[Senate Hearing 106-260]
[From the U.S. Government Publishing Office]
S. Hrg. 106-260
CORRUPTION IN RUSSIA
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HEARINGS
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 23 AND 30, 1999
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
U.S. GOVERNMENT PRINTING OFFICE
61-362 CC WASHINGTON : 2000
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COMMITTEE ON FOREIGN RELATIONS
JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana JOSEPH R. BIDEN, Jr., Delaware
PAUL COVERDELL, Georgia PAUL S. SARBANES, Maryland
CHUCK HAGEL, Nebraska CHRISTOPHER J. DODD, Connecticut
GORDON H. SMITH, Oregon JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas PAUL D. WELLSTONE, Minnesota
CRAIG THOMAS, Wyoming BARBARA BOXER, California
JOHN ASHCROFT, Missouri ROBERT G. TORRICELLI, New Jersey
BILL FRIST, Tennessee
Stephen E. Biegun, Staff Director
Edwin K. Hall, Minority Staff Director
(ii)
C O N T E N T S
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September 23, 1999
Corruption in Russia and Recent U.S. Policy
Page
Biden, Senator Joseph R., Jr., prepared statement................ 11
Ermarth, Fritz W., former CIA and NSC official................... 24
Prepared statement of........................................ 26
Legvold, Dr. Robert, professor of political science, Columbia
University..................................................... 40
Merry, E. Wayne, former State Department official; and director,
Program on European Societies in Transition, Atlantic Council
of the United States........................................... 35
Prepared statement of........................................ 38
Moody, Jim E., former Deputy Assistant Director, Criminal
Investigation Division, Federal Bureau of Investigation; and
founder of Jim Moody and Associates, L.L.C..................... 28
Prepared statement of........................................ 30
Talbott, Hon. Strobe, Deputy Secretary of State, Department of
State.......................................................... 3
Prepared statement of........................................ 5
Response to additional question for the record from
Senator Helms.......................................... 15
Response to additional question for the record from
Senator Hagel.......................................... 16
September 30, 1999
Corruption in Russia and Future U.S. Policy
Finckenauer, Dr. James O., professor of criminal justice, Rutgers
University (currently on leave) Washington, DC................. 76
Prepared statement of........................................ 82
Graham, Dr. Thomas E., Jr., senior associate, Carnegie Endowment
for International Peace, Washington, DC........................ 66
Prepared statement of........................................ 70
Reddaway, Dr. Peter, professor of political science and
international affairs, George Washington University,
Washington, DC................................................. 57
Prepared statement of........................................ 61
Smith, Senator Gordon H., prepared statement..................... 56
(iii)
CORRUPTION IN RUSSIA AND RECENT U.S. POLICY
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THURSDAY, SEPTEMBER 23, 1999
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 3:36 p.m., in
room SD-419, Dirksen Senate Office Building, the Hon. Jesse
Helms (chairman of the committee) presiding.
Present: Senators Helms, Hagel, Smith, Biden, Kerry and
Wellstone.
The Chairman. The meeting will come to order.
I have been instructed by the distinguished Senator from
Delaware, Mr. Biden, the ranking Democrat on the committee, to
proceed. He is on his way. Like all the rest of us, he has a
busy schedule.
The subject of today's hearing, as is well known, and I am
glad to see so many people here today, is corruption in Russia
and recent revelations about the diversion of billions of U.S.
taxpayers' dollars into the pockets of corrupt Russian
officials.
Now, the committee's purpose is to examine if the Clinton-
Gore administration contributed to this problem, and if so, how
so, and also whether the administration was aware of this
corruption, but chose to ignore it.
We are pleased to have Deputy Secretary of State Strobe
Talbott with us to discuss the administration's position,
following which we will hear from a distinguished group of
former officials of the State Department, CIA, and FBI, as well
as a noted scholar.
Now, let me stress at the outset, our purpose today is not
to debate the wisdom of supporting or engaging Russia. We are
here to discuss how the administration managed or mismanaged
the United States' relationship with the Russian Government,
and specifically what happened to the $5.2 billion in grants
and $12.8 billion in loans that were entrusted to the U.S.
Government by the American taxpayers to support our Russian
policies.
Now, the administration's defenders have argued that, yes,
the United States' aid was stolen, but they say that was a
small price to pay for the nuclear stability our assistance had
bought. Now, these defenders and their logic, it seems to me,
lean on a weak reed, to say the least.
A program for deconstructing and preventing the
proliferation of Russian nuclear weapons accounts for a mere
eight percent of the U.S. assistance to Russia. Now, our
purpose today is to try to determine what happened to the rest
of that money, which was supposed to facilitate Russian reform.
I confess deep concern that the policies pursued by the
President and Mr. Gore, through the so-called Gore-Chernomyrdin
Commission, may have abetted corruption in Russia.
It has been widely reported that in 1995 the CIA sent a
memorandum to the Vice President discussing corruption in the
Russian Government, and warning that foreign aid funds were
being diverted into the pockets of Russian officials, and the
Vice President is said to have sent the memo back with a
scatological epithet scrawled across it. Emblematic of the
administration's policy, apparently he did not want to know.
Just last week the Washington Post reported that the First
Lady's two brothers were involved in a nut-growing venture with
a crooked Georgian warlord, whose goal is to overthrow our
friend and ally, President Eduard Shevardnadze.
Worse still, the Rodham brothers' partner in this venture
was a man named Gregory Loutchansky, and we'll hear about him
later today, a known organized crime figure, involved in the
smuggling of nuclear materials.
Now, the question is inevitable, why would the Rodhams do
business with a thug like Loutchansky? The better question, I
guess, is: Why wouldn't they? After all, Loutchansky was
invited to attend a 1995 fund-raiser, you know where, and he
had his picture taken with the President in 1993, and I guess
that's the one over there.
Loutchansky was invited to that fund-raiser the same year
the President went to Moscow and called for, quote, ``an all-
out battle to create a market based on law, not lawlessness.''
Uttering that worthy phrase, while simultaneously consorting
with a corrupt figure like Loutchansky, surely sends the wrong
signal to President Yeltsin and Russian leaders of today. How
can the United States ask Russian Government officials not to
consort with such criminals at home when our own President and
Vice President appear to have done so?
I hope our witnesses today will address why the
administration has failed to make a priority out of ending the
theft of U.S. aid, and of excising corruption from the highest
levels of the Russian Government.
The administration's defense has been a declaration that
the alternative to looking the other way was to abandon our
policy of engagement with Russia. I contend that the opposite
is true. By not pressuring Russia's leaders to expunge
corruption, the United States has led the Russian people to
lose faith in market economics and democracy.
It is patently dishonest to suggest that the only policy
choice is between forsaking engagement and giving Russian
kleptocrats a carte blanche to pick the American taxpayers'
wallets.
It is my hope that this hearing, and one next week, will
provide new thinking about ways the United States can help the
Russian people get rid of irresponsible leaders who are
stealing from us and them.
I would like to welcome in the audience today a delegation
from the Russian Parliament, led by Alexander Kulikov,
conducting their own investigation on the corruption in Russia.
Gentlemen, I want you to know wherever you are seated that
I look forward to cooperating with you to get to the heart of
this matter.
I will tell you what I am going to do, Mr. Talbott. We will
give Joe Biden the alternatives of making his opening statement
when he gets here or after you have completed, if that is all
right.
Secretary Talbott. As you wish, Mr. Chairman.
The Chairman. I wish you would let me recognize your lovely
wife, if she would just wave at us.
Thank you very much.
You may proceed, sir.
STATEMENT OF HON. STROBE TALBOTT, DEPUTY SECRETARY OF STATE,
DEPARTMENT OF STATE
Secretary Talbott. Thank you, Mr. Chairman. If it is all
right, Mr. Chairman, in order to leave maximum time for our
discussion, I will submit the full statement for the record,
and offer some compressed opening remarks here.
The Chairman. Very well.
Secretary Talbott. I welcome the opportunity to discuss
with the committee not only developments in Russia, but U.S.
policy toward Russia. Mr. Chairman, I think you have chosen a
very good time for this hearing.
Russia is much on our minds these days, and rightly so.
Secretary Albright has spent this week up at the United
Nations, and she has heard repeatedly from our friends and
allies around the world that Russia is much on their minds,
too.
You referred in your opening remarks to President
Shevardnadze of Georgia. I left a meeting at the White House
between President Shevardnadze and President Clinton, and I can
assure you that the general subject that we are discussing
today is much on President Shevardnadze's mind.
All of our friends, and allies, and partners around the
world are counting on us, very much including the executive and
legislative branches of the U.S. Government working together,
to manage this relationship with skill, foresight, and clarity
of purpose.
Now, Mr. Chairman, not for the first time, and not for the
last, the Russian people are undergoing what many of them call
the time of troubles. Those troubles pose a complex set of
challenges to American, foreign, and national security policy.
Now, as you point out, the trouble that has received the
most attention of late is a state of allegations and
revelations about large-scale financial malfeasance, including
charges of money laundering through American banks.
The challenge to us is three-fold. First, to ensure that we
are enforcing our own laws and protecting Americans from
international organized crime; second, to ensure that we are
doing everything we can to protect the integrity and
effectiveness of our bilateral and international assistance
programs; and third, to intensify our supportive and
cooperative work with those Russians who realize, as Foreign
Minister Ivanov stressed in New York when he met with Secretary
Albright on Monday, and with President Clinton yesterday, that
their country and their people are suffering from rampant crime
and corruption, and that we must continue to work with those in
Russia who are committed to fighting back against that scourge.
Now, Russia has other troubles, too, continued fighting,
which has intensified today, we understand, between insurgents
and Russian troops in the North Caucasus, claiming hundreds of
lives. Terrorist bombings in Moscow and two other cities in
Russia have exceeded the death toll of Oklahoma City and the
World Trade Center combined.
Like crime and corruption, terrorism is not just a Russian
problem, it is a global one, and like crime and corruption, it
will not prove susceptible to just a Russian solution. On both
issues, the Government of Russia has sought help from us and
from others.
One of the several issues that we and the executive branch
are discussing in our current consultations with the Congress,
including, I hope, in this hearing today, is the terms of our
ability to provide that help and the strategic goals that our
support for Russian reform is meant to serve.
Let me, before going to your questions, and those of your
colleagues, suggest an overall context for that discussion.
First and foremost, our policy must advance the national
security of the United States, both in the short term and the
long term.
The test that we must apply day in and day out, year in and
year out, from one administration to the next, is whether the
American people are safer as a result of our policy. This
administration's Russian policy needs that test. When we came
into office, there were roughly 10,000 intercontinental nuclear
weapons in four states of the former Soviet Union; most were
aimed at the United States. Today, there are about half that
many, some 5,000. They're only in Russia, and none are targeted
against us.
We are discussing significant further reductions in overall
numbers, and further steps to diminish the nuclear threat in
all of its aspects.
Mr. Chairman, would you like me to pause so that Senator
Biden can deliver his opening statement, or shall I continue?
Senator Biden. No. Please continue, Mr. Secretary.
Thank you, Mr. Chairman.
Secretary Talbott. The issue of controlling nuclear weapons
and reducing the threat to the United States is one of several
issues of vital importance to the U.S. that Secretary Albright
and Minister Ivanov grappled with this week, along, by the way,
with the subjects of peace in the Middle East, in the Balkans,
and in the Caucuses.
My point, Mr. Chairman, is simply this: Corruption is an
important issue that we are taking very seriously, but as we
probe its cause, and as we refine our response, we must keep in
mind that it is part of a much larger process under way in a
vast and complex country, a country whose nature is a state and
whose role in the world will have a lot to do with what sort of
twenty-first century awaits us.
For a decade now, Russia has been undergoing an
extraordinary transformation. In fact, it has been undergoing
three transformations in one, from a dictatorship to an open
society, from a command economy to a market, and from a
totalitarian empire and ideological rival toward becoming what
many Russians call, and aspire to as, a normal, modern state,
integrated into the international community of which we are a
part.
We have been helping to keep that process going. Just as
one example, the FREEDOM Support Act, another program supported
by the Congress, has helped Russia make dramatic improvements
in the protection of human rights and religious freedoms.
All of us are realistic about the difficulties. Russia's
transformation has encountered plenty of obstacles, none
greater and more challenging than the crucial need to create
the laws and institutions that are necessary for fighting crime
and corruption in an open society and a market economy. Still,
the transformation continues, and so must our commitment to
stay engaged.
I am gratified, Mr. Chairman, to hear you say that there is
really no debate about whether to stay engaged, the question is
how, to what end, and with what rules and standards.
While there are no easy answers, and no quick answers to
what ails the Russia body politic today, there is one
overarching principle that is fundamental to creating the
forces for change that will drive the scourge of corruption out
of Russian society, and that is democracy. I think it is
particularly appropriate, Mr. Chairman, that our proceedings
today should include the participation of a delegation of
parliamentarians from Russia.
When I was in Moscow two weeks ago, I was struck yet again,
as I so often am, by the preoccupation of virtually everyone I
met with the upcoming parliamentary and Presidential elections.
For the first time in their history, Russian citizens are now
voters. They can register their grievances, express their
aspirations through the ballot box, or for that matter, on a
soap box.
Their grievances prominently include disgust with
corruption. Their aspirations prominently include good
governance, honest governance. If they and the leaders they
choose can stay on the course of constitutional rule and
electoral democracy, not only will Russia's own people be
better off, but so will we.
That is the hard-headed essence of why we must continue to
support them in coping with the difficulties they face, notably
including those that are in the headlines today. That is also
why Russia's current problems with crime and corruption are
different from the corruption that was so entrenched under
Soviet communism.
Indeed, one way to look at today's troubles in Russia is
part of a legacy of an evil past, and as a result of the
incomplete, but ongoing transition to a better future. The
solution to those troubles is for them to keep moving forward
and for us to support them as they do.
For our policy of engagement with Russia to be effective,
they must have the backing of the American people and, of
course, of this body, and it is very much in that spirit that I
look forward to our discussion today. Thank you.
[The prepared statement of Secretary Talbott follows:]
Prepared Statement of Hon. Strobe Talbott
russia: its current troubles and its on-going transformation
Thank you, Mr. Chairman. I welcome the opportunity to discuss with
the Committee developments in Russia and U.S. policy toward that
country. You have chosen a good time for this hearing. Russia is much
on our minds these days, and rightly so. Secretary Albright is at the
United Nations this week, and she has heard repeatedly from our friends
and allies around the world that Russia is much on their minds too.
They are counting on us to manage U.S.-Russian relations with skill,
foresight and clarity of purpose.
Not for the first time and not for the last, Russia is undergoing a
time of troubles. Those troubles pose a complex set of challenges to
American foreign and national security policy.
