Book: Russian Roulette

S >> Sam Vaknin >> Russian Roulette




Some of the money probably financed the fantastic salaries of Dubinin
and his senior functionaries. He earned $240,000 in 1997 - when the
average annual salary in Russia was less than $2000 and when Alan
Greenspan, Chairman of the Federal Reserve of the USA, earned barely
half as much.

Former Minister of Finance, Boris Fedorov, asked the governor of the
central bank and the prime minister in 1993 to disclose how were the
country's foreign exchange reserves being invested. He was told to mind
his own business. To Radio Free Europe/Radio Liberty he said, six years
later, that various central bank schemes were set up to "allow friends
to earn handsome profits ... They allowed friends to make profits
because when companies are created without any risk, and billions of
dollars are transferred, somebody takes a (quite big) commission ... a
minimum of tens of millions of dollars. The question is: Who received
these commissions? Was this money repatriated to the country in the
form of dividends?"

Dubinin's vehement denials of FIMACO's involvement in the GKO market
are disingenuous. Close to half of all foreign investment in the
money-spinning market for Russian domestic bonds were placed through
FIMACO's nominal parent company, Eurobank and, possibly, through its
subsidiary, co-owned with FIMACO, Eurofinance Bank.

Nor is Dubinin more credible when he denies that profits and
commissions were accrued in FIMACO and then drained off. FIMACO's
investment management agreement with Eurobank, signed in 1993, entitled
it to 0.06 percent of the managed funds per quarter.

Even accepting the central banker's ludicrous insistence that the
balance never exceeded $1.4 billion - FIMACO would have earned $3.5
million per annum from management fees alone - investment profits and
brokerage fees notwithstanding. Even Eurobank's president at the time,
Andrei Movchan, conceded that FIMACO earned $1.7 million in management
fees.

The IMF insisted that the PwC reports exonerated all the participants.
It is, therefore, surprising and alarming to find that the online
copies of these documents, previously made available on the IMF's Web
site, were "Removed September 30, 1999 at the request of
PricewaterhouseCoopers".

The cover of the main report carried a disclaimer that it was based on
procedures dictated by the central bank and "... consequently, we (PwC)
make no representation regarding the sufficiency of the procedures
described below ... The report is based solely on financial and other
information provided by, and discussions with, the persons set out in
the report. The accuracy and completeness of the information on which
the report is based is the sole responsibility of those persons. ...
PricewaterhouseCoopers have not carried out any verification work which
may be construed to represent audit procedures ... We have not been
provided access to Ost West Handelsbank (the recipient of a large part
of the $4.8 IMF tranche)"

The scandal may have hastened the untimely departure of the IMF's
Managing Director at the time, Michel Camdessus, though this was never
officially acknowledged. The US Congress was reluctant to augment the
Fund's resources in view of its controversial handling of the Asian and
Russian crises and contagion.

This reluctance persisted well into the new millennium. A congressional
delegation, headed by James Leach (R, Iowa), Chairman of the Banking
and Financial Services Committee, visited Russia in April 2000,
accompanied by the FBI, to investigate the persistent contentions about
the misappropriation of IMF funds.

Camdessus himself went out of his way to defend his record and reacted
in an unprecedented manner to the allegations. In a letter to Le Mond,
dated August 18, 1999 - and still posted on the IMF's Web site, three
years later - he wrote, inadvertently admitting to serious
mismanagement:

"I wish to express my indignation at the false statements, allegations,
and insinuations contained in the articles and editorial commentary
appearing in Le Monde on August 6, 8, and 9 on the content of the
PricewaterhouseCoopers (PWC) audit report relating to the operations of
the Central Bank of Russia and its subsidiary, FIMACO.

Your readers will be shocked to learn that the report in question,
requested and made public at the initiative of the IMF ... (concludes
that) no misuse of funds has been proven, and the report does not
criticize the IMF's behavior ... I would also point out that your
representation of the IMF's knowledge and actions is misleading. We did
know that part of the reserves of the Central Bank of Russia was held
in foreign subsidiaries, which is not an illegal practice; however, we
did not learn of FIMACO's activities until this year--because the audit
reports for 1993 and 1994 were not provided to us by the Central Bank
of Russia.

