent per year,.in 

developing countries lOpercent annually, and in under developed approx. lSpercent, in 

Russia in the best times of economic development their return was up to 30percent , and 

in August of 1998 even.up to 200percent. Taking into consideration that the Central 

bank,..and institutions close to it, have always controlled not less than SOpercent percent 

·of the stock market, the federal authorities -. had they really wanted to - could have 

,lowered the ·profits of state securities that caused the pyramid to grow at a supersonic 

speed. However, such action was not part of the plans of the companies who earned 

excessive returns in the.securities market. They needed a high and speculative antifederal rate of return. We all remember those companies that were close to the Chubais -

Aleksashenko·group: MFK Renaissance Capital Group (Jordan), Montes Auri (Kokh), 

ONEXIM (Potanin), etc. Moreover, certainly, the group of the Central bank. The market 

· players at that time would explain their confident behavior exclusively by the friendship 

between their leaders and state officials. They needed the state to guarantee the rate of 

profitability not at 10 -lSpercent per year (which is more or less reasonable), but at 30 -

200percent . 

The· federal authorities had another serious reason for maintaining such 

excessive interest rates for state securities: the Central Bank needed to show 

profits. For example, in 1997 the net income earned by the CB on GKO trading 

generated 5.5 billion rubles. In other words,· by managing the financial pyramid 

on the eve .of August 17, the CB was leading .the country to default. The CB 

· made .interesting· use of these profits. According to Yuri Boldyrev, vice-Chairman 

of the Audit .Chambe~. the audit in 1997 showed that the Central Bank had spent 

7 .5 billion rubles for administrative·. purposes. We may add . that all the 

expenditures for state management in Russia were approximately equal to this 

while the volume of construction works, carried out by the CB without any 

interruption, was equal to the scale of residential construction , in the entire 

country. 

During the period from January .to August 1998 the -profits earned in the GKO 

market by the government and Central Bank bureaucrats had become enormous. 

At that time everything had become obvious even for the least educated people. 

In December 1997, the GKO market stopped to be the donor of the stated 

budget. In order to survive, the state had to. prolong the life. of the pyramid 

scheme and therefore started to pay off the bonds, although · not with newly 

acquired assets - increasing the Internal federal debt -but at the cost of th~ state 

budget. In other words, starting from December 1997, GKO trading had lost its 

value for the State budget. Rather, by replenishing the budget, it was draining up 

to 35percent of its revenues. The Ministry of Finance spent 600 billion rubles 

from the budget to keep the GKO market going. The bureaucrats started to fill 

their own pockets and as well as those ofs of associated oligarchs. This was 

done at the expense of tax payers, such as miners, teachers, and physicians 

who suddenly were confronted with arrears of their salaries. It means that 

starting from 1997, it was completely senseless to issue new GKOs. What Is 

more, the issuance of GKOs was criminal as it generated only more wealth for, 
46 

the players in the stock market. The rest of the story is already known. As soon 

as it became clear that the federal securities market was about to collapse and 

the state could no longer sustain the pyramid scheme, the government received 

a number of projects proposing a civilized way of restructuring the domestic debt. 

None of this projects has ever been implemented. Persons well known by now, 

drove the annual interest rate for federal securities from 30 to 200percent and 

when there were no funds anymore with which to pay off the debt, they simply 

declared default. We assume that the country didn't need the GKO market in 

general, because its budgetary profitability existed for a short period of time and 

ceased already in 1996. However, if that was the case and these persons built 

the pyramid, it had to be restructured - at least in the period between 1997 and 

1998. The government, however, was not motived by the interest of the State. 

That is why no restructuring took place. It didn't take place because notorious 

people were able to gain great wealth exactly because of the collapse of the 

market in 1998. Restructuring could have provided a cushion to effects of a 

pyramid scheme with regard to its timing, but government continued to state that 

the pyramid was solid and the situation was under control - not only at the 

beginning of 1998 but also in August 1998. They brought about the default crisis 

which led to the following results: defaulted domestic debt of 400 billion rubles, 

losses suffered by the banking system of 150-200 billion rubles, catastrophic 

GDP and investments volumes, lowering of the country's credit rating and 

continuing deterioration of the population's living standards. 

In edition 33 (D) we reported that around three billion dollars of our approximately 

five-billion Dollar IMF stabilization credit were bought out by state officials and 

their friends who made rubles profits on GKO trading. According to our experts' 

opinion, they have bought dozens of billions of dollars in the federal securities 

market. The CB used to sell around 1QO million dollars daily replenishing its 

assets with IMF funds. In order words, by providing disbursement to stabilize the 

ruble, the IMF in fact contributed to launder the rubles illegally earned by 

notorious people In a pyramid scheme. Our experts estimate that the participants 

of the federal securities market bought approximately 70percent of all the 

currency available on the market. · 

P.S. Since the Constitution does not require state bureaucrats to assume 

personal responsibility for their decisions, all the attempts by citizens, State 

Duma and the Federation Council to initiate proceedings through the General 

Procurator's Office on the GKO case will be doomed to fail. 
47 

---- .. -F .. ,. -

• STATEMENT oF·rtIB HoNoRABLE'il JA:MEs wooLsEY, DIRECTOR oF CENTRAL- - .-., .. ,. -

INTELLIGENCE, ON INTERNA TIONAL·ORGANIZED CRIME AND NUCLEAR SECURITY 

to the House of Representatives, Congressional Record, June 27, 1994, Page: El335. 2 National Drug Intelligence Center, October 1993, cited in the report ''Russian Organized Crime', from the 

·· Office of the Attorney General of the State of California, Daniel E. Lungren, (State of California: 

California, 1996), March 1996, page S. 3 Moscow "/zvestija", "Part Seven of Series entitled 'Who Wields power in Russia' ",in Russian, by 

Izvestija Analytical Department, 20 July 1994. 4 "Washington Times", "Most of Russia's Biggest Banks Axe Linked to the ~fob, CIA Report Says Illegal 

Activities Spread to the District", 5 December-1994, by Bill Gertz, p. A0I. The article went on to 

state that the local Menatep Bank representative stated that his office docs not take deposits in the 

US and a representative for the Russian Embassy stated that "he was not aware of any 'official' 

Menatep office" in Washington. However, in June 1997, the Menatep Bank representative was 

reported by the local newspapers to be seeking US S 3.2 billion in investments from US sources 

for the renovation of the Russian telecommunications industry. 5 STATEMENT OF TIIE HONORABLE R. JAMES WOOLSEY, DIRECTOR OF CENTRAL 

"INTELLIGENCE, ON INTERNATIONAL ORGANIZED CRIME AND NUCLEAR SECURITY 

to the House of Representatives, Congressional Record, Jwte 27, 1994, Page: El335. 6 Phil Williams, ''Hysteria, Complacency and Russian Organized Crime", Post-Soviet business forum 

Briefing No. 8, Royal Institute of International Affairs, October 1996, p. 5. 7 ''The High Price ofFreeing Markets,'' The Economist, February 19, 1994, p. S7. 1 Sunday Times London, April 10, 1994. Also See "The Russian Mafia" (Washington D.C.: U.S. 

Department of Energy, Office oflntelligence and National Security, Office of Threat Assessment, 

1993); Stephen Handelman, "The Russian 'Mafiya','' Foreign Affairs 73 (March/April 1994), p. 

83; Claire Sterling, Thieves' World, The Threat of the New Global Network of Organized Crime 

(New York; Simon & Schuster, 1994), pp. 34, 90; Mark Elliott, "Economic Crime and the 

Necessity of Morality," a chapter in William Clark, ed., Economic Crime and Market Reform in 

the Fonner Soviet States (Boulder, Col: Wcstview Press, forthcoming). 9 Personal conyersations in 199S-1996.with victims of car theft in Latvia and Russia as well as several 

Latvian police officials. 10 "Russian MVD Fights Shadow Economy and Organized Crime", as heard on Radio Rossii on 13 June 

1991 in an interview with Chief of the Detective Division of the Mocow Criminal Police, 

translated in RFE Weekly News on 18 June 1991 byVictorYassman 11 .National Drug Intelligence Center, 0ctober 1993, cited in the report "Russian Organized Crime', from 

the Office of the Attorney General of the State of California, Daniel ·E. Lungren, (State of 

California: California, 1996), March 1996, page S. 12 "Mafia Accumulating Property", translated from Russian language broadcast of radio station "Elcho 

Moskvy" on 22 April 1994, in RFE Weekly News on 26 April 1994. Quoted researchers from the 

Russian Academy of Sciences. 13 ''Tax Police Colonel in Corruption Scandal", translated from Russian language broadcast ofNfV on 9 

April 1996, in RFE Weekly News on 26 April 1994 

. 14 Moscow "Obshchaya Gazeta" in Russian, "Solntsevo Gang Members, Operations Revealed", 1S-21 May 

97, No 19, p 7, translated by FBIS in FBIS-SOV-97-104 of21 May 1997. 15 Trud, 18 May 1996, as reported in RFE Weekly News, "Murder Wave", 22 May 1996, by Peter Rutland. 16 Komsomolskaya praYda, 24 September 1996, in RFE Weekly News of 25 September 1996 by Victor 

Yassmann. - 17 "Russian Organized Crime', from the Office of the Attorney General of the State of California, Daniel E . 

. Lungren, (State of California: California, 1996), March 1996, page 5 18 Reuters News, ''Russian Mafia Expands into New Areas, Using the US to Launder Dirty Money", 1 

• November 1995. 19 Vanity Fair Magazine, "Brighton Beach Goodfellas",by Robert Friedman, January 1993, pp. 27-34. 20 Komsomolskaya pravda, "Russian Mafia in the US: Cosa Nostra Has Showdown with a Russian 

Pretender", 19 December 1996, p. 2, in RFE Daily Report, FBIS-SOV-97-042-S. 
48 

Reutm News. "ltuailn Mafia Expands into New Ams. U1iq the US to Launder Dirty Money", l 

November 1995. 
49 

Testimony-t>f the Center for the Study of Transnational Crime and Corruption (TraCCC) 

at American t'niversity, Washington, D.C. 

Russian Corruption and U.S. foreign Policy 

October 7., 1999 

Before the Committee on International Relations, U.S. House of Representatives 0 

Prepared by: 

Professor Keith.Henderson 
,-50 

GLASNOST II -AN UNFINISHED RUSSIAN NATIONAL ANTHEM 

WITH AN EMERGING DEMOCRATIC CHORUS: RUSSIAN AND GLOBAL 

CORRUPTION IS AT A CRITICAL CROSSROADS 

Thank you Mr. Chairman and Members of the Committee. It is an honor for me to appear 

before you today and I will try my best to share my candid thoughts and reflections on my past and 

current anti-corruption work and welcome your questions. My main interest is in advancing a global 

and Russian anti-corruption agenda and in s~g both lessons learned during my tenure at USAID 

from 1993 to March 1999-and my current activities-at-The Transnational Center for Crime and 

Corruption (TraCCC) at The American University. You may know'that TraCCC is the brainchild 

of my esteemed colleague, Professor Louise Shelley, who formed the center in 1995 with seed money 

from the MacArthur Foundation. Our main objective is to undertake academic and applied research 

on global crime and corruption problems, through creative multi-disciplinary partnerships with 

scholars and practitioners in targeted countries. With support from the U.S. Department of Justice 

and others, we have helped establish sister cent~rs in four Russian cities and one in Ukraine. With 

the Chairman's pennission I will try to s~ari~ my. t_estiinony for the Committee. 

In 1997, Elena Bonner, former dissident, human rights activist and widow of the Nobel Peace 

Prize laureate Andrei Sakharov, made an observation that I believe sums-up the current general state 

of affairs in Russia: 

"The intelligentsia seems to have abandoned its historic calling of compassion and 

assistance in the favor of grabbing crumbs dropped by the corrupt and powerful" 

Ms. Bonner further noted that while considerable freedoms had been achieved in a relatively 

short period of time, the collapse of the education and healthcare systems, forced military 

conscription, unconstitutional pre-detention law enforcement policies, abominable prison conditions 

and substandard wages and living conditions made many of the former concerns of dissidents look 

trivial. She called upon the international community and the Russian leadership to refocus its 

attention on core societal values and goals, such as freedom of the press and rooting out corruption. 

I believe her comments set the stage not only for today's discussion, but they also argue for a global 

anti-corruption summit and raise several important questions. 

QUESTION ONE. Is Corruption both a RussJ.a_n and int~rnational problem that requires 

global solutions? 

Over 130 years ago during an earlier reform era, Czar Alexander II, as told by one FrenchRussian historian, identified Russian corruption as a centuries old problem that was a major deterrent 

to Russia's integration with the West. The historian observed that the causes of corruption that 

existed then remained applicable today (1896): ·(i) a society ruled by men not laws; (ii) a 

secretive, restrictive bureaucracy that stifles justice and the press and the development of 

strong state institutions; (iii) a weak civil society unable to check government action and (iv) 

a disdainful citJzenry. These are the same core problems facing Russia today. 
The political, economic and social problems facing Russia, the U.S., Europe and the global 

financial system stem in large part from our collective failure to fully acknowledge, understand or 

respond to what is now recognized as one of the biggest threats to global economic growth and 

political stability -- public and private "grand" corruption. This phenomenon has greatly limited the 

power of the State to play a positive role in developing society in countries around the world. 

While the effects of grand or high-level corruption have negative economic and politi~ 

consequences on all countries, including the United States, they have a disproportionate negative 

impact on developing and transition countries and any subsequently emerging middle class. Indeed, 

many development specialists of all disciplines, including economists, lawyers, political scientists, 

CEO's and policy makers, now believe that systemic comiption in developing and/or transition 

countries, such as Russia, makes long"'.'term sustainable economic and political development virtually 

un-achievable. However, because most people in positions of power around the world, whether in 

the public or private sector, have chosen to treat grand corruption much like the global AIDS/lilV 

epidemic - either under a cloak of silence or with rhetoric. There is still no serious, concerted, 

holistic effort underway to address or prevent this regional and global phenomenon. From my 

perspective, most in the international business community, the family of multi-laterals and 

donors, as well as most public officials, are all moving-too slowly and are behind the learning 

curve. 

Institution-Building 

There are myriad reasons why key reforms in Russia have had limited resonance. Many are 

truly beyond U.S. or European control and relate to Russia's embryonic embrace of democracy and 

capitalism and the unprecedented revolution underway. Thus, even though it has been ten years since 

the fall of the Iron Curtain, from a historical and pragmatic perspective, the notion that the U.S. or 

anyone else lost Russia seems at once premature, naive and unrealistic. As this Committee knows 

well, it takes generations, not years, to build democratic institutions, a market economy, a viable civil 

society and a rule of law culture. 

Some of the key musical notes absolutely essential to creating a Russian democratic rhapsody 

with an economic chorus have been written in a relatively short period of time. However, some notes 

must be re-written, harmonized and receive broader, sustained public and international support. The 

most important institution, an.independent media and investigative journalism, is finding its 

voice, although it is still too weak and inexperienced to sing loudly or in key. The makings of an 

independent judiciary, in the form of Russia's new Constitutional Court, is also beginning to emerge. 

Judicial Reform 

The Constitutional Court, and to a lesser degree the Supreme Arbitration Court, are beginning 

to resolve disputes between competing branches of government, private citizens and businesses, 

respectively, that will help protect the personal and private property rights of citizens and businesses. 

These judicial decisions and some of the legal reforms that have occurred are creating the legal 
52 

foundation necessary to·sustairi democratic and economic reforms. While some of these new rules 

of the game need further revision, the real challenge today is implementation and enforcement 

Effective, fair, timely enforcement of these new rules will provide the missing notes to Russia's 

emerging national anthem and will ultimately determine Russia's long-tenn future and place in the 

new world order. This legal infrastructure and the evolution of a rule of law culture is absolutely 

essential to support a market-based democratic society and the empowering music of an independent 

media and investigative journalism. 

Parliamentary Reform 

Whether one agrees with all of ~Heies~tors, a viable, independent parliament must 

also be part of the equation. lnjJ,!Stafew short years we-~e beginning to see the Duma assume some 

resp.9nsibility for governing and taming the volatile and complex economic and political forces 

shaping Russia. Public participation through.elected repi"esentation and a system of checks-andbalances no longer seems to be an illusory goal As this 'institution becomes stronger and more 

representative, the melodies being written .and/or edited by· diverse parliamentary composers, in 

conjunction with othedmportant voices within Russian ~ociety, should help generate more public 

support for.democratic principles and free markets. This kind of public dialogue is essential to the 

consensus building process that must take place before corruption can be minimized and to sustain 

reforms. 

Civil Society 

Most important, advocacy groups, political parties, business and professional associations and 

· civic groups, at the local and national levels, are stronger and are beginning to play in hannony. In 

short, civil society is beginning to monitor more closely the overall direction and music-making 

process of Russia's orchestra leader. This is the most encouraging sign that Russia is on the right 

page of music, however slow its composition. 

However, in order for this music to be captured in the hearts of Russians, we must refocus 

and redouble our collective efforts. 1bis kind of prevention-oriented agenda should be balanced with 

a crediblelaw enforcement agenda. Accountability, civil society oversight and institution-building 

are key watch-words of¢e day. 

Global Anti-Corruption Dialogueffreaty 

. It is therefore incumbent upon the United States, along with its G-8 partners, to launch a 

global .anti-corruption initiative. If the United States does not assume a leadership role in this 

endeavor, more financial crises, political and economic instability and poverty will likely result. Many 

.. transition·and developing countries will never become part of the new world order and the mutual 

goals of economic growth and democratic governance will never be fully realized. 
53 

QUESTION TWO. What lessons have the U.S., the multi-laterals and the international 

community learned through their experience in Russia? 

This is a difficult question to answer since events are ever-changing and remain embryonic. 

However, I will attempt to outline 11 few key points that stand-out in my mind, based upon my own 

personal.efforts and observations made during the 1993 to 1999 time-frame. As the senior rule of 

law and crime and colTllption advisor to USAID's Bureau for Europe and New Independent States 

from July 1993 to March 1999, I had the privilege and opportunity to play a small part in one of the 

most important and historical revolutions of our time. 

For sure, the early refonn days were exciting and challenging times, and many of us, like the 

Russian people, had high expectations that in retrospect were unrealistic. Our programmatic efforts 

were also undertaken without a holistic grand strategy and with little coordination with our European 

allies. Some of this was unavoidable initially, given time constraints, evolving volatile political events, 

our inexperience in the region and the complexity of the task at hand. However, overtime it became 

clearer that there were some "underground" forces at work and that they were stifling many 

important economic and political reforms. 

Support for small patronage networks 

Ten years after the fall of the Iron Curtain, there is growing evidence that the infonnal and 

formal patronage networks that existed prior to the break-up of the FSU are either still intact or 

stronger than ever. This is true both in-country and transnationally. The result is systemic private and 

public corruption that makes sustainable economic and political reform extremely difficult if not 

unattainable. Democratic pluralism, a system of checks and balances and an independent media and 

judiciary are still only ideals captured on paper and are not a reality. 

Corruption within the law enforcement community and the judiciary presents the highest 

barrier to sustainable political and economic development. Many believe that until this conspiratorial 

network and unreformed bureaucracy is cleaned-up, that little can be done to address organized crime 

and conuption. Fundamental civil service reforms, the adoption and effective but fair implementation 

ofintemational law enforcement protocols and new criminal procedure codes must be undertaken as 

a first step to sustainable reform 

Failure to make judicial reform and fighting crime and corruption a high priority issue 

According to various business surveys, the twin problems of organized crime and colTllption, 

coupled with "unpredictable judiciaries", seriously impedes long-term trade and investment. The 

result is that GDP has fallen dramatically since 1989 and public trust and confidence in democratic 

free markets bas been badly shaken. In addition, many believe that no real middle class with is 

emerging. 

These three inter-related problems promote capital flight, money laundering and organized 

crime, inhibit institutional and political development and the free flow of infonnation. The result is 
54 

that the banking and financial systems in these countries are under-regulated and~ often controlled 

by organized criminal networks and/or corrupt public officials and private sector oligarchs. 

Western Complicity 

There is also growing evidence that "Western" private sector complicity in playing by the 

current corrupt rules of the game is an important factor that both discourages the development of a 

rule oflaw state and encourages public cynicism. Too often U.S. advisors act as intermediaries or 

facilitators between corrupt public officials and the private sector and appear to have sometimes 

unduly influenced U.S. foreign policy for their own private gain. 

Donor Corruption. Donor non-transparency and non-accountability comprise another part 

of this problem. The public does not have access to the details of various loans or refonn programs 

and thus can not serve to monitor government or donor activity and the proper distribution of funds 

Corruption within the donor community or associated with donor programs negatively impacts public 

perception and confidence and stifles the emergence of a middle class with vested long-term interest. 

While recent public and business surveys in Georgia and Albania indicate that donor corruption is 

perceived as less serious than corruption within the law enforcement community (including tax and 

customs), it is seen as a contributing factor to the overall corruption problem. This finding may be 

significant since there is little serious investigative journalism or reporting on this topic in either the 

Western or FSU press. Moreover, few high-level public officials or rich businesspeople are ever held 

fully accountable. 

Current IMF, World Bank or USAID staff guidelines still do not require fonnal corruption 

analyses in their overall country reports or strategies. Even when corruption is deemed to be systemic, 

no formal loan or program conditionality is required and there is no consensus among donors as to 

what the minimum terms of conditionality should be. There is very little information sharing among 

·either donors or between donors and the national or international law enforcement community. 

Even today most donors do not have clear employee or contractor guidelines related to their 

obligation to report serious corrupt acts internally or externally. Moreover, they do not have the 

auditing or oversight mechanisms or staff to monitor programs or loans, much less the political will. 

Indeed, .. donors do not want to become more accountable and see this function as someone else's 

problem. 

Financial Sector Corruption. Continued reliance on some of the financial institutions and 

outdated rules - both in the West and in Russia, coupled with our seemingly blind or naive eye. is 

also part of the complicity problem. Our failure to fully acknowledge and understand that some of 

these institutions are criminally controlled and that some march to the tune of corrupt public officials 

and/or entrepreneurs. is a problem yet to be seriously addressed by anyone. Recent country, regional 

and global financial crises, such as occurred in Russia, Indonesia, South Korea and all point to the 

need for prompt and concerted action. 
55 

HIID and Bank of New York Cases. Elements of the Harvard Institute for International 

Development's Russia reform investigation and the Bank of New York money laundering case, while 

not factually analogous, both illustrate many inter-related corruption problems both inside and outside 

the donor community, as well as the serious development and law enforcement challenges confronting1 ' 

all concerned. · 

Whatever the facts and findings in the Bank of New York money laundering case, it is 

representativeoflarger, inter-related global problems: Weak, non-tritnsparent, global and country 

financial systems, poor oversight and accountability, strong transnational criminal networ~ 

and official and corporate corruption. 

Inadequate governmental and non-governmental oversight of public and private players and 

public funds, coupled with weak law enforcement and unclear laws, has led to myriad and 

compounded economic and political problems for both Russia and the U.S. A lack of competition 

within the public procurement process and too much government political intervention are also 

significant contributing causes of the resulting problems in both cases. 

These cases illuminate the need to enhance competition and structure corruption safeguards 

into programs at the outset. These safeguards should include "know your employee" rules, as well 

as "know your customer" rules. This is particularly important when dealing with little-known 

people and institutions. In both cases it appears as though donor funds were misused and that people 

in positions of trust were colluding with corrupt public and private sector people and entities. 

These cases also clearly illustrate the need to enhance international law enforcement 

cooperation and accountability and the need to concentrate on financial sector, corporate 

governance and internal donor reforms. Other key high priority refonns include: (i) the adoption 

of international accounting and auditing standards that promotes fair audits and shareholder 

accountability (ii) progressive bankruptcy codes that allow enterprises to reorganize fairly and quickly 

(iil) international public procurement codes and regulations that ensure competition promote 

transparency and (iv) transparent (post) privatization processes. 

Some of the people involved in both cases appear to have ties to corrupt former and current 

public officials as well as to corrupt private sector businessmen and/or organized crime figures. 

We do not know exactly how these cases will unfold; however, the cast of seemingly linked 

characters/entities and the complexity and depth of some of their questionable activities, calls into 

question the USG process and laws by which these individuals were originally employed and 

operated. 

In short, multiple criminal investigations related to several individuals involved in different 

transactions are underway in both cases and the USG's and business community's integrity and 

reputation has been called into serious question. The long-tenn economic and political fall-out on 

USO relations with Russia, the financial community and on reforms in general, is not yet fully 

understood. 
p6 

QUESTION THREE. When Did We Know That Corruption Should be a Serious Issue? 

1994/95 - The Loans-For-Shares Scheme and the Yeltsin Crime Decree. Reasonable 

people cm certainly disagree, to a point, on this question. However, I believe in hindsight that most 

analysts r,now identify the 1995 "loans-for-shares" scheme as a clear indication that some of the 

"reformers" we were working closely with had ulterior, self-interested motives. That event, coupled 

with the 1994 Yeltsin Organized Crime Decree, which gave the Ministry of Interior almost limitless 

pow~rs to ~st and prosecute individuals outside the scope of the new Russian Constitution, should 

have 'sent important signals to ~l that organized crime and corruption was occurring at very high 

levels within the Russian Government. An international outcry ensued but was summarily rejected 

by the Russian government. 

· I do not pretend to be an expert on the loans-for-shares scheme and I do not know all of the 

facts intimately. However, no one seriously questions the fact that the scheme had serious flaws that 

called into question the motives of key "reformers." 

Even Anders Aslund at Carnegie, a well and highly respected former Chubais protege and 

long-time Russia watcher, acknowledges that this scandal "blemished" both Chubais and large scale 

privatization in general. In an October 1999 Foreign Affairs article, Aslund notes that a few large 

banks were allowed to privatize some enterprises at auc1ions that they controlled. Many lawsuits and 

volatile wars among bankers and the managers of these entefPrises occurred both during and after 

this process. In the end, while only 15 enterprises were involved, several notably represented some 

of Russia's most valuable assets -- oil: Yukos, Sibneft and Sidanko. He observed that the new 

majority owners did not behave like self-interested proprietors but just continued the management 

theft,-- primarily by selling the products below market prices to theh own trading companies. 

Aslund then goes on to obser.ve that the barrier to reform in Russia has never been the 

workers or the people, who have been exceedingly complacent. Rather, the threat has always come 

from elites who want to live on corruption. I concur with Aslund's analysis and conclusion that 

the best way to control these kin.d of "forces" is through effective democracy. · 

Other circumstances that raised more suspicion in my own mind related to the fact that the · 

USG knowingly made a decision not to properly oversee implementation ofHIID's critical legal and 

economic reform program that the HIID contract was awarded non-competitively, and that my late 

1994 request for an Agency report regarding exactly who we and the World Bank were planning to 

provide tens of millions of dollars worth of assistance to within the Russian Government was first 

accepted and then denied without a full explanation (see the 1996 GAO HilD Report # 97-27). 

April 30, 1996 - Congressional Testimony Before the House Committee on 

International Relations. Professor Louise Shelley, now my colleague at The American University, 

Louise Freeh, the Director of the F.B.I., and Eric Seidel, Deputy Attorney General in New York, 

John Deutch, Director of the Central Intelligence Agency, and others, were among the first to 

publically sound an organized crime/corruption warning-call with respect to certain forces operating 
57 

within Russia ~d th~ United States. Director Peutch noted ''that a fu.tlc betw~ the governing eJite 

and the criminal elements impedes-~e al;>ility oftlie Russiiμi Government to'i:p.eet the population's 

expectations of socialjustice, a quality of opportunity and improyed living standards." _He also noted 

that the law enfoi:c~ment forces were undersW!ed, underfunded an4 plagued wi~ c°9rruptj~n. 

Professor Shelley, Director Deutch and N.Y. Deputy Attorney General Seid,el also iestifi~d .. th,at 

organized crime's hold on the Russian banking community was a serious problem that had to be 

addressed. Finally, several noted that Russian organized criil).~ was estimated to cont_rol up to 40% 

of the Russian ~nomy. . .. , . .. . . . 