The trouble that has received the most attention of late is a spate
of allegations and revelations about large-scale financial malfeasance,
including charges of money-laundering through American banks. The
challenge to us is threefold: first, to ensure that we are enforcing
our own laws and protecting Americans from international organized
crime; second, to ensure that we are doing everything we can to protect
the integrity and effectiveness of our bilateral and international
assistance programs; third, to intensify our work supportively and
cooperatively with those Russians who realize--as Foreign Minister
Ivanov stressed in New York when he met with Secretary Albright on
Monday--that their country and their people are suffering from rampant
crime and corruption, and who are therefore committed to fighting back
against that scourge.
Russia has other troubles too. Continued fighting between
insurgents and Russian troops in the North Caucasus is claiming
hundreds of lives. Terrorist bombings in Moscow and two other cities
have exceeded the death toll of Oklahoma City and the World Trade
Center combined.
Like crime-and-corruption, terrorism is not just a Russian
problem--it's a global one; and like crime-and-corruption, it won't
prove susceptible to just a Russian solution. On both issues, the
Government of Russia has sought help from us and from others. One of
the several issues we in the Executive Branch are discussing in our
current consultations with the Congress--including this hearing today,
Mr. Chairman--is the terms of our ability to provide that help and the
strategic goals that our support for Russian reform is meant to serve.
Let me, before going to your questions, suggest an overall context
for that discussion:
First and foremost, our policy must advance the national-security
interest of the United States--both in the short-term and the long-
term. The test we must apply--day in and day out, year in and year out,
from one Administration to the next--is whether the American people are
safer as a result of our policy. This Administration's Russia policy
meets that test. When we came into office, there were roughly 10,000
intercontinental nuclear weapons in four states of the former Soviet
Union; most were aimed at the United States. Today, there are about
half as many--some 5,000; they're only in Russia; none are targeted at
us; and we're discussing significant further reductions in overall
numbers and further steps to diminish the nuclear threat in all its
aspects. That's one of several issues of vital importance to the U.S.
that Secretary Albright and Minister Ivanov grappled with earlier this
week, along with peace in the Middle East, in the Balkans, in the
Gulf--and in the Caucasus.
My point, Mr. Chairman, is simply this: corruption is an important
issue that we are taking very seriously, but as we probe its cause and
as we refine our response, we must keep in mind that it is part of much
larger process under way in a vast and complex country--a country whose
nature as a state and whose role in the world will have a lot to do
with what sort of 21st century awaits us.
For a decade now, Russia has been undergoing an unprecedented
transformation. In fact, it is undergoing three transformations in one:
from a dictatorship to an open society; from a command economy to a
market; and from an totalitarian empire and ideological rival toward
becoming what many Russians call--and aspire to as--a ``normal, modern
state,'' integrated into the international community of which we are a
part.
We've been helping keep that process going. Just as one example,
the FREEDOM Support Act and other programs have helped Russia make
dramatic improvements in the protection of human rights and religious
freedoms.
All of us are realistic about the difficulties. Russia's
transformation has encountered plenty of obstacles, none greater and
more challenging than the crucial need to create the laws and
institutions that are integral to fighting crime-and-corruption in an
open society and market economy. Still, the transformation continues,
and so does our commitment to stay engaged. And while there are no easy
answers and no quick answers to what ails the Russian body politic
today, there is one overarching principle that is fundamental to
creating the forces for change that will drive the scourge of
corruption out of Russian society, and that is democracy. When I was in
Moscow two weeks ago, I was struck, yet again, by the preoccupation of
virtually everyone I met with the upcoming parliamentary and
presidential elections. For the first time in their history, Russian
citizens are now voters; they can register their grievances and express
their aspirations through the ballot box--or, for that matter, on a
soap box. Their grievances prominently include disgust with corruption;
their aspirations prominently include good governance.
If they and the leaders they choose can stay on the course of
constitutional rule and electoral democracy, not only will Russia's own
people be better off, but so will our own. That's the hard-headed
essence of why we must continue to support them in coping with the
difficulties they face, notably including those that are in the
headlines today. That's also why Russia's current problems with crime
and corruption are different from the corruption so entrenched in
Soviet communism. Indeed, today's problems are a result of an
incomplete transition to democracy and market reform. The solution to
today's problem is to keep moving forward to realize the full promise
of the transformation Russia has begun.
Since the Cold War ended, the United States has, as Secretary
Albright pointed out in her speech last week in her speech before the
Carnegie Endowment for International Peace, pursued two basic goals in
our relations with Russia. The first is to increase our security by
reducing Cold War arsenals, stopping proliferation and encouraging
stability and integration in Europe. The second is to support Russia's
effort to transform its political, economic and social institutions.
Both of these goals are very much works in progress.
In the years since Russia helped bring the Soviet system to an end,
our work with that nation has helped secure some breakthroughs that are
clearly in the national interest. First, the Soviet Union dissolved in
a largely peaceful fashion with its nuclear weapons in secure hands, an
outcome that was not foreordained. Imagine the chaos the world would
face if the Soviet Union, and its nuclear arsenal, had come apart in
the same way Yugoslavia has. First the Bush Administration and then the
Clinton Administration worked assiduously to ensure that such a
nightmare did not come to pass.
Second, Russia helped dismantle the apparatus of the Soviet system
and has rejected the forcible reformation of the Soviet Union or the
creation of a new totalitarian super-state. It has no practical option
to turn back the clock.
Third, the people of Russia, and their leaders, have embraced
democracy and have held a series of free and fair elections at the
national and local levels, followed by a stable transition of offices
and power, and more broadly, are assembling the building blocks of a
civil society based on public participation.
Fourth, Russia has made important strides in replacing central
planning with the infrastructure and institutions of a market economy.
Fifth, and equally important, Russia remains committed to working
as constructively as possible with the U.S. and other nations of the
international community.
International support is an essential part of helping Russia take
difficult internal steps to restructure itself.
The President, the Vice President, Secretary Albright and the rest
of us have always understood that in transforming itself, Russia has
been tearing down dysfunctional Soviet structures, but it has only
begun to put in place the mechanisms of a modern state.
This is an enormous and time-consuming task. Russia, after a
millennium of autocracy and more than 70 years of communism, had little
or no historical memory of civil society, of a market economy or the
rule of law. The Soviet system itself was in many ways
institutionalized criminality. I first heard the phrase ``kleptocracy''
used to describe the Soviet state. There are no ``good old days'' of
real law and order or legitimate private enterprise to which Russia can
return.
In short, crime and corruption are part of the grim legacy of the
Soviet Communist experience. The rampancy of that problem has impeded
Russia's own progress and impeded our ability to help Russia move
forward. Moreover, as Russia dismantled communism and sought to create
a new market economy, the weaknesses inherent in its new economic
institutions created vulnerabilities to corruption. That is why, in his
1995 visit to Moscow, President Clinton called for ``a market based on
law, not lawlessness.''
Yet, just as we cited these dangers, we were also engaged in
finding solutions. U.S. assistance, as well as that of multilateral
bodies such as the International Monetary Fund, have focused on
building the broader structures that will allow the democratic citizens
of Russia--who have the most to lose from corruption--to bring
transparency and accountability to both government and business
dealings.
We have consistently emphasized the need for transparency and
accountability in our dealings with Russia, and in the dealings of the
international financial institutions working with Russia. When problems
have arisen, we have insisted on full and complete investigations and
will continue to do so. In instances where there have been concerns
about Russian practices, the Fund has tightened controls, preformed
audits and reduced lending levels.
The IMF has conditioned further tranches on effective safeguards
that lending will not be misappropriated, a satisfactory accounting of
relevant Central Bank activities, and genuine broad-based
implementation of reforms that go beyond simple commitments. Both
multilateral and bilateral support for Russia will be shaped by this
kind of realism. A Russian interagency law enforcement team headed by
Federal Security Service Deputy Director Viktor Ivanov was in
Washington last week to meet with Justice, FBI, Treasury and State
officials. By the way, while this visit was primarily to deal with the
Bank of New York case, the Russian team also met with FBI Director
Freeh and State Department counter-terrorism officials to discuss the
recent bombings in Russia.
I have referred several times to the sheer size of Russia. In that
connection, I would like to emphasize that three-quarters of FREEDOM
Support Act assistance is spent on programs that do not involve the
Russian government, as part of our effort to help build grassroots
support for change. The U.S. government has worked to build
relationships with Russian law enforcement and judicial entities and
helping them increase their capabilities to operate in a professional
and ethical manner. We have also promoted the rule of law at the
grassroots level by working with non-governmental organizations, human
rights advocates, and independent media watchdogs, and by promoting
ethical business practices.
For example, USAID's Rule of Law Project, which was developed in
response to a presidential initiative that arose out of the 1993
Vancouver Summit, works with core Russian legal institutions on
judicial and prosecutorial training, legal education reform and
strengthening legal non-governmental organizations. The project has
assisted the legislative drafting and the training of hundreds of
judges from the commercial courts.
In addition, several U.S. law enforcement agencies have
representatives based in Moscow who are working directly with their
Russian counterparts on issues of mutual concern. There are three FBI
attaches in Moscow working on ongoing criminal investigations and
prosecutions. The U.S. Customs Service, DEA, U.S. Secret Service, DOJ
and INS also have representatives in Moscow.
Law enforcement agreements with Russia allow us to share
information on cases and cooperate on investigation, prosecution and
prevention of crime. The current Mutual Legal Assistance Agreement
between the United States and Russia allows each side to request
information, interviews and other background material to support
investigations. In June 1999, the U.S. and Russia signed a Mutual Legal
Assistance Treaty which, when ratified and brought into force, will
replace the Agreement. The Treaty will expand and strengthen the scope
of cooperation, facilitating investigation and prosecution of
transnational criminals.
In addition, in the recognition of the transnational dangers posed
by the increased crime in the NIS and Central Europe, the U.S.
government established the Anti-Crime Training and Technical Assistance
Program. An interagency effort administered by the State Department,
this effort is designed to help law enforcement officials develop new
techniques and systems to cope with crime while simultaneously
strengthening the rule of law and respect for individual rights. A
major goal of this program is to develop partnerships between American
and New Independent States law enforcement agencies that will enable
them to combat organized crime and prevent organized crime in the New
Independent States from spreading in the U.S.
In conclusion, Mr. Chairman, Secretary Albright has asked me to use
this occasion to reiterate the case that she has made to you and your
colleagues for the resources we need in order to defend and advance
American interests. Congress is currently proposing a cut of between 25
and 30 percent from the President's FREEDOM Support Act budget request
for programs in Russia and elsewhere in the New Independent States. The
Secretary believes such cuts would be dangerously short-sighted,
because the purposes of this assistance--from building an independent
media to promoting small businesses--are fundamentally in our
interests. She hopes that engagement with Russia should be something
Republicans and Democrats can agree on. Engagement is a bipartisan
foreign goal because it serves the long-term interests of the American
people.
The Chairman. Senator Biden.
Senator Biden. Mr. Chairman, I would like to ask unanimous
consent that my entire opening statement be placed in the
record.
My staff handed me a copy of your opening statement, in
which the last paragraph said, ``It is patently dishonest to
suggest that the only policy choice between forsaking
engagement and giving Russia kleptocrats a carte blanche to
pick the American taxpayers' wallet.'' I agree with that, and I
am delighted that you have made clear the need to have
engagement. The question is in how to engage.
One of the things I hope we will not do, not you and I, but
the Congress and the country, is engage in an argument of ``Who
lost Russia.'' Russia is not ours to lose. Russia is the
Russians' to lose, and Russia is the Russians' to find, but I
do think that it is important that during this hearing we begin
to get some perspective on some of the assertions that have
been made in the press, and either may be true, are true, and
if are true, may or may not have the impact that they're
asserted to have.
We hear that Russian corruption has put American taxpayers
at risk, and those allegations. One troubling charge has been
that the Russian Central Bank that received the money from IMF
loan programs sent some of that money to an offshore bank, I
think the acronym is pronounced--how do you pronounce it--
``FIMACO.''
Did Russians cheat when they moved some of their central
bank funds to this offshore bank? Yes, they did, in my view.
Were IMF funds stolen or diverted for criminal purposes? I
don't know.
At the insistence of the IMF, PricewaterhouseCoopers, an
independent accounting firm, undertook a review of those IMF
funds, and the deal that I mentioned, and found no evidence
that IMF funds were ultimately misappropriated. At the end of
the day, those funds were returned to the Central Bank.
Still, this kind of behavior is outrageous and
unacceptable, and if Russians want to become part of the
international community, like other normal nations, they have
to be made to understand that.
As I understand, the IMF is doing just that now. They're
beginning to change the way in which they'll deal with loans.
Have there been consequences because of this deal and other
outcomes? The IMF will not deposit funds now in the most recent
loan to Russia. This time, the IMF retains full control, using
funds to pay off Russian ongoing obligations without any
participation by the Russians themselves.
It is something that does not ordinarily--you do not have
to baby-sit most countries when you give IMF funds, but
obviously, they have demonstrated they need a babysitter. That
is on top of new additional commitments and conditions imposed
by the IMF to clean up their public finances.
I personally think it is time for us to consider further
steps to restore some confidence in our ability to target and
to track international financial assistance to Russia, and I
hope the administration has something to say about that today
as well. Perhaps, the most recent sensational news is the
discovery that billions of dollars have been illegally
filtered, quote, ``laundered'' through several U.S. banks.
While we must ultimately demand to know the source of these
funds, right now there is no evidence that they came from
international assistance programs.
Sadly enough, there is, on its face, sufficient private tax
evasion, corruption, and racketeering in Russia to account for
those funds.
Finally, there is another possibility. The bilateral U.S.
assistance to Russia has been among the sources of the mass of
capital flows that have plagued the Russian economy, but the
fact is that most of our aid is in the form of expertise,
exchanges, and closely targeted projects, with a low risk for
diversion, because there is not a high percentage of them being
in hard dollars.
Despite the lack of hard evidence that any American
taxpayers' money has been drawn into the web of Russian
corruption, the very nature of the black market economy and
protection rackets that account for so much of Russia's economy
these days means that neither blanket accusations nor blanket
denials seem to hold any water.
So let us grant the critics the worst of the claims, and
for the sake of argument, concede that all the worst-case
assumptions are true, but let us also look at the other side of
the ledger. Look at the plus side of the balance sheet, and
you'll see what the average American has received in exchange
for these alleged wastefully diverted funds. I say alleged.
In 8 years since the United States opened its relationship
with Russia, this is what we have accomplished. Russia has
reduced the number of nuclear missiles from 9,500 to 6,000.
Over 1,500 Russian nuclear warheads have been deactivated.
Some 300 Russian missiles launchers have been destroyed.
Russian troops have withdrawn from Central Europe, the Baltic
States, and more importantly, Russia has made no serious effort
to reconstitute the Soviet Union under its denomination.