The IMF, when apprised of the possible range of FIMACO activities,
informed the Russian authorities that it would not resume lending to
Russia until a report on these activities was available for review by
the IMF and corrective actions had been agreed as needed ... I would
add that what the IMF objected to in FIMACO's operations extends well
beyond the misrepresentation of Russia's international reserves in
mid-1996 and includes several other instances where transactions
through it had resulted in a misleading representation of the reserves
and of monetary and exchange policies. These include loans to Russian
commercial banks and investments in the GKO market."

No one accepted - or accepts - the IMF's convoluted post-facto
"clarifications" at face value. Nor was Dubinin's tortured sophistry -
IMF funds cease to be IMF funds when they are transferred from the
Ministry of Finance to the central bank - countenanced.

Even the compromised office of the Russian Prosecutor-General urged
Russian officials, as late as July 2000, to re-open the investigation
regarding the diversion of the funds. The IMF dismissed this sudden
burst of rectitude as the rehashing of old stories. But Western
officials - interviews by Radio Free Europe/Radio Liberty - begged to
differ.

Yuri Skuratov, the former Prosecutor-General, ousted for undue
diligence, wrote in a book he published two years ago, that only c.
$500 million of the $4.8 were ever used to stabilize the ruble. Even
George Bush Jr., when still a presidential candidate accused Russia's
former Prime Minister Viktor Chernomyrdin of complicity in embezzling
IMF funds. Chernomyrdin threatened to sue.

The rot may run even deeper. The Geneva daily "Le Temps", which has
been following the affair relentlessly, accused, two years ago, Roman
Abramovich, a Yeltsin-era oligarch and a member of the board of
directors of Sibneft, of colluding with Runicom, Sibneft's trading arm,
to misappropriate IMF funds. Swiss prosecutors raided Runicom's offices
just one day after Russian Tax Police raided Sibneft's Moscow
headquarters.

Absconding with IMF funds seemed to have been a pattern of behavior
during Yeltsin's venal regime. The columnist Bradley Cook recounts how
Aldrich Ames, the mole within the CIA, "was told by his Russian control
officer during their last meeting, in November 1993, that the $130,000
in fresh $100 bills that he was being bribed with had come directly
from IMF loans." Venyamin Sokolov, who headed the Audit Chamber prior
to Sergei Stepashin, informed the US Senate of $2 billion that
evaporated from the coffers of the central bank in 1995.

Even the IMF reluctantly admits:

"Capital transferred abroad from Russia may represent such legal
activities as exports, or illegal sources. But it is impossible to
determine whether specific capital flows from Russia-legal or
illegal-come from a particular inflow, such as IMF loans or export
earnings. To put the scale of IMF lending to Russia into perspective,
Russia's exports of goods and services averaged about $80 billion a
year in recent years, which is over 25 times the average annual
disbursement from the IMF since 1992."

The Chechen Theatre Ticket

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

One hundred and eighteen hostages and 50 of their captors died in the
heavy handed storming of the theatre occupied by Chechen terrorists
four days ago. This has been only the latest in a series of escalating
costs in a war officially terminated in 1997. On August 22, a
helicopter carrying 115 Russian servicemen and unauthorized civilians
went down in flames.

The Russian military is stretched to its limits. Munitions and spare
parts are in short supply. The defense industry shrunk violently
following the implosion of the USSR. Restarting production of
small-ticket items is prohibitively expensive. Even bigger weapon
systems are antiquated. A committee appointed by the Duma, Russia's
lower house of parliament, found that the average age of the army's
helicopters is 20. Russia lost dozens of them hitherto and does not
have the wherewithal to replace them.

The Russian command acknowledges 3000 fatalities and 8000 wounded but
the numbers are probably way higher. The Committee of Soldiers' Mothers
pegs the number of casualties at 12-13,000. Unpaid, disgruntled, and
under-supplied troops exert pressure on their headquarters to
air-strafe Chechnya, to withdraw, or to multiply the money budgeted to
support the ill-fated operation.

Russia maintains c. 100,000 troops in Chechnya, including 40,000 active
soldiers and 60,000 support and logistics personnel. The price tag is
sizable though not unsustainable. As early as October 1999, the IMF
told Radio Free Europe/Radio Liberty: "Yes, we're concerned that it
could undermine the progress in improving (Russia's) public finances."

As they did in the first Chechen conflict in 1994-6, both the IMF and
the World Bank reluctantly kept lending billions to Russia throughout
the current round of devastation. A $4.5 billion arrangement was signed
with Russia in July 1999. Though earmarked, funds are fungible. The IMF
has been accused by senior economists, such as Jeffrey Sachs and
Marshall Goldman, of financing the Russian war effort against the tiny
republic and its 1.5 million destitute or internally displaced
citizens. Even the staid Jane's World Armies concurred.