1997 -The First Anti-Corruption White Paper and Strat~gy 

During the spring of 199}, upon my own initiative but with the blessing_ofUSAID's Europe 

and New Independent State'.s: Bureau; I authored the u:s. government's first white paper· on 

corruption. Over the next six months, this paper was discussed in an number of interagency settings 

and with various individuals inside and outside of government.' This paper; which outlined the causes . p_f corruption' in the f SU and pos~ible programmatic solutions, was adopted as the official U!;,AID 

strategy for addressing.s9~ption .in_ the_~gion in the, w,inter of,19·97. ;K.ey elements of ~s·holistic 

strategy, which focused on mutually supportive trade and investment, good governance and ci~l 

society issues of common interest, were later included in the State Department's first formal policy ' 

statement on Russian corruption in late 1997 or early 1998. .I submit it for the recor? ~s an 

.a~chment to this testimony. That said, a compr~bensivl! anti-corruption initiative, with or 

.without donor support, bas yetto_be liruncbed in Russia •. _ . ,. · · ··· · 

. QUES'QON .F.OUR. What Can.Be Done To Ad~res~ ~o~ruptio1{ and Wh~at are Some Of the 

.. Lessons Learned? . , . . . · _: · . . · · .. 

. First. D~ ~ot attempt to ere.ate ~ig or.little dzais br c~ari~as. Puttiμg all' ofyo~r refonn eggs i:i:i, o~e 

basket without- broad public participation, support and oversight is a recipe· for failure. ·it also 

.~d~rcuts fulldamentaL dem_ocrati~_ pr~ci.I?~es and_-opens μp ~e _process_ to _c~rrupp?n. 

·second. hlsist on transi~:~~y within the donorcomm~ty. On the .giving ~nd, the public has a right 

to know how their money is being spent (developed c~untriesj;' on·ilie receiving end, the public has 

. aright to participat,:: jn the decisip,n~making and monitoring of tbi~ mon~y ( d,::velopipg and transition 

. countries). I can not teli you have many times I have been told by 'd~no~· iμid potential, d~mQr 

recipients that corruption is rampant within the old boy network that exists both here and abroad. 

~~tential ~ipients and.ev,e.ry~y.citizens are μow very s_uspi9iQus of the U.S. ~d oth~rs.offering to 

.Iendthe~a~t:lpingh~d. '. ... ·: ... _ _,, ·._ ... · .. ,., . · ,_· _ · _ .' · · . 

Third. .Ad~ance an international. Globat'_ Anti:~o~pt_~on. jreatY,,.and Mitilinum T~tiiis of 

Conditionality for donors that is priqritized and mandatory. Donors could not make specified kinds 

of loans or participate in certain reforms unless these minimum terms were agreed to in full. 

, A~eq~~ .support for. an ,indipenderi{jiufa;iary, media and ci_vil society; as -well as heitlth 'and 

·educ.~tiqq :programs, m~t b~ part ·<:>,Qhis, pa~lcag~_- . . . . . ' . . . . . . 

Fourth. Give the OECD Anti-Bri~ry Treaty and t~e 0.~ganization of Ametjcan Stat~ ,Anti- ... ~,. . _. ' ~~ . ~ -~ - ,,,. . . . ... ' ,.- ~ ' . ' 
Corruption Treaties 'some impetus and teeth. More intensive, creative monitoring mechanisms that 

include civil soci~ and b~iness coaimunity oyersight must be part of this package. In addition, 

intema~onal corporations should be held iegally accountable for corrupt complicity. 

Strengthening key multi.;lateraf organizations and enhancing the·u.s. diplomacy and capacity to 

implem~nt forei~ po}icy is an essential ~ep in 1!1~ new world order.'. 

Fifth. 'Enhance international law enforcement cooperation/communication through more informal 

and fonnal structures/procedures. More regional, sector focused , interdisciplinary training programs 

t_hat are tied to short and long".'term reforms and strategies are needed so that people (properly vetted) 

can develop mutual trust and share transnational "knowledge."· 

Sixth; Promote the 'tlow of "corruption" infonnation among donors and between donors and the law 

enforcement community. This should includ·e legal and ethical obligations that all requires government 

employees' and l>usinesses to report onc''suspicious transactions." Passage and implementation of Access 

to Infonnation, Whistl,e-Blower laws and policies that provide legal and poli!ical protection to whistleblowers, prosecutors, police;judges, policy makers and journalists is paramount Until the "code of 

silence" is'broken and "culture ~f secrecy" within governments there is little.hope of exposing or rooting 

out co~~tion. ·- · · 

Seventh. Promote more competition in the public procurement process and international best practices 

and good governance principles in both the private and public sectors. Many international best practices 

and standards have or are emerging within the last few years but most countries, particularly those in the 

transition ~d developing world, do not know whether or how to implement them. Particular attention 

should be given to some of the hard work that has been done by various international bodies including 

the World Trading Organization, the Organization for Economic Cooperation and Development and 

various professional international business and trade associations (e.g., 

~unting/audi~g/bankihg/corporate governance/trade and investment, etc). • • . ' • ' t ; • f• '. • ' ' : 

Eighth. Promote ~ore long-tmn institution-building/reforms.related to entities that can provide a check 

. 9n governmental action Gudiciaries, financial regulatory bodies, independent auditing agencies, 

ombudsmen, small business associations, advocacy groups; etc); · · · · 

Ninth. Promote· policies that promote more cooperation betw~en the. executive and parliamentary 

~ches and ~ore _inte_ragency coorci~ation. . 

Tenth. Promote more academic and applied research related to underst~ding the causes and costs of 

corruption - particularly the full economic and political impact of systemic corruption. More private• 

public partnerships are needed in order to create viable solutions to complex problems and to stay onestep ah~ of organized crime_ ~d°~~t public o~cials. __ · . 

Eleventh. Enhance co~unic~tion and ~gag'e~enrwithin the global and intelligence commμnities, 

donors and the business community and more due·diligence needed to protect the global financial system 

and_ donors. "Know your customer'' and '.'know your employee" rules need' to be strengthened .. 

Attac~ent: 1_997 USAID Anti-Ce~rliptien White Paper 
59 

RITE PAPER 

CORROPTION IN THE BOB.OPE AND NEWLY INDENDEN'l' STATES RAS 

HISTORICAL AND CONTEMPORARY CAUSES AND 'l'KREATENS ~ECENT 

DEMOCRATIC A2lD ECONOMIC REFORMS 

SCOPE OF TRE PROBLEM AND SUMMARY RECOMMENDATIONS 

Since the bi-polar political alliances of the Cold War have 

largely ended, countries in the ENI and around the world have 

begun to place the political and economic spotlight on a common problem -- corruption. While there is no generally accepted 

definition of "corruption", for present analytical purposes, this 

white paper defines it simply as the misuse of·public office for 

private gain. The specific ENI focus is on what some call "grand 

corruption", such as high-level bribery, procurement fraud, 

embezzlement and customs and tax evasion. These activities are often directly related to or part of organized criminal 

activ.ities. [It should be noted that while many of the issues in 

this paper relate to a number of ENI countries, much of the 

information and commentary relates more to Russia and the Newly 

Independent States, since that is where most of the research on this subject has been done to date.] 

Corrupt governmental practices are deemed to be widespread 

governance problems that serve to both nourish organized crime 

networks and·negatively and simultaneously impact host country 

economic growth, trade and investment and the development of· 

democratic institutions. They also have significant negative 

impact on the activities of the international business community, as well as the emerging middle class and professions in these 

countries, and. inhibit entr~preneurship and the development of a pluralistic rule of law society. In the final analysis, these· 

emerging constituencies are the chief beneficiaries of the 

reforms underway and they represent the coalition of interests 

necessary to root-out corruption and sustain economic and 

political ref9rms. 

While the scope of this paper is limited to governmental 

corruption, it should be acknowledged that the lines between the 

activities of the governmental and business communities i~ many 

of these countries are quite blurred. Thus, corruption issues more directly related to corrupt corporate governance activities 

clearly need to be addressed alongside governmental corruption; 

however, that set of complex issues will be addressed in a separate paper. 

Having said that, it is important to examine the corruption 

issue into a larger context, because of the interrelationship 

between the issues of democratization, trade and investment and 

economic growth. Similarly, the lines between activities related 

to.organized crime and corruption are also very blurry. organized 

criminal elements are perhaps some of the greatest beneficiaries 

of corruption, as they are taking full advantage of -countries 
60 

that lack the laws, regulatory systems and democratic 

institutions necessary. to support market-ba·sed democratic 

societies. Becaus~ of the complex relationship between all of 

these USG priority areas, policy mak·ers necessar'ily need to view 

the corruption issue as multi-dimensional and of wide-ranging 

impact-and importance. Other important related issues not 

explored in this paper pertain to narcotics and ·nationat security 

concerns, such as nuclear smuggling. The USG should commission 

another paper focused on these crosscutting issues ·after·a 

targeted field ass~ssment ,is co~pleted. · 

In summary, the report attempts to outline the problem, ·is 

well as some· of the key policy ·issues arid short and'long term 

programmatic. options·. It also _ad~ances several _USG ENI specific 

recommendations,·including~. 

l. That the U.S. law enforcement community conduct an 

assessment of its existing efforts to combat organized crime-to 

determine whether corruption issues are properly incorporated 

into its objectives,. strategy and programming. 

2. That the USG broaden the substance and·geographic reach of 

its anti-corruption agenda by moving beyond CECO countries to 

include targeted countries of the developing world; current u.s. 

objectives focus o~ promoting WTC procurement code reforms and 

requiring CECO countries ·to make it a·criminal act to bribe 

foreign procurement officials (to pass a law akin to the u.s; · Foreign qorrupt Practices ·Act) and on prohibiting countries from 

allowing ·c~mp~n~~s to such make bribes tax deductible~ 

3. That th~ CSG develop an international anti-corruption 

strategy, which ~ay include the promotion of· a regional or_-global 

anti-corruption 'treaty -- perhaps by building upon the InterAmerican'Anti-corruption Treaty and/or tbe·council of Europe's 

current efforts ·to develop a similar treaty for Europe. .. . - .. ' ' --' 

4. That USAID, on a country-by-country basis, assess the need, 

in collaboration with the EU, for incorporating more specific 

anti-corruption technical assistance components into its core civil society, institution-building and privatization/economic 

restructuring ~rogr~s. ·.· 

s .· .That ~SAID 'develop a regi~nal ·anti-corruption initiative· 

that is complementary _-to the' current USA:rb core progrui.·-that is 

part of a broader regional and global strateglc effort. 

SURVEY OF RESEARCB.-(also·see·attached) 

.. A su'i:'vey, of; ,the growing literature 'arid research is revealing 

in that .it ·~how~ ~~at -~~ch of what we now know ~bout corruption·· 

has been learned· in the last ·decade or so and that there is ·still 

niuch we dci' .not know. -·This fact is true· --for both :the developed · and developing world. Only rei'cently have academics· ·and ·, 
61 

practitioners begun-to acknowledge corruption as one ·of the. 

greatest post Cold-War·.threats,· alongside other major issues such as illegal immigration, illicit trafficking in nuclear and . · chemical weapons, transnational organized crime and today's all 

important battles for free and fair trade, economic development 

and democracy, There is also·a growing recognition that it is 

especially important to address the anti-corruption issue in the 

emerging societies of the former Soviet Union -- where an unprecedented economic and poHtical revolution is still .in its 

embryonic stage. · 

While it is difficult to quantify the economic and political 

cost df corruption; since-it is esseritially.a. consensual crime 

and often goes unreported, there is a growing consensus that it 

is a serious barrier to the national security, political and 

economic goals of the United States •. For example, a recent 

report by the U.S. Department of Commerce estimated·that.the U.S. 

business community lost approximately $11 billion in foreign 

contracts to bribery alone in 1994. ·At the same time; there is· 

almost unanimous agreement that corruption is· a very complex 

socio-economic problem that requires a multi-faceted global 

response. 

A strong ar~ument.can be made that the time is~ripe.to 

addre~s the corruption:problem within a broader strategic 

framework. Various forces are driving the need for action, 

including a sea change in public attitudes as a result of various 

forces arising out of an emerging democratic globalized economy. 

Today, the public has access to much more information about the 

way in which their governments operate, allowing them to hold 

~heir governments -ore accountable.· Also; the ·emergence.of moie 

rule of law societies and independent-media have resulted in more business interaction and an engaged and growing civil- soci~ty-. 

As a consequence, a new global culture and methodology for 

relating to each othe·r, as exemplified through the growth of r 

international law (such as the World Trading Organization and the 

adoption various international treaties)is now taking shape,.a 

fact that will redound-to the benefit of· all. · 

HISTORICAL PERSPECTIVE AND CAUSES OF-CORRUPTION 

bur picture of corruption is necessarily being·constantly· 

recolored, as we learn more about its causes and nature ·and the 

countries in which we are·working arid inv~sting •. New information 

technology-and dramatic global-economic and political forces are· also sharpening our image. The international political and 

business community, as we11· as a more ·engaged and vested . citizenry, now seems less likely to accept corruption as a price 

to pay to maintain. certain political and business alliances. 

An tiistoricai.perspective•is-also important to ·understanding 

and appreciating this global issue. Whether wear~ talking about 

the days of Peter the Great during 18th century Russia, Louis XV 
62 

during· 19th cen.tury France, o:i:: South-Korea, <ttaly -qr Mexico,.in . the 20th century, corruption has_ been a serious 1 .al thou_gh . infrequently, . .discuss.ed ph~nomenon. .- . .. · 

In 1-894, a French/RU$Sian ·$c;holar, Anatole Leroy._~eau1ieu, · . identitied corruption as a centuries- old pr_oblem for Russia .that· was a major deterrent.to Russia's beco~ing part of the world · community •. Indeed, many of the causes of.corrupti9.n he 

identified ·then seem equally applicaJ:;,le today: ( iJ .. a sqciety _ ruled by men instead of by laws; (ii) a secretive, _restrictive . bureaucracy that stifles justice and the press and the 

development -of strong.·state· institutions;. (iii) a weak civil 

society unable to ,check gover,nmental action and ( iv•) . a disdainfu_l 

citizenry. 

As previou~ly mentioned, the causes.of corruption _have m,any historical, contemporary and .tangled,roots. One of the-main 

distinctions between_ the·problem in Russia and that of _the more_ 

developed world.is that it appears·to be systemic throughout 

society. ·In·. other words, corrupt practices are an acceptable · and 

often necessary method of making things happen on-an every day 

basis in Russia. In effect, they are the established "rules.of 

the game." By contrast, in the more developed world, corruption 

is a violation· of the "rules of·game itself." Whether in the 

developed or developing world,·experience.has taught us that when 

corruption is. fully exposed, it has sometimes literally.rocked 

the polit1cal leadership of governments as well _as huge m~lti7 

national corpo~ations. 

One of the fundamental pol-i~y issu~$ is whether corruption_ 

should be.-.considered a high priority developm~.ntal issue for many of the countries in the ENI. Baseq upon what--we now know about· 

the impact of corruption globally, as evidenced by USAID's 

experience in Latin America and Africa, ·as well as recent reports 

from Ukraine·, Russia and Romania,· the answer would appear to be.' 

that·it should be. · 

One organization,attempting to measure-how corr~pt the 

business community perceives a country to be· to be is 

Transparency International (see Corruption Perception Index 

attached). It is interesting to note that the bottom thir~-- of 

the 54 countries surveyed is occupied exclusively by developing and -former communist countries. Nigeria.is last, Ch~na sqth, 

Russia 47th, India 46th, and Indonesia 45th. The lowest _ranked 

of the-Western countries is Italy at 34th. The resulting_picture 

leads one to believe that corruption is an acute problem for the 

developing world, which is a place where political and economic 

stability and .economic growth-are very sensitive and important 

issues. It may·also be one of·the m~in r.easons why some pr~vious 

reform efforts have not been entirely successful. -

-_... In summary, the causes of· corruption, at least in Russia 

where we know the.most, are believed to be largely attributable 

to the ·following factors: 
63 

1. History/ethos -- Russia's autocratic and communist syst~ of 

governance ov~r the centuries, except .for sllort-1-ived pockets -of 

reform, has resulted in systemic corruption and anti-government 

public.attitudes. 

2. Nascent .economy and fledgling institutions --:tl;le legal 

infrastructure is.still not.in place, incl~ding th~ regulatory 

stems necessary to implement the economic.laws and~ reformed law 

enforcement communi~y and.indepe~dent judiciary. capable of 

enforcing them. (and resolving economic disputes fairly and.· 

effectively). 

3. Uncommitted political lead~rshi.p;se .. king.to retain power and 

make mo~ey --·high-level political.commitment-and integrated and 

sequenced programmatic response~ to-.reform are essential elements 

of success; otherwise trying to.mix untamed capitalism with a patrimonial institutional environment may only result in.a• 

breeding ground for "more of the same." 

4. Little g·overnmental accountah.ility/tran~parency .o~· powersharing and no system of c!;lecks and balances exists --.policies. 

and procedures for governing, promoting trade and invesi;ment_and 

collecting and. d.istributi.ng resources (such _as laws and· policies 

related to·procurement, tax, and customs, a weak ~nd ~on-refo~ 

oriented parliament.and weak judiciary) are often ~nclear, 

unenforceable, unfai:i; and conflicting. 

s. unacceptahie budgets ·and politic~l support for key .. institutions and crime and corruption initiatives -- without the 

necessary resources an4 politic•! support k~y institu~ions_can 

not implement· an~ •~force th_e laws azu~. regula_tions fairly and 

effectively. -

6. An eml)ryonic civil society incapable-of supp~;ting'and 

checking governmental" action--- few-effectiva_govarJllllent-vatch~og 

and advocacy groups exi_st. 

ENI ANTI-CORRUPTION ACTIVITIES AND OPTIONS (also see attached) 

. ,: To date, .the cor:rupiion issue has re<;:eived relatively, little 

pol-itical attention i~ most countries of the ENI-. Indeed, the 

issue.has been addre~seQ largely through indirect but important means. Specifically, maj~r donors, including ¥SAID, the ~c and 

the World:Bank, _have embraced a ~ore .conventional prescription 

for this illness; namely, suppo:i:-~, for- k~y democratic ·.re~orms and 

processes, including fr~e anfi f'~ir el~c:tions, an~ basic market 

reforms, . such as. pri vati_zation, .. decentralizat;ion. and f inanc~al 

and administrative. regulation. All of th~~e. ·activ,i.t,i.es, .. · .· · including reducing the incentives for bribery and elilnina~~ng 

subsidies, trade restrictions and preferential treatment in 

-·.governmental·,purchases, along with new regulations in ~e financial, -securities, environmental aod,consumer protection 
64 

sectors·--- even while deregulation and privatizat±on initiatives are underway, 'nee~ ,.-continued strong support~ . 

The most directly related USG effort has been·largely. 

focused on addressing transnaticnal crganized crime issues.-This 

initiative· ·i_s· currently· being implemented· by various USG"law 

enforcement agencies and·· includes training· programs for law 

enfor·cem-ent officials and technical assistance in-·the· development 

of laws and cooperative·procedures to·address,crimes as . - , moneylaunde:dng; narcotics tra:ff icking,: nuclear- smuggling · and ... environmental crimes. The European Community has a-similar law, 

enforcement anti-crime program in place, but it also includes 

programs related to· illegal immigration. It has more recently launched· a separate anti-corruption initiative through_ the.· 

·council of E\lrope, ~hich is now in the process of conducting· 

country _a:ss·esslilents and linking ·this program to its ant:i:-crime 

initiative. · · · ·· 

There is a growing recognition ~hat corruption is feeding 

the growth· of organized crime. Many believe that it is critical 

for developing countries and the international community to move quickly to contain this growth before it becomes part and parcel 

of t~e· new economy and body politic. If that'unholy alliance 

between organized crime and. the business and governmental· 

communities:occurs, experience in countries such as Italy. has 

taught us that it may take- genera t io·ns to break the. back of 

organized crime -- which by then is capable of exporting crime 

and reversing hard-won economic and political reforms. - - \ ' ~.., 

·As·previously_mention~d, recent economic and political 

global forces, c·oupled with the· efforts o·f an emerging free· 

media, as well as experiences in other countries such as South 

Korea, Mexico and Italy, all point to the need to expand the 

anti-corruption·:prescription: beyond· basic economic policy and 

institutional reforms. Cl'early, a-· tirst, · fundamental ·step nee4ed 

in many DI countries is to place increased ~phasis en initiatives that increase th• demand for form within t~e 

governmental and wsiness ccmm~iti _s and, ~h~ public at large. 

_What would appear to be needed is a larger strategic framework·to address the-interrelateij, transnational issues at 

hand, as well as a·more sharpened,political and demand-driven 

prograliunatic approach that allows those with the most to gain 

from reforms to better understand the real political and economic 

costs·associated with corruption. Obviously, implementing sucn·a program requires ·considerable time, coordination, resources,and 

political support from both the host· country and the- · international community.· Targeted assessments and design. 

exercises~ done in coordination-'·with· the EU,·, need. to be 

undertaken. . ;, 

The next step; then, is"for a targeted assessment to be do~e 

followed by· the development . of a regional strat.egy that can· be· 

used as the basis for a coordinated regional initiative that 
65 

complements our current efforts but addresses the problems at 

hand more directly-, Special emphasis should be given to issues 

related to transparency in government, such as institutional 

procurement procedures and intergovernmental relations, and 

providing the bureaucratic incentives necessary to promote and 

sustain reforms, _such as civ_il service reforms. 

Serious strategic consideration -also-· needs to be given to · implementing components of any new initiatives under the auspices of the World Bank or another multilateral organization such as the OSCE.· The OAS/Inter-American Anti-cor~uption _Treaty, or the 

_current, treaty efforts of,. the· EU/Council of Europe, may be the 

right models for ENI cons1deration; In any case, U~AID's 

experience and our new grasp of this complex, transnational· 

problem, all point to the desirability of_ working in a multilateral, leveraged manner when possible; 

··In summary, next steps should include _the development' of 

programmatic responses that promote: :-

1. Inter·national "best practices" principles ·related to 

transparency, efficiency, ethics and compet'ition _in ·government 

and business. 

2. civil society development -- ·including citizen and business 

education campaigns, advocacy ·and government "watchdogs" groups an~ oversight mechanisms focused _on exposing and preventing corruption. · · 

3. More academic anti-corrup.tion research· and exchanges as well as anti-corruption training programs and support for journalists,· judges, prosecutors and police. 

4. Laws, regulations, institutions and financial systems 

necessary to effectively and fairly protec_t pz:operty rights, 

attack and prevent corruption and enforce·the laws. · 

s. The development of an ENI regional .anti-corruption strategy 

and integrat~d and coord-inated program'ing.· · 

Attached as an addendum is an overview of current anticorruption policies and progr1JJDS by al.l.major donors, as well as some exB.IDples of successful models 'that have been developed in 

·other parts oL the world. Also at:t:ached is a fairly recent 

bibliography vhich swmaarizes .any of the research papers t:hat 

have been vrit:t:en on t:h1s topic. 

attachments: 

1. summary of Donor Activity 

2. Summary of Research 

3. · Executi va summary 

4. Programmatic Options 
66 

DONORS CURRENTLY ENGAGED IN ANTI-CORRUPTION ACTIVITIES IN THE ENI 

" ,, ' . 

I. European commwiity (EC) and council o~ Europe-(CoE) 

·The EC, in cooperation with one of its sister organizations, 

CoE, has recently launched an anti-corruption initiative in the 

ENI •. This i~itiative is_ being developed alongside- a related 

.EC/ENI anti..:crime pr_ogra,m, which is primari-ly fos:used on specific 

law enforcement problems related to international ~rganized · · crime, such as money laundering, ·nar·cotics, nucl~ar smuggling, 

environmen:t~t issues and illega-1 immigration. · The CoE is _in the . process of, ~nd·ertaking country anti..;.cc;,rrupt:io:i:i assessments (th_e 

majority of ENI countries are signatories to the Guidelines of 

the .coE and Covenants ~f-the EC) and-designing country ~rograms. 

Among other things, its· regionai sti-a-i;egy calls for: 

1. _· The .n.e~es~ary legislative and. regulatory measure-:1, including 

transparent financial.~yste~s; · 

2. The development of interagep.cy and international .co.operative 

mechanisms t~ 'pr.event and combat organized crime, and . ·corruption; · · · · · · · 

3 .. Effec:tive protection for indiV:~duals providing information or seeking .to. ,enfor_~_e the law; 

4. New sp~ci·alized :bodies· to ·tight crime and c~rruption·; 

5. Technol_ogy and training for t_argeted law enforcement bodies. 

6. co·untry parti.cipation in. key ~μlt.ilateral docum~nts and 

treaties that estal:llish standards of practice and · 

cooperative proc~dure~_for combating crime and corruption. 

One of· the EC/c'~E,'s ~ey· oJ::lje~.ti~~s is. to c:{eveiop an international anti-corruption treaty for all of Europe (including 

most of the ENI), by the fall.of 1997 •. A cursory. review of the: 

draft. convention reveals :t~_at · it in9ludes .!l!~ny of· th_!! ,same, 

principles and provisions as the previously mentioned InterAmerican Anti-Corruption Treaty. specifically, they both (iJ 

estal:)lish a strategic_framework Ci~) reco)!llllend ~~~ development.of 

regional and,coun~ry ~pecific initiativ,s (iii) require the• 

adoption .of, specific good_. government practices and (iv). set-f'~rth 

the,, procedur~s for intern.I!' tional cooperi!l tion. 

II. world Bank (Bank) and Economic Development Institute .(ED+) 

one important international development .i~ .,that To~. Bank's_ 

new president, James Wolfensohn, intends to .. m?ke'°this. ;i~sue.-a 

high priority for- the first time_. He recently drew at~~i;itlon to: 
67 

deduction). Led by the U.S., this two-decade~ old effort appears 

to finally be reaping· dividends, and there is optimism that 

member countries will agree to pa~s such a law by the end of 

1998. . 

Bovever, OECD is·not the appropriate mechanism to develop 

any ENI initiative since OECD mem])ership does not include·any ENI 

or developing countries~ 

rv. World Trade Organization (WTO) 

The successor to the· General Agreement on Tariffs and Trade 

(GATT) ·, the WTO is the new world trading organization charged 

with developing ·and enforcing the new "rules of the game" for 

transacting international trade in· most sectors of commerce. Under the leadership of USTR,··the U.S. is one of its most active 

members. One international standard being promoted that.directly 

relates to corruption concerns the adoption of competitive and 

transparent government procurement procedures and policies (these 

procedures are similar but more specific than those promoted by 

the UN). The u.s. has endorsed both the WTO and UN Procurement 

Guidelines but is actively promoting those under W'l'O as a model 

for all member countries (including those in the ENI). 

V. United Nations (UN)·· 

Most of the work of the UN on corruption was done ~n the 

1970 1 s and so•s during a failed·attempt to.develop an anti~ 

corruption treaty. For a variety of reasons, many of which would 

not appear to be rele~ant today, that effort was not successful. 

In recent years, the-UN Crime Commission·has primarily focused on help1ng organize ·workshops and· collecting and disseminating 

information related to organized crime and development criminal 

ju~tice reform issues. ' 

The UN has also played a leading role in developing and 

promoting the UNCITRAL procurement rules·-- which set-forth 

general standaras and principles for government procurement; 

Through UNDP, it also implements rule of· law type programs, many 

of which are focused on human rights issues. · 

In· 1996, under u.s. leadership, the UN adopted a resolution 

that requires countries to make·it a crime to bribe foreign 

procurement officials and to eliminate the tax deductibility of 

such bribes (mirroring the previously mentioned OECD initiative). xn theory, this reso1ution must now be imp1emented by &11 UN 

member countries (including the ENI). 

VI. o.s. Department of State (State) 

·As previously mentioned, much.of State's focus to date has 

been on economic issues related to U.S. business interests, e.g., 

making the ~ribery of foreign procurement officials a crime and 
68 

ending the tax deductibility for such bribes (State/Office of 

International Investment). It appears that.this twenty~year 

effort has ac,hiev!=!d some ::;e~ent success and that this agenda will 

be .largely accomplished by the end of 1998 (although efforts to ensure country implementation and compliance will necessarily 

need_to_.be continued). ptber USG priorities.include supp~rt for 

the W'l'O procurement standards (tJS'l'R and commerce) and anti-crime 

lav enforcement training efforts (State/INL) . . There is no one,, · entity at State coordinating work in these related area's. -

Vl:I. United states Agency for Int•rn~tio~al Development. (tJSAID) 

, As· previously mentioned i~ the White Paper, aside from 

USAID's core program in many.countries, e.g., inst,it~tional. and 

economic.·re~orms; most of its· directly related ant1~corruption 

experience pertains to Latin ~erica and Af~ica~ While these 

regions -admittedly may be di,stinguishable from the ENI ih a number of ways, a review of these programs· and t~e ki~ds of 

problems they are attempting to addr~ss reveals that they contain some models and lessons learned relevant to the ENI •. · 

-,In Latin America, .. the· traditional method of governance is 

similar to some countries in the ENI. There, a public offic~al's 

duty is inseparable from the patrimonial obligation to family, clan, clique or party. Likewise, the state is the primary 

property owner, producer, financier, inve~tor and employer~ 

Official salaries are unacceptably low and "speed money" for 

every virtually ever.y official action is still custom in many 

countri~s .. Here, USAID is funding pul:>lic education. campaigns, 

the fqrmation of anti-corruption chapters and coalitions and is 

promoting c9untry implementation of the Inter-American Ant~-

Corruption Treaty. Simila_r programs are supported by the Africa 

Bureau, ~!though no regional anti-corruption treaty exists there. 

, In addition, so~e countries i'n Af~ica appear to be having. some success with a new model program based upon .an "islands of 

integrity concept." In this case a specific problem is 

identified and analyzed and the governmental entity. c~arged with 

addressing. the problem is reformed and "isolated" from the rest o~ the corrupt bure.aucracy. Much of the analytica;L product · i,s 

devoted to highlighting the ~ull costs of corruption, the 

benefits of reform, and the options to address the specific problem. It receives the necessary support from the highest 

level officials and builds-in bureaucratic incentives and 

protection into its overall program! 

As in Latin America, a number of post-Colonial African 

countries, nee-patrimonial regimes also became the rule and 

bribery a common aspect of governance. Indeed, some believe that 

corruption-funded patronage to kinsmen and·cronies has 

exacerbated regional, ·tribal, religious and ethnic divisions and 

contributed to a continual fiscal hemorrhage. The impact and· 

form·of corruption in one African country may be instructive .. 
69 

The International Forum for Democratic Studies estimates 

that in oil-rich Nigeria some $12.2 billion in government revenue was divested to "extra-budgetary accounts" between 1988 and 1994, 

and there are no records of how these funds were used. Even 

though oil earnings have steadily increased over the years, 

Nigerians' standard of living has fallen dramatically (per capita 

annual gross income fell from $950 to $300 from 1985 to 1993). 

In the meantime, Nigerians still wait in line for gas and import 

nearly 70% of their petroleum needs. In other words, Nigeria's 

oil earnings, which account for about 80% of the country's 

revenues, seem to do less to support the economy and feed the 

public than to enrich many of those in power (who immediately transfer their wealth to foreign banks). 

Although not funded by USAID, another model for possible 

emulation in the ENI mau be the Hong Kong Crime conunisston 

(HXCC). This is an independent agency that reports directly to 

the Governor and operates completely independently from the 

police and the rest of the civil service. Basically, it serves as a public education mechanism and investigates alleged 

corruption activities (and exposes them to the public through 

hearings). The HI<CC's findings and recommendations are then 

turned over the Attorney General for possible prosecution. 
70 

ANTI-CORRUPTION PROGRAMMATIC COmrrR.Y OPTIONS 

CIVIL SOCIETY PROGRAMS 

o nongovernmental watchdog/advocacy groups, civic monitoring 

organizations with hotlines, associations of professionals, businesses and users/providers of governmental services, self 

regulatory organizations, targeted cost/benefit analytical studies, and·coalitions that mobilize.business and labor groups as well as the media. 

o free and independent.media, training for investigative journalists, ethical codes for journalists, international press 

centers, human rights organizations. 

o educational programs for.businesses and citizens.focused on the economic and political costs of corruption, how to - participate in governmental programs, how to protect their 

property rights and ·public opinion polling. 

o national, regional and international workshops and 

conferences. 

GOVERHHENTAL PROGRAMS 

o transparent procedures and laws, freedom of information and 

financial disclosure laws, internal auditing laws and procedures, 

conflict of interest/ethical guidelines for executive, 

.legislative and judicial branches, whistle blower protection 

programs, witness protection programs. 

o inspector generals, office of the ombudsman, auditor 

generals, independent anti-corruption commissions/committees, 

independent counsels, donor coordination mechanisms. 

o institution building programs related to the judiciary, the 

parliament, the procuracy, the law enforcement institutions and 

regulatory systems (capital markets, banking system), targeted islands of opportunity (tax police). 

o targeted civil service reforms including a salary scale 

abov.e the minimum standard of living, incentives for reforms and 

rewards for honest ofticials,.cost/benefit studies, performance based pay hikes, rotation of offices, modern management systems, and the appointment and dismissal procedures for judges, 

prosecutors and police. 

o laws and regulations clearly: defining corruption;, protecting property rights; fairly punishing corrupt practices; 

enhancing inter-agency law enforcement coordination; outlining 

transparent and competitive procurement bidding procedures; 

mutual assistance treaties and regional/global cooperative 

mechanisms. 
71 

o transparent and fair privatization of government assets, 

decentralization, reduction of import tariffs, tax reform and 

enforcement, financial reform and enforcement, demonopolization 

and triming discretionary administrative and prosecutorial power, 

freeing of exchange rates, ending of price controls, development 

of a harmonized regulatory system of property rights, licensing, 

banking, taxes customs, credit and financial management. 

o nationa,l, -regional and international workshops and 

conferences. 

o law enforcement programs designed for the police, 

prosecutors and judges should include drafting assistance to 

develop fair and effective laws to address specific corrupt 

practic~s, inter-agency/international coordination mechanisms and 

procedures, criminal law training, ethical codes and guidelines and human rights training. 
Mr. Chairman: 

72 

David Satter 

Senior Fellow, The Hudson Institute and 

Visiting Scholar, The Johns Hopkins University Nitze School of 

Advanced International Studies (SAIS) 

October 7, 1999 

House Committee on·lntemational Relations 

Statement on Corruption in Russia 

-The reports of massive Russian money laundering through the Bank of New York 

have awakened Americans to the victimization of the Russian people by their leaders and 

the poSSt"ble consequences for the United States if corruption leads to Russia's social and 

political disintegration. 

This newfound awareness, however, raises a disturbing question: How was it 

possible for the administration to depict the looting of Russia for so long as the progress 

of democracy and to back a coterie of corrupt Russian leaders whose actions were actually 

antithetical to reform? 

The answer lies in the failure to understand that, in the wake of communism, 

Russia's greatest need was not a "correct" set of economic policies but rather the 

, restoration of moral values which was only possible under conditions of the rule of law. 

By ignoring moral criteria and giving our uncritical backing to a group of leaders whom 

we identified as "reformers," we did not contribute to the welfare of Russia but only to its 

complete criminaliz.ation. 

~ The following is a partial list of the events which should .have alerted American 

· policy makers that Russian reform was being carried out in a moral vacuum and the 

necessary role of the United States was to defend the rule of law. 

The Confiscation of Savings. In January, 1992, prices in Russia were freed but no 

effort was made to index.·savings. The result was that in a few months, 99 per cent of the 

savings of the Russian population disappeared. Persons who had put money aside to buy a 

car or apartment or to pay for a wedding or funeral were left with nothing. Persons who 

had worked ·in remote areas of the country. where a differential·was paid on salaries were 

now stranded there, in many cases, for the rest of their liv~s. 

The Pyramid Schemes. As·the·rate of inflation reached 2500%, fraudulent 

commercial banks and investment companies inundated Russiaps with advertising offering 

enormous returns on investment. The government-made no effort to.limit this advertising 

or to check on the firms which, in almost all cases, were pyramid schemes, with the result 

that millions of people with no experience of deceptive advertising or capitalist 

investment, lost their savings a ~rut time. 
73 

Export Licenses. The government began to allow anyone to export who could get 

a license. Because Russian raw materials were bought for rubles at internal prices and sold 

abroad for dollars, export licenses were akin to permission to print money. In Moscow, 

they were issued by the Ministry of Foreign Economic Ties, which functioned like a 

market, granting the licenses in return for bnoes, with the fee for the license insignificant 

by comparison with the size of the bnbe. 

Voucher Privatization. In a move described as •~pie's capitalism," the 

government gave each Russian the right to acquire a voucher which was redeemable for a 

share in Russian industry. The vouchers, however, were ofno help to individual Russians 

who had no say in management even when they invested their voucher in their own 

filctory. They were useful ·to those who could acquire them in great numbers and criminal 

and commercial structures began to buy them up on the street and use them to purchase 

the most desirable factories, often at giveaway prices. 

Criminalization. Criminal gangs saw that well connected insiders were using their 

ties to government officials to acquire vast, unearned wealth and began to use terror to 

take over their enterprises. One sign of this was the growing number of bankers and 

businessmen who fell victim to contract murders. Soon, however, gangsters, businessmen 

and corrupt officials began to work together. The gangsters needed the help of 

businessmen to manage large enterprises and the businessmen needed the gangsters to 

enforce contracts and collect debts. As the gangs prospered, bandits, businessmen and 

government officials developed close ties and, without any interference from the 

government, formed a single economic unit. 

The Abolition of Parliament Opposition in parliament led Yeltsin to rule by 

decree, which inspired the parliament to pass laws which nullified his initiatives. The 

conflict was finally settled when Yeltsin illegally dissolved the Supreme Soviet and, in the 

wake of a massacre outside the Ostankino television tower, persuaded the defense minister 

to authorize the shelling of the deputies who were still holed up in the parliament building. 

In a vote which is now believed to have been falsified, a new constitution was adopted that 

emasculated parliament and provided for the creation of an authoritarian, presidential 

regime. 

Money Privatization. The government began to sell off Russia's enterprises for 

cash in auctions that were rigged in favor of whatever group was able to win favor with 

the local authorities and the state property committee. n: in a rare case, there was 

competitive bidding and a powerful group was outbid by an insistent competitor, the 

successful bidder could pay for his tenacity with his life. The resuh of this system was that 

enterprises were sold at absurdly reduced prices and the income raised from privatization 

in Russia from 1992 to 1996 was only 0.15 per cent of budget revenue although the 

government had sold off the industrial base of the country. 

Chechnya. The government launched an invasion of the se1f proclaimed 

independent republic of Chechnya in hopes of having a "short, victorious war." Unable to 

defeat the Chechen resistance on the ground, the regime began the carpet bombing of 

civilian areas resulting in the heavy loss of life, particularly among Russian noncombatants. At the same time, more than 1,500 Chechen civilians were picked up by 

Russian interior ministry troops, taken to .filtration camps and never heard from again. 
74 

Nonpay,r,ent. In 1993-94, the government began not paying for state orders and 

delaying payments on pensions and salaries for state employees. At the same time, banks 

entrusted with budgetaty funds and enterprise directors began delaying paym~t on their 

obligations and depositing the money at interest in commercial banks. The result was that 

the nonpayment of salaries became Russia's leading source of social tension, subjecting 

individuals to intense strain and engendering a sense of total helplessness. 

Loans for Shares. The government began to borrow money from commercial 

banks in return for shares in desirable, nonprivatized industries. In theory, the loans for 

shares program provided for competition for the shares. In practice, however, the winner 

was the bank with the closest "informal" ties to the government. Once an enterprise had 

been ''mortgaged," the proprietaty bank was free to exploit it. When the government failed 

to pay back the bank loans, which, given the state's revenue shortage was always the case, 

it was up the bank holding the mortgage to organize the final sale of the enterprise. In all 

cases, the enterprise then became the property of the bank providing the original loan. In 

this way, the crown jewels of Russian industry were acquired for a song. 

The attempt to transform Russian society without either moral criteria or the rule 

of law led to one of the gravest crises in Russia's history. In the resulting atmosphere of 

moral anarchy, the country was looted. The Russian gross domestic product fell by more 

than half More important, Russia suffered a demographic catastrophe as male life 

expectancy in the period since 1990 fell by more than six years to 57, the lowest in the 

~dustrial world. Such a disaster befell Russia under peacetime conditions only twice 

before, in 1932-3 under conditions of famine and in 1937-8, at the height of the Stalinist 

terror. 

In this situation; there was a historic role for the United States. With the fall of 

communism, the U.S., which at the time had overwhelming moral authority in Russia, 

could have insisted on moral practices and the strict rule oflaw, using two levers which 

would have been critical: political pressure and our influence over international loans. 

Instead, we used our power not to advance the rule of law but to promote the interests of 

a specific group. 

It is often argued that the United States had no choice but to help Yeltsin because 

the alternative was to help the communists and nationalists who wanted to take his place. 

In met, however, insisting on honesty and fair dealings from the reformers would have 

been the greatest favor that anyone could have done for them. 

The reformers lost popularity in Russia not because they backed democracy but 

because they facilitated the criurinaJiz:ation of the country. 

The answer now is to rethink our entire approach to Russia which must b~ with 

an understanding of the moral vacuum that was left by communism. Only by recognizing 

that Russia's first requirement is a structure of law and morality that is valid for everyone 

can the groundwork be laid for real economic reforms capable of saving Russia from its 

present desperate situation. lfwe continue, however, to pretend that Russia is "on the 

, path to reform" and Yeltsin and his confederates are the "embodiment of democracy," we 

may soon find that the growing desperation in Russia could produce a reaction capable of 

affecting not just Russia but the rest of the world as well. 

# 
75 

s OVEREIGN VENTURES INCORPORATED 

HOUSE INTERNATIONAL RELATIONS COMMITTEE 

TESTIMONY BY 

MATmEW H. MURRAY 

PRESIDENT, SOVEREIGN VENTURES, INC. 

OCTOBER 7, 1999 

"SMALL BUSINESS: 

A RESPONSE TO CORRUPTION IN RUSSIA" 

HOLD FOR RELEASE: October 7, 1999 10:00 a.m. 

FOR FURTHER INFORMATION, PLEASE CONT ACT: 

U.S. Office: Tel (703) 534-3848/Fax (703) 534-4741 

Russia Office: Tel (7-812) 324-6706/Fax (7-812) 327-3125 

Email: sovven@aol.com 
76 

have been professionally involved in Russian affairs for 20 years, as a legislative 

assistant in the Senate, a researcher at the Carnegie Endowment and Library of Congress, 

an attorney representing western corporations and an investor. Between 1992-1998, I 

lived in St. Petersburg and managed a number of business start-ups on behalf of the U.S. 

firm, Sovereign Ventures. 

My dedication to earn profit for Sovereign Ventures on a legal basis has instilled a deep 

appreciation for the cultural barriers to small business in Russia. Other countries making 

the transition from a command economy, such as Poland and the Czech Republic, have 

succeeded in removing barriers. During Russia's transition, by contrast, small business. 

has been severely regulated. The most mundane activities are subject to licensing and 

reporting ·requirements. Taxes are imposed not simply on profits, but also on revenues, 

the mere movement of capital and goods. A small business that challenges government 

authority risks sanctions and state interference. 

The main element in Russian culture stifling entrepreneurs is the unrestrained role of 

· government - not .only in regulating the economy, but also in profiting from the 

economy. Many officials in Russia have an expectation of financial reward for serving in 

public office. Many government positions are for sale and votes on legislation have an 

established market price. 

During Russia's transition to capitalism, this expectation of reward has led to what 

economists call "rent-seeking". · Rent-seeking is conducted by political elites in 

transitional economies who use their access to power to :privatize state property 

spontaneously at nominal prices. As power-brokers, they convert their access to assets 

.. into cash by renting them to business. At times, rent-seeking takes the form of a demand 

for a bribe or extortion. Often, however, rent-seeking is quasi-legal, making it harder to 

detect. 

The use of public position for private gain did not start with Perestroika or privatization. 

Nor-can it be explained simply by Russia's low government salaries. To comprehend the 

phenomenon, your must first examine-Russian history. Due to the absence of a strong 

idea of the state, government officials have traditionally been inclined and permitted to 

take care of their personal interests first. Toe Tsar's provincial representatives were 

expected to "feed themselves from official business". Under Soviet central planning, state 

-- resources were exploited by those with access to power, the members of the communist 

party, whose positions were bought and sold like commodities. 

This government behavior takes place against a ·backdrop of public tolerance and weak 

institutions. Traditionally, Russian people have shown extreme dependency on the 

government and been reluctant to hold . officials accountable. Currently, the Russian 

constitution provides Duma members immunity from prosecution. Russia lacks an 

· independent judiciary capable of prosecuting .government officials and an independent 

press capable of protecting their investigative journalists. 
77 

While Russia engages in privatization and other market reforms, official corruption adds 

a layer of rent on economic activity, increasing transaction costs for small business and 

the price of goods and services for consumers:- By imposing an enormous number of 

different taxes and collecting them arbitrarily, the Russian government also extracts rent 

from small business. 

Even tax reform designed to help small business yields new costs. For example, in 1995, 

Russia simplified the tax code for small business by eliminating all taxes in favor of a 

straight 10% tax on revenue, but left it to local legislators to decide how to implement the 

new reform. In St. Petersburg, they defeated the purpose by imposing a fee of up to 

$8,500.00 per year on those businesses who wanted to use the simple tax. Foreign small 

businesses are effectively prohibited from using the simple tax, which is only available to 

companies with less than 25% foreign ownership. 

I am pleased, therefore, to have the opportunity to appear before the House Committee on 

International Relations. At this time in debate over aid to Russia, there is consensus that 

the introduction of capitalism needs to be accompanied by the rule of law. But it would 

appear difficult to accept that the motivation for legal reform will not come from the 

Russian government. Historically, Russia's public officials have not relinquished their 

unilateral powers of interpretation and enforcement of the law. Currently, due to lack of 

resources and political will, the government is unable to enforce existing laws or adopt 

new legislation to protect small business and private property. 

Instead, small business itself is the most effective agent for the type of social, legal and 

political reform sought in Russia. To date; Russia's market reforms have failed to 

produce a middle class. Small business can fill the "missing middle" by producing 

independent entrepreneurs with a vested interested in a stable and transparent legal 

system and the determination to hold government officials accountable. 

To reduce official corruption, and otherwise sustain market reform, Russians must be 

empowered to remove all barriers to small business. Russia does not need western 

financial capital as much as it needs "social capital" - that is, the trust and shared values 

among individuals, businesses and government officials which are the very foundation of 

a successful market economy. Social capital accrues at the grassroots through the 

creation of voluntary organizations, such as business, trade and professional associations, 

rotary clubs, church groups, charities and non-governmental organizations. As small 

businesses must work together to break-down market barriers, they are a natural catalyst 

for the formation of such voluntary organizations. 

Due to the special value Americans attach to small business and the rule of law, the 

United Stat~s has been acting to create social capital in Russia, by helping to build 

voluntary organizations, to reinforce traditional Russian ethics and to shape government 

institutions which are accountable. For example, in September 1998, the Eurasia 

Foundation, a non-governmental organization funded by the U.S. Agency for 

International Development, provided Sovereign Ventures an $88,000.00 grant to begin a 

private sector initiative to promote business ethics. The Grant helped St. Petersburg 
78 

small businesses create the Declaration of_ Integrity in Business Conduct, a voluntary 

statement of commitment to international business principles and practices~ Between 

June and September 1999, over 100 businesses voluntarily signed the Declaration of 

Integrity in Business Conduct The Association of St. Petersburg Ccmtractors, the St 

Petersburg Chamber of Commerce and Industry, the St. Petersburg International Business 

Association, the American Chamber of Commerce and the St. Petersburg Rotary Club, 

which together have a combined membership of over 1,200 companies, have supported 

the· Declaration and presented it to their memberships for signature. By adopting the 

Declaration, each company undertakes a no-bribery pledge and must implement a code of 

business ethics. 

The Declaration is a small but critical step towards creating social capital among Russian 

businesses, business associations and non-governmental organizations in St. Petersburg. 

By empowering them to make a unified commitment to repudiate bn'bery, the Declaration 

potentially provides leverage to require the St. Petersburg government to take reciprocal 

actions to reduce opportunities for demanding bribes. The Governor of St. Petersburg's 

Council on Investment, an institution represented by both local government and private 

sector leaders, has already endorsed the Declaration. (The Declaration of Integrity in 

Business Conduct and a list of the signatories to the Declaration are attached for your 

reference.) 

After a decade of rent-seeking capitalism, Russians must accept the fact that government 

corruption is endemic, an historical burden on economic and political modernization. 

Russians must find their own path to root out corruption, using the multitude of positive 

values and ethical traditions found in Russian culture. The St. Petersburg Declaration of 

Integrity is but one example of a process whereby Russians are beginning to integrate 

their strong moral traditions with international standards of business ethics. 

Faced with the evidence of government corruption iri Russia, many in .the United States 

are shouting: "call the-game". As though punishing this powerful nation will enable it to 

throw off a complex history. As though many other nations were not similarly infected 

by crony capitalism. 

Instead, we should recognize that the process of rooting out corruption is long term and 

~t · Russians must find their •own path towards this objective. Under these 

circumstances, it would be a mistake to isolate .further the Russian people. On the 

contrary, ·the United States should seize upon the evidence of endemic corruption in 

go\o'.emment to increase aid directly to small business and micro-enterprises and the nongovernmental organizations and business associations which are needed to lobby their 

interests. In·the process, the U.S. can ·help Russian citizens prosper and fonn the social 

capital needed to protect individual private property from rent-seeking capitalists. · 
79 

DECLARATION OF INTEGRITY IN BUSINESS CONDUCT 

IX SAINT PETERSBURG, RUSSIA 

Date: 

PRINCIPLES 

The undersigned representative of the St Petersburg business community ("Party to the 

Declaration") recognizes the following international principles of business conduct as the 

basis of this Declaration oflntegrity in Business Conduct ("Declaration"): 

Transparency. The functioning of a market economy presumes that each market 

participant conducts business with transparency, exchanging accurate infonnation with 

other market participants on an efficient basis while respecting nonns of 

confidentiality. 

Sanctity of Contracts. Respect for the sanctity of contracts and the honoring of oral 

commitments l~ads to commercial ties built on good will, trust and reputation for 

honesty. , 

Competition. A competitive economy provides transparent rules and opportunities for 

market participants, rewards quality of performance and deters reproachable methods 

of obtaining advantages over other market participants. 

Renydiatioo of Corrupt Practices. Corruption inflicts damage on market relations 

and on the economy as a whole. Repudiation of corruption as a method of business 

faciJitates the process of stabilizing the market. 

Legal Settlement of Disputes. A civil market presumes the rejection of illegal and 

dangerous methods to defend economic interests. Any use of violence against a 

person in a business dispute, including the use of physica1 or psychological coercion. 

is impermissible. 

DECLARATION 

NOW, THEREFORE, in order to integrate the Declaration's principles fully into the 

business culture of St Petersburg, by applying the principles consistently in concert with 

other members of the business community, each Party to the Declaration declares that 

ARTICLE I. CODE OF BUSINESS CONDUCT 

A The Party to the Declaration has adopted or shall adopt a Code of Business Conduct 

based upon the principles set forth in this Dec]aration ("Code"). 
80 

B. The Party to the· Declaration which has adopted a Code shall present the Secretary of 

the Governor of Saint Petersburg's Council on Investment («Depository») with a 

copy of the Code at the time of signing this Declaration. 

C. The ·Party to the Declaration which shall adopt a Code shall ·present the Depository 

with a copy of the Code as soon as·practicable but no later than ninety (90) days after 

signing this· Declaration. In order 10 ensure that the Code confonns with the 

.. principles set forth in this Declaration, each Party to this Declaration which shall 

adopt a·Code can-utilize the.Model Code of Ethics in Business Conduct attached to 

this Declaration. 

D. The Party to the Declaration shall ensure that the Party's employees are familiar with 

the provisions ·of·the Party's· Code. and systems of control that prevent actions by 

employees that are contrary·to the provisions of the Party's Code;· -

E. The Party to the Declaration shall . present. the Depository a letter affinning that the 

Party has' faithfully conducted business· in accordance with the Party's Code on an 

annual basis. 

ARTICLE D. PUBLICATION 

A. By signing the Declaration; the Party to this Declaration hereby agrees to be included 

on a-Register of Parties. to the Declaration ( "Register"), which shall be maintained and 

publicized by the Depository. The Register shall include the name of the Party to the 

Declaration and .the dates the Party's representatives signed this Declaration. _ 

· B. The Depository shall update the Register regularly to include each new Party to the 

Declaration. 

ARTICLE ID. MISCELLANEOUS 

A. The Party to the Declaration is signing and executing the Declaration voluntarily. 

B. Two duly a1,1thorized representatives of the Party to the Declaration shall sign and seal 

two {2) copies of this Declaration. One (1) copy shall remain with the Party to this 

Declaration and the second shall be submitted to the Depository. 

For and on the behalf of __________ _ 

Company Stamp 

I 
81 

SIGNATORIES TO THE DECLARATION OF 11'1TEGRITY IN 

BUSINESS CONDUCT IN ST. PETERSBRUG 

Septem her 1 ~ 1999 

Westpost 

Otis EIC\1dors-St Petersburg 

KBE-Wmdows Teclmologies 

"Sevzapmontagavtomatica" Group 

lnsW'8nce Company "lnterros-Soglasie" 

Nonresidential Property Fund Consult (NF Consult) 

ASTER 

Business Initiative Center 

Construction Group# 35 lgeorstroy 

InsW'8nce Company .. Zurich-Rus'" 

Sovereign Property Holdings, LCC 

Insurance Company "Alma" 

LOYAL 

MilZBr 

SpetZtrest #27 

Construction Group 28 

Building Group 42 

Aqua Nord LTD 

Delata Verona 

Bronze Lion 

Paris sur Neva 

Diamond 

MBC (International Water Senice) 

Group on Geodetic Work and Engineering Research 

Construction Group I 06 

Reider 

·Mechanical HandJing Consuhants Limited 

Technostrom-Construcrion 

Thennoline Engineering 

Transmachproect 

AssiDomain Packaging St. Petersburg 

Sindbad-Travel 

VNIIOIDROLIZ 

Rothmans-Ncvo 

MaglineLTD 

Mehzclcnstroy 

LenStroyReconsrucziya 

Containerships St Petersburg 

Travel agency Ekipage 

Grand Europe Hotel 

Nepnme 

Gloria 

American House, Inc. 

Tehlen 

Geoizol 

Ad\'811ce-C 

Sevenergostroy 

StroyStekloComplect 
82 

SIGtt\A TORIES TO THE DECLARA TIOS 

page two 

Alla Fedotova Business-Ser\'ice 

LenSpetz.\1u 

Alsim Alarko 

Russian Initiative for Self Employment 

Wakenhut Neva 

Kelly Services 

Eye Microsurgery 

Lentek 

Ladoga Foods 

Arctl"ka 

Yit Yhtyma OYJ 

Mechanical Group 260 

Petro-Bait-Audit 

Unipak Rus 

JP Terasto (Jaakko Poyry) 

Orminen St Petersburg 

KPMG 

Marketing Consulting Design 

Western-European Insurance Agency 

KBC 

AST 

St. Petersburg Chamber of Commerce 

Center for Citizen Initiatives 

Honeywel1 

ESAB 

C'onstruction Company "Renaissance .. (Vozrogdenie) 

AEROPROF 

Eurovent 

lnsuarance Company "Guide" 

British Airways St.Petersburg 

Nevski lnsitute on Language and Culture 

DHL 

Luch 

UNJSTO 

DlZ 

Ne\'skaya Medicine Company 

Baltiyskaya Construction Company 

Elf 

Veho 

Minimax 

Militaey Insurance Company 

Plastburg 

Metrobor 

Sovam Tcleport 

Norman DL Consultance 

Henkel Em Tosno 

Spezstroi Contractor Association 

Borskoye Glass 

NASTA-BALT 

Structured Technologies 

Lengazteplostroy 

Kodeks 

Gipronikel Institute 
83 

Konstantin Borovoi 

Deputy of the State Duma of the Russian Federation 

October 7, 1999 

House Committee on International Relations 

ln the money Jaundering process, we have three very important stages. The first is 

the appearance of the dirty money from different sources (bribery, criminal money, 

mixed money). The second is the transferring and preliminary cleaning of this 

money. ·n,e third stage is the creation, with that money, of legal economic and 

political vehicles for the purpose of laundering more money or insuring the 

process. I will concentrate on the first stage because it is the subject of my research, 

announcements, official declarations and press conferences in Moscow. 

1) Corruption in Russia is the result of a more complicated and widespread illness. 

Russia has ceased to be a democratic country and is very quickly transforming itself 

into a small and evil empire. This is very dangerous for itself, its citizens and for its 

neighbors. Corruption and the criminalization of power arc only the outward 

.appearances of a more general process. 

2) \ \'hat we now call the enonnous size of corruption and criminalization in Russia 

was typical for Russia in the years 1995-96. Today, we have to speak about a new 

quality of that outward appearance. Now, corruption and criminalization have 

become the ffeativc clement of power, without which power cannot exist. To put it 

simply, it l<x)ks this way: if the government doesn't pay the parliament, they will 

not accept the budget and pass very important laws, for example, tax Jaws. If big 

companies, for example, oil or gas, stop paying the government they can 

disappear-they can be made to go bankrupt. This scheme is working at the state, 

region, city, district, and branch levels, even at the level of individt1al tax officials or 

small enterprises. The most dangerous thing is that this scheme is working v~ry 

effectively and everybody has accepted it. The currency of payment can vary: 

cash-rubles or dollars; cheap credits; different privileges; additional support from 

the budget; support for the government during election campaigns, and so on. 

3) Corruption and the criminalization of power may be the most important 

structural element of the system. 1t is starting to have an influence on the behavior 

of the n·hole system and on tht:1 motivations for Russian internal and foreign policy. 

How can the list of what should be in the armory be reconciled with what is actually 

there in reality? After some military official has sold weapons worth $200 million 

dollars, tlu~ discrepancy can only be covered up by a real war, which is happening in 

Dagestan and in Checlmya. In the Georgian ans\\·er to some of the accusations by the 

Russian side, President Shevardnadze, with great wit, answered that Russian 

wt•apons for the Russian people for an internal Russian war can only come from 

Ru~sian territory. 
84 

In Russian foreign policy we can see some decisions which are the rest1lt of 

blackmail to get more support from outside for "reform." It is quite clear that it 

happened during the process of NATO enlargement, when it was declared that 

including Poland is against Russian interests and can destroy the balance of the 

forces between Russia and the U.S. 

Alrnost the same thing happened during the Yugoslav events. In 1998, from 

September through the summer, an unprecedented anti-Western and antiAmerican campaign was being spread. Russian military forces were planning 

military confrontation and military conflicts with NATO. In his official statements, 

l\lr. Ivanov, the Russian Minister of Foreign Affairs, called the U.S. leadership 

military criminals. The Russian leadership unilaterally closed programs of 

cooperation with the U.S. whi)e, at the same time, they distributed economic, 

political and military support to Milosevich and Saddam Hussein. Also at the same 

time, Mr. Primakov was very active in negotiations to gain financial support for 

Russia and credits from the IMF and World Bank. What was the U.S. leadership 

doing? Protesting? No. The proposal was to soften Moscow's position in exchange 

, for financial support and credits. But, I would ask you, for what purposp? To make a 

new and stronger democratic system or a new aggressive empire? This is very 

dangerous for the world. 

4) In 1991 the possibiJity for democratic development ,vas created in Russia but the 

Soviet-type bureaucratic system wasn't 9estroyed. The military-oriented, inefficient 

plans weren't destroyed. And generally, a sort of competition started between the 

old economic and political system and the new rnles of behavior and the newly 

appearing economic enterprises. 

In 1992 it was quite dear to me what American policy in relation to Russia was 

-American financial support was directed at support of the Soviet type of power. 

And, in fact, it was supporting the old political,system and old economy. At that 

time I was president of the biggest stock exchange and chairman of different banks 

and invei-;tment companies. Together ·with other big entrepreneurs and economic 

and political experts, we created a special report about our concerns on that subject. 

In that report we proved that support of the old system and the old economy would, 

in the .near future: 

• create f;normous bribery in Russia; 

• support Soviet and empire-oriented political forces; and 

• create enormous difficulties for Russia's development. 

Or, to put it simply, make it impossible for Russia to be a democratic country with a 

frt?e markt?t economy. 

During my meetings with IMF, World Bank and U.S. administration officials, I tried 

to explain my concerns and our proposals for how to change actual conditions but, 

unfortunately, I didn't receive the reaction I expected. But the reaction, 

unfortunately, was v.ery typical-such as my meeting with Mr. Strobe Talbott, who 

call('d me a person who doesn't believe in a democratic future for Russia and too 

economically liberal even on an American scale. 
85 

Not forgetting my position, I arranged that report like a statement for President 

Clinton, which was printed in the Russian media and sent through the American 

Embassy. At that time, the general position of the U.S. administration in relations 

with Russia was to create an environment for the self-development of democracy 

and a market economy in Russia. I would like to have seen someone try to propose 

the same way of creating democracy in post-war Germany in 1945. (In 1948, after the 

ne\\" .German constitution was adopted, more than 70% of Germans were ready to 

support the retum of the Nazi Party to power.) 

5) The results of this mistaken strategy created some paradoxical situations in 

relations with Russia. Indirectly, taxpayers' money has now financed some projects 

in Cuba, Iraq, Iran and Belgrade. This is the strategy, by the way, that Primakov and 

Yeltsin called the creation of a "multi-polar world." With American taxpayers' 

nwney, they are now developing a new type of weapon and the means for its 

delivery. 

And it.is exactly with American taxpayer's money that they are arranging dirty, antihumanitarian propaganda campaigns against NATO, the "faces of the Caucasus 

nationalities," the Baltic countries, and the United States. Now, for the first time 

since the Soviet era, in the minds of the Russian people, enemy number one is 

America. In April this year, the entire anti-American propaganda campaignwhich was led by the Russian government-reached such a high level that 85% of 

the Russian population would be happy to support delivery of military volunteers 

and weaplins, even S-300 anti-aircraft missile systems, to Milosevich. They would 

also support Russia's entering the war against America on the Milosevich side. 

6) Even humanitarian and food support for Russia, which started in September 

1998, is subject to the system's corruption and criminalization. In September 1998, I 

asked to meet with an American official who was responsible for delivering and 

distributing American aid and food support to Russia. I told him that the person 

responsible for connections with him, Vice Prime Minister Kulik, was not the right 

person for that type of activity. I gave him information that the food support, which 

had not yet appeared in Russia, was already stolen and could not effectively help the 

Russian population. And his answer was "Don't worry, we will watch everything 

and control everything. Nobody will steal even one grain." Two weeks ago, 

information that everything was stolen appeared in the media. I am telling you 

about this to explain how even American assistance and help can be discredited by 

the actual c-riminal situation in Russia. 

What is to be done? 

1) Say good-by£' to your il/11sio11s n/1011I Russin. In Russia there is no democracy now. 

H's now only the illusion of democracy, a virtual democracy. \Ve have to accept it 

and be mnre pragmatic, like doctors who cannot allow personal feelings. 

2) Good e.rpatisc. A long term program for relations with Russia has to be created. 

Together with l\lr. Knzyrev, the former Minister of Foreign Affairs, we created a 
86 

special institute for the problems of international cooperation. This institute started 

a special program for deeper research into: 

a) a Jong term prognosis for Russia's development in 50 years; 

b) project "Different Russia," which is especially for those who cannot 

, understand the radical changes happening in Russia in the last three years; 

c) a realistic appraisal of the forces in Russia_, which has to include a real 

accounting of the so-called KGB-or Primakov's-group, which has a great 

deal of influence now in Russia; 

d) accounting for the changes in the Russian people's mentality connected 

with the enormous propaganda campaigns in Russia in the last 5 years. 

3) Any sort of mindless support to Russia which cannot be correctly checked and 

coordinated with the political goals of civilized societies must be immediately 

stopped. 

4) The most importm,t thing is 11ot to lose the pulse of Russin. This means that 

everything stupid has to be excluded from relations ·with Russia but everything 

important for Russian democratic development must be saved and maybe 

developed. 

, Ve arc ready to join that program and be useful to it and present our expertise in 

that field. 
87 

U.S. H0WJC of Rt:piesentatives: Committee on Intmuational Relations 

Hearin& on U.S. Policy toward Russia. Part 2: C-orruption in the Russian Government 

October 7. 1999 

Statement of Lynn D. Nelson (l>rofcssor of Political Science and Sociology, Virginia 

Commonwealth University; formerly senior researcher, Institute of Sociology of the 

Russian Academy of Sciences) 

Overvifll' 

Comiption, which was endemic to the Soviet system, has worsened in scope and 

magnitude within Russia since the demise of the Soviet Union and now is deeply 

embedded in the political and economic spheres at every level of Russian society. This 

development has been promoted through administ,ative-bureaucratic decision making at 

both the fcdcra1 and regional levels which has re-versed efforts towmd broad 

democratization an<l fac:ilitated widespread criminalizauon in the R\1$$ian economy. 

The United States can support efforts to overcome corruption in Russia through 

clearheaded analysis of J)l'e'Vious policy advJce. with a view towan:l encouraging 

strateaies in the future that more adequately cmpbasm, institution building. the 

strengthening of civil society and the rule of law. 

Soviet Era Roo1s of C~ft'llption in Kassia 

The organization and hlstitutioas of the Communist Party itself are deeply implicated jn 

Russia's extreme problem. with corruption. and criminality today. A broad range of 

transactions in the USSR during the Soviet period bad involved arnmaemenu that were hidden from scnitiny and benefits that flowed from an individual's skill at operating 

oul$ide the system of off"lclal mies. The Communist Party was the principal integrating 

strueture in this system, lcgitimatin& and facilitating corrupt practices in many cases and 

also serving as a constraining influence on some of the mOTC visible manifestations of self 

aggrandjzement m the official economy. Further, under Gorbachev there was a conscious 

effort to legalize shadow economy ilJitiati'\1C$ in the hope: of mon., efficiently using 

shadow capital to supplement the mainstream. economy. 

The Soviet economy had been built on the unchecked exploitation of both natural 

l'CSO\!l'CCS and human capital in the pursuit of objectives that were justified as being in the 

interest of all of society. Wrth no institutions of civil society to evaluate or even 

effectively monitor these developments and progress tov..-ard these goals,. c:orruption of a 

high order became routine. 

Administntive Corruption in the 1"°8 

With the end of the Soviet Union and the dominating influence ofth~ Communist Party, 

powerful individuals in administrative positions finally achieved, with Y eltsin's 
88 

ascendancy and the Oaidar-Chubais economic program. objectives they had been seeking 

since before the Gorbachev period. They rcaliz.cd freedom from Communist Party 

control. Many gained ownership of vast amounts of property and resoun,cs. And they 

enjoyed these benefits in a context that would prevent competition. The institutional 

arrangements that had created Soviet departmental and regional "clans" were left largely 

intact below the top administrative levels of official power. These admjnistrativcburcaucratic clans and their members "'.)ecame major bcnoficiaries of the Russian 

privatization program, effectively turning their positions, in the case of-nome.nldorura _ 

members, and their hidden capital and connections. ·in the case of many shadow economy 

participants, into legal property ownership and enhanced political power. 

OtliciaJ comiption in privatization and decision making more generally has taken many 

forms, from small scale bribe-taking and rant-sccking of various typeS, to bogus property 

auctions and high-stakes COffllJ>don in the .issuing of "cheap" money from banks that 

were themselves-often created through the privatization of Communist Party assets. A 

number of Russian businesses are closely tied to first-tier regional administrative: elites 

8;lld top-ranking former Party leaden who remain in positions of political authority. In 

these cases, interests depend heavily on the favor of officials for privileges and benefits 

-- that range from securing buildings and equipment to recc,jving,nccessary permits and 

licenses and being granted speclal tax consideration. These debts are paid not only in 

money but also in numerous other favors, such as lucrative jobs for relatives of officials. 

Corniption and Economic Policy 

The nature of the Soviet era administrative system for orderiq economic as well as 

political relations was well known when the Yeltsin refonns began. Procedures were 

needed that would bavc pointedly begun to rc:sbapc the established institutions of 

reciprocity and reward in which the socialist culture of the USSR had been grounded. 

Instead. however. the reformers chose to quickly graft private ownership onto the wellrooted economic amm.gc:ments that prevailed when the refonns were started. They also 

consciously decided to welcome illegally ecquired--capitBI and acknowledged that 

strategy. 

This -development. combined with the Joss of Communist Party controls. has resulted in 

the expansion of criminality in mainstream economic relations. Criminalization of 1hc 

economy has been further facilitated by the .patcem of"region-centered corporatism which 

prevails in many areas. Widespread rent seeking and diverse forms of economic 

exploitation are to be expected when both political aod economic power are concentnrtcd 

m the hands of regional authorities and many-firms are thus prevented from becoming 

independent market participants. 

Cornaption in the Mainstream Ecoa.omy 

A fundamental reason that criminality js so pervasive and deeply embedded in the 

Russian economy is that the shadow-criminal approach to economic relations 

transformed the mainstream economy, rather than being transformed by it The 
89 

mainstream economy took on featutes of 1:he shadow economy that have continued to 

develop and further crystallim during the 1990s. Not only was the money that these new 

business people used to acquire property often unlawfully gained. but "business" methods 

that they have frequently employed continue to be illegal in many cases - ranging from 

bribery and extortion to murder. The criminalization of bwi.ness is now tharougbly 

mainstream, w the extent that people expect, end get, illegality as an integral component 

of routine business activity. J have extensively documented this featute ofthe busicess 

environment through ongoing research in five Rmsian regions since the first days of the 

Y cltsin reforms. 

In Russia today. mark.et-like structures operate in an environment in which market 

principles are thwarted by administrative power. and entrepreneurship is hampered. by the 

same administrative controls. At the 'time that the Soviet Union ceased to exist, the 

nonstate sector was developing rapidly. The number of oooperatives and private 

enterprises had grown dramatically from 1988 on-ward, and with these developments a 

new class of entrepreneurs had begun to emerge which promised. cwcn before the 

breakup of the USSR, to pose a real challen,se to the State economic monopoly. 

In c:ontmst to the positive developments under Gorbachev, the Yeltsin period has been 

characteri7l8d by policies that have inhibited the expansion of a supportive infrastructure 

for cmn:,PJCDCUl'Ship. Although Yeltsm and many other poJitical leaders continued to 

speak encouragingly about entrepreneurship. adequate measures were not fodbcoming to 

put in place a comprehensive lcpl ftamewo.rk foT .market relations, for example, to create 

a workable system for financing business development, and to ensure tax policies that 

would provide adequate illCCiltivcs for J)l'Ofit-making. 

Respondents in my longitudinal research project have detailed a variety of tactics that 

St$ and local officials employ to use their positions for personal benefit. Entrepreneurs 

are often illegally charged fur services of various types. They are required to pay fees that 

are not established and fmcd for infractions that are not proven. Entrepreneurs must rent 

their places of business, of coun;e, and rents ere often shockingly high -- frequently many 

times higher that official rates. Officials have, in some cases, set up their own enterprises 

while at the same time withholding sought-after business permits ftom potentiel 

competitors, and in other situalions they have been found accepting bribes to ftmDd 

business development funds to certain business people and not others. 'These fimlinas 

help to explain why. in spite of a reform program that osteDsJoly hu been aimed at 

creatin8 a free market. the expansion oflegal entrepreneurship in Russla bas been 

disappointing. 

There cJearly has been growth itt the private sector since l 991. but a subs1antial 

proportion ofit bas been in the "gray area." nus "pay area." ent:reprencursbp is a 

problem for the govemment, becauso tax revenues .me forgone. and it discourages 

potential entrepreneurs who me unwilling to do business in this way. Because these "gray 

&!ft." operations provide fertiJo soil for criminal activity, the forces 1bat impede the 

development of nc:w legal businesses produce undesirable outcomes for the entire society. 
As a result of these and related developments. "reform" has 1eOded to become a. 

distinctively Western-sounding word for describing the changes in Russia's economy 

since the end of the Soviet period. From the l"C'IJl8ins of an economic system in disarray, 

the burcaucratic-industrial-fmancial alliance has solidified its power, U$ing old 

connections and new money, ~ in many cases. opportunistically. The Ru.uian 

govemment continues to affirm its support for small business, but the predominant trend 

today is towanl the consolidation of coJ:J)Oratism. 

Corruption and the Rffenal of Democratizing Reforms 

Relations in the political as well as the economic sphere have increasingly tuen on 

negative featwcs of the shadow-criminal sector because institutions wbjch could have 

checked such a development have not been consistently encouraged. Russian reformers 

and Western advisers prominently attempicd to discredit the legislative brancb while 

supporting swh executive abuses of power as Y eltsin's illegal moves in dissolving the 

Russian parliament in September and Octoberl 993. During the time leading up to this 

crisis. a numbet of inaccurate and misleading statements were made about the 

composition and workings of the for.mer Russian parliament in an effort to diSCl'Qlit the 

body as a whole. Prominent Western.political leaders also were implicated in this 

pJW.eSS. Again and again, decree replaced lesfslative deliberation, and such 

·circumvention of established procedures was justified on ostensibly pragmatic grounds. 

While Yeltsin was consolidating executive power 81 the federal level. executives in 

Russia's regions were following-the same scripL At all levels, then. the last sources of 

authority -were being systematically eliminated that could check adminis1rative policy end 

privatiution decision-making. which was increasingly carried out behind closed doors. 

Widespread nbuses·ofpowcr followed, Vlrith little organized resistance. Favorablypositioned form~ Communist Party elites successfully re~ 1h.cir strength - now, as 

business people and executives presiding ovor clan structW"Cs. Those in power reaped 

windfall benefits tbrouah, these maneuvers, and the Russian citizenry knew it. 

These developments did not promote grass-roots democrati7.ation and the strengthening 

of civil society. The 1990s have seen a marked deQlinc in the sm:ngth of democraticallyoriented political groups that WCIC the vanguard of-change as the Communist Party was 

losing legitimacy during the late 1980s and fflU'ly 1990s. Many·who had advocated broad 

democratization and the building of institutions that would support market relations were 

forced to give ground to interests that supported strong administrative involvement over 

economic activity. 

The Road Ahead 

It is widely understood that incomplete liberalization has brought on a sharp rise in 

corruption and criminality in the economic sphere end in Russian society more generally. 

What is less evident to a number of analysts, ho~er. is why liberalization did not 

-. proceed as it had been envisioned by Russia's economic planners and their advisers from 

the West. They believed that the old institutional arrangements would $0Ulehow give way 
91 

under pressure from economic reforms. but that did not happen. It should not have been 

expected. The economic sphere does not ope.rate independenily of culture, and the 

economic l~crs on which the reformers depended were incapable of quicldy overcoming 

the J)CJ"V8Sivc structural, politically grounded, impediments that were well entrenched. 

Today, Russia's most serious crisis is a crisis of values. Many institutions of the old order 

remain in place, but without effective rcslraining principles to keep power.tw interests in 

check, through shared reference to overarching values mid "TU]~ ofth~ pmc,." Today 

this crisis of values threatens destabili2:ation in every sphere - economic, political and 

social. Effective support from the West during the cum,at period must include fowsed 

concentration on ideas and practices in which we arc cxpcricm:cd and whieh have been 

proven effective: an emphasis on law over the 1ransitory appeal of individual leaders. and 

attention to liberal principles that emure :freedom in the economic. political and $Oclal 

spheres. Promotion of these core values. and of policies that encourage them. is the best 

way to confront the, COffllption in Russia that bas OCCOUIO a defining feature of postCommunism in 1hc, 1990s. 
Excerpt of Statement of J. Michael Waller 

Vice President, American Foreign Policy Council 

International Relations Committee Hearing on 

92 

U.S. Policy Toward Russia, Part I: Warnings ud Dissent 

October 6, 1999 

Pressure on AID ·contractors: 

"That expert, Professor Louise Shelley of the American University and a 

colleague of mine at Demokratizatisiya journal, had early. evidence that organized 

criminal elements had·exploited the U.S.-backed privatization program. In June 1994, 

ARD-Checchi Rule of Law project director David Bronheim sent an e-mail notice to 

offices in Moscow, Kiev·and elsewhere with a warning about Dr. Shelly that appears to 

be intended to suppress and discredit her: 

'I - Prof. Shelly. Please treat this with enonnous care. If I had known what 

· Shelly-was up to, I would have resisted Henderson's instruction to put her on the 

.consulting contract. ·She is a bomb with a lit fuse.- Her hobby horse is that the 

AID privatization program has been exploited by organized crime.' 

'1 _l The privatization program is the showpiece, flagship .etc. of the AID program 

in Russia: Shelley, without understanding what she is doing, is trying to sink the 

flagship. Under no circumstances can we be seen as helping that effort. We have 

·• no.interest whatsoever in damaging the,centerpiece of the AID program in 

Russia.' 

There you have it: as frank an admission possible that exp~rts concerned with 

corruption of U.S. assistance programs were simply not welcome. A copy of the e-mail is 

attached." 
93 

FROM: David Bronheim, 73744,2306 

TO: Moscow office (murphy), INTERNET:ard@ard1.law.msk.su 

Dennis Whelan (1), INTERNET:whelan@whelan.law.msk.su 

CC: Michael Goldstein (1), 1NTERNET:mg04ruteoflaw.kiev.ua@relay.ussr.eu.net 

gregory goss, 73744,2323 

Richard Hart (ARD}, 73252,2335 

Peter Maggs, 737 44 ,2317 

Hope Payne, 73203,373 

DATE: 6/17/94 11:22AM 

Re: 94(2)db/13 

94(2)db/M13 

· 1- Prof. Shelley. _Please treat this with enormous care. If I had known 

what Shelley was up to, I would have resisted Henderson's instruction to 

put her on consulting contract. She is a bomb with a lit fuse. Her hobby 

horse is that the AID privatisation program has· been exploited by organised 

crime. 

1. 1. The privatisation program is the showpiece, flagship etc of the AID 

program in Russia. Shelley, without understanding what she is doing, is 

trying to sink the flagship. Under no circumstances can we be seen as 

helping that effort. We have no interest whatsoever in damaging the 

centerpiece of the AID program in Russia. 

1.2. Reed must understand our position, and must realize we have a very 

nervous stomach about this. You will discover that this will make his 

stomach hurt as well. He will not want to be seen in USAID as someone 

involved ·with a program that might discredit AID. Please discuss this with 

him frankly. 

1.3. Henderson will be in Moscow in ten days. Please encourage Reed to 

have the 3 of you talk this over. -

2- Repeat of earlier question: How are you paying Watts for time after 

June 2 ??? 

3- ref yr dw_dc.c june 10, para 1.b. It raises no problems at all to come 

back to USAID with more tech assist and less toys. We are only following. 

their advice and adding more tech assistance. They will love it. (Have you 

in fact submitted to USAIO a Work Plan and a draft MoU? Newton is away 

today, but I have seen niether. The only thing I am aware we submitted to 

AID was a design document. John says he left with you draft work plan and 

MoU documents, but nobody here has any awareness of a submission to USAID). 

3.1. Again, the fact that we follow USAlD's inclinations and develop our 

project along more satisfactory lines is something to be pleased about. We 

should be very upfront about this. We are making more headway than we 

anticipated. . · 

3.2. Scholarships is a very difficult concept to administer. We can't do 

it directly, and to do it through the academy• will be an adminstrative 

tangle - since they told us that it is the sending jurisdiction that pays 

for the student. It would be easier to pay lump sum to academy to cover the 

cost of a certain number of students if they tell us how students are 

selected, what the attendance is and what the courses are. 
94 

Opening Statement 

The I lonorable Christopher H. Smith. 

House International Relations Committee Hearing 

October 7, 1999 

Mr. Chairman, thank you for holding these hearings this week on U.S. policy toward 

Russia. The series of hearings that you have convened on Russia, and your leadership of 

this committee has been instrumental in increasing our knowledge of Russia and our relations 

·with that nation. I believe it is especially important that the voices of our guests today be 

heard. In this connection, I would raise two points. 

Mr. Chairman, about two months ago, after the press reported on an investigation of 

a New York City bank for possible Russian money laundering, Washington did its best 

Colonel Renault out of Casablanca, and was "shocked ... shocked" to find that there was 

corruption in Russia. The administration, when pressed, admitted that, yes, corruption was 

a problem. But it said everyone should. "calm down," because we were getting our money•~ 

worth in terms of disarmament, democracy, and economic development, however uneven. 

To tell Americans to "calm down," however, is·patronizing and wrong. Eight years 

after the collapse of the USSR, many people in Russia people blame America for supporting 

"reformers" and "reforms" that were associated with corruption that has robbed Russia of 

great wealth and left many people poorer. True, in the early l 990s reformers tried to rein in 

some of the worst corruption, but later their own reforms added to the problem. Too little 

reform, implemented too dishonestly has today left Russia crisis-ridden, unstable, and 

impoverished. Moscow's waging ofa cruel and failed war in Chechnya is both a symptom 

and a cause of Russia's distress. 
\ 

95 

Now, the American people have a right to ask. Did not the Congress fund substantial 

assistance to Russia in the hope it would promqte honest government and effective economic 

reform? Did not President Clinton and Vice President Gore meet often with Russian leaders 

and report that progress was being made? If so, what went wrong? And why are so man~ 

Russians down on reform and blaming America and the West? 

As the Washington Post reported in an extensive article last month, the administration 

is trying to backtrack on its optimistic depictions and predictions for Russia. I look forward 

to our witnesses' comments on our Russia policy and how the administration responded to 

suggestions that all was not right in Russia, as well as our witnesses' thoughts on what effect 

U.S. policy may have for the upcoming parliamentary and presidential elections. 

Let me add here, Mr. Chairman, that I am aware of the argument that for all its 

problems, Russia, and by extension, the United States, are much better off than we were 

during the Cold War era, that the United States spends large amounts of foreign aid on other 

nations that are corrupt, and that Russia is being held up to an unrealistic standard. I have 

some sympathy with that argument. I visited Russia this past summer, and I was 

there in 1988. The progress is obvious. But I have to ask: what was our contribution? 

Where did our taxpayers' money go? What happened to the investment opportunities that 

we heard so much about? Did our efforts help the Russians? Or did our efforts simply 

feed a kleptocracy that held back reform? In other words, have the Russian people 

progressed to the extent that they have despite our help, rather than because of it? 
96 

I am also deeply disturbed by the war currently going on in Chechnya. I know that 

the majority of people in neighboring Dagestan have been opposed to the incursions by 

guerrillas from Chechnya. The Russian government says it is fighting terrorism. If the \ 

United States Government can appropriately assist the Russian Government in apprehending 

through legal means the truly-guilty parties in the explosions that took almost 300 lives in 

Russia, then I support that assistance. 

But Mr. Chairman, the Economist has it exactly right: the logic of Russia's current 

actions in Chechnya is,madness. And it is a malevolent. madness, laying waste to land and 

- killing innocent people whose only-crime is to inhabit a lawless and desperately poor land. 

Ironically, until recently Moscow enjoyed considerable international sympathy in the current 

North Caucasus situation. Now iLappears to be simply carrying out a war of vengeance 

against Chechnya,-and_the Chechen people under the cover of dealing with the Dagestan 

incursion. It began with the long-running and intensified purge of so-called "dark people" 

in Moscow, and has now become another full-scale war against Chechnya itself. Like the 

· Bourbons of old, Moscow appears to have learned nothing and forgotten nothing where the 

North Caucasus is concerned. 

Moreover, Prime Minister Putin has announced that Moscow no longer recognizes 

President Maskhadov as President of Chechnya. Whatever we may say about the \ 

Maskhadov administration, one thing is clear. He was elected in free elections under the 

aegis of the OSCE with the approval of the Russian Federation as a result of the Khasavyurt 

Agreements. By distancing himself from the international community and acting like a 

communist leader of the old Soviet Union, Prime Minister Putin is taking Russia in the 
97 

wrong direction - toward militarism and authoritarianism. This is a path that bodes ill for 

Russia and the entire world. President Yeltsin should at least meet with President 

Maskhadov, and other legitimate spokespersons for the region, work toward a negotiated 

solution to the conflict - with outside assistance ifnecessary. For instance, the OSCE made 

a very constructive contribution to ending the bloodshed in Chechnya three years ago. lbis 

is certainly an avenue that should be considered. 

Mr. Chainnan, thank you again for holding these hearings. I look forward to hearing 

the testimony of our witnesses. 

0 

- -- - -- - -- - -- - -- - - - - - -, 

: 1111111111~H11Wli1il~1~iH~il1ll~H11111111 

3 0273 00624013 6 
- - . 

. 1111111110,,,, 

0AM-P3Q377 · 

.· ;' . ··~ ' , ' ., '' .. ' " . ' . '; . ' ' ' 

: •• • , •! • ' .• 

' ' ' ' '· ' ' ' 

: ' '' ' ; .:. ' ' . ' ' . '. ! ·. ' 

' •,. , •• • C : < • , , 

• "'?