Russia was a participant in the Gulf war, and has joined us
in peacekeeping operations in Bosnia and in Kosovo. Russia now
holds free elections at all levels around the country. Russian
society is open to an unprecedented degree. Russia has opened
its doors to the outside world, so foreigners now visit
formerly closed cities, and Russians come here by the
thousands.
The Russian press, once represented by a dreary Communist
Party-controlled Pravda, is now free and even raucous in its
criticism of the government, and the Russian welfare state that
the Communists were so proud of, has, albeit, painfully, begun
to feel the effects of a global economy.
So there is another point that needs to be stressed. U.S.
assistance to Russia has been targeted in bringing about
structure reforms that would be both deep and long-lasting.
Importantly, this assistance has included components of
fighting both crime and corruption.
The administration, in its semi-annual meetings with
various prime ministers, has worked to promote the rule of law
in Russia, with not as much success as we would like, but we
are trying.
Topics of these meetings include a bilateral law
enforcement cooperation, law enforcement assistance, anti-
corruption assistance at a grassroots level, ethics training,
and dozens more programs. So I would suggest it is simply wrong
for people, and I read it in the press, to suggest that these
problems have been ignored.
They have been identified as problems, they have been
devoted time, funds, and personnel to deal with, and they have
to be dealt with again, and we have to try new ways to try to
deal with them.
You might say that we have not committed sufficient
resources to these programs, but it is not true that corruption
has been ignored. So what are the lessons to be drawn from our
experience? It seems to be that, obviously, there are problems.
They are problems that we know about and cannot pretend they do
not exist.
That our assistance to Russia has caused problems? No
reading of Russian history, which is full of examples of
serious corruption, can support the claim that there has not
always been corruption. But there has been and continues to be
tangible progress, and it may be two steps forward and one
back, but there is progress.
So I agree with the Chairman, it should not be a debate
about whether or not we engage or disengage, it is about the
degrees to which we can engage more rationally and more
effectively.
I would conclude by saying, Mr. Chairman, that I can
remember when we sat here and I was with the staff members, now
an ambassador, a guy named John Ritch, drafting the SEED Act,
which became the FREEDOM Support Act, and some iteration of the
FREEDOM Support Act, or of the SEED Act, and we all said then,
which we should remind everybody now, it has been 8 years, and
800 years of history we are trying to turn around.
The idea that Russia is going to get it right, get it
straight, have no corruption, have a market economy that works
like ours, have elections that are like ours, and have a system
that is remotely like ours, or other Western European
countries, in the near term, and have it all done neatly is
beyond anyone's capacity, except the Lord Almighty himself, but
the Russian people have to do a heck lot more, and Russian
institutions do so.
I am anxious to hear how we are going to strengthen our
oversight, if you will, on our dealings with Russia, but I
sincerely hope that everybody heeds your admonition that this
is not about whether or not we engage or do not engage, it is
about how to engage.
I thank you for your time, Mr. Chairman, and I thank the
Secretary for allowing me to follow him with my opening
statement. It should have preceded it.
[The prepared statement of Senator Biden follows:]
Prepared Statement of Senator Joseph R. Biden, Jr.
There is a lot of clamoring right now--most of it driven by U.S.
election hysteria--about ``Who lost Russia.'' This is absurd. Russia is
not lost--it is right there where it has always been.
In any case, it was not ours to lose. It still belongs to
the Russians. They control Russia's destiny--no one else.
No one--not the IMF, not the United States, not the G-7
countries--was ever going to influence Russia's policy except
at the margins.
What has been ``lost'' however, is a rational perspective on the
pace and ease of the current transformation of Russia. No one said that
change from a Communist system to a free market, democratic society
would be easy.
Change will take generations; we have always known that.
This country, first under George Bush, now under Bill Clinton, has
done the right thing in trying to ease Russia's transition from
Communist bully to responsible member of the world community.
And the successes are remarkable. We must remember that the Soviet
Union came apart less than eight short years ago. In that brief time,
Russia has reduced its nuclear arsenal and slashed its military
spending. It has held democratic elections and resisted a return to
Communism.
It has opened its doors to the outside world so that foreigners now
visit formerly closed cities, and Russians by the thousands come here.
The Russian press--once represented by the dreary, Communist party-
controlled Pravda, is now free and even raucous in its criticism of the
government. And the welfare state that the Communists were so proud of,
has--albeit painfully--begun to feel the effects of the global economy.
Obviously, there have been, and will continue to be, frustrations
and missteps. Corruption is one of the most visible ones.
The current hysteria on this topic misses the main point--that
corruption, while unpleasant for those of us in other countries to
contemplate--harms the ordinary, decent Russian more than it does us.
Russia has the biggest stake in getting its house in order.
I must admit to some puzzlement about this focus on corruption in
Russia right now. Corruption is always deplorable, anywhere that it
occurs. But it is an ugly fact of life in many countries that we do
business with every day.
U.S. assistance to Russia has been carefully targeted at bringing
about structural reforms that would be both deep and long-term. This
assistance has included components on fighting both crime and
corruption:
Vice President Gore, in his semi-annual meetings with the
various Russian prime ministers, has worked vigorously to
promote rule of law in Russia.
Topics of these meetings included: bilateral law enforcement
cooperation, law enforcement assistance, rule of law
assistance, anti-corruption assistance at the grassroots level,
ethics training, and dozens more programs.
It is patently ridiculous, therefore, to say that this
Administration has ignored these problems. On the contrary, this
Administration has not only identified the problems, but has devoted
time, funds, and personnel toward addressing them.
So, what are the lessons to be drawn from our experiences in
Russia?
That there are problems? Of course there are problems. We
knew there would be.
But there is tangible progress. It may be two steps forward
and one step backward. But there is progress.
Should we disengage because of these problems?
Certainly not. The world needs a stable, prosperous,
democratic Russia. There is simply no alternative to that.
We, the other G-7 members, and other industrialized nations
must continue with our assistance programs, IMF loans and other
measures to cushion Russia's transition to democracy and free-
market capitalism.
Does this mean that we should not be careful of how we spend our
assistance money there?
No, of course not. If more controls are needed on U.S. assistance
and IMF money, then let's put those controls into place.
But under no circumstances can the West abandon Russia. Russia
truly will be ``lost'' if we do that.
The Chairman. Very good.
Now, before we proceed, I want to call attention to the
second panel, and I want them to be accorded adequate time to
testify and to be questioned, but I am going to set the time
for the first round, and maybe the only round of questioning,
at 5 minutes.
The second panel is Fritz Ermarth, the former CIA and NSC
official, Jim Moody, the former Deputy Assistant Director of
the Criminal Investigative Division of the FBI, and founder of
Jim Moody and Associates, Mr. E. Wayne Merry, former State
Department official and director of programs on the European
Societies in Transition of the Atlantic Council of the United
States, and Dr. Robert Legvold, professor of political science
at Columbia University, New York.
Now, bear in mind that, Mr. Talbott, at the last minute
after the red light has come on, if you are asked a question, I
want you to have time to answer it, but I do not want to run
very far over 5 minutes per Senator.
Now, my first question is: Was information known to the
United States that former Prime Minister Viktor Chernomyrdin
was involved in corruption or failed to use his power to stop
corruption by Russian officials?
Now, without divulging any classified material, I wonder if
you can confirm whether the CIA did produce a memorandum on
corruption by the Prime Minister of Russia, and did Vice
President Gore, in fact, read and dismiss that CIA report?
Secretary Talbott. Mr. Chairman, let me start----
The Chairman. That is a mouthful, I know.
Secretary Talbott. Sir?
The Chairman. I said that is a mouthful of a question, but
you may proceed.
Secretary Talbott. Let me start by respectfully declining
to comment on anything whatsoever to do with intelligence
matters or the product of the intelligence community. I hope
you will permit me that.
In appropriate closed sessions we can, of course, go much
further than we can in open session, and nothing whatsoever
should be inferred about the specifics of the question that you
raised from my inability to say anything about intelligence
matters.
Let me say that the issue of corruption has been very much
on the agenda of U.S.-Russian relationships at all levels,
including at the level of President Clinton and President
Yeltsin, and certainly including at the level of Vice President
Gore and former Prime Minister Chernomyrdin for quite a number
of years.
In fact, one of the many offshoots of the Gore-Chernomyrdin
Commission, to which you referred in your opening comments, was
a sub-group to deal with the problem of organized crime and
corruption.
We have been pursuing that issue directly with the Russians
for quite a number of years. If and when either our
intelligence community or our law enforcement community comes
into possession of information with regard to specific
individuals or specific cases, we make sure that the process is
in place for those investigations to go forward, and we deal
with the facts as they emerge, but the short answer is that
with all Russian leaders we have been pushing the issue of
corruption, and incidentally, a number of Russians have been
quite eloquent themselves, including the Foreign Minister this
week, on the harm that corruption has done to Russia.
The Chairman. Sir, you agree with your colleague,
Ambassador-at-Large Stephen Sestanovich, who testified on May
20, 1998 before this committee regarding the IMF bail-out funds
flowing into Russia, and we have that on the poster there
somewhere.
He said, ``What people did with those dollars, I do not
know. I would not be a bit surprised if some of them went into
Swiss banks, but it is what tends to happen when you have a run
on the currency. People get their money out of Russian banks.''
Now then, the IMF, as I understand it, puts its funds into
the Russian central bank, is that correct?
Secretary Talbott. Yes. That has been true in the past.
The Chairman. If a Russian Government official subsequently
steals money from the bank, is that a theft of IMF funds, in
your judgment?
Secretary Talbott. There are two issues here, of course.
One is Russian law and the other is American law, and for that
matter, laws governing the other contributing countries of the
IMF. If there is a credible allegation that laws are broken,
then the issue becomes a law enforcement matter, and we pursue
it vigorously as such.
With your permission, could I comment on two points that
you just touched on----
The Chairman. OK.
Secretary Talbott [continuing]. And what you said? First of
all, the IMF, with the, of course, vigorous participation of
the Department of Treasury, has taken very seriously over the
past year, well before these recent allegations hit the press,
any suggestions, whatsoever, that there was misappropriation of
IMF funds. For nearly a year after the August, 1998, financial
crisis in Russia, IMF lending was suspended to Russia.
In July, there was a new program, but the money for that
program, which goes to partial financing of past IMF loans,
does not go to Russia at all, it does not go to banks in
Russia. It remains here, and simply moves within the IMF to
cover that refinancing.
Could I comment on the quoted statement of my friend and
colleague----
The Chairman. Sure.
Secretary Talbott [continuing]. Steve Sestanovich here? I
think it is----
The Chairman. Go ahead.
Senator Biden. Mr. Chairman, with your permission, I yield
you my 5 minutes, and you continue, because I will get plenty
of chances to ask him questions later.
Secretary Talbott. Mr. Chairman, I thank you for providing
the only setting in Washington where I can crash a red light. I
appreciate that very much, and I will try to be brief.
We have to distinguish between different forms of the
problem here. What I think Steve was talking about was the
issue of capital flight, that is, money getting out of Russia.
That might be money that Russians have earned, and they may
have earned it legitimately. It may also be money that foreign
investors had put into Russia.
One of the problems that Russia has coped with over the
last--well, actually, inadequately coped with, is failing to
develop a banking system, a set of tax laws, and an investment
climate that will allow capital to remain in Russia. Not all of
the capital that has left Russia, whether for Swiss bank
accounts, or New York bank accounts, or real estate in the
Riviera is necessarily laundered money, or ill-gotten gains.
Part of our goal in our continuing engagement with Russia
on these issues will be to get them to, for their own sake,
improve the climate for investment in Russia, so that the money
will stay there. So we should not assume that all of the money
that we are talking about over here is necessarily symptomatic
of corruption.
The Chairman. Do you agree or disagree that IMF money has
been subject to massive capital flight? Yes or no?
Secretary Talbott. Well, first of all, money is fungible.
There is no question that Russia has suffered generally from
the problem of capital flight, being able to keep money of any
kind in the country.
An awful lot of it goes into mattresses, literally, in
Russia, because Russians do not trust banks, and a lot of it
has fled the country. As for the IMF money, the indications so
far are that there is no evidence that IMF money, per se, has
been misappropriated.
The Chairman. There has been no flight of IMF funds, is
that your answer?
Secretary Talbott. Well, again, when money leaves, it hurts
Russia.
The Chairman. It is all right for you to say you do not
know, but do not give me a convoluted answer to it.
Secretary Talbott. Well, it is an attempt at just
recognizing an economic reality, which is the fungibility of
the money.
The Chairman. What do you know about the assertion by the
fired Russian Prosecutor General Yuriy Skuratov, reported in
the press that $3.9 billion of the $4.8 billion IMF bail-out
for Russia in 1998 never entered Russia? Do you deny that?
Secretary Talbott. I certainly cannot vouch for that. Both
the IMF external auditors, PricewaterhouseCoopers, in
particular, the U.S. Government, are all seeking to establish
the facts, and we will rely on the facts as our own agencies
establish.
The Chairman. You do not know. You say you do not know.
Secretary Talbott. I say that I certainly cannot vouch for
his assertions.
The Chairman. Do you not believe that it was sent by the
Russian Central Bank directly to commercial banks, bypassing
the currency market, is that not a matter of fact?
Secretary Talbott. I would really prefer to confine myself
to what our own authorities have been able to establish.
The Chairman. Well, is that the official answer of the
administration? Is that all you know about it?
Secretary Talbott. Well, let me--I think probably the best
way to both do justice to your question and make use of our
time is the following. You have put before me a specific
allegation, and I will provide you promptly for the record our
analysis of and reaction to his allegation.
The Chairman. Very well. Senator.
[The following response was received subsequent to the
hearing:]
Response of Deputy Secretary Strobe Talbott to the Question of Senator
Helms
Question. What do you know about the assertions of the fired
Russian prosecutor general, Yuri Skuratov, reported in the press, that
$3.9 billion of the $4.8 billion IMF bailout for Russia in 1998 never
entered Russia? Do you deny that?
Answer. IMF funds were handled in a manner reflecting standard
operating procedures for U.S. dollar clearing operations--whether from
Russia or any other country. When the Central Bank of Russia sells
dollars in the Russian foreign exchange market, the actual transfer of
dollars from seller to buyer takes place in U.S. dollar clearing
accounts--all of which are located in the United States.
The report by PricewaterhouseCoopers regarding the July 1998 IMF
disbursement to Russia summarized the process which took place as
follows:
The Government of Russia informed the IMF on July 23 that it would
like the IMF payment to be made in dollars and deposited in the Russian
Central Bank's account at the New York Federal Reserve Bank. Some of
the money was then invested in U.S. T-bills, while the remainder was
transferred to the Central Bank's U.S. dollar clearing account at the
Republic Bank of New York.