No one knows how much the war has cost Russia hitherto. It is mostly
financed from off-budget clandestine bank accounts owned and managed by
the Kremlin, the military, and the security services. Miriam Lanskoy,
Program Manager at the Institute for the Study of Conflict, Ideology
and Policy at Boston University, estimated for "NIS Observed" and "The
Analyst" that Russia has spent, by November 2001, c. $8 billion on the
war, money sorely needed to modernize its army and maintain its
presence overseas.

Russia was forced to close, post haste, bases in Vietnam and Cuba, two
erstwhile pillars of its geopolitical and geostrategic presence. It was
too feeble to capitalize on its massive, multi-annual assistance to the
Afghan Northern Alliance in both arms and manpower. The USA
effortlessly reaped the fruits of this continuous Russian support and
established a presence in central Asia which Russia will find
impossible to dislodge.

The Christian Science Monitor has pegged the cost of each month in the
first three months of offensive against the separatists at $500
million. This guesstimate is supported by the Russians but not by Digby
Waller, an economist at the International Institute for Strategic
Studies (IISS), a London-based military think tank. He put the real,
out-of-pocket expense at $110 million a month. Other experts offer
comparable figures - $100-150 a month.

Similarly, Jane's Defense Weekly put the outlay at $40-50 million a day
- but most of it in cost-free munitions produced during Soviet times. A
leading Soviet military analyst, Pavel Felgengauer, itemized the
expenditures. The largest articles are transport, fuel, reconstruction
of areas shattered by warfare, and active duty bonuses to soldiers.

The expense of this brawl exceed the previous scuffle's. The first
Chechen war is estimated to have cost at most $5.5 billion and probably
between $1.3 and $2.6 billion. Russia allocated c. $1 billion to the
war in its 2000 budget. Another $263 million were funded partly by
Russia's behemoth electricity utility, UES. Still, these figures are
misleading underestimates.

According too the Rosbalt News Agency, last year, for instance, Russia
was slated to spend c. $516 million on rebuilding Chechnya - but only
$158 million of these resources made it to the budget.

Russia has been lucky to enjoy a serendipitous confluence of an
export-enhancing and import-depressing depreciated currency,
tax-augmenting inflation, soaring oil prices, and Western largesse. It
is also a major producer and exporter of weapons. Chechnya serves as
testing grounds where proud designers and trigger-craving generals can
demonstrate the advantages and capabilities of their latest materiel.

Some - like the Institute of Global Issues - say that the war in
Chechnya has fully self-financed by reviving the military-industrial
complex and adding billions to Russia's exports of armaments. This
surely is a wild hyperbole. Chechnya - a potentially oil-rich territory
- is razed to dust.

Russia is ensnared in an ever-escalating cycle of violence and futile
retaliation. Its society is gradually militarized and desensitized to
human rights abuses. Corruption is rampant. Russia's Accounting Board
disclosed that a whopping 12 percent of the money earmarked to fight
the war two years ago has vanished without a trace.

About $45 million dollars in salaries never reached their intended
recipients - the soldiers in the field. Top brass set up oil drilling
operations in the ravaged territory.

They are said by Rosbalt and "The Economist" to be extracting up to
2000 tons daily - double the amount the state hauls.

Another 7000 tons go up in smoke due to incompetence and faulty
equipment. There are 60 oil wells in Grozny alone. Hence the
predilection to pursue the war as leisurely - and profitably - as
possible. Often in cahoots with their ostensible oppressors,
dispossessed and dislocated Chechens export crime and mayhem to
Russia's main cities.

The war is a colossal misallocation of scarce economic resources and an
opportunity squandered. Russia should have used the windfall to
reinvent itself - revamp its dilapidated infrastructure and modernize
its institutions. Oil prices are bound to come down one day and when
they do Russia will discover the true and most malign cost of war - the
opportunity cost.

Russia's Israeli Oil Bond

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

Russian Roulette - The Energy Sector

Last week, Russia and Israel - erstwhile bitter Cold War enemies - have
agreed to make use of Israel's neglected oil pipeline, known as the
Tipline. The conduit, an Iranian-Israeli joint venture completed in
1968 is designed to carry close to a million barrels per day,
circumventing the Suez canal.

