December 18, 2000   

This Date's Issues:   4694 • 4695

Johnson's Russia List
#4695
18 December 2000
davidjohnson@erols.com

[Note from David Johnson:
1. The Globe and Mail (Canada) editorial: The challenge for Russia's Putin.
2. Bloomberg: Russian Journalist Beaten, No Money Taken, Paper Reports.
3. Daniel Rancour-Laferriere: New book, RUSSIAN NATIONALISM FROM AN
INTERDISCIPLINARY PERSPECTIVE: Imagining Russia.
4. BBC Monitoring: Russia: brain drain in defence sector seen as "security threat."
5. Laura Belin: the tone on JRL.
6. RFE/RL: Paul Goble, ONWARD CHRISTIAN SOLDIERS.
7. Peter Lavelle:  Year-end Letter or my Russian 'Fourteen Points.'
8. Euromoney: Ben Aris, How long can it last.
9. The New York Review of Books: Raymond Bonner, The Russians Are Coming! (Review of Red Mafiya: How the Russian Mob Has Invaded America by Robert I. Friedman)]    
 
*******

#1
The Globe and Mail (Canada)
December 18, 2000
Editorial
The challenge for Russia's Putin

Vladimir Putin cuts a striking figure. Fit, intelligent, clearly in
command, Russia's President handled himself with aplomb when journalists
from The Globe and Mail and two Canadian television networks interviewed
him last week. Canadians will get a closer look when Mr. Putin appears in
Ottawa today, and they are bound to be impressed. Unlike the last Russian
president to visit Canada, Boris Yeltsin, Mr. Putin is popular, clever and
sober. But is he as good as he looks? Can he do what Mr. Yeltsin so
miserably failed to do and pull Russia out of its decade-long
post-communist slump?

Although he has been in office for nearly a year, the signals are still
mixed. Mr. Putin says all the right things about democracy, the rule of
law, the free market and international co-operation. "When we speak of the
strengthening of the state, we don't mean the curtailment of democratic
freedoms," he told his interviewers, "because without adequately developed
democratic institutions for the protection of human rights -- including in
business -- the market economy cannot develop."

He does some of the right things, too. He has surrounded himself with
bright economic reformers. He has ushered in a responsible new budget and a
better tax-collection law. He has sought closer ties with Western countries
and their leaders. He is trying to trim Russia's unwieldy and expensive
armed forces.

But he has done many troubling things, too. He has continued to prosecute
the ugly little war in Chechnya, a campaign that has included
indiscriminate attacks on civilians and abominable treatment of refugees
and prisoners of war. He has cracked down hard on critical media, chasing
into exile two media barons who dared to question him. He has used the
security services, where he cut his teeth, to harass inconvenient
foreigners. He has played footsie with nasty regimes in Iran, Iraq and
Yugoslavia.

Most troubling is his handling of dissent. Mr. Putin seems to think that,
if he silences the critics and concentrates power in his own efficient
hands, then the trains will run on time. In fact, the opposite is true.
Russia will not truly succeed until critics are free to criticize, and
power is more evenly distributed. Open societies are more efficient because
they can work out their problems through free debate. Mr. Putin claims he
understands that, but his actions say otherwise.

A visit to Canada is a good time to set him straight. Without preaching,
Prime Minister Jean Chrétien should forcefully remind Mr. Putin how much
Canada deplores Russia's behaviour in Chechnya. He should tell him how
worried Canada is about his treatment of critical media. He should urge him
to strengthen key democratic institutions such as the judiciary and
parliament.

Despite the missteps of his first year, it is far too early to write off
Mr. Putin as just another post-Soviet autocrat. But if he is to succeed in
his mission to rescue Russia, he must stop equating dissent with disorder
and accept it for what it is: the essential foundation of a successful
modern society.

*******

#2
Russian Journalist Beaten, No Money Taken, Paper Reports
 
Moscow, Dec. 18 (Bloomberg)
-- Oleg Lurye, a 37-year-old correspondent for Novaya Gazeta, was beaten
early Sunday morning by five unknown people, Sevodnya reported.

Lurye and his wife were about to park their car as they returned home about 2
a.m. Sunday morning when the five attackers surrounded him. They locked his
wife in the car and beat him. No money or valuables were taken, the paper
said.

``He started to offer them money, his watch and his mobile telephone, but
they were not interested in these,'' said Dmitry Muratov, editor-in-chief of
Novaya Gazeta, Sevodnya reported. ''This was an attempt to scare, maybe to
warn the journalist.''

Lurye, an investigative reporter who has written articles criticizing top
government officials -- including Alexander Voloshin, the Russian president's
chief of staff -- and businessmen, suffered a severely beaten face but was
not hospitalized, Sevodnya reported.

In the past 10 years, about 200 Russian journalists have been killed,
according to a presentation at the Russian House of Journalists.

*******

#3
Date: Sun, 17 Dec 2000
From: Daniel Rancour-Laferriere <darancourlaferriere@ucdavis.edu>
Subject: New book

Here is some information about a new book that will be published by Edwin
Mellen Press in January of 2001.  I would be grateful if you would make
this information available to the list.

Thanks very much.
Daniel Rancour-Laferriere
Professor of Russian
Director, Russian Program

The following book will be published by the Edwin Mellen Press in January
(2001).

Title - RUSSIAN NATIONALISM FROM AN INTERDISCIPLINARY PERSPECTIVE:
Imagining Russia
Author - Daniel Rancour-Laferriere, Professor of Russian, University of
California, Davis
Contents -
Preface by Kathleen Parthe
Introduction: The Slow Dawn of Russian National Awareness; Russia vs. Rus';
The Long Memory of Russian Nationalists; Psychoanalysis and National Feelings
PART I: The Russian Self and The Illusion of Russia -- What is Russian
Identity?; Identity is Not Character; The Post-Soviet Identity Flux; Russia
as Imagined Collective; The Individual and Mother Russia; Mother Russia
Herself; Europe vs. Asia; Eurasianist Russian Nationalism; The Deep End of
Eurasianism; The Island of Russia; Is Russia Falling Apart?; Fragmentation
by Emigration; Are the Russians a Biological Unity?; Russia as Riddle; The
Empty Russian Idea; The Illusion of Russia
PART II: The Russian Other and the Enemies of Russia -- The Threatening
Other; Some Surface Features of Ethnic Hatred in Russia; Assimilationism
and Ethnic Hostility; The Hateful Side of Russian Universalism; The
Narcissism of Empire; Ontogenetic Explorations; Ethnic Projection; Relating
Masochism to Ethnic Paranoia; Conclusion - Some Personal Experiences
Notes
Bibliography
Index
ISBN: 0-7734-7671-7. YEAR: 2001. PAGES: 364pp.
Available on the web at mellenbooks.com

*******

#4
BBC Monitoring
Russia: brain drain in defence sector seen as "security threat"
Text of report in English by Russian newspaper `Segodnya' on 29 November

Finally, the authorities have noticed that Russian science is dying. At a
meeting yesterday, the government discussed urgent measures for its
resuscitation. Tasking themselves with attracting young scientists to
research and development at large, the ministers paid special attention to
the sheer shortage of cadre in the defence industry.

The "young brains" deficit in defence is so tangible that it has been
recognized as a "security threat" for Russia. Even though the situation with
"peaceful" science is catastrophic. The share of scientists aged 40 or less
accounts for 20 per cent and by 2002 their number might drop twice, so that
the average age of our researchers will exceed 50.

Worldwide experience shows that serious achievements are obtained by
scientists aged 27-40. But talented Russian college and university graduates
cannot be attracted by the poor compensation and ancient equipment of
research and development institutes. And they go to post-graduate education
not for the sake of science, but to postpone their conscription duty and to
get a degree in science that would facilitate their future employment in
commerce or their professional immigration.

Over a 10-year period our science has lost over 400,000 scientists, with
defence expertise enjoying special demand abroad. According to the Minister
of Education, Vladimir Filippov, "the USA has set a target to attract
specialists in the field of science and defence industry, which includes a
special quota for Russian experts. If we do not undertake urgent steps, we
will be working for another country's defence".

The government decided to stop youths from going to the Pentagon. There are
budget plans for a 4-fold increase of student grants at defence
sector-related university departments, as well as to raise lecturers'
salaries at these departments by 30-40 per cent. It was also decided to
create a state training plan for engineering and scientific cadres for the
defence sector.

In order to retain young people in the Russian science, the government is
willing to allocate R820m from the 2001 federal budget for pay increases,
R800m for facilities development, 12.5m to meet housing needs and another
R80m for some "retention efforts". Where this money will come from is yet to
be clarified.

According to the Ministry of Finance, it does not have to be additionally
raised, it can be "redistributed" from other budget sections.

*******

#5
Date: Mon, 18 Dec 2000
From: laurabelin@excite.com (Laura Belin)
Subject: the tone on JRL

I would like to respond to Andrew Miller's latest message, in which he
creates a false dichotomy: either JRL provides civil debate "from the lofty
heights of some academic Mt. Olympus," or it provides Russia-watchers with
the "maximum information," preferably using a Rush Limbaugh-type discourse
that can be "accessed by the ordinary American."

Miller seems to think that JRL comments should be brutal to be true to the
spirit of Russia. The more offensive a message is, the more authentic and
worthy are its author's opinions. If a posting prompts a reply threatening
bodily harm, that's something to be proud of.

I do not understand why requests to keep the debate civil would somehow
deprive JRL readers of important information about Russia. Many JRL readers
feel passionate about issues relating to Russia, but contributions can be
useful, and disagreements sharp, without gratuitous insults. If an abusive,
crude rhetorical style were the hallmark of insightful commentary, then
Sergei Dorenko would be Russia's most informative journalist.

For every reader like Miller, who seems to delight in insults, there may be
another like me, who finds the most strident JRL contributions reveal more
immaturity than wisdom.

No one is calling for censorship, or for David Johnson to completely ignore
any source of information about Russia. But I think JRL would generate more
interesting arguments from a wider range of readers if the personal insults
were fewer and farther between.

Best,
Laura Belin
St. Antony's College, Oxford

*******

#6
RADIO FREE EUROPE/RADIO LIBERTY, PRAGUE, CZECH REPUBLIC
RFE/RL Security Watch
Vol. 1, No. 22, 18 December 2000
Security, Corruption and Foreign Policy in Russia and
the Post-Communist Region

ONWARD CHRISTIAN SOLDIERS
By Paul Goble

A Moscow court decided last week that the Salvation Army
represents a security threat to the Russian government. That
ruling may make it impossible for that international
humanitarian assistance organization to reregister before the
end of this month and thus force it to suspend operations in
Moscow.
Kenneth Baillie, the head of the Army's Russian
operations, said that the Moscow city court had reached this
conclusion on November 28. "Since we have the word 'army' in
our name," he said, the court said "we are a militarized
organization bent on the violent overthrow of the Russian
government."
The Salvation Army, of which Baillie is a colonel, was
founded in the nineteenth century along military lines but
without the usual military goals. Its members carry no
weapons and have as their mission assistance rather than
conquest.
This finding will make it impossible for the group to
register as required by Russian law, and court officials said
they would give its officers the official verdict only
sometime within the next month -- a delay that might make it
impossible for the Salvation Army to appeal to a higher
court.
The Salvation Army has been present in Russia since the
collapse of communism. In addition to Moscow, the group
operates community centers in 13 other Russian cities which
provide food, shelter, and clothing to the homeless, the
elderly and other less fortunate people.
One 85-year-old participant in the Salvation Army's
Russian program told a Moscow newspaper on Wednesday that
"this is the only thing that saves us lonely people. Here we
get everything we need, love and human contact." And the
leader of the Moscow Salvation Army office added that "if we
have to close it, [the people who have been using it] will
lose everything. They'll have nothing but their four walls.
The Salvation Army's current legal travails began in
1997 when the Russian parliament passed a law requiring
religious organizations with less than 15 years of work in
Russia to register with the local authorities. The Army's
Moscow office filed documents in February 1999. In August of
that year, Moscow officials refused to register the group.
At that time, the Moscow city officials said that the
group could not register because its headquarters were
outside of the Russian Federation and that it could have only
a representative office in Moscow. In response, the Army
filed suit which in July 2000 upheld the city's position. The
current finding against the Army was the result of the
group's appeal of that decision.
These legal appeals, the Salvation Army said, had forced
it to spend more than 20,000 dollars in legal fees, money
that the group indicated it would have much preferred to
spend on those in need.
Colonel Baillie told "The Moscow Times" this week that
the Moscow court's latest action showed that the Salvation
Army had been singled out, although he said that it was
"unclear" as to why. But he acknowledged that there's a
general wariness and suspicion of foreigners: "That's part of
Russian culture and certainly part of the religious culture."
No court in any other region of Russia has taken such an
action against the Salvation Army, but officials in this
region are likely to be watching to see whether the finding
against this group is upheld or overturned. If the court
decision stands, many of them may also move against the
group. If it is overturned, they are less likely to try to
close the Army's operations.
But these regional courts are not the only ones who will
be watching to see just what the Russian legal system does.
The Salvation Army enjoys near universal support around the
world for its longstanding efforts to help those in need
regardless of nationality, religion, or political
affiliation.
During this holiday season, when the Army's officers
stand on the streets of major Western cities to collect money
for its charitable activities, such a Russian move against
the group will undoubtedly cause many people to draw new
conclusions about the direction that Russian political life
is taking.
But the Salvation Army has pledged to continue to work
where it can because its officers have always insisted that
they answer to a far higher court than any judicial assembly
in any particular city or any particular country.

*******

#7
From: "Peter Lavelle" <plavelle@metropol.ru>
Subject:  Year-end Letter or my Russian 'Fourteen Points'
Date: Mon, 18 Dec 2000

Untimely Thoughts: Year-end Letter or my Russian 'Fourteen Points'

Dear All 

It is turning into a tradition; many of you have asked me to place Russia's
current year into perspective.  Done, the following is my take on my
adopted country - three years on:

   1. The year should focus on the "Man of the Year" - Putin (or, for those
who know me well: "The Year of Who Controls the Political Discourse").
That second bottle of champagne is still memorable almost a year later
after Yelstin's historic and meaningless departure. 
   2. Putin's authority building strategy - pitched battles with the
Family, final showdown to occur next year, economic and financial issues to
dominate.  The easy attacks on the "oligarchs" being the targets of the
2000.  (BTW: failure in Chechnya, the Kursk tragedy, the TV tower fiasco,
and various bombing does not harm the president's public opinion standing). 
   3. Politics - in the most normative sense - dominated 2000; economic and
financial issues easily sidelined because of advantageous world commodity
prices.  Next year, Putin will have to avoid a financial crisis similar to
1998 while attempting to reconstruct the economy, i.e. banking reform,
development of a real commercial paper market, continued privatizations,
sector restructuring, PSAs, attracting investment in the oil & gas and
utilities sectors, etc.  Is he up to task? - this is the Russian question
of 2001.  It will be a year of living dangerously. 
   4. Meaningful political opposition all but neutralized. With the close
of 2000, Putin can - without much difficulty - get the Duma to do what he
pleases.  Duma politics of this year was not about substance - it was about
'kto-kvo' (read: who is in charge). The Duma - it would appear - is quite
satisfied with being merely being a debating society. So much for the
integrity of the Communists and the so-called 'liberal-conservatives".  The
return to the Soviet anthem might the best metaphor to describe this as
well as the establishment of an alternative power center - the Security
Council, I believe this is his "just in case" scenario to implement
Presidential rule if necessary. 
   5. The autonomy of the regions reneged.  One of Yelstin's hallmarks
reversed. The center can giveth and taketh it way, it would seem.   This is
as it should be.  The U.S. Supreme Court would certainly not disagree.
Interestingly enough, Russia now has a similar "states rights" arrangement
without fighting a civil war. 
   6. Freedom of speech is not seriously under threat: Gusinsky and other
gross abusers of the free media will rather find their end.  Destroy NTV's
independence is to destroy the value of NTV.  This is not in Putin's
interest - he too is interested in what others think; if he acts upon those
thoughts is another matter. Gusinsky belongs in prison - hopefully, for his
sake, it will be a foreign penitentiary, considering the energy shortages
in Siberia and everything.  
   7. Russia "re-entered" the world with the advent of the Putin
presidency.  Putin and his people realize that the US is not either willing
or capable to determine the agenda of the international community. Russia
has decided - with little fear of retribution - to stake some old and new
claims in the world.  This has served domestic and foreign policy purposes
well.   At any rate, I hope to get a cheap 'all-inclusive' vacation deal to
Cuba next year, the menus will of course be in Russian - not in "American"
as so many US citizens have a habit of saying.   
   8. Putin will have a lot of fun with George Jr.  Even with all of
senior's friends, George W will grope in the dark for at least a year.  It
does not matter much; W will be like his father - a one-termer.  In the
mean time, Putin and his people will be very creative - confusing the hell
out of the old, out-fashioned and unreconstructed Cold Warriors.   Western
Europe - during this time - will look to Putin as a breath of fresh air
after dealing with the new American administration's apprenticeship.   Said
differently, German beer for the Russians is more palatable than American
Rice.  I don't expect the new US president to be in Russia very soon - he
still has to apply for a passport I hear. 
   9. Concerning the banal question of "Who lost Russia" debate in America,
the more the Americans point fingers at other Americans the more the
Russian political elite revels in delight at the stupidity of the their
American counterparts.    I would not be surprised that if some Russians  -
new victims within the American-invented international culture of guilt -
will somehow convince some American politicians and academics that Stalin's
purges were the result of misguided American foreign policy.  Once done, an
American lawyer will represent the aggrieved Russian clients - still one
more payment made to Russia that will end in a safe haven bank account.
Who is the one that has the flat learning curve in this relationship? 
   10. Economic and financial reform will continue!  Putin may be
xenophobic for internal purposes, but in reality he knows that Russia must
conform to established and international recognized economic behavior.
(This is what makes Russia and Putin so intriguing).  I am still very
bullish about Russia, though in a sensible and selective way. 
   11. Putin will get the loan restructuring deal he needs - why should the
rich West allow insignificant and financially marginal Russia put the rest
of developing world in tailspin?  We are only talking about a few billion
dollars - what is the big deal?   Is it true the USS Cole and all its
state-of-the-art technology cost one billion dollars - one ship?  How much
(or how many Coles) does Russia owe the West? 
   12. The state reasserted itself.  While not according to the tastes of
the rich and comfortable West, this is the best for Russia for the time
being.  Under Yelstin, both state and society were weak; Putin is obviously
more interested in strengthening the former.  Civil society will have to
find its own way  - if it can do so independently.  (This, unfortunately,
still remains a big question ten years after the fact). 
   13. Is Russia a good investment, moving forward?  Well, if you listen to
me you won't lose money!
   14. My question to you all - how much will Edmond Pope make from his
eight-month tour of the Russian legal system? CNN could ask him to become
their Russian Legal Affairs Expert (though probably reporting from a
Virginia affiliate).  I hope there will be a TV mini-series.  Here, we are
in desperate need of cheap American TV programs (sic).  If so, who might
play Putin? Is Perot available? If not, I hope he writes a book for the
Internet that least. 

In closing, as you all probably already know: My view of all of this is
that Putin (Putinism) is part two of a three part revolutionary drama.
Putin's stage time will last least be a decade.   The world may change -
but Putin's Russia will continue on its course according to its best
interests.   This is as it should be. 

And George W, you need an Aids test and two pictures for a visa to the
Russian Federation. And, if you ever think about coming here, I am certain
Doug and Marty can find you a corner table (with notice, of course) at the
Boar House.  Directions: you can go either east or west - you will find us
eventually.    

Yours very truly and happy holidays,
Peter Lavelle
Head of Research
IFC Metropol
Moscow, Russia
plavelle@metropol.ru
 
******

#8
Date: Mon, 18 Dec 2000
Subject: How long can it last
From: "Ben Aris" <benaris@online.ru>

Dear David,

This is a box form a report I am just finishing for Euromoney, which I
thought your readers may find interesting. Talking to analysts they say that
high oil prices ­ while important and helpful ­ are not the key to Russia¹s
growth at the moment. More importantly they believe that the current growth
will last at least another year, and more likely several years, even if oil
prices fall. I think the positive effect of the devaluation on the economy
has been, and continues to be, underestimated. I have been hearing for the
last two years that the devaluation effect is about to wear off, and it is
still there. This whole issue deserves closer inspection.

Best Regards
Ben Aris

How long can it last
Growth and Oil box
Euromoney ­ Russia Report
Moscow
Friday, December 15, 2000
Ben Aris

Russia is growing strongly for the first time in ten years and all thanks to
record high international prices for oil says conventional wisdom, but how
long can it last?

High oil prices help, but they are only half the story, and some analysts
say less than that. Even if the average oil price falls, as long as it
doesn¹t fall below $21 (the assumption used in calculating the 2001 budget)
then the government will be able to meet all its spending promises and the
growth will continue. By the end of last year (2000) the government were
already starting to hedge its bets and hiked the export tariff on oil from
EURO34 per ton to EURO48, a 40% increase. As the budget was calculated at
the old tariffs, oil could fall to below $20 and the budget would still be
fulfilled.

High oil prices have contributed to the enormous $60bn trade surplus Russia
is running compared with a meagre $14.4bn in 1997. The hard currency flowing
into the country has helped remonetorise the economy:
non-payment has been all but eradicated; wage arrears have fallen; and tax
revenues are up to the point where Russia has been running a budget surplus
since last March (2000).

Oil exports have helped to pay for all this but at least as important is the
after effects of devaluation. Exports have risen by $12bn between 1997 and
the end of 2000 to around $100bn thanks to oil, but imports have fallen
faster, dropping from $73.6bn in 1997 to $44bn by the end of 2000. Following
devaluation Russian companies stepped in to fill this $30bn gap.

DEVALUATION EFFECT

Devaluation of the ruble was the best thing that ever happened to Russia¹s
industry suffocating under an overpriced ruble. For companies with exports,
overnight real costs were quartered while revenues grew on the back of
rising international commodity prices. For the purely domestic producers,
the fall of the ruble meant floods of cash arrived in the country as imports
left. Where companies and workers used to be forced to accept IOUs, suddenly
they were being paid in cash, which in turn fuelled consumption.

Devaluation effects are still what is driving Russia¹s growth and has
already lasted a lot longer than anyone expected: in the aftermath of the
crisis economists were predicting triple digit inflation for 1999, which
actually finished the year closer to  36%.

Mikhail Khodorkovsky explains why the devaluation effect has lasted so long.

"If it costs $20 to make a TV in Malaysia but you can sell it for $100 in
Japan, because of the trade between the two countries, within months the
price in Tokyo will fall to near $20," says Khodorkovsky. "But it doesn¹t
matter how much it costs to make a TV in Russia because no other country
could buy it even if it is as good as the Malaysian TV. Russia is not
integrated into the world economy and so the devaluation effects have lasted
much longer here."

With so many companies paying each other with promissory notes (or just not
paying at all) there was a lot of slack in the economy but two years after
the crisis it is showing signs of heating up. Reforming the Russian economy
is becoming a race against time: what will kill off the current growth
fastest is ruble appreciation.

The ruble has held remarkably steady since the devaluation, but has already
appreciated by about a third over 2000 finishing the year around Rb28 to the
dollar from Rb6 to the dollar before the crisis. Russian companies and the
budget are doing well because of a cheap ruble but this can¹t last forever.

Economists disagree on how long it can last. Al Breach, an economist with
Goldman Sachs who was the first finger an over-priced ruble as the root of
Russia¹s ills, believes there is another two or three years before the
devaluation effect wears off. Yaroslav Lissovolik, an economist with
Renaissance Capital believes there is another year to go. And Sergey
Prudnik, an economist with Troika Dialog, thinks there is another three to
five years of effect left.

It is a complex call to make. An appreciating ruble will reduce the profits
from exports, but it will also increase the personal wealth of the
population, thus increasing consumption further. At the same time companies
are investing while times are good, but are they investing enough so that
they will be competive once their price advantage has worn off?

WINDOW OF OPPORTUNITY

Strong growth and lots of cash has created a benign business environment in
which Russia¹s enterprises are flourishing. Production and consumption are
both increasing; production grew 10.4% in October year-on-year and is
growing fastest in the light industries which need relatively little
investment to increase quality and productivity. By the end of 2000 the
growth had spread to the heavier end of the spectrum to things like oil and
power whose decline in production has finally bottomed out.

Companies are investing again; since the fall of the Soviet Union domestic
investment has fallen by about 80% from the 1991 benchmark, but by October
it was up 23% year-on-year to Rb113.7bn ($4bn).Things are easy now, but
unless companies invest enough to raise production standards the current
growth will falter once the price advantage evaporates.

"Now investment is growing strongly, but looking across the sectors, they
are not doing enough," says Lissovolik. "Most of the investment is
concentrated in the export orientated sectors and is being made mostly by
large companies. Not enough companies are taking advantage of this window of
opportunity."

MAKING IT LAST

The government is in a position to make the window bigger by pushing through
structural reforms: deregulation and banking reform are two sectors which
would make the biggest difference.

The slack in the economy has nearly been taken up, but making more effective
use of the extra cash in the system would create more slack. Banks are not
playing the role of financial intermediaries (see bank section) and so money
that could be used to invest and create more economic activity is simply
lying idle in the Central Bank¹s vaults.

Deregulation would also create more economic activity and make growth more
robust and sustainable. Russia is missing the middle layer of small and
medium enterprises (see reform section) that would also make any growth
longer lasting.

A fresh spanner was thrown into the works in December when it became
increasingly clear that the Paris Club of creditors were not going to let
Russia restructure their $49bn plus debt. The government had already assumed
it wouldn¹t have to pay a $3.2bn payment that comes due in 2001 at was
scrambling around at the end of last (2000) year to find some extra money.

"The government is trembling," says Troika¹s Sergey Prudnik, "but they are
struggling quite effectively and should be able to find the money."

For once the government seems aware of the danger the country¹s economy is
in and the oil sector is rich enough to bare the cost of ad hoc payments
like that of the Paris Club. Since he came to power in May, President
Vladimir Putin has been lucky and the longer the current growth is the more
robust the economy will be. But Russia is still very vulnerable to external
shocks. The question now is: can Putin do enough, fast enough?

Notice: the Russia Business List

As an aside, I have started a small list ­ the Russia Business List -- for
those more interested in the business, economic and financial aspects of
Russia¹s development. The piece above is the sort of thing the list carries,
but there is also discussion of more company-specific issues, the reform
effort and legislation.

It is made up mainly of the daily research from Moscow-based banks, but also
includes research from market research companies, the IFIs, articles and
whatever else I find interesting.

It is available as an email:

To subscribe to this group, send an email to:
RusBiz-subscribe@egroups.com

To unsubscribe from this group, send an email to:
RusBiz-unsubscribe@egroups.com

Or it can be viewed on the Internet at

http://www.eGroups.com/group/RusBiz

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#9
The New York Review of Books
November 16, 2000
The Russians Are Coming!
By RAYMOND BONNER  
[DJ: Footnotes not here.]

Red Mafiya: How the Russian Mob Has Invaded America
by Robert I. Friedman
296 pages, $25.95 (hardcover)
published by Little, Brown

Robert Friedman's book is the first to describe in detail the Russian
mobsters who have established criminal enterprises throughout the world.
His prose sometimes makes it sound like a sequel to Pulp Fiction. A Russian
killer in Brooklyn murders a boy, he writes, "by picking him up like a
ragdoll with one hand and plunging a knife into his heart with the other."
But more than any other reporter he reveals how sophisticated, ruthless,
rich, and multinational Russian criminals have become.

Among other things, he writes, they have arranged the sale of military
helicopters and a submarine for the Colombia drug barons, and they have
acquired influence over the American National Hockey League by threatening
players from Eastern Europe and Russia and extorting money from them. They
have infiltrated the international financial system, rigging share prices
and buying banks in Hungary, Israel, and California. Now they are expanding
into Nigeria, South Africa, and Australia.

The "Russian mafia," as Friedman describes it, is not a single
organization, but rather a catchall phrase for mobsters who come from the
former Soviet Union. The term mafiya appeared in the 1970s to refer to
corrupt Communist Party officials; since the Soviet Union collapsed it has
been used to refer not only to officials but to organized criminals and
prominent business leaders, including some of the "oligarchs" who have
acquired power and vast fortunes inside Russia.1 Some Russians object to
the phrase "'Russian' mafia," arguing that many of the gangsters are from
other nationalities-Ukrainian, Georgian, Latvian, for example. For this
reason, FBI reports sometimes refer to "Eurasian" organized crime
syndicates, which include those run by Russian nationals; this only creates
more confusion since many of the syndicates have nothing to do with Asia.
In fact, wherever they were born, most are now Russian citizens, and use
Russia or Israel as their base.

It is often said that Russian mobsters started to become active
internationally when the Berlin Wall came down and the Soviet Union
disintegrated. But Friedman traces their beginnings back to the 1970s, when
the Soviet Union, under pressure from Washington, permitted Jews to
emigrate. The Communist leaders, Friedman writes, "took this opportunity to
empty its jails of thousands of hard-core criminals, dumping vast numbers
of undesirables...on an unsuspecting America, as well as on Israel and
other Western nations."

Since tens of thousands of people jailed by the Communists were not
criminals, when questions were raised about a mobster's time in prison they
tended to be dismissed, and they still are. But many were jailed because
they were in fact criminals-pick-pockets, extortionists, and murderers.
Some of the toughest of them formed loosely organized associations while in
prison, and maintained their connections with one another after they were
released. For example, Friedman writes, gangsters who call themselves
"thieves-in-law" (vor v zakonye) take vows never to hold a job, or pay
taxes, or cooperate with the police or the state, except to trick them.
Some of them, he was told, have on their chests tattoos of a giant eagle
with razor-sharp talons. The FBI estimates there are between seven hundred
and eight hundred thieves-in-law, some of whom are listed alphabetically in
an eighteen-page appendix to a 1994 FBI report, "Russian/Eurasian Organized
Criminal Enterprise." Along with thousands of legitimate Russian-Jewish
immigrants, these and other criminals established their first base in
Brighton Beach in Brooklyn. From there they moved on to Miami, in a big
way, and to a lesser degree to Los Angeles.

Friedman began reporting about Russian organized crime in the 1980s, well
before others were aware of it, and he may well know more about Russian
mobsters than any single law enforcement official. Unlike many journalists
reporting on organized crime who rely on official sources, Friedman spent
much time with the mobsters, drinking with them in the garish nightclubs
they own. Some of them trusted him enough to allow him to interview them
after they went to prison. But some caution is required: organized crime
members are, of course, notorious liars, protesting their innocence when
caught, and bragging about their importance when they are confident they
are not in danger. Friedman was able to extract information from the
agencies pursuing the mobsters-the FBI, CIA, British police, Israeli
intelligence. A caution here, too: information handed out by police
officials contains raw accusations, often based on hearsay.

A flaw of Red Mafiya is that it has no notes. Among other things, this
means that it is not always possible to know which of Friedman's dramatic
findings have been discovered by Friedman himself, and which he has taken
from secondary sources, such as newspapers or magazines, whose credibility
and accuracy cannot be checked. This omission will deny the book the
importance it should have with readers and with government officials and
policymakers. But even if many of Friedman's accusations may not stand up
in a criminal case, his book is a much-needed exposé of the brutality,
sophistication, and influence of Russian-organized crime groups and of the
failure of public officials to deal with them.

1.

Friedman shows how the collapse of the Berlin Wall and then of the Soviet
Union opened up global opportunities for criminals. One of his examples is
Boris Nayfeld, a fairly typical heroin dealer who, along with his brother
(who murdered a young man for insulting his girlfriend), emigrated from
Russia to Brighton Beach in 1990. "He obtained the drugs in Thailand,"
Friedman writes,

smuggled them into Singapore, and then stashed them in TV picture tubes and
shipped them to Poland through a Belgian-based import-export company, M&S
International. From there, Russian couriers from Brighton Beach with valid
US passports 'bodied' the heroin into the United States through New York's
Kennedy Airport.
Semion Mogilevich, whom Friedman describes as "the world's most dangerous
gangster," is far more sophisticated in the use of technology:

He has created a global communications network through secure satellite
telephones, cellular clone phones, encrypted fax machines, e-mail systems,
and state-of-the-art computers, all of which are conducted by a host of
Ph.D.'s he employs. Relaxed travel restrictions and the greatly increased
volume of international trade have enabled Mogilevich to extend his
operations throughout the world, setting up a welter of legal and illegal
companies that have helped to penetrate international bank-ing systems and
stock exchanges, where he has planted top aides.

Although Friedman has been dogging Mogilevich for many years and wrote a
chilling article about his criminal empire in The Village Voice two years
ago, the mob leader's name did not appear in The Washington Post, The Los
Angeles Times, The Wall Street Journal, The Financial Times, or The New
York Times until August 1999. He was then named in connection with the
investigation into allegations that Russians were laundering billions of
dollars through the Bank of New York. 
 
Mogilevich, born in Ukraine and now a Russian citizen, served several years
in Soviet prison in the 1970s for illegal currency transactions and fraud.
On being released, he made his first millions defrauding fellow Jews
leaving the Soviet Union. He offered to sell their jewelry, works of art,
and other valuables in Russia, and send them the money abroad. He kept the
money.

During a trip to Hungary in the 1980s he fell in love with a Hungarian
woman, and after the Wall came down, he set up his headquarters in
Budapest. At least that is how Mogilevich explained how he came to Hungary
when I talked to him last year. But Budapest was also a place from which
Mogilevich could expand his activities in the West. He was protected by a
senior police official in Budapest and the Hungarian police did not pursue
him while he built up a criminal conglomerate-including prostitution,
extortion, drug and weapons trafficking, art fraud, money laundering.
(Under pressure from the United States, the police official was fired in
late 1998, and Mogilevich may not be so welcome in Hungary these days.)

Mogilevich's organization had two villas outside Prague where his
"enforcers" took those who crossed him or refused to pay blackmail. An FBI
report says, "Trained by Russian Afghanistan war veterans, the young
athletic enforcers are known for their brutality. Victims are generally
repeatedly stabbed and tortured before they die."

During a three-year period in the early 1990s, according to a British
police report, Mogilevich laundered at least $50 million through the Royal
Bank of Scotland, with the help of a London solicitor whose wife happened
to be a former mistress and the mother of one of his children.3 (He also
has an ex-wife, a daughter, and a granddaughter in the United States.)
Mogilevich, now fifty-four years old and weighing close to three hundred
pounds, denies that he was engaged in money laundering. His problems with
the authorities arose, he says, because he was not familiar with Western
banking, and did not speak English; he therefore, he says, hired a
solicitor, whom he paid $500,000, and that was the only reason the British
authorities thought he was laundering money.

When the British closed down his activities, Mogilevich turned to North
America, setting up YBM Magnex, a company near Philadelphia whose core
business was industrial magnets manufactured in Hungary. The company had
well-known businessmen on its board of directors and its books were audited
by two prominent American accounting firms. It issued glossy annual
reports, and its stock traded in Canada while the company awaited a listing
on the Nasdaq. But the company was also a cover for a very sophisticated
money-laundering operation. Eventually Canadian and American authorities
caught up with it. In June 1999, the company pleaded guilty to securities
fraud in the Federal District Court for the Eastern District of
Pennsylvania. Mogilevich, meanwhile, is back in business in Russia.

Such tales about the criminal escapades of the Russian mobsters raise the
question of what is being done to combat them. The answers suggested in Red
Mafiya are not encouraging. In 1992, federal and state authorities finally
broke up an operation in which Russian mobsters illegally sold gasoline in
several states. This was costing federal and state collectors billions of
dollars in revenues annually-"the biggest tax heist in US history," says
Friedman. It was the first significant action against the Russian mob. In
general, Friedman writes,

state and federal law enforcement agencies were loath to go after Russian
mobsters, instead devoting their energies to bagging Italian wiseguys, a
traditional route to promotion. And because the Russian mob was mostly
Jewish, it was a political hot potato, especially in the New York area,
where the vast majority of refugees were being resettled by Jewish welfare
agencies.

As for the FBI, which has the resources and the legal authority to
investigate the Russian mob, Friedman says that were it not for the
bureau's "own sluggishness in addressing the problem, the Russian mob in
the United States would never have become as powerful as it is today." It
wasn't until 1994 that the bureau set up a special force to deal with
Russian organized crime. By then, Friedman says, there were some five
thousand "hard-core Russian criminals" in the New York region. Yet the
FBI's spokesman in New York, Joe Valiquette, told Friedman, "The Russian
Mafia has the lowest priority on the criminal pecking order."

Recently, Jonathan Winer, a former senior United States government
official, provided a rare view of how federal authorities bungled a major
investigation into the Russian money laundering involving the Bank of New
York. Winer was deputy assistant secretary of state for international law
enforcement; his job was to find ways to work with other nations to curtail
money laundering and international crime. After Friedman's book was
published, Winer told a congressional committee that he was first alerted
to the Bank of New York's large-scale money-laundering operation by the
Manhattan District Attorney's office in March 1999. When he learned more,
six months later, it was still not from anyone in the United States
government, but from British officials, who were keeping an eye on
Mogilevich.

>From the British, Winer learned that in eight thousand transactions during
eighteen months $4.2 billion had been moved through a suspicious account at
the bank-an average of one wire transfer every five minutes, twenty-four
hours a day. But this was not enough to make anyone suspicious, apparently.
The transactions were handled by a small company called Benex, which turned
out to be the creation of an officer at the Bank of New York, Lucy Edwards,
and her husband, Peter Berlin.

"My jaw literally dropped open," Mr. Winer said in his congressional
testimony. "I had never heard of any money laundering case of this
magnitude." Yet, he said, only one FBI investigator, in New York, had been
assigned to the investigation, and when Winer had returned from the British
briefing, he discovered that no one in Washington was aware of it. He
promptly reported the British findings to his superiors at the State
Department, as well as to the National Security Council and to the Justice
Department, which was in the dark even though the FBI was supposedly
investigating.

As soon as the Bank of New York scandal became front-page news in August
1999, congressional committees held hearings, and Republicans used it to
criticize the Clinton administration's policies toward Russia. Yet no one
seemed concerned to ask why no serious action had been taken while billions
of dollars were being sluiced through the accounts.

Obviously that much money could not have come from Mogilevich, no matter
how vast his criminal empire. Most of it came from Russia's oligarchs, the
handful of wealthy Russians who looted Russia for their own personal
wealth, buying up businesses at low prices during privatization, then
stripping them of their assets. The oligarchs used the Bank of New York to
launder their riches; other Russian businessmen used the Benex-Bank of New
York pipeline to cheat the Russian government out of customs duties and tax
revenues.

Federal authorities did not close down the connection between Benex and the
Bank of New York until the links between them were publicly disclosed in
newspaper accounts. FBI officials said they had left the account open
because they wanted to follow the money trail and to find others in the
Russian crime network. In other words, while Russia was being bled of
billions of dollars, federal authorities watched-another matter that
Congress has not investigated.  5 See the testimony of Jonathan M. Winer,
former deputy assistant secretary of state and now counsel in the Alston &
Bird law firm, to the US House of Representatives Committee on Banking and
Financial Services, March 9, 2000. Winer left government service late last
year; this probably explains why he was willing to speak publicly and
candidly about the manner in which the investigation was handled.

Nor has Congress given the Justice Department the laws it considers
necessary to combat money laundering. To break the power of today's
international criminal cartels-whether run by Russians or Colombian drug
barons-will require shutting down their ability to move illegally acquired
funds through Western financial institutions. The United States and
European governments criticize small island nations such as Antigua, the
Cayman Islands, and Nauru, as well as Cyprus and Liechtenstein, for their
willingness to protect illegal money. But the Bank of New York case shows
how American laws can be equally at fault.

For a foreigner to launder money through an American financial institution
is a crime only if the money comes from drug trafficking, terrorism, or
bank fraud. But money made from prostitution, extortion, or weapons
trafficking, for example, can be washed through an American bank without
any consequences to the depositor or the bank. Corrupt foreign politicians
and dishonest foreign businessmen can get their money into American
financial institutions, as they did in the Bank of New York case, without
violating American laws.

Efforts by the Justice Department to toughen money-laundering legislation
have been blocked by Congressman Henry Hyde, the conservative Republican
from Illinois, who has kept the legislation bottled up in his subcommittee.

2.

Whatever the American laws, a successful campaign against Russian mobsters
will require the cooperation of other governments, particularly those of
Russia and Israel, the two countries that are now the principal residences
of most Russian crime bosses.

Mogilevich lives openly in Moscow. Moscow is also home for Sergei
Mikhailov, head of Solntsevskaya, the largest of the Russian criminal
organizations, which, according to the FBI, has some two thousand members
worldwide. Mikhailov was acquitted by a Swiss court on money-laundering
charges in December 1998, in part because the Russian authorities did not
fully cooperate with the Swiss prosecutors; he returned to Moscow a hero
for having beaten the authorities in the West.

A grand jury in Philadelphia has been investigating Mr. Mogilevich for more
than a year, and Friedman suggests at the end of his book that the jury has
already handed up a sealed indictment. I have not been able to confirm
this, but federal law enforcement officials and Mogilevich's lawyer in Los
Angeles say that they expect him to be indicted. If that happens, how hard
will the next administration put pressure on the Putin government if it
refuses to hand Mogilevich over? United States officials say that the
Russian government has given almost no help in the Bank of New York
investigation.

"Of all the nations where the Russian mob has established a presence, none
has been more deeply compromised than the State of Israel," Friedman
writes, adding that the Russian mafia has "become a grave threat to the
stability of Israel." Although this may be a bit hyperbolic, the Russian
mafia does have a strong, safe base in Israel-a story that American and
Israeli journalists have largely overlooked. One FBI report observes, for
example, that most members of Mogilevich's criminal organization have
Israeli passports. And Jonathan Winer told Friedman (when Winer was still
the State Department's crime expert), "There is not a major Russian
organized crime figure whom we are tracking who does not also carry an
Israeli passport."

The Russian mobsters have taken advantage of the right of any Jew to become
an Israeli citizen, and of the country's desire to attract capital. Israel
has no money-laundering laws. Its open banking system, a US official told
me, was "developed for good motives," but was "perverted by the Russian
mafia types. One could pick up a passport and a bank account, and operate
like you couldn't in the rest of the Western world."

Along with Mogilevich, American officials put high on their list of
suspects two of his lieutenants, Gregori Loutchansky and Vadim Rabinovitch.
Loutchansky ran a trading company called Nordex, which American and
European officials say has links to Russian organized crime and once acted
as broker in the sale of Scud missiles from North Korea to Iraq.
Rabinovitch ran the Nordex office in Kiev.

In Israel, the Russian mob leaders have bought protection from senior
government officials, and have poured so much money into political
campaigns there that they have been able to name candidates for local and
national office. The admired former Soviet dissident Natan Sharansky, who
has become active in Israeli politics, has admitted taking campaign
contributions from Nordex, in spite of pleas from American officials to cut
his links with Loutchansky.

When Loutchansky invited a list of prominent Russian mobsters to his
birthday party in Israel in 1996, the Israeli police began to grow alarmed.
And an Israeli police official told me that they have begun to look more
closely at how the Russian mobsters got their citizenship. A naturalized
Israeli citizen can't be deprived of citizenship if he commits a felony,
but he can if he has obtained that citizenship by fraud, such as falsely
claiming to have Jewish ancestors. Late last year, the Israelis revoked the
citizenship of Sergei Mikhailov, the mob leader acquitted in Switzerland;
an Israeli police official recently told me that others' will also be
revoked.

Recognizing the threat to American interests from Russian organized crime,
the FBI opened an office in Budapest in April of this year. Not only has
the city been the headquarters for Mogilevich and Mikhailov but, according
to investigators, over half of the money that went through the Bank of New
York was first funneled through Budapest banks.

This is the first full-scale bureau office outside the United States. Until
now, the FBI has had agents posted as attachés in American embassies around
the world, but they function primarily as semi-diplomats. The Hungarian
government was eager to have the FBI office installed in Budapest, and,
after a brief protest, it has had enthusiastic support in Hungary, even
from the opposition political party.

But, such moves have not been widely applauded within the bureau. Much
opposition has come from senior officials who wanted the office to be
opened as quietly as possible; they also fear political repercussions if
anything goes wrong, such as an FBI agent getting caught in a shoot-out.
Conservatives in Congress argue that the FBI ought to stay home and keep
the streets and banks safe for Americans; liberals fear any expansion of
the FBI's power, in view of its past abuses. But the reality is that the
Russian crime gangs don't respect borders; they now can reach into the
United States without coming close to Brighton Beach.

******

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