Over the course of July and August, the Central Bank made trades in
the Russian foreign exchange market. Most of these trades were directly
with 30 or so large Russian banks, with the remainder conducted through
domestic currency exchanges such as the Moscow Interbank Currency
Exchange (MICEX). At the end of each trading day buying and selling
transactions were netted out, and dollars were transferred between the
Central Bank's dollar clearing account at Republic Bank of New York to
the dollar clearing accounts of the Russian Banks that bought the
dollars. True, the dollars never left the United States. This is normal
financial practice.
Senator Hagel. Mr. Chairman, thank you. Mr. Secretary,
welcome. A little off the mark here, but I noted in your
testimony the progress that we have made regarding nuclear
weapons with the Russians. It may be ironic, but one of the
most significant tangible measurements of the relationship we
have with the Russians over the last 10 years after the
implosion of the Soviet Union has actually been the military
relationship.
You note in here, Mr. Secretary, that now we are dealing
with about 5,000 Russian nuclear weapons, and you say they are
only in Russia now, and you further say none are targeted at
us. Who are they targeted at?
Secretary Talbott. Let me give you my best attempt at an
answer on that, with the proviso that I would like to check
with our technical experts to followup. I believe, in effect,
they are simply not targeted. Whether that would be true of all
of them, I do not know. Russia has other countries that it
thinks about in terms of deterrence.
Re-targeting a weapon takes a relatively short period of
time. I believe that they are currently simply not targeted,
and await re-targeting in a crisis of some kind, but I have
some friends at the Pentagon I would like to check with on
that.
[The following response was received subsequent to the
hearing:]
Response of Deputy Secretary Strobe Talbott to the Question of Senator
Hagel
Question. The Administration has stated that no Russian nuclear
weapons are targeted at the U.S. What are these weapons targeted at?
How long would it take to re-target them against us?
Answer. The detargeting initiative was a confidence-building
measure that symbolizes the improved relationship between the U.S. and
Russia. In this regard, it is one of a series of such measures adopted
in the aftermath of the Cold War, including discontinuing strategic
bomber ground alert and continuous airborne command post operations,
and withdrawing and eliminating certain tactical nuclear weapons.
For Russian ICBMs, detargeting means that the launch control system
has been set with a zero or null set. Targeting data, however, could be
reloaded in a missile's on-board computer if so ordered. Russian press
reports have stated that Russian systems remain on alert and that in a
matter of 15 minutes, at most, Russian ICBMs can be retargeted to their
main targets.
If a missile without targeting data loaded into its guidance system
were to somehow be launched, it would almost immediately go into an
uncontrolled flight and crash back to earth.
Senator Hagel. If that is the case, is that not a little
misleading to say that they are not targeted at us, when in a
matter of seconds, they are retargeted, as you suggested.
Secretary Talbott. I understand your point, but by the way,
I am not sure if it is a matter of seconds, but it is not a
matter----
Senator Hagel. It is pretty fast, is it not?
Secretary Talbott [continuing]. Of days.
Senator Hagel. I think we give maybe the wrong impression,
I have heard the President say this, too, like this is kind of
a benign threat. They may have 5,000 nuclear warheads, they are
not targeted at us, so, therefore, life is good. I think that
does not accurately reflect the situation.
Secretary Talbott. Well, let me, with respect, suggest
another way of looking at it, while taking your point that the
pure military significance of de-targeting may be at the
margins.
First, if you couple it with the other statistics that you
referred to and that Senator Biden referred to in his opening
statement, namely the overall reduction in levels of Russian
strategic weaponry, it requires more significance. But the main
point here is political, and that is that the United States and
Russia do not now regard each other as enemies in the way that
they did during the cold war.
So I think if you look at it in that context, it has
significance, but I would not--I take your point, we should not
overstate the military significance of de-targeting.
Senator Hagel. Thank you. Now, on to the subject at hand.
In light of the present revelations concerning corruption and
other problems, this is an imperfect world, but obviously,
reality dominates here. This being the last year of the Clinton
administration, you look at the FREEDOM Support Act, and other
programs that the United States has with the Russian
Government, Russian people, in light of these revelations. What
changes is the administration intending to make, anticipating
to make, or will make, or are making, to try and focus this
assistance, paid for by the American taxpayer, in areas where
we have some more reasonable assurance that this money is doing
what we intended it to do?
Secretary Talbott. Well, let me, if I could, divide the
question into two parts. First, as I hope I have already
indicated, and want to reiterate, we learn from experience as
we go along.
We have certainly learned from the experience of the past
year, since August 1998, and every time we either see ourselves
an opportunity to tighten up the controls, the stringencies,
the protections, particularly when it comes to international
financial institutions, and what they do, we do that. We
institute those changes.
Secretary Summers, in testifying on the House side earlier
this week, detailed some of those measures that the Treasury
and the IMF are undertaking.
With regard to our bilateral assistance, as I think Senator
Biden alluded to, our bilateral assistance, by and large, does
not put money into Russian pockets or into the Russian treasury
or banks. Most of our bilateral assistance is much more in the
area of technical assistance, know-how, and that kind of thing,
but the program you referred to, the FREEDOM Support Act, gives
us numerous ways to help the Russians deal with the problems of
crime and corruption through our grassroots organizations,
better banking laws.
Since my time is out, I will just sort of point over my
shoulder to our colleagues from the Russian Parliament as the
bearers to the ultimate answer to your question.
The real answer to Russian crime and corruption is for the
Russian people to elect legislatures who will pass laws and
establish enforcement mechanisms that will get a grip on the
problem.
Senator Hagel. Mr. Chairman, thank you.
Mr. Secretary, thank you.
The Chairman. Senator Kerry.
Senator Kerry. Thank you, Mr. Chairman.
Mr. Secretary, welcome. We are glad to have you here today.
Secretary Talbott. Thank you, Senator.
Senator Kerry. Mr. Chairman, on the subject of money
laundering and international crime, thanks to this committee
and to your indulgence Mr. Chairman, and at other times with
Senator Lugar and Senator Pell, I have had a chance to really
be involved in this issue for a long time, and I know it is
always very dangerous to use one's self as a reference, but
notwithstanding, I wrote a book 2 years ago called ``The New
War,'' in which I dedicated a chapter to the subject of Russia,
and I called it ``The Hijacking of the Russian Bear.''
I just want to read one thing to you, to share with you
sort of a sense of what already was happening 2 years ago, and
then I want to ask the Secretary, because I do not think there
is a better expert on Russia in our country than the Secretary
to perhaps comment on it.
I wrote 2 years ago that ``What is happening in Russia
today is more than simple frontier-style robbery,'' referring
to what George Soros had talked about as a period of robber-
baron, capitalist transition.
``It is the hijacking of the nation's entire economy by
increasingly organized criminal groups through systematic
racketeering, murder, fraud, auto theft, assault, drug
distribution, trafficking, and weapons, and radioactive
material, prostitution, smuggling, extortion, embezzlement, and
the infiltration and purchase of Russian banks.
``Russia's criminal class has evolved from the black
marketeers, minor thugs, and fixers that existed at the fringe
of the old Soviet state, into the sophisticated power brokers
and money men who are pushing the one vast and powerful empire
into wholesale criminality and corruption. Russians describe
the current period as a `smuta,' or time of troubles, a chaotic
interregnum like that of the early 17th and 20th centuries,
when anarchy ended only with the establishment of yet another
autocracy. Russia is going through a revolution, a depression,
and a gold rush simultaneously. Everything is up for grabs, and
might makes right.''
I might add to that, Mr. Chairman, that at the time, I
quoted Mr. Yeltsin, who acknowledged publicly that the Mafia is
the single greatest threat to the survival of Russian
democracy, at a statement that was underscored by the 1994
Mafia contract killing of Dmitri Kolodoff, the investigative
reporter, who was looking at what was happening in Moscow at
the time.
But then I also said, and I want the Secretary to comment
on this, I said, ``A brief glance into Russia's past shows the
current criminal chaos was a long-time in the making.''
The fact is that when all of the barriers fell down with
the fall of the Berlin Wall and the transition, there was this
enormous rush into capitalism, a free market system, with no
controls, no capacity, and no understanding, no regulation at
all, and it was only in 1994 that we got an FBI office finally
into Moscow.
I would ask the Secretary, given his superior knowledge of
the transitional processes of life under the first 70 years of
communism, but even prior to that, under the czar, whether or
not we are not going through a process of evolution. Do you
believe that the debate about losing Russia is entirely
inappropriate, the debate about how we get at the elicit
transfer of our tax money, or how we further regulate and
cooperate, and put in place their capacity to survive as a
democracy, is the real debate, and is that where we ought to be
focusing our attention?
I wonder, Mr. Secretary, would you comment on the
historical background, realities, life in Russia, how we ought
to be looking at it from our national interests.
Secretary Talbott. Senator, I had, before coming up here,
hoped very much that nobody would use the phrase, ``we lost
Russia,'' and I certainly vowed not to use it myself, and I am
now--you and Senator Biden have both used the phrase, and I
read the book. I read the book.
Senator Kerry. In a very different context.
Secretary Talbott. The following is the best line I have
heard, which I hope I can just get onto the record quickly, and
then respond to one or two other things that Senator Kerry
said.
Jim Collins, our very fine Ambassador in Moscow, likes to
say, ``Who lost Russia? The Communists lost Russia.''
Now, what he means by that is the Communist Party of the
Soviet Union. They lost the Soviet Union, and the process that
the Russian people have put in place, including the one
represented by the parliamentarians here, is really a matter
about the Russian people getting their country back.
Now, the essence of what the Senator said is that it is a
very messy process, even dangerous, and sometimes bloody, but
the only quarrel I have with your overall depiction in the
passage that you read is that it is very bleak.
It does not take account that amidst all of those clouds
there is some sunlight, including the sunlight that is the best
disinfectant for the problem of corruption. You referred to
investigative reporters. The Russian press is very lively, and
vigorous, and aggressive now.
The Russian Parliament, anybody can get up and say
anything, including shaking his fist at the President of the
country. The election process is ongoing. That is where the
hope is.
The Chairman. Thank you, sir.
Senator Smith.
Senator Smith. Thank you, Mr. Chairman.
Mr. Secretary, we welcome you to this committee.
I think it was Senator Biden, who said Russia is not ours
to lose, and I agree with that. But U.S. tax dollars are ours
to lose, and I suspect that we are losing them. And what I most
want to know is when we are going to stop losing them. And I do
not know that you have a date certain where you can tell us
that.
But I--I am an author, along with Senator Sarbanes, of a
letter to President Clinton asking him to be tough with the
Congress in negotiations on the budget to try to increase the
150 account.
It is not a politically popular position to take in this
body to be for foreign aid spending, but I know that the State
Department, frankly, very much cares about our succeeding in
increasing that budget beyond what the appropriators have
allocated.
But I have to say if a further distribution goes out, I
believe it is the end of September from the IMF to Russia--and
the public generally does not get the distinctions of these
various columns of accounts.
And I believe that the State Department is playing with its
own future when we see stories where money never gets to
Russia, but just simply is funneled off in some corrupting
scheme.
So I do not know whether--what Senator Sarbanes and I have
done is wise or not, but I do want to say on the record that I
think that the--the State Department's ability to get more out
of this Congress depends on what happens in Russia.
I wonder if you have a comment on that.
Secretary Talbott. I do indeed. And my first comment is on
behalf of Secretary Albright, very personally, I would like to
thank you and Senator Sarbanes for your support for increasing
the foreign affairs account of the budget.
And I think it is a very sound position indeed and one that
can be argued from the standpoint of the national interest,
which she has done on numerous occasions.
I also totally agree, Senator, with the proposition that we
who bear responsibility, both for the formulation and the
implementation of policy owe it to you and, through you, to the
American people to provide accountability for the funds.
As we have discussed earlier in this hearing, with regard
to the funds that have been used for macroeconomic
stabilization, support of Russia in the past, there is no new
money going to Russia under the current IMF program.
It is--the phrase that the Treasury uses is that it is
involved in a lockup, which means that it is here in Washington
to help with this refinancing.
Larry Summers, earlier this week, detailed additional
protections that will be put in place to govern any future
programs, with regard to what is actually under the--part of
the function 150 account, and that is the FREEDOM Support Act.
I think that we can come up here and meet with you and your
colleagues at any time and argue two points very convincingly:
No. 1, that we have maintained the highest degree of
accountability and protection for the money itself. And second,
a lot of those programs are helping the Russians to deal with
this problem.
Senator Smith. Well, I just--I would say in an open mike to
everybody at the State Department, I wish you could come with
me to any town hall that I hold in Oregon, and you would find
invariably that somebody mentions foreign aid as a waste of
money.
I try to describe it as waging peace, not waging war, but I
do say it is in the interest of the State Department, the 150
account to--to shepherd this money in a way that does not end
up in the headlines we see in newspapers right now.
Let me--looking backward with the remaining time--perhaps
one more question. I have a question about a Pavel Lazarenko,
and wonder if before he was detained at--at the Kennedy
Airport, he had met with President Clinton prior to that. He
was detained for corruption. What did the administration know
of his corruption?
I have a question about Anthony--Anatoliy Chubais. Did
the--was he--is he corrupt? What has happened with him? What
does the administration know of his dealings?
And finally what does the administration know about payoffs
benefiting Boris Yeltsin and his family? I am specifically
referring to credit card accounts provided to Yeltsin and his
two daughters by a Swiss construction company, and I also
wonder about a Yeltsin son-in-law, Leonid D'Yachenks and a--and
an apparent money laundering scheme involving the Bank of New
York, which has been documented recently in the Washington
Post.
What does the administration know of these things and have
we been complicit in any way in these things? I think the
public really needs to know.
The Chairman. Right. The Chair is going to let the witness
answer the question, but I warn at the outset not to start a
question at--when the yellow light is on.
But go ahead and answer the question, because it is a good
question.
Secretary Talbott. Thank you, Mr. Chairman. I hope you and
Senator Smith will understand that I am really constrained from
commenting on specific allegations, particularly about
individuals, especially when their--the integrity and
confidentiality of our own investigative processes are
involved.
And for the second time in this hearing, I would ask that
nobody infer from that any comment whatsoever on the
individuals that you have mentioned.
Now, if--if I am--if I understood you correctly, the first
gentleman you mentioned, Mr. Lazarenko, is a former prime
minister----
Senator Smith. Correct.
Secretary Talbott [continuing]. Of Ukraine.
Senator Smith. Correct.
Secretary Talbott. Mr. Chubais has held various positions
in the Russian Government.
Senator Smith. Correct.
Secretary Talbott. A number of us, including the President
in some cases, have had dealings with these gentlemen. I
certainly met with Chubais numerous times in recent years in
their official capacities.
And I can put it this way succinctly, we have been doing
the Nation's business with them, which is to say developing
U.S./Russian relations in a way that would serve the American--
the American people. That goes for all of the ones that you
mentioned.