It rarely does, though. The Shah was deposed in 1979, Egypt became a
pivotal Western ally, the Israeli-developed Sinai oil fields were
returned to Egypt in the early 1980's, and, in a glutted market, Israel
resorted to importing 99 percent of the 280,000 barrels it consumes
daily.

According to Stratfor, the Strategic Forecasting consultancy, "tankers
bearing Russian crude from the Black Sea port of Novorossiysk would
unload at Israel's Mediterranean port of Ashkelon. After that, the oil
would traverse the Tipline to Israel's Red Sea port of Eilat, where it
would be reloaded onto tankers for shipment to Asia. The Eilat-Ashkelon
Pipeline Co. estimates the pipeline will be ready for Russian crude in
mid-2003."

Russia is emerging as a major oil supplier and a serious challenge to
the hegemony of Saudi Arabia and OPEC. Even the USA increasingly taps
the Russian market for crude and derivatives. With Arab countries -
including the hitherto unwaveringly loyal Gulf states - progressively
perceived as hostile by American scholars and decision makers, Russia
arises as a potent alternative. The newfangled Russian-Israeli
commercial alliance probably won applause from Washington hardliners,
eager to relieve the Saudi stranglehold on energy supplies.

Quoted by the American Foreign Policy Council, Russia's Energy
Minister, Igor Yusufov, addressing the Russian-US Energy Forum in
Houston, Texas, last month said that "the high degree of economic and
political stability that the Russian Federation has achieved makes it a
reliable supplier of oil and gas."

He expressed his belief - shared by many analysts - that Russia will
become a major exporter of oil to the USA "in the foreseeable future".
According to the Dow Jones Newswires, private Russian oil firms, such
as Lukoil, are heavily invested in US gas stations and refineries in
anticipation of these inevitable developments. As if to underline
these, the Financial Times reported, on October 3, a purchase of
300,000 barrels of oil from the Russian Tyumen Oil company.

The deal with Israel will allow Russia to peddle its oil in the Asian
market, a major export target and a monopoly of the Gulf producers.

Russia is in the throes of constructing several pipelines to Asia
through its eastern territories and Pacific coastline - but completion
dates are uncertain.

For its part, according to the Department of Energy, Israel extracts
natural gas from offshore fields but has no commercial fossil fuel
resources of its own. It imports oil from Mexico, Norway, and the
United Kingdom and coal from as far away as Australia, Colombia, and
South Africa. Israel buys natural gas and oil from Egypt. The bulk of
the energy sector is moribund and state-owned, ostensibly for reasons
of national security. The deal with Russia is a godsend.

Israel is perfectly located to offer an affordable alternative to
expensive and often clogged oil shipping lanes through the Suez Canal
or the Cape. A revival of the Trans-Arabian pipeline (Tapline) to Haifa
can considerably under-price the politically wobbly Iraqi-Turkish and
the costly Suez-Mediterranean (Sumed) alternatives.

With one of every five Israelis a Russian ‚migr‚ and confronted with
the common enemy of Islamic militancy, Israel and Russia have embarked
on a path of close cooperation. Prime Minister Sharon's visit to Russia
last month was a resounding success. Faced with these millennial
geopolitical developments, anti-Semitic conspiracy theorists are having
a field day.

The Jewish lobby, they say, is coercing America, its long arm, to
hijack the Iraqi oil fields in the forthcoming war and thus to
counterbalance surging Russian oil exports. Israel, they aver, planned
to carry out, in October 2001, an operation - "Mivtza Shekhina" - to
secure southern Iraq's oil fields while also mitigating the threat of
weapons of mass destruction aimed at its population centers.

Conspiratorial paranoia notwithstanding, it is unlikely that the USA is
motivated by oil interests in its war on Saddam. A battle in Iraq aimed
solely at apprehending its crude would be fighting over yesterday's
oilfields. Only an easily replaceable one tenth to one eighth of
American oil consumption emanates from the Gulf, about a million
barrels per day of it from Iraq. Moreover, the war is likely to
alienate far more important suppliers, such as Russia - as well as the
largest European clients of Gulf oil extracted by American firms.
Strictly in terms of oil, a war in Iraq is counterproductive.

Additionally, such a war is likely to push oil prices up. According to
the Council on Foreign Relations, "for every dollar-per-barrel increase
in oil prices, about $4 billion a year would leave America's $11
trillion economy, and other importing countries would lose another $16
billion per year."

Israel understandably did discuss with the USA its role in a showdown
with Iraq. Russia, unsettled as it is by America's growing presence in
central Asia and exercised by its determination to take on Iraq - may
be trying to lure Israel away from its automatic support of US goals by
dangling the oiled carrot of a joint pipeline.

Russia also hopes to neuter the rapprochement between Israel and the
Islamic nations of Turkey and Azerbaijan, traditional adversaries of
Moscow. Israel is the second largest buyer of oil from Azerbaijan. It
is one of the sponsors of a pipeline from the Baku oilfields to the
port of Ceyhan in Turkey. The pipeline stands to compete with a less
costly and more hostile to the West Russian-Iranian route.

These are momentous times. Oil is still by far the most strategic
commodity and securing its uninterrupted flow is essential to the
functioning of both developed and developing countries. There is a
discernible tectonic shift in production and proven reserves from the
Persian Gulf, the US except Alaska, the North Sea, and Latin America to
northern Europe, Russia, and the Caspian Basin. Yet, oil is still a
buyers' market. OPEC has long been denuded of its mythical power and
oil prices - even at the current interim peak - are still historically
low in real terms.

But Russia stands to gain whichever way. Middle East tensions, in
Palestine and Iraq, have ratcheted oil prices up resulting in a
much-needed budgetary windfall. Russia's mostly-privatized oil industry
has cleverly ploughed back its serendipitous profits into pipelines,
drilling, and exploration. When the dust settles in the deserts of
Arabia, Russia will emerge victorious with the largest oil market
share. Israel is not oblivious to this scenario.

Russia's Idled Spies

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

The Industrious Spies

Russian Roulette - The Security Apparatus

Sweden expelled yesterday two Russian diplomats for spying on radar and
missile guidance technologies for the JAS 39 British-Swedish Gripen
fighter jet developed by Telefon AB LM Ericsson, the telecommunications
multinational. The Russians threatened to reciprocate. Five current and
former employees of the corporate giant are being investigated.
Ironically, the first foreign buyer of the aircraft may well be Poland,
a former Soviet satellite state and a current European Union candidate.

Sweden arrested in February last year a worker of the Swiss-Swedish
engineering group, ABB, on suspicion of spying for Russia. The man was
released after two days for lack of evidence and reinstated. But the
weighty Swedish daily, Dagens Nyheter, speculated that the recent
Russian indiscretion was in deliberate retaliation for Swedish
espionage in Russia. Sweden is rumored to have been in the market for
Russian air radar designs and the JAS radar system is said by some
observers to uncannily resemble its eastern counterparts.

The same day, a Russian military intelligence (GRU) colonel, Aleksander
Sipachev, was sentenced in Moscow to eight years in prison and stripped
of his rank. According to Russian news agencies, he was convicted of
attempting to sell secret documents to the CIA. Russian secret service
personnel, idled by the withering of Russia's global presence, resort
to private business or are re-deployed by the state to spy on
industrial and economic secrets in order to aid budding Russian
multinationals.

According to the FBI and the National White-collar Crime Center,
Russian former secret agents have teamed with computer hackers to break
into corporate networks to steal vital information about product
development and marketing strategies. Microsoft has recently admitted
to such a compromising intrusion.

In a December 1999 interview to Segodnya, a Russia paper, Eyer Winkler,
a former high-ranking staffer with the National Security Agency (NSA)
confirmed that "corruption in the Russian Government, the Foreign
Intelligence Service, and the Main Intelligence Department allows
Russian organized criminal groups to use these departments in their own
interests. Criminals receive the major part of information collected by
the Russian special services by means of breaking into American
computer networks."

When the KGB was dismantled and replaced by a host of new acronyms,
Russian industrial espionage was still in diapers. as a result, it is a
bureaucratic no-man's land roamed by agents of the GRU, the Foreign
Intelligence Service (SVR), and smaller outfits, such as the Federal
Agency on Government Communications and Information (FAPSI).

According to Stratfor, the strategic forecasting consultancy, "the SVR
and GRU both handle manned intelligence on U.S. territory, with the
Russian Federal Security Service (FSB) doing counterintelligence in
America. Also, both the SVR and GRU have internal counterintelligence
units created for finding foreign intelligence moles." This, to some
extent, is the division of labor in Europe as well.

Germany's Federal Prosecutor has consistently warned against $5 billion
worth of secrets pilfered annually from German industrial firms by
foreign intelligence services, especially from east Europe and Russia.
The Counterintelligence News and Developments newsletter pegs the
damage at $13 billion in 1996 alone:

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