Book: Russian Roulette

S >> Sam Vaknin >> Russian Roulette




"Our own satellite is an dire need. So far, we are using data
"received" from US and Russian satellites. Some information we use is
free, but we have to pay for certain others ... We have high-class
specialists but they are leaving the institute for commercial
structures because they are offered several times bigger salaries. I
have many times raised this question and said: Look, Russia pays us not
a small amount to lease Baykonur [some 115m dollars a year], why should
we not spend part of this money on space research? We could have
developed the space sector and become a real space power."

Kazakhstan has its own earth profiling program administered by its own
cosmonauts. It runs biological and physical experiments in orbit. The
"tokhtar" is a potato developed in space and named after Kazakhstan's
first astronaut, the eponymous Tokhtar Aubakirov.

Almost all the former satellites of the USSR have established their own
space programs after they broke away, vowing never again to be
dependent on foreign good will. Romania founded ROSA, the Romanian
Space Agency in 1991. Hungary created the Hungarian Space Office.

The Baltic states - to the vocal dismay of many of their citizens -
work closely with NATO on military applications of satellites within
the framework of BALTNET (the Baltic air space control project). Poland
(1994), Hungary (1991), Romania (1992) and the Czech Republic have been
cooperating with ESA on a variety of space-related commercial and civil
projects.

Ukraine hedges its bets. It signed with Brazil a space industry
bilateral accord in January. A month later it signed five bilateral
agreements regarding the space industry with Russia.

Many Western academic institutions, NGO's, and commercial interests
created frameworks for collaboration with space scientists from Central
Asia, Central and Eastern Europe, Russia, CIS, and NIS. The University
of Maryland pioneered this trend with its East-West Space Science
Center, formed in 1990.

The space industry - and particularly the emerging field of launch
technologies - represents one of the few areas in which the former
communist countries may retain a competitive edge and a relative
advantage. The West would do well to encourage the commercialization of
this knowledge.

The alternative is proliferation of missile technologies and military
applications of technology transferred within collaborative efforts on
civilian projects with Western partners. The West can save itself a lot
of money and heartache by being generous early on.

Russia's Vodka Wars

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Vodka is a crucial component in Russian life. And in Russian death.
Alcohol-related accidents and cardiac arrests have already decimated
Russian life expectancy by well over a decade during the last decade
alone.

Vodka is also big business. The brand "Stolichnaya" sells $2 billion a
year worldwide. Hence the interminable and inordinately bitter battle
between the Russian ministry of agriculture and SPI Spirits. The
latter, still partly owned by the state, is the on and off owner of the
haloed brand "Stolichnaya", James Bond's favorite.

SPI's PR firm, Burson-Marsteller, posits this commercial conflict as a
classic case of the violation of the property rights of hapless foreign
shareholders by the avaricious and ruthless functionaries of an
unreformed evil empire. They question Russia's readiness to accede to
the WTO and its respect for the law.

SPI's latest press release consists of the detailed history of this
harrowing tale. The brand Stolichnaya, as well as 42 others, were
privatized in 1992.

The firm quotes a document, bearing the official seal of the maligned
ministry, which states unambiguously: "VAO Sojuzplodoimport has the
right to export Russian vodka to the USA under the following
trademarks: Stolichnaya, Stolichnaya Cristall, Pertsovka, Limonnnaya,
Privet, Privet Orange (Apelsinovaya), Russian and Okhotnichya."

The privatization was completed in 1997 when the old SPI was sold to
the new SPI Spirits. The new SPI claims to have assumed $40 million in
debt and invested another $20 million to rebuild the company into "one
of the world's leading vodka producers". Yet, the Russian government,
as heavy handed as ever, clearly is unhappy with SPI.

It says the privatization deal was dubious and that SPI paid only
$300,000 (or maybe as little as $61,000 claim other sources) for the
multi-billion dollar brands, including "Stolichnaya", "Moskovskaya",
and "Russkaya". The government values the brands at a far more
reasonable $400 million. Other appraisers came up with a figure of $1.4
billion.

The government, in a bout of new-found legal rectitude, also insists
that the seller of the brands, the defunct (state-owned) SPI, was not
their legal owner. It also questions the mysterious shareholders of the
new SPI - including a holding company in tax-lenient Delaware. SPI's
trademarks portfolio is represented by an Australian law firm,
Mallesons Stephen Jaques.

Putin himself set up a committee for the repatriation of these and
other consumer brands to the state. He craves the beneficial effects
the alcohol sector's tax revenues could have on the federal budget -
and on its powers of patronage. A central state-owned brand-holding and
distribution company was set up less than two years ago. Ever since
then, the alcohol sector has been subjected to relentless state
interference. SPI is not the most egregious case either.

"The Observer" mentions that SPI currently runs most of its business
from inscrutable Cyprus, a favorite destination for Russian money
launderers, tycoon tax evaders, and mobsters. SPI's German distributor,
Plodimex, is increasingly less active - as three new off shore
distribution entities (in Cyprus, the Dutch Antilles, and Gibraltar)
are increasingly more so.

The FSB ordered Kaliningrad customs to prohibit bulk exports of
Stolichnaya. Cases of the drink are routinely confiscated. Criminal
charges were brought against directors and managers in the firm. The
Deputy Minister of Agriculture is discrediting SPI in meetings with its
distributors and business partners abroad. He is also accused by the
firm of obstructing the court-mandated registration of its trademarks.

The courts have lately been good to SPI, coming out with a spate of
decisions against the government's conduct in this convoluted affair.
But on February 1, the firm suffered a setback, when a Moscow court
ruled against it and ordered 43 of its brands, the prized Stolichnaya
included, returned to the government (i.e., re-nationalized).

SPI is doing its best to placate the authorities. It is rumored to have
offered last month to use its ample funds to supplement the federal
budget. It has indicated last September that it is on the prowl for
additional acquisitions in Russia - a bizarre statement for a firm
claiming to have been victimized. "The Moscow Times" reported that it
is planning to sign a $500,000 sponsorship agreement with the Russian
Olympic Committee.

Summit Communications, a country image specialist, placed this on its
Web site in November last year:

"One example of a savvy Russian company that has managed to do well in
the West by finding the right partner is the Soyuzplodimport company
(see also p. 14). Soyuzplodimport, or SPI, has the exclusive rights to
export Stolichnaya, which vodka lovers in the U.S. fondly refer to as
'Stoli'. Some 50% of the company's export turnover comes from the
United States, thanks mostly to its strategic alliance with
Allied-Domecq for U.S. distribution.

'I'm not sure that all Americans know where Russia is on the map, but
most of them know what Stolichnaya is,' muses Andrey Skurikhin, general
director of SPI. 'I want the quality of Stolichnaya in America to
create an image of Russia that is pure, strong and honest, just like
the vodka. At SPI, we feel that we are like ambassadors and we will try
to do everything to create a more objective and positive image of
Russia in the U.S.' "



SPI's troubles may prove to be contagious. Allied Domecq, its British
distributor in America and Mexico, now faces competition from Kryshtal
International, a subsidiary of the troubled Kristal distillery, 51%
owned by Rosspirtprom, a government agency. Kryshtal signed
distribution contracts for "Stolichnaya" with distilleries backed by
the Russian ministry of agriculture.



Allied and Miller Brewing have announced a $50 million investment in
product launch and marketing campaigns only two years ago.
"Stolichnaya" (nicknamed "Stoli" in the States) sells 1 million
12-bottle cases a year in the USA (compared to Absolut's 3 million
cases).



The trouble started almost immediately with the first foreign
investments in SPI. As early as 1991, Vneshposyltorg, a government
foreign trade agency, tried to export Stolichnaya in Greece. This led
to court action by the Greeks. Vodka wars also erupted between the
newly-registered Russian firm "Smirnov" and Grand Metropolitan over the
brand "Smirnoff".



The vodka wars are sad reminders of the long way ahead of Russia. Its
legal system is rickety - different courts upheld government decisions
and SPI's position almost simultaneously. Russia's bureaucrats - even
when right - are abusive, venal, and obstructive. Russia's
"entrepreneurs" are a penumbral lot, more enamored with off-shore tax
havens than with proper management. The rule of law and private
property rights are still fantasies. The WTO - and the respectability
it lends - are as far as ever.

Let My People Go

The Jackson-Vanik Controversy

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

The State of Israel was in the grip of anti-Soviet jingoism in the
early 1970's. "Let My People Go!" - screamed umpteen unfurled banners,
stickers, and billboards. Russian dissidents were cast as the latest
link in a chain of Jewish martyrdom. Russian immigrants were welcomed
by sweating ministers on the sizzling tarmac of the decrepit Lod
Airport. Russia imposed exorbitant "diploma taxes" (reimbursement of
educational subsidies) on emigrating Jews, thus exacerbating the outcry.

The often disdainful newcomers were clearly much exercised by the
minutia of the generous economic benefits showered on them by the
grateful Jewish state. Yet, they were described by the Israeli media as
zealous Zionists, returning to their motherland to re-establish in it a
long-interrupted Jewish presence. Thus, is a marvelous fiat of
spin-doctoring, economic immigrants became revenant sons.

Congress joined the chorus in 1974, with the Jackson-Vanik Amendment to
the Trade Reform Act - now Title IV of the Trade Act. It was Sponsored
by Senator Henry ("Scoop") Jackson of Washington and Rep. Charles Vanik
of Ohio, both Democrats.

It forbids the government to extend the much coveted "Most Favored
Nation (MFN)" status - now known as "Normal Trade Relations" - NTR -
with its attendant trade privileges to "non-market economy" countries
with a dismal record of human rights - chiefly the right to freely and
inexpensively emigrate.

This prohibition also encompasses financial credits from the various
organs of the American government - the Export-Import Bank, the
Commodity Credit Corporation (CCC), and the Overseas Private Investment
Corporation (OPIC).

Though applicable to many authoritarian countries - such as Vietnam,
the subject of much heated debate with every presidential waiver - the
thrust of the legislation is clearly anti-Russian. Henry Kissinger, the
American Secretary of State at the time, was so alarmed, that he flew
to Moscow and extracted from the Kremlin a promise that "the rate of
emigration from the USSR would begin to rise promptly from the 1973
level."

The demise of the USSR was hastened by this forced openness and the
increasing dissidence it fostered. Jackson-Vanik was a formidable
instrument in the cold warrior's arsenal. More than 1.5 million Jews
left Russia since 1975. At the time, Israelis regarded the Kremlin as
their mortal enemy.

Thus, when the Amendment passed, official Israel was exuberant. The
late Prime Minister Yitzhak Rabin wrote this to President Gerald Ford:

"The announcement that agreement has been obtained facilitating
immigration of Soviet Jews to Israel is causing great joy to the people
of Israel and to Jewish communities everywhere. This achievement in the
field of human rights would not have been possible but for your
personal sympathy for the cause involved, for your direct concern and
deep interest."

And, to Senator Henry Jackson, one of the two sponsors of the bill:

"Dear Scoop,

The agreement which has been achieved concerning immigration of Soviet
Jews to Israel has been published in this country -a few hours ago and
is evoking waves of joy throughout Israel and no doubt throughout
Jewish communities in every part of the globe. This great achievement
could not have been possible but for your personal leadership which
rallied such wide support in both Houses of Congress, for the endurance
with which you pursued this struggle and for the broad human idealism
which motivated your activities on behalf of this great humanitarian
cause. At this time therefore I would like to send you my heartfelt
appreciation and gratitude."

US trade policy is often subordinated to its foreign policy. It is
frequently sacrificed to the satisfaction of domestic constituencies,
pressure groups, and interest lobbies. It is used to reward foreign
allies and punish enemies overseas.

The Jackson-Vanik Amendment represents the quintessence of this
relationship. President Clinton tacitly admitted as much when he
publicly decoupled trade policy from human rights in 1994.

The disintegration of the Evil Empire - and the privatization of
Russian foreign trade - has rendered the law a relic of the Cold War.
Russian Jews - including erstwhile "refuseniks", such as Natan
(Anatoly) Sharansky - now openly demand to rescind it and to allow
Russia to "graduate" into a Permanent Normal Trade Relations (PNTR)
status by act of Congress.

American Jews - though sympathetic - would like guarantees from Russia,
in view of a rising wave of anti-Semitism, that Jews in its territory
will go unharmed. They also demand the right of unhindered and
unsupervised self-organization for Jewish communities and a return of
Jewish communal property confiscated by the Soviet regime.

Congress is even more suspicious of Russian intentions. Senator Gordon
Smith, a Republican from Oregon, recently proposed an amendment that
would deprive Russia of foreign aid if it passes legislation impinging
on religious freedom. Together with Hillary Clinton, a Democrat from
New York, he introduced a damning Jackson-Vanik resolution, saying:

"Any actions by the United States Government to "graduate" or terminate
the application of the Jackson-Vanik Amendment to any individual
country must take into account ... appropriate assurances regarding the
continued commitment of that government to enforcing and upholding the
fundamental human rights envisioned in the Amendment. The United States
Government must demonstrate how, in graduating individual countries,
the continued dedication of the United States to these fundamental
rights will be assured."

The Senate still refuses to repeal the Jackson-Vanik Amendment despite
its impact on six former Soviet republics and other countries and
despite passionate pleas from the administration. On May 22 it passed a
non-binding resolution calling for PNTR with Russia. Jackson-Vanik
remained in place because of the row with Russia over imports of US
poultry.

Senator Joseph Biden, Chairman of the Senate Foreign Relations
Committee, who represents a major poultry producing state (Delaware)
made these statesmanlike comments following the session:

"I can either be Russia's best friend or worst enemy. They keep fooling
around like this, they're going to have me as their enemy."

Mikhail Margelov, Chairman of the Foreign Relations Committee of the
Federation Council, understandably retorted, according to Radio Free
Europe/Radio Liberty quoting from strana.ru:

"By citing the controversy over chicken legs, the Democrats have openly
acknowledged that Jackson-Vanik does not protect Russian Jews, but
American farmers."

According to ITAR-TASS, he presented to President Putin a report which
blamed Russia's "unstable" trade relations with the USA on the latter's
"discriminatory legislative norms."

The Amendment has been a dead letter since 1994, due to a
well-entrenched ritual of annual Presidential waiver which precedes the
granting of NTR status to Russia. The waiver is based on humiliating
semi-annual reviews. The sole remaining function of Jackson-Vanik
seems, therefore, to be derogatory.

This infuriates Russians of all stripes - pro-Western reformers
included. "This demonstrates the double standards of the U.S." -
Anatoly B. Chubais, the Chairman of UES, Russia's electricity monopoly,
told BusinessWeek. "It undermines trust." Putin called the law
"notorious".

In October last year, the Russian Foreign Ministry released this
unusually strongly-worded statement:

"The Jackson-Vanik Amendment has blocked the granting to Russia of most
favored nation status in trade with the USA on a permanent and
unconditional basis over many years, inflicting harm upon the spirit of
constructive and equal cooperation between our countries. It is rightly
considered one of the last anachronisms of the era of confrontation and
distrust."

Considering that China - with its awful record of egregious human
rights violations - was granted PNTR last year, Russia rightly feels
slighted. Its non-recognition as a "market economy" under the
Jackson-Vanik Amendment led to the imposition of import restrictions on
some of its products (e.g. steel). The Amendment also prevents Russia
from joining the WTO.

Worst of all, the absence of PNTR also inhibits foreign investment and
the conclusion of long term contracts. Boeing expressed to the
Associated Press its relief at the decision to normalize trade
relations with China thus:

``Stability is key in our business. We must look 18 to 24 months ahead
in terms of building parts, planes and servicing them. It has been
difficult for China to make such agreements when they don't know if
they would have an export license the following year or whether the
United States would allow the planes to be delivered.''

Fimaco Wouldn't Die

Russia's Missing Billions

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Russia's Audit Chamber - with the help of the Swiss authorities and
their host of dedicated investigators - may be about to solve a long
standing mystery. An announcement by the Prosecutor's General Office is
said to be imminent. The highest echelons of the Yeltsin entourage -
perhaps even Yeltsin himself - may be implicated - or exonerated. A
Russian team has been spending the better part of the last two months
poring over documents and interviewing witnesses in Switzerland,
France, Italy, and other European countries.

About $4.8 billion of IMF funds are alleged to have gone amiss during
the implosion of the Russian financial markets in August 1998. They
were supposed to prop up the banking system (especially SBS-Agro) and
the ailing and sharply devalued ruble. Instead, they ended up in the
bank accounts of obscure corporations - and, then, incredibly, vanished
into thin air.

The person in charge of the funds in 1998 was none other than Mikhail
Kasyanov, Russia's current Prime Minister - at the time, Deputy
Minister of Finance for External Debt. His signature on all foreign
exchange transactions - even those handled by the central bank - was
mandatory. In July 2000, he was flatly accused by the Italian daily, La
Reppublica, of authorizing the diversion of the disputed funds.

Following public charges made by US Treasury Secretary Robert Rubin as
early as March 1999, both Russian and American media delved deeply over
the years into the affair. Communist Duma Deputy Viktor Ilyukhin jumped
on the bandwagon citing an obscure "trustworthy foreign source" to
substantiate his indictment of Kremlin cronies and oligarchs contained
in an open letter to the Prosecutor General, Yuri Skuratov.

The money trail from the Federal Reserve Bank of New York to Swiss and
German subsidiaries of the Russian central Bank was comprehensively
reconstructed. Still, the former Chairman of the central bank, Sergei
Dubinin, called Ilyukhin's allegations and the ensuing Swiss
investigations - "a black PR campaign ... a lie."

Others pointed to an outlandish coincidence: the ruble collapsed twice
in Russia's post-Communist annals. Once, in 1994, when Dubinin was
Minister of Finance and was forced to resign. The second time was in
1998, when Dubinin was governor of the central bank and was, again,
ousted.

Dubinin himself seems to be unable to make up his mind. In one
interview he says that IMF funds were used to prop up the ruble - in
others, that they went into "the national pot" (i.e., the Ministry of
Finance, to cover a budgetary shortfall).

The Chairman of the Federation Council at the time, Yegor Stroev,
appointed an investigative committee in 1999. Its report remains
classified but Stroev confirmed that IMF funds were embezzled in the
wake of the 1998 forced devaluation of the ruble.

This conclusion was weakly disowned by Eleonora Mitrofanova, an auditor
within the Duma's Audit Chamber who said that they discovered nothing
"strictly illegal" - though, incongruously, she accused the central
bank of suppressing the Chamber's damning report. The Chairman of the
Chamber of Accounts, Khachim Karmokov, quoted by PwC, said that "the
audits performed by the Chamber revealed no serious procedural breaches
in the bank's performance."

But Nikolai Gonchar, a Duma Deputy and member of its Budget Committee,
came close to branding both as liars when he said that he read a copy
of the Audit Chamber report and that it found that central bank funds
were siphoned off to commercial accounts in foreign banks.

The Moscow Times cited a second Audit Chamber report which revealed
that the central bank was simultaneously selling dollars for rubles and
extending ruble loans to a few well-connected commercial banks, thus
subsidizing their dollar purchases. The central bank went as far as
printing rubles to fuel this lucrative arbitrage. The dollars came from
IMF disbursements.

Radio Free Europe/Radio Liberty, based on its own sources and an
article in the Russian weekly "Novaya Gazeta", claims that half the
money was almost instantly diverted to shell companies in Sydney and
London. The other half was mostly transferred to the Bank of New York
and to Credit Suisse.

Why were additional IMF funds transferred to a chaotic Russia, despite
warnings by many and a testimony by a Russian official that previous
tranches were squandered? Moreover, why was the money sent to the
Central Bank, then embroiled in a growing scandal over the manipulation
of treasury bills, known as GKO's and other debt instruments, the OFZ's
- and not to the Ministry of Finance, the beneficiary of all prior
transfers? The central bank did act as MinFin's agent - but
circumstances were unusual, to say the least.

There isn't enough to connect the IMF funds with the money laundering
affair that engulfed the Bank of New York a year later to the day, in
August 1999 - though several of the personalities straddled the divide
between the bank and its clients. Swiss efforts to establish a firm
linkage failed as did their attempt to implicate several banks in the
Italian canton of Ticino. The Swiss - in collaboration with half a
dozen national investigation bureaus, including the FBI - were more
successful in Italy proper, where they were able to apprehend a few
dozen suspects in an elaborate undercover operation.

FIMACO's name emerged rather early in the swirl of rumors and denials.
At the IMF's behest, PricewaterhouseCoopers (PwC) was commissioned by
Russia's central bank to investigate the relationship between the
Russian central bank and its Channel Islands offshoot, Financial
Management Company Limited, immediately when the accusations surfaced.

Skuratov unearthed $50 billion in transfers of the nation's hard
currency reserves from the central bank to FIMACO, which was
majority-owned by Eurobank, the central bank's Paris-based daughter
company. According to PwC, Eurobank was 23 percent owned by "Russian
companies and private individuals".

Dubinin and his successor, Gerashchenko, admit that FIMACO was used to
conceal Russia's assets from its unrelenting creditors, notably the
Geneva-based Mr. Nessim Gaon, whose companies sued Russia for $600
million. Gaon succeeded to freeze Russian accounts in Switzerland and
Luxemburg in 1993. PwC alerted the IMF to this pernicious practice, but
to no avail.

Moreover, FIMACO paid exorbitant management fees to self-liquidating
entities, used funds to fuel the speculative GKO market, disbursed
non-reported profits from its activities, through "trust companies", to
Russian subjects, such as schools, hospitals, and charities - and, in
general, transformed itself into a mammoth slush fund and source of
patronage. Russia admitted to lying to the IMF in 1996. It misstated
its reserves by $1 billion.

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