That said, our investigative agencies and other agencies
that are in the business of establishing facts, particularly
where criminal law is concerned, do their work; and when their
work produces something that either merits public attention or
bears on the foreign policy of the United States, they tell us
at the State Department. We react accordingly.
The Chairman. Good. Thank you.
Senator Wellstone.
Senator Wellstone. Thank you, Mr. Chairman.
First of all, Mr. Secretary, I am glad you are here.
Welcome.
Second of all, on a personal note, I have said it to you
before, you know, my father grew up in czarist Russia. His--he
fled the Communists, never could go back. I think probably
Stalin murdered his family.
And I think for personal reasons and, more importantly, for
reasons having to do with our country, I think what happens in
Russia will crucially affect the quality of our lives and our
children and our grandchildren's lives, so I am in complete
agreement with your focus on engagement and I think it is very
short-sighted to be cutting the FREEDOM Support Act budget. I
think it would be a big mistake.
I have two pointed--rather, two pointed questions for you.
One of them, the New York Times--I do not think we have gone
over this--just reading from the New York Times, September 8,
first paragraph, ``The Clinton Administration learned of the
Federal investigation into allegations of Russian money
laundering at the Bank of New York 5 months earlier than it
previously acknowledged, senior Administration officials said
today.''
Then they go on and say, ``Then Treasury Secretary Robert
Rubin''--this is not in the spirit of bashing. I just want to
try to get an answer to the question--``and Deputy Treasury
Secretary Larry Summers both knew about the investigation
before our Government approved a $640 million installment of
loans to Russia in July.''
And my question is: Are--are you concerned that--that the
administration may have concealed what it knew about the
investigation? Could this have been----
Secretary Talbott. May I--I'm sorry. Just----
Senator Wellstone. Are you concerned that the
administration may have concealed what it knew about the
investigation? Could this have been done to avoid having to
answer questions about approving the loan without considering
money laundering as an issue? And should not money laundering
at least have been a consideration in deciding whether or not
to approve the loan?
Secretary Talbott. I understand your question.
I believe, on the basis of some knowledge of the facts
here, that the administration--and that means both the State
Department and the Treasury Department--handled this very
delicate matter absolutely appropriately.
Senator Wellstone. Yes.
Secretary Talbott. As so often is the case in government,
one has to strike a balance between various considerations, and
objectives and principles.
There is a very important principle operating in our
Government, which is the sanctity of the grand jury process.
And whenever information is at play, as it were, in an ongoing
judicial process of that kind, all officials who know about it
are very constrained in what they can do about it.
Now, the facts here were the following: It is true that--
that what I would call the upper middle levels of the State
Department, somebody did find out about the fact that there was
a judicial inquiry or a criminal inquiry elsewhere in the
United States having to do with the Bank of New York.
That individual and the State Department did exactly what
the book requires. They made sure that the Justice Department
was aware of this.
And the procedure here is that the Justice Department will
then brief the State Department at an appropriate level when
the facts and the case are developed to the point where they
are felt to have some kind of foreign policy relevance. And
that happened in August, and I was part of that briefing.
So the--we originally--we, the Department, originally found
out about the Bank of New York case in the spring. It was
briefed to me, Ambassador Sestanovich and some others, a few
weeks ago in August.
Now, how would this have affected our posture with regard
to money laundering? First of all, we were already pushing, as
we felt effective and appropriate, our Russian partners and
colleagues to put in place a money laundering law.
In fact, that is one of the themes that Vice President Gore
had been developing in his work with Prime Minister
Chernomyrdin. And, in fact, the Duma did pass a money
laundering law, and the Yeltsin administration vetoed it. We
were critical of that decision.
Senator Wellstone. Mr. Secretary, what I was really asking
was how it--how it affected our posture vis-a-vis the granting
of the loan, knowing about this. Should it not have been more
of a consideration?
Secretary Talbott. The loan you referred to--the loan that
would have been in the timeframe here would have been the loan
in July, the IMF loan in July, which is covered by this--this
lockout provision that I referred to earlier--lockup, excuse
me. Lockout is something else. That is, protecting the money so
that it remains in a closed circuit within the IMF.
So I--you would have to ask Treasury. Secretary Summers did
address this case in some detail earlier in the week, but my
impression is that it would not have had any effect on that.
Senator Wellstone. OK. Thank you.
Secretary Talbott. But what it does underscore is the need
for us to keep pressing, and I hope the issue will come up when
you meet later with the Russian Parliamentarians, the
importance of Russia having a money laundering law.
Senator Wellstone. Yes, absolutely.
The Chairman. Mr. Secretary, it was nice of you to come up,
and you are an old hand at this. I think you kind of enjoy
sparring with Senators.
Bear in mind that a lot of Senators are absent today who
would be here if they were not tied up on appropriations
conference reports and that sort of thing.
But we thank you for being here, but I hope it is not too
much to ask that I allow Senators who are not here, and
Senators who are here, to file additional written questions
with you, and you would expedite your answers to us. Would you
do that?
Secretary Talbott. I will.
A question--could I say, Mr. Chairman, in addition to
thanking you for the chance to be up here that I know several
of the individuals on the next panel.
I have profited from my association with them. In Bob
Legvold's case, as a long-time mentor of mine; and in the
others, as--as colleagues. And I will study very closely the
proceedings that are about to follow.
The Chairman. Very good. I do not like for the second panel
to be postscripts. And these are, as you say, very talented,
interesting individuals.
Thank you, sir, for coming. And thank you for bringing Mrs.
Talbott with you.
Secretary Talbott. Thank you, Mr. Chairman.
The Chairman. The second panel will assume their positions.
Let me say at the outset that the committee thanks you so
sincerely for being here this afternoon.
As I said, I am trying to get away from this thing where
distinguished witnesses, like yourselves, amount to postscripts
and I want the media to hear you, too.
So that is the reason I was sort of expediting and if I
might suggest we are going to print in the record your entire
remarks. And to the extent that you feel inclined to do so, let
us move it along so we could have some back and forth with the
members of the committee.
Mr. Ermarth, you may begin.
STATEMENT OF FRITZ W. ERMARTH, FORMER CIA AND NSC OFFICIAL
Mr. Ermarth. Thank you, Mr. Chairman. I am deeply grateful
to you, sir, and to the committee for this opportunity to speak
on an agenda so important to our Nation and to--to Russia.
You have my written testimony. I will confine my remarks to
a handful of short but, I think, very important points----
The Chairman. Very well.
Mr. Ermarth [continuing]. Which I think represent a
foundation of the critique of people like me and others who
have been critical of our administration.
It is true, first, the roots of Russian crime and
corruption go way back in--in Soviet--in the Soviet past. This
applies especially to the lack of the rule of law. It is
particularly important to understand that the plundering and
capital flight we have been talking about, characteristic of
today's Russian economy, were really initiated by the Communist
leadership and the KGB back in the late eighties. That is where
the short gentleman standing with Mr. Clinton--with President
Clinton got his start.
That is not, however, an excuse for wrong-headed policies
on the part of Russia subsequent to the collapse of communism
or on our part.
Second, what we have called economic reform in Russia has
not created market economy or capitalism as most hoped. Rather,
it--it created what I would call crony capitalism, without
capitalism.
Insider privatization in alliance with corrupt officialdom
has produced a system dominated by a very few powerful
individuals and entities who strip wealth out of the country,
and send it abroad, rather than investing to create wealth and
prosperity at home.
The result has been impoverishment and profound
instability. And now a battle royale is going on among the
stakeholders in this system for the control of the Kremlin and
the Presidential succession.
So what we are talking about is more authorized crime than
organized crime--official crime than organized crime.
But organized crime is there. And it interacts with this
plundering system as both a beneficiary and as a facilitator,
through such activities as protection racketeering and money
laundering.
Now, these realities have been completely visible from the
start, although the administration has not been saying so until
in the last few weeks. They have been amply reported by a host
of Russian and Western observers.
No failings of American intelligence can be blamed for any
failure to see these realities. There were some failings, and
they need to be corrected.
The historic failing of American policy, however, in this
period was that it gave support too uncritically for too long
to this phony crony capitalism in Russia. It did so
rhetorically, politically and financially, chiefly through the
IMF.
The result has been that prospects for true economic reform
in Russia have been made in many ways more difficult than they
were initially. And worst of all, we have lost much respect and
admiration among the Russian people, as have the very ideas of
democracy and capitalism.
This in no way ignores what has been achieved under the
Nunn-Lugar program, for example. But I believe Secretary
Talbott misrepresented that balance sheet somewhat. And I would
be happy to respond to questions on that, if you wish.
The problem with the IMF has been more perversion of
funds--perversion of funds than diversion of funds. Rather than
encouraging the stabilization and growth of the Russian
economy, it has served to legitimize the extraction of wealth,
the plundering.
But there does seem to have been something that sure looks
like diversion to me in the summer of 1998. And that is what
Prosecutor General Skuratov was talking about.
Now, why the administration pursued the policies it did for
so long in the face of these realities is still not entirely
clear, because its belated explanations I do not find terribly
persuasive.
There were alternative strategies and tactics for reform
available to the Russian regime, which we could have supported
more honestly and effectively.
That our national security objectives required us to
support the--the Yeltsin regime and its policies so
uncritically is hardly persuasive, because our security
interests in Russia are arguably in worse shape now and face a
more problematic future than the very positive and very
optimistic atmosphere that existed in 1992 and 1993.
The influx of vast sums of Russian money into our economy
during this period, probably amounting to hundreds of billions
of dollars, poses serious questions for law enforcement, for
banking regulation and so forth.
Now, whether that money was stolen by crime or just by
corrupt businesses, laundered or just deposited, it inevitably
created American stakeholders in the process that brought it--
brought it here.
Whether such American stakeholding in this phony crony
capitalism and the capital flight it produced exerted an
influence on U.S. policies that helps explain the otherwise not
easily explainable, and thereby abetted the process, is a valid
question for this committee.
Finally, Russia is not lost. It is stuck. It is stuck in a
swamp between a Soviet past and alternative future
possibilities, which range from the bright and friendly to the
dismal and threatening, from our point of view and from their
point of view.
Our task here is to assay the past, reassess our policies,
and get ready for the possibility that a window of real reform
in Russia will reopen if and after they get through their
impending elections.
At the very least, we must quit repeating past errors.
There are better paths available to the Russians and for our
policy.
If this committee can illuminate them, I--as I understand
it intends to do in future hearings, Russia and America will
both be grateful to you.
Thank you, Mr. Chairman.
The Chairman. Thank you, sir.
[The prepared statement of Mr. Ermarth follows:]
Prepared Statement of Fritz W. Ermarth \1\
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\1\ This prepared testimony is a significantly amended version of
that provided by the author to the hearing of the House Committee on
Banking and Financial Services on 21 September.
---------------------------------------------------------------------------
Mr. Chairman, I deeply appreciate the opportunity to testify before
this committee on Russian corruption and the challenge it poses to US
foreign policy.
I would like to focus my testimony on the larger context of Russian
developments that have spawned this challenge. This is because we must
keep the most important issue in the forefront, namely, the fate of the
political and economic reforms within Russia upon which more than
anything else rest our security interests with respect to Russia.
We must consider how our country's future security and well-being
will be threatened if, once again, Russia fails in the historic task of
finding her way to authentic, stable democracy and a just, prosperous
society with a market economy.
My bottom line is this: Russia is not lost. Russia is stuck in a
swamp between the Soviet past and several alternative future
possibilities, some invitingly bright, some ominously dark. The larger
purpose of these hearings, in this and other committees, and of the
debate now, finally, taking place in our political arena about Russia,
is to understand her condition and prospects better and to inform
better American policies for encouraging the brighter prospects of
democracy and capitalism.
The threat from Russian crime and corruption springs from two
fundamental and interrelated realities: first, the grave weakness of
the rule of law in Russia, and second, the perversions of what we have
called economic reform.
The Soviet communist system was itself a kind of structured
lawlessness. To be sure, the Soviet Union had myriad laws. But they
were not rules for regulating relations among the members of a self-
governing society. Rather they were tools for maintaining power, to be
used, abused or ignored by those who held power. They afforded ample
space for official and unofficial criminality. In the later Soviet
period, the manifestations of this--ranging from petty thievery, to
organized crime, to enrichment of the partocracy--expanded as the
structures of Soviet power decayed. The collapse of communist rule gave
free rein to these phenomena in a new setting.
The new setting is something for which I have not found a good
definition. It has important features of democracy and capitalism, but
it is not authentic democracy and capitalism. Focusing on the economic
side, I would use the term crony capitalism without much capitalism. It
lacks firm property rights and good corporate governance. It is about
the distribution and especially concentration of wealth, but far less
about investment and the creation of wealth. And, above all, it is
about the extraction and expatriation of wealth.
This came about in large measure because of the manner in which the
reformers of the post communist regime tried to create capitalism
amidst the wreckage of the Soviet order. As one analyst I've read put
it, they proceeded in good communist fashion to create a new capitalist
class by basically appointing them. Relying largely on privileged,
insider relationships, vast resources and enterprises were placed into
private hands, often old communist hands, at less than fire-sale
prices. Enterprises were sold off at less than cash value of annual
revenues in some cases. Export and import privileges were handed out to
cronies.
Thus, the process of privatization was from the outset a rip-off at
the expense of the state and society. This, along with the destruction
of people's savings through gratuitous inflation in the early 1990s,
deeply blighted the public's view of capitalism from the outset. The
reformers took a course certain to alienate society; and they
deliberately ignored the task of building public understanding and
support.
It still might have worked out had the new owners proceeded to
manage their new wealth as real capitalist entrepreneurs by investing,
building, and creating. Far too often, however, they did not. Lacking
confidence that their new wealth could be profitably invested in Russia
or even that they could hold on to it, they all too often extracted it,
stripped it, plundered it out of Russia and sent it abroad where it
could be safe and productive. In this manner a country rich in natural
resources and productive potential saw its state and society
impoverished. The society and domestic economy reacted with various
coping strategies, from barter trade to moonlighting work. The state
reacted with measures that went beyond very creative financing, like
simply not paying its bills. Among other things, it created what
appeared to be a no-lose casino in short term debt by which Russian and
then foreign speculators essentially were allowed to plunder the state
budget until it collapsed in August 1998.
What we've seen here is not so much organized crime as authorized
crime intertwined with corrupt government and politics at all levels.
And it has abetted and been abetted by organized crime with its money
laundering skills and protection racketeering.
The fundamental misdemeanor of Western, including American, policy
was that it bought into this phony-crony capitalism too uncritically
and for too long. So did the mainstream media, and the mainstream
foreign policy establishment. The protests of Russian and Western
observers who knew what was going on went unheeded.
Let it be noted here that the kleptocratic or plundering nature of
Russian so-called reform was obvious from the start. You did not need
exotic CIA analysis to see or understand it. It was lavishly reported
in the Russian press. Moreover, you did not need to read Russian. There
was plenty of English language analysis out of Russia and from Western
analysts. And you did not need a lot of time: Anyone who cared about
Russia and was willing to take one half hour a day could get the whole
story from Johnson's Russia List, an heroic one-man compilation of
daily reporting by David Johnson of the Center For Defense Information,
a source known to all Russia watchers.
One of the sad consequences of US policy, so persistent in the face
of reality that one has to suspect intent, was that IMF lending, while
ostensibly aiming to stabilize the economy and encourage investment,
actually lubricated and legitimized this process of stripping and
expatriation of wealth. It was more perversion than diversion of IMF
money. This perversion of the IMF into a cover for Russian kleptocracy
was hugely injurious to Russia and to our interests. It raises
questions as to whether the IMF should be the central institution for
financial aid to the transition economies in Russia and the rest of the
former Soviet Union.
Defenders of current US policy have not even addressed this charge
of perversion of the IMF directly. As to the charge of diversion, they
are basically saying, ``We did no wrong and we are not going to do it
again.'' In other words, they are saying diversion has not been proved,
but new IMF lending will not go to the Russian central bank but rather
from one IMF account to another to service Russian debt.
Perhaps not proved conclusively, the charge of diversion is very
compelling with respect to events of summer 1998. Anatoly Chubais, the
leader of Russia's dream team of reformers, has said ``we conned'' (my
kinuli) the IMF into that round of lending to support the ruble and
crisis ridden Russian financial markets. The IMF lent the Russian
Central Bank some $4B for that purpose. The IMF bought rubles in the
Russian market with those dollars, and the dollars immediately escaped
to the West, in fact never really left the West. This was widely
reported in the Russian press at the time, in some Western reporting as
well. And now the embattled former Russian prosecutor, Mr. Skuratov,
undoubtedly relying on investigative data fully accessible by him, has
described what happened. The Russian Central Bank used at least $3B to
buy rubles, not from the Interbank Currency Exchange, but directly from
Russia's most active kleptocrats, its so-called commercial banks. They
immediately deposited the dollars in Western correspondent accounts.
What is diversion if not this?
Why have American policymakers bought into this plundering system
so uncritically? Perhaps we shall have to await their departure from
office for candid answers to this question. To date, their explanations
have been most unsatisfactory. They claim to have known about Russian
crime and corruption all along. This is true; but then why the
persistent support for and misrepresentation of this system? They claim
that they have always known the development of Russian democracy and
capitalism would take a long time. This is also true; but then why
support a system that in many ways makes successful development of
Russian democracy and capitalism even more difficult than it was at the
beginning? They claim they had no better alternatives. This is NOT
true; they had the alternative of honesty about what was happening. And
the Russia regime had alternatives to what they did--among others, the
democratic opposition was offering them--and they were open to Western
recommendations because they needed Western money. Finally, the
defenders of American policy claim that we had to give the Yeltsin
regime the support we did because your security interests on such
matters as arms control, proliferation, and the Balkans demanded the
support of that regime. Yet our security relations with Russia are in
worse shape today than they were at the beginning of the current
administration. And worst of all, we have lost the respect and
admiration of much of the Russian people.
I cannot adequately explain the motives behind the policies we have
seen except as a toxic combination of political and economic naivete, a
cynical belief that a continual misrepresentation of Russian realities
could be sold to most audiences, and a certain amount of selfishness on
the part of influential American stakeholders in the great outflow of
Russian wealth.
If one includes the period of the late 1980s, when much of this
activity accelerated under the aegis of the KGB and the communist
leadership, one might guess that from 200 to 500 billion dollars have
left Russia in what is very loosely called capital flight. Some of it
is derived from plain crime, like drug traffic, stolen cars and
weapons. Some it is entirely legitimate except for tax evasion. I
strongly believe that most of it is in the gray zone in between, that
is, the product of phony-crony capitalism. Some of it gets laundered
because its owners need to disguise its origins to all observers. But a
lot of it just gets deposited and invested. And not much of it stays in
Cyprus or other tax havens. Much of it, probably most of it, has come
into the biggest, safest, most accessible, and profitable investment
target in the world, the United States.
Here it undoubtedly goes in several directions. Some stays liquid
for future use. Some returns to Russia for business, political, or
criminal purposes. Some gets invested in portfolios, real estate, and
business. And I am sure that some of it goes to political contributions
of various kinds. Why can I permit myself this seemingly inflammatory
statement? First, because of the logic of the situation; that's normal
behavior for this kind of money. And I am sure it is quite bipartisan,
because this kind of money doesn't care about the values, the issues,
the candidates or the parties. It cares about influence. Second,
because there have been some examples in the press. And, third, because
knowledgeable FBI specialists in this area have said so. This is, I
believe, a proper subject for the investigations of the Congress.
I would assign greater weight, however, to a more general problem.
Money on this scale acquires patrons, protectors, and leverage. How
much leverage and with what effects on government policies? I would ask
for example: Did those Americans heavily invested in the Russian GKO
market, by which vast profits were extracted from the Russian budget
and vast losses risked, exert influence on the US Government to
encourage more IMF lending last summer? Mr. Soros and others have
strongly implied so.
Mr. Chairman, let me state that the picture I have painted so far
is unfair. There is real capitalism and real democracy in Russia. There
are decent businesses, honest policemen, and clean politicians. Which
returns me to my first point. Russia is stuck, not lost. If the
Russians can somehow get through the current crisis of terrorism,
conduct their elections, and create a somewhat stable and legitimate
government, I believe there is a possibility that a window for real
reforms will reopen. I hope then we shall be ready to be supportive
with policies more perceptive, more honest, and more constructive than
they have been in the past. At least we must avoid repetition of past
errors. That I see as the most important purpose of our inquiry here.
Thank you, Mr. Chairman.
The Chairman. Mr. Moody.
STATEMENT OF JIM E. MOODY, FORMER DEPUTY ASSISTANT DIRECTOR,
CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BUREAU OF
INVESTIGATION; AND FOUNDER OF JIM MOODY AND ASSOCIATES, L.L.C.
Mr. Moody. Thank you very much, Mr. Chairman. I would like
to thank you and the committee for having me here.
The Chairman. It is our pleasure. Thank you.
Mr. Moody. As for my statement, I will be pleased that you
will accept that. I will even cut down the one I have just to
make sure that everybody gets a lot more time.
I am not a Russian scholar. I am a law enforcement
practitioner, retired. But I started dealing with the Russians
in October 1990; and from day one I found out that corruption
was one of the major problems that they were facing, corruption
and organized crime.
I will give you an example. During one of my trips, in the
early morning hours--and it must have been 3 or 4 o'clock in
the morning--a high ranking Russian official brought seven
officers in to meet me, so we could talk a little bit, and he
wanted me to meet people in Russia that were not corrupt.
On another trip, I met a high-ranking officer and he
estimated that 90 percent of his officers were corrupt, which
is a monumental problem to address.
But almost always when they talk about corruption over
there, they say the court system is worse, and based upon----
The Chairman. Pull the mike a little closer.
Mr. Moody. OK. And based upon their system, it is very
possible that the court system is worse, because their system
is similar to Napoleonic code where you only have to bribe,
threaten, or intimidate one individual and it will stop a case.
When--whenever you start looking at this and start
establishing a relationship with them, I think there is a
number of steps that has been taken that have been very
positive.
One is the PDD42, addressing international organized crime.
Another one is the FBI office in Moscow, which is the point for
coordinating of investigations.
A third one was the relationship that the G-8 countries
have gotten together and started addressing law enforcement
issues, the fact that law enforcement issues are now an agenda
item on diplomatic meetings, the fact that the financial action
task force is taking a lead on addressing money laundering
internationally, and the money that has been allocated by
Congress for training, including FBI training, other agencies'
training in the former Soviet Union and the establishment of
the International Law Enforcement Academy in Budapest.
I also believe that the fact that Congress amended some of
the legislation that--that allows the intelligence communities
to produce assistance to United States law enforcement agencies
is very important.
Now, there were--when you start looking at the problem as
you sit now, Senator Kerry aptly described what happened a few
years ago, but I would say today that has been raised to a
little bit higher plane, in that you have not just strictly the
former black marketeers involved. You have high-level party and
government officials that are literally plundering the country.
So what is the long-term effect to us here in the United
States? You--you--you always worry about Russia reverting back
to what it was. I do not think that will ever occur.
But what we will see in the United States--we will continue
to see significant criminal activity carried out by
individuals, both here in the United States and ordering
illegal activity in the United States from without the United
States.
And these will all be addressed. Items like the Bank of New
York is on--is--is in the press today. And probably what we
will find out about that is the vast majority of that money
will never be proven to be money laundering.
That is a very visible thing that you can see that is a
threat. But to me, that is not the biggest threat facing us
today.
The biggest threat facing us today in the United States is
the literal billions of dollars that these people have
generated that they are going to start investing.
And the best place in the world to invest right now is the
United States, so they are going to be purchasing companies.
They are going to be establishing companies, or they are going
to be investing in our stock market to have a tremendous
economic effect upon us.
Now, I am an experienced organized crime investigator, and
I have never found anybody who was a criminal who gained his
money as a criminal that did not run a business illegally once
they get control of it.
The long-term effect of what we are facing is monumental,
and I do not know how bad it is going to be. Now, that to me
is--is the biggest problem that we are facing.
There is going to be a tremendous appearance of legitimacy
and a tremendous amount of back-door illegal activity that is
going to be very, very, very difficult to root out.
I do believe, though, that we should continue to build the
infrastructure with the Russian authorities. I think that is
very, very important for us for the long-term future to address
this problem.
And I--again, I would like to thank you very much for
inviting me.
The Chairman. Well, we certainly thank you, sir. And you
can expect some questions and discussion--but I agree with you.
[The prepared statement of Mr. Moody follows:]
Prepared Statement of Jim E. Moody
I would like to thank the Chairman and the United States Senate's
Committee on Foreign Relations for inviting me to appear before you on
the issue of ``Russian Corruption and Recent U.S. Policy.''
As background, I am not a scholar on the Soviet Union, Communism or
foreign intelligence operations. I am a law enforcement practitioner
with extensive knowledge of organized criminal activities, methods,
modus operandi, strengths, weaknesses and the development of criminal
intelligence. With regard to the former Soviet Union, other than
training to do battle with their military forces and preparing defense
plans during the Vietnam era, my first association with the Russians
occurred in October 1990.
first meeting with russian authorities
As an explanation, I managed the FBI's Organized Crime Program from
September 1988 until I retired in June 1996. The investigation of both
local and worldwide organized crime groups, including those involved in
drug trafficking, was my responsibility. In October 1990 I attended a
United Nations sponsored conference in Russia hosted by the Ministry of
the Interior or MVD. At this conference I met and discussed organized
crime issues with law enforcement officers, practitioners and scholars
from around the world. I also met with the Interior Ministers or their
Deputies from all the Soviet Republics. In addition, I had sidebar
meetings with Russia's Komitet Gosudarstvennoi Bezopasnosti (KGB) and
others interested in organized crime.
As a result of these meetings I brought back to the United States a
belief that great changes were occurring in the Soviet Union. Also, I
became aware of the fact that the Russian authorities had an organized
crime problem that was a threat to their national security. They also
had significant corruption problems along with inadequate laws, which
were generally accepted and supported by civil society. Their lack of
understanding and/or knowledge regarding how to address the organized
crime problem was another great concern.
preparing to meet the challenge
Based upon the worry that we were not adequately prepared and with
the concurrence of the FBI Director, I ordered a survey of the
approximately 63,000 ongoing FBI criminal investigations. The goal of
the survey was to learn what criminal cases we had involving Russia or
Russians. I believe we found 68 investigations at that time that met
those criteria. However, what struck me about these cases was not only
the fact that they crossed all the FBI's criminal program lines, but
that they were complex investigations with significant violence and
money involved.
Based upon this survey, in June 1991 the FBI established Russian
Organized Crime as a subprogram of our overall Organized Crime Program.
Identifying Russian Organized Crime in this manner allowed FBI offices,
for the first time, to investigate these criminal groups. Subsequently,
in October 1991, based upon my presentation, the Attorney General and
her Organized Crime Council established Russian Organized Crime as an
investigative/prosecutive priority for Federal Law Enforcement.
Due to manpower restrictions, the FBI prioritized the criminal
groups and criminals on which we can focus our investigations based
upon their threat to America or United States citizens. Our priorities
after designating Russian Organized Crime a subprogram, not in priority
order, were as follows:
American La Cosa Nostra
Italian Organized Crime--(Sicilian Mafia, Comorra,
N'drangheta, Sacred Crown)
Colombian and South American Organizations
Mexican Drug Trafficking Organizations
Asian Criminal Enterprises--(Major groups include Japanese
Boryokudan, Chinese Triads and Chinese Drug Trafficking
Organizations, Korean, Vietnamese and Filipino Criminal
Enterprises)
Criminal Syndicates--(Major criminal groups, primarily
involved in drug trafficking, such as the Jamaican Drug
Trafficking Organizations and the Nigerian Criminal
Enterprises)
European/Eastern European Organized Crime--(Commonly called
Russian Organized Crime)
Gangs--(Examples would be the Crips and Bloods Street Gangs,
Black Gangster Disciples, Outlaw Motorcycle Gangs, and others
who may be regionally or locally prominent or extremely
violent)
It should be noted that six of the eight above listed groups are
headquartered outside of the United States. These groups supply the two
indigenous groups. It is because of these threats to the United States
that the FBI is attempting to place itself in a better position to
address the problem by expanding its offices in our Embassies overseas.
we have the tools and knowledge
Being an Organized Crime specialist I fully support the FBI's
definition of the organized crime phenomenon. The FBI defines Organized
Crime as a ``continuing criminal conspiracy having an organizational
structure, fed by fear and corruption, and motivated by greed.'' The
purpose of Organized Crime is to generate profits. Profits provide
power. Corruption is a vital tool of Organized Crime. I believe you
cannot have Organized Crime without corruption. This corruption can
take many forms and can range from a telephone repairman installing
call forwarding services for a small apartment with ten telephone
lines, knowing he is supporting an illegal gambling operation to
Government officials using their positions to support illegal
activities.
Once you have organized criminal activity entrenched in a society,
it is very difficult to eradicate. I do not believe it is possible to
destroy organized crime using autocratic methods. Benito Mussolini
tried to do that in Italy. He failed.
I do believe that you can destroy organized crime structures using
the ``rule of law'' and gaining the support of society. Fortunately,
the United States has anti-organized crime legislation that will
support this. However, technology is overtaking the basis of some of
these laws, requiring some modifications.
Even with the legislation, there are a number of problems and
obstacles that must be overcome before addressing organized crime or
major conspiracies. One of the major problems is identifying the
problem. As explanation, a friend of mine liked to describe the problem
of detecting who or what is Organized Crime by using the analogy he
took from a Sherlock Holmes mystery. To paraphrase, Dr. Watson once
asked Sherlock Holmes, ``Who is the most dangerous criminal in
England?'' Holmes responded, ``Dr. Morarity.'' Dr. Watson's replied,
``Dr. Morarity? I never heard of him.'' To which Holmes replied,
``That's why he is the most dangerous.'' ``Who'' is very important for
successful Organized Crime investigations.
With regard to Russian Organized Crime and Russian crime in
general, the ``Who'' continues to be a pressing problem for US law
enforcement. I learned from my first interaction with Russian
authorities that they had an endemic corruption problem. In fact, you
could easily observe corruption, though on a small scale, when I was
first there. I also met Russians that wanted to do something about the
problems facing their society.
russia's law enforcement shortcomings
However, events often overtook good intentions. As the former
Soviet Union dissolved, Russia and the Newly Independent States did not
have an infrastructure of regulatory agencies such as the United
States' version of the Federal Deposit Insurance Corporation or the
Securities and Exchange Commission to regulate newly emerging
capitalistic industries. In addition, many internationally recognized
criminal laws were nonexistent or sorely lacking. I would describe
their criminal code shown to me as consisting of a 6" x 9" pamphlet
approximately 1/8" thick.
Then as now, the recognized law enforcement authorities were
lacking in training and equipment. In addition, the police were
underpaid, underprivileged, understaffed, overly bureaucratic and were
not supported by government mechanisms for ensuring democratic law
enforcement. Also, like most other governmental agencies in the former
Soviet Union, the police had a significant corruption problem, as did
the judicial system. One ranking officer confided to me that he
believed that over 90% of his officers were corrupt.
Because of the rapid collapse of the Soviet system, the lack of
regulatory institutions, corruption of authorities and institutions,
and virtually no criminal legislation, organized criminal groups
suddenly became the only functional organizations providing goods and
services. They controlled the black market. The black market became the
Russian version of free enterprise and it fed and clothed Russia. This
led to big problems. The black market was run by criminals who were
positioned to gain vast amounts of wealth and influence, expand their
operations, recruit new members--including government officials--
further corrupt the system and even challenge the emerging democratic
institutions and governments as well as entrepreneurial capitalistic
efforts. These groups became an even more important element of Russia
and became entrenched in their society just as the Cosa Nostra did in
the United States.
In the last few years, organized criminal activities increasingly
have had a debilitating effect on Russia's move towards a capitalist
society. The lack of adequate criminal laws, a fair and impartial civil
court and tax system and corruption have also harmed Russia's budding
entrepreneurs. Most small to mid-sized Russian companies have been
required to operate in a system unlike any other. Security is one of
the biggest non-income producing items in many Russian company's
budget. They often pay up to 30% of their budget for security, most
often to an Organized Crime Group. Due to corruption, another equally
high expense is lobbying. A peculiar feature of doing business in
today's Russia is that the two expenses are almost always
interconnected and interdependent. This is a lot of overhead to pay in
order to be allowed to operate a company securely.
political corruption the major problem
However, organized criminal groups preying on Russia and its
businesses are but one problem facing the country. A larger problem is
the government and former party officials that have also used the
opportunities available to them to enrich themselves and their
associates. Corruption has flourished; promises of a rapid transition
to a democratic society based upon capitalism have been sidetracked.
Full privatization of government-owned industries and land has not
occurred. When industries were privatized, only insiders have
benefited.
Once again, the FBI's definition of Organized Crime is a
``continuing criminal conspiracy having an organizational structure,
fed by fear and corruption, and motivated by greed.''
effect upon the united states
At the same time, the easing of travel restrictions has enabled
many Russians to come to the United States. The number of United States
visitors' visas issued for Russians had at one time increased by more
than forty times. Successful criminals are greedy; they want to
increase their profits, safely. Since the United States is the richest
country in the world and their assets are safe here, we have hosted
many organized crime members and corrupt officials. We have also
received their money. We still do. However, we have to recognize that
the money we receive, though probably generated using methods deemed
illegal in the United States, is not necessarily illegally generated in
Russia.
Organized crime groups attempt to legitimize their affairs and
profits by influencing or controlling businesses. Violence,
intimidation and use of illegally generated money are their tools for
taking over businesses. Once established in legitimate businesses,
however, criminal organizations are not content to play by the rules as
their legitimate business competitors do; they will illegally
manipulate the affairs of the legitimate businesses they control in an
attempt to monopolize the industry or business in question. Legitimate
businesses are a prime target for exploitation or infiltration by
organized crime. You can rest assured that US-based businesses are
being established or being purchased using money from Russia. The long-
term effects of these investments remain to be seen.
I do not believe that there is a society free of corruption. Law
enforcement must work within the confines of the ``rule of law'' to
address corruption, one of the foundations of organized crime. We must
use the ``rule of law'' as a weapon. Fortunately, the FBI has been
successful in doing this in the past. I believe they will continue to
be successful in the future.
previous fbi success using the ``rule of law''
In the early 1980s we learned how successful international
organized crime investigations could be using the ``rule of law'' while
investigating Italian Criminal Enterprises.
Sicilian Mafia members were operating in the United States and
internationally but were headquartered in Sicily. At that time we knew
that there was a significant amount of corruption in Italy.
We were able to identify Italian law enforcement officers and
prosecutors who we believed we could trust and cooperate with to
jointly address the crime problem in our countries. At that time,
however, Italy's laws were based upon the Napoleonic Code. These laws
did not allow undercover operations, court-ordered electronic
surveillances or adequate plea-bargaining. They had no Witness Security
Program and criminal conspiracies could not be adequately surveilled to
develop evidence against those directing others to commit crimes. These
authorities are absolutely necessary to successfully address organized
crime. Despite these obstacles, we were successful with developing
sufficient evidence to support the Pizza Connection prosecution in the
United States and the Maxi-trial in Italy.
Based upon this success, we established the Italian-American
Working Group. Although organized crime members have murdered some of
the original Italian members of this Working Group, the Working Group
continues to function today.
Through our cooperation, Italian law enforcement officials were
able to observe how the FBI conducted Criminal Enterprise
Investigations, within the ``rule of law.'' Based upon these successes
and lobbying by Italian law enforcement, Italy changed its laws to
somewhat mirror United States' anti-organized crime legislation.
Actually, their laws now give more legal authority to law enforcement
agencies than ours do.
The FBI uses lessons learned jointly with Italian authorities as
the ``Italian Model'' to follow in their efforts internationally. This
genuine give and take, finding ways to support each other and working
within the applicable ``rule of law'' is the ``Italian Model'' being
used as an outreach program to other law enforcement agencies
internationally and with Russian authorities. Successes have been
achieved. Much remains to be done.
fbi relationship with the mvd
After overcoming some significant administrative and bureaucratic
obstacles within the FBI, I was able to establish a working
relationship with the Russian MVD beginning in February 1993. At that
time, Mikhail Yegorov, Russia's First Deputy Minister of Interior newly
designated to head their anti-organized crime effort, and I met for one
week at FBI Headquarters.
At the end of our meeting, the FBI and MVD agreed to cooperate on
organized crime issues. From that moment, the MVD helped the FBI
identify the ``who'' described above as being so important in organized
crime cases. They saved us untold investigative man-hours. In addition,
the MVD was instrumental in returning FBI fugitives to the United
States for prosecution. They assisted us in this manner even though we
had no Mutual Legal Assistance Treaty or Extradition Treaty.
We established a Working Group consisting of the MVD, the German
Bundeskriminalamt (BKA) and the FBI. The BKA's involvement was vital
because Germany experiences organized criminal problems coming from
Eastern Europe a short time before we do in the United States. In
addition, the criminals often operate in all three countries. This
Working Group continues to meet regularly to share criminal
intelligence and coordinate investigations.
Investigations coming from this Working Group have been successful.
Some of the investigations have targeted high-level Russian government
officials requiring the MVD officers to conduct their portion of the
investigation while under death threats. Some of these officers have
indeed been physically harmed. The group of officers we worked with in
Russia has been described by one new magazine as the ``Untouchables.''
Due to new Russian legislation and Presidential Decrees, the KGB
was reorganized and split into different sections and given new
responsibilities. At this time, the FBI is also working jointly with
the Federal'naya Sluzhba Bezopasnosti or, translated, the Federal
Security Service (FSB). This organization is the descendant of the
former 2nd Directorate of the KGB and has been given law enforcement
responsibilities.
Also, after some effort, we were allowed to post an FBI Legal
Attache's office in our Embassy in Moscow. This office allows our
Agents to build relationships with Russian law enforcement and is the
focal point for coordination of criminal investigations conducted
jointly.
us government response to international organized crime
I believe that the United States Government has taken some
significant steps to address international crime including organized
crime. Because of these steps, the United States is in a much better
position to address the criminal problems we see today. In addition,
the future may bring even more success.
I will name a few of these positive steps that I believe have been
helpful and will be to future successes. In October 1995, President
Clinton signed a Presidential Decision Directive (PDD) regarding
international organized crime. He also made a speech before the United
Nations identifying the problem and requesting that organization and
its member states to address the problem. Additionally, the PDD caused
a better coordination of efforts by all government agencies.
Through the Great 8 conferences, international crime and
specifically international organized crime has been an agenda item
resulting in the Great 8 countries agreeing to encourage other
countries to act forcefully to address the problem. They also agreed to
enact legislation and set up procedures themselves that will have a
significant, long-term, positive impact on the crime problem. Also, the
Financial Action Task Force, which is composed of several countries,
has supported initiatives that have been and will continue to be of
assistance in the law enforcement effort. Our Treasury Department is
the lead United State agency in this effort.
Also, Congress has authorized funding for FBI training of Eastern
European law enforcement as well as the establishment of the
International Law Enforcement Academy in Budapest managed by the FBI
jointly with Hungarian authorities. In this manner, the FBI has trained
hundreds of Eastern European officers. Some of this training has been
specialized. For instance, I know that the FBI held specialized
corruption training for Russian investigators and prosecutors at their
Academy in Quantico. It is my understanding that other Academies
modeled after the FBI Academy are planned.
In short, these initiatives are attempting to work with countries
and law enforcement agencies throughout the world to enact laws and
address international crime and organized crime in a coordinated
manner. These efforts are the first steps in a long-term process.
Corruption is but one of the targets of these efforts. However, it
should be remembered that it is not illegal in many leading countries
to pay foreign government officials. Also, some countries allow their
businesses to deduct bribe payments as a business expense, just as
other countries expect to pay bribes to conduct business.
russia today
I believe that Russia must enact adequate criminal laws. Several
times proposed legislation have been processed through the Russian Duma
and Federation Council and forwarded for President Yeltsin's signature.
Each time the legislation has been returned, unsigned.
If President Yeltsin or his successor eventually approves the
proposed legislation that I last reviewed as requested by the
Federation Council, Russia will have one of the strongest anti-
organized crime legal authorities in the world. As I set forth above, I
believe it is vital to have the necessary legal authority to address
organized criminal activity within the ``rule of law.''
Concurrently, the Russian Courts must be strengthened and corrupt
officials removed. The same is true for the law enforcement agencies.
If there is adequate legal authority and the courts and law enforcement
authorities can get corruption within their ranks under control and
they do not acquiesce to self-serving and possibly illegal political
pressures, I believe that we will see a sea change in Russia. Russian
citizens will be able to trust their government institutions, depend
upon justice being applied equally and the forces of democracy and
business will greatly improve their standard of living.
There are Russian authorities that want to improve their system.
They want to root out corruption and lawlessness. They want to develop
a democratic society based upon capitalism with a Russian tilt. We
should be prepared to support their efforts, while understanding that
they will not totally follow the American example. However, we can
provide them our expertise and experience while they make the
transition through these difficult times.
I would like to thank Chairman Helms and the Senate Committee on
Foreign Relations for inviting me today. I would be pleased to provide
any additional insight that I may have.
The Chairman. Mr. Merry.
STATEMENT OF E. WAYNE MERRY, FORMER STATE DEPARTMENT OFFICIAL;
AND DIRECTOR, PROGRAM ON EUROPEAN SOCIETIES IN TRANSITION,
ATLANTIC COUNCIL OF THE UNITED STATES
Mr. Merry. Thank you, sir.
We have disposed of the ``Who lost Russia'' question here
today as meaningless, which it is. But the ``Who robbed
Russia'' question is very real, and it is going to stay with
us.
There is also the question what impact there has been on
our own national interest from the failure of economic reform
in Russia.
The robbing of Russia has been pretty much a global
activity, with lots of non-Russian hands. This is how Baltic
states became exporters of commodities they did not produce;
how Switzerland, Singapore and Caribbean countries became
centers of Russian finance. It is how Russians have transformed
the real estate market of Southern Europe. And it is why
thousands of automatic teller machines in posh parts of
Manhattan are all programmed in the Russian language.
I suspect much of the money is already in non-Russian
hands. Past lootings of other countries like Nigeria, Zaire,
the Philippines, and so forth, all enriched the West. And I see
no reason why Russia is going to be any different.
We Americans have certainly played our part and quite
knowingly provided a warm welcome for many tens of billions of
dollars that were strip-mined from Russian public properties.
And I think we should be very cynical when we hear bankers
claim to be ``shocked, shocked'' that money laundering was
going on.
But we are also complicit through our Government's role in
determining what economic path Russia was going to take. Russia
is certainly responsible for itself for good or ill, and
Russians pretty much are always their own worst enemies.
But the Russia that emerged from the collapsing Soviet
Union was very dependent on the United States, both financially
and psychologically. It received a very great deal of money and
advice from this country. And I think our authorities are
responsible not just for the dollars, but for the policies as
well.
Our Government--and this applies to both the previous and
the current administrations--made our assistance conditional on
the adoption of what is sometimes called the ``Washington
consensus'' of monetarist mechanisms known as shock therapy. In
Russia, these policies were catastrophically wrong. Russia was
very much like a very sick middle-aged man seeking medical
advice after decades of chronic bad habits. Unfortunately, he
consulted a team of surgeons at the U.S. Treasury and at the
IMF, who prescribed radical surgery, because that is all they
knew how to prescribe. Unfortunately, the Pennsylvania Avenue
surgical team never bothered to take this patient's medical
history nor to evaluate his capacity to survive surgery. When
the Russian patient's vital signs began to fail on the
operating table, the surgeons just resorted to more and deeper
surgery, until his family members finally called a halt.
The very worst feature of this monetarist-malpractice case
is that alternative therapies were never even considered, nor
were suggestions that this patient would be better served by
less radical, less intrusive or longer-term care. The patient
was less important than the doctrine. We forgot the maxim,
``First do no harm.''
Most Russians of the reformist stripe did not favor our
economic prescription. They felt that shock therapy was just
wrong for their country, that it was too much of a challenge
and was insufficiently concerned with vulnerable members of the
society. They were interested in other models and looking for a
right mixture for their own needs, their own traditions, and
their own national limitations.
But the United States absolutely insisted on radical market
reform and used our dominance of the international financial
institutions to force-feed it on Russia. In the process we
allied ourselves with some of the most ruthless, undemocratic
and rapacious people in the country, people who are so
shameless they actually refer to themselves as ``The
Oligarchs.''
Now, these robber-barons and their political allies care
very little for the well-being of average Russian people. And
their attitude toward electoral democracy is one of undisguised
contempt. These people have made the name of free enterprise
stink in Russia as decades of Soviet propaganda never could.
However, I think the most egregious of American policy
errors and one that is almost incomprehensible, given our own
national history, is the confident assumption of the Washington
consensus that a viable legal system would appear in Russia
automatically and as a matter of course after the application
of market shock therapy.
This is certainly a case of putting the cart before the
horse. Our policy quite literally gave precedence in our Russia
policy to the concept that ``greed is good'' over the concept
of ``due process of law.'' In the process, we created
incentives for the very public theft and capital flight that we
now deplore.
Unfortunately, legal reform was the single field where we
as a country could have made the best and most enduring
contribution to the Russian transition. A few years ago, I can
tell you, most Russians saw America as the best model for a
successful constitutional system and law-based state.
Unfortunately, our Government's priorities were elsewhere. A
number of Americans, mostly in private institutions, have
worked with Russian counterparts on legal reform and I salute
them. But they never received much more than lip service from
their own Government. You only have to look at the tangible
record of the programs and at the low priority given to rule of
law at summit meetings and other high-level meetings. It is
very easy in Washington to identify who in our Government is
responsible for cooperation with Russia in energy, space
flight, privatization, Bosnia, and other things. But who in our
Government has Russian rule of law as a top priority? I put it
to you: No one.
American businessmen in Russia are constantly pointing to
the need for legal reform, because they know that law and not
money is the true basis of market capitalism. Russia can choose
any kind of different economic model, but any one is going to
require a bedrock of law in order to succeed. I believe the old
Soviet system ultimately failed because it was based on
arbitrary and unaccountable power, rather than on law. And the
crony capitalism which we helped to create and rationalize as a
mere blemish on the road to the Promised Land, has failed
because it is lawless. Now, the rule of law did not develop
automatically or by accident in this country, and it is not
going to in Russia.
It has been asked recently ``What did our policymakers know
about corruption in Russia, and when did they know it?'' I can
only say that anyone involved with Russia, whether in the
Government or on the street, knew about it all along. It was
never any secret. Even if the U.S. Embassy and the CIA had
never written a word on the subject, the Western press covered
the story; and the Russian media has reported on corruption
constantly. Indeed, an entire series of reporters have been
killed for their efforts in this area. Anyone who wanted to
know knew. The real questions are: What did our policymakers
care about this issue, and what did they do about it? I put to
you that the record of neglect on legal reform in our policy
will give you the answer.
Mr. Chairman, we have been told by our authorities that
there was really no alternative to the shock therapy policy and
to support for the crony capitalists, that these policies were
vital to shore up pro-Western forces in Russia, to forestall a
Communist return to power, to assure responsible behavior by a
nuclear armed country and to protect American influence and
interest.
I ask you not to believe it. The Russian oligarchs are not
pro-Western. They are pro-self. Most true Westernizers in
Russia today are alienated from their own government and its
policies; and they are alienated from the United States.
Eight years ago, our reputation and prestige as a society
in Russia were supreme. Today, even the young in Russia see
America as unprincipled and cynical. Russian democrats
condemned their government's war against the people of
Chechnya. Our authorities condoned it.
Russia's Communists are a fading political force, and the
strength they retain comes from an understandable popular anger
at the enrichment of an odious handful and the impoverishment
of working people. If such policies were carried out in this
country, you might see red banners on our streets.
The Russian military maintains the stewardship of its
nuclear arsenal for their country's benefit and not for any
convenience of ours. Our cooperation in reducing nuclear
arsenals, and not just theirs, but both of our nuclear arsenals
in tandem, in parallel, is a mutual interest. And if anything,
this process has been slowed down, delayed by shock therapy and
the consequent collapse of the military industrial sector in
Russia.
And to imply, finally, that we must accommodate systemic
corruption in order to maintain influence is the eternal
rationale of short-term expediency. We were given the same
rationale in other places, from Iran under the Shah, Zaire
under Mobuto, to Indonesia under Suharto. And we have seen the
price of such short-term expediency.
Mr. Chairman, I certainly do not equate Russia and Boris
Yeltsin with the cases I just cited. Unfortunately, I think
that our Government, for practical policy purposes, does. And I
think this is unworthy of both of our countries. Russia is
certainly one of the great countries of the world and it will
be important for our interests in the century ahead.
Russia is also a very resilient society, but we should not
expect its people to show endless patience with failed
policies. They have a right to organize their national
household as they see fit, even if it does not equate with
current American fashion and doctrine.
Disengagement from Russia is certainly not an option. I
would hope that learning from our mistakes could be.
Mr. Chairman, it is an honor to appear before your
committee, sir.
The Chairman. Thank you, sir.
[The prepared statement of Mr. Merry follows:]
Prepared Statement of E. Wayne Merry
Mr. Chairman, I appreciate the opportunity to appear before this
famous Committee.
The question ``Who Lost Russia?'' is meaningless and misleading. In
contrast, the question ``Who Robbed Russia?'' is very pertinent. We
should also inquire into the damage done to American national interests
from the failure of economic reform in that country and our role in
that failure.
Robbing Russia is a global activity, with lots of foreign
participants. How else could Baltic states become major exporters of
commodities they do not produce; how else did Switzerland, Singapore
and Caribbean islands become centers of Russian finance; how else could
Russians transform the real estate market in southern Europe; and why
else are automatic teller machines in posh sections of Manhattan
programmed in Russian? I suspect much of the loot is already in non-
Russian hands. The looting of Nigeria, Zaire, Mexico, the Philippines,
and Indonesia all enriched the West. Why should Russia be different?
Americans have played their part and provided a warm welcome for many
billions of dollars strip-mined from Russian public properties. We
should be very cynical when bankers profess to be ``shocked, shocked''
to learn that money-laundering has been going on.
We are also complicit through our government's role in determining
Russia's economic path. Yes, Russia is ultimately what Russians
themselves have made it, for good and ill, and Russia is always its own
worst enemy. But the Russia emerging from the Soviet collapse was both
financially and psychologically very dependent on the United States. It
received a great deal of both money and policy guidance from
Washington. I believe our authorities are accountable for the dollars
and for the policies as well.
Our government--both the current and previous Administrations--made
assistance conditional on adoption of the so-called ``Washington
consensus'' of monetarist mechanisms called ``shock therapy.'' In
Russia, these policies were disastrously wrong. Russia was like a sick
middle-aged man seeking medical advice after decades of chronic bad
habits. Unfortunately, he consulted surgeons (at the U.S. Treasury and
the IMF) who prescribed radical surgery as their standard response to
any ailment. The Pennsylvania Avenue surgical team did not bother to
take the patient's medical history nor to evaluate his ability to
survive surgery. When the Russian patient's vital signs began to fail
on the operating table, the surgeons resorted to more and deeper
surgery, until his family finally called a halt. The very worst feature
of this monetarist-malpractice case is that alternative therapies were
never even considered, nor were suggestions the patient would be better
served by less radical, less intrusive, and longer-term care. The
patient was less important than the doctrine; we forgot the principle,
``first do no harm.''
Mr. Chairman, most Russians reformers did not favor our economic
prescription; they felt shock therapy was wrong for their country, was
too great a challenge, and insufficiently concerned with vulnerable
elements of society. They discussed other models, ranging from
Scandinavian and French to Korean and Chilean alternatives, looking for
the right mix for their own needs, traditions, and limitations. The
United States absolutely insisted on radical market reform and employed
our dominance of international financial institutions to force-feed it
on Russia. In the process we allied ourselves with some of the most
ruthless, undemocratic, and rapacious people in the country, people so
shameless they refer to themselves as ``The Oligarchs.'' These robber
barons and their political allies care little for the well-being of the
Russian people, while their attitude toward electoral democracy is
undisguised contempt. These people have made the name of free
enterprise stink in Russia, as decades of Soviet propaganda never
could.
However, the most egregious of American errors--and one made almost
incomprehensible by our own history--is the confident assumption of the
``Washington consensus'' that a viable legal system would appear in
Russia automatically and as a matter of course after the application of
market shock therapy. The mildest metaphor I can apply to this view is
that it put the cart before the horse. Our policy gave precedence in
the Russian transformation to the concept that ``greed is good'' over
``due process of law.'' We thereby created incentives for the public
theft and capital flight we now deplore.
Ironically, legal reform was the field where we could have made the
best and most enduring contribution to the Russian transition. A few
years ago most Russians saw America was the best model of a successful
constitutional system and law-based state. Sadly, our government's
priorities lay elsewhere. I salute those American institutions and
citizens, mostly private, who have worked with Russian counterparts on
legal reform, but their efforts never received much official
appreciation or support. Lip service, yes, but look at the tangible
record: at the meager programs and funding and at the low status given
to rule of law at summits and other high-level meetings. It is easy to
identify the Washington officials responsible for cooperation in such
fields as energy, space flight, Bosnia, or privatization. Who in our
government has Russian rule of law as a top priority?
American businessmen in Russia constantly point to this problem,
because they know that law, not money, is the true foundation of market
capitalism, but Washington still does not get it. Russia can choose a
different economic model, but any approach requires legal bedrock to
succeed. I believe the old Soviet system ultimately failed because it
was based on arbitrary and unaccountable power rather than on law. The
``crony capitalism'' we helped create (and then rationalized as a mere
blemish on the road to the Promised Land) has failed because it is
lawless. The rule of law did not develop automatically or by accident
in America; it will not in Russia.
It is now asked, ``What did our policymakers know about corruption
in Russia and when did they know it?'' I can only say that anyone
involved with Russia--in government or on the street--knew about it all
along. There was no secret. Even if the Embassy and CIA had not written
a word, the Western press covered the story fairly well, while the
Russian media reported on corruption constantly; indeed, a series of
reporters were killed for their efforts. Anyone who wanted to know,
knew. The real questions are, ``Did our policymakers care and what did
they do about it?'' The record of neglect on legal reform will give you
the answer.
Mr. Chairman, we have been told there was no real alternative to
shock therapy and to support for the ``crony capitalists,'' that these
policies were vital to shore up pro-Western forces in Russia, to
forestall a Communist return to power, to ensure responsible behavior
by a nuclear-armed country, and to protect American influence and
interests. Please don't believe it.
The Russian oligarchs are not pro-Western, they are pro-
self. Most Westernizers in Russia today are alienated from
their own government, its policies, and from the United States.
Eight years ago our reputation and prestige in Russia were
supreme; now even the young see America as unprincipled and
cynical. Russian democrats condemned their government's war
against the people of Chechnya; our government condoned it.
Russia's Communists are a fading political force, and the
strength they retain comes from understandable popular anger at
the enrichment of an odious handful and the impoverishment of
working people. If such policies were carried out in this
country, you might see red banners in the streets.
The Russian military maintains stewardship of its nuclear
arsenal for their country's benefit, not for any convenience of
ours. Our cooperation in reducing nuclear arsenals is a mutual
interest and has, if anything, been delayed by shock therapy
and the collapse of the military-industrial sector.
To imply we must accommodate systemic corruption in order to
maintain influence is the eternal rational of short-term
expediency. We were given the very same rationale about Haiti
under Duvalier, about Iran under the Shah, Zaire under Mobutu,
Indonesia under Suharto, and elsewhere. The long-term price of
such short-term expediency should be clear.
Mr. Chairman, I absolutely do not equate Russia and Boris Yeltsin
with the cases I just cited. Unfortunately, I think our government, for
practical policy purposes, does. This is unworthy of both countries.
Russia is one of the great nations of the world and will certainly be
important for our interests in the century ahead. Russia is also a
resilient society, but we should not expect its people to show endless
patience with failed policies. They have the right to organize their
national household as they see fit, even if it does not equate with
current American fashion and doctrine. Disengagement from Russia is not
an option, but learning from our mistakes should be.
Mr. Chairman, it is an honor to appear before your Committee. Thank
you.
The Chairman. Mr. Legvold.
STATEMENT OF DR. ROBERT LEGVOLD, PROFESSOR OF POLITICAL
SCIENCE, COLUMBIA UNIVERSITY
Dr. Legvold. Mr. Chairman and other committee members, for
me, too, it is very much an honor to be before you today.
My concern is rather different from the colleagues who have
appeared before you today, including that of Strobe Talbott at
the outset.
I am fearful that in this sudden renewed focus on Russia,
we are framing ways--we are framing issues in ways that are
likely, in the long run, to jeopardize our national interest.
There is much in U.S. policy toward Russia since the fall
of communism that has been wrong, or at least arguably so, and
Mr. Merry has just very vigorously argued so.
There, however, is also much that is wrong in our current
national discourse about Russia. And I have been taught since I
was a small boy that two wrongs do not make a right.
As long as I am tossing around this word ``wrong,'' let me
add two other relevant wrongs. In Russia, since independence,
things have gone wrong, in some respects very wrong, but that
is only half the story, for as others have said, there is some
important things that have gone right considering the
circumstances.
In U.S./Russian relations, things are going wrong now. In
some important respects, very wrong. But, again, that is only
half the story. There are other extraordinarily important
things to preserve and to pursue within that relationship.
None of this is to say that the topic of your hearing--of
these--of this session today and subsequent one, and the issue
that now seems to have re-centered Russia in our mind's eye is
illegitimate. Far from it. This question of corruption and
money laundering and collateral issues are very important for
several reasons.
And it is important that we unravel the issue, and that we
address it effectively, first, in order to protect the
integrity of our banking system; second, in order to protect
the integrity of our foreign aid programs; third, in order to
protect this country from the international effects of
organized crime; and finally, in order to appreciate an
important dimension of what indeed is going wrong in Russia.
That is the way in which the conversation has been focused
up to this point and very much in the panel this afternoon.
And in the process, in terms of what has gone wrong,
something that is threatening a key interest of ours, a
national interest of ours, which is namely Russia's successful
passage to an open, vibrant market-oriented society.
In reviewing the last 9 years of U.S. policy toward Russia,
one could argue that the Bush administration failed to push
hard enough for critical elements of economic reform essential
at the very outset of the process, and that the international
financial institutions failed to provide their fair--their fair
share of the wherewithal in order to make it occur.
One could argue that the Clinton administration was
mistaken in the degree of unconditional support given to
Yeltsin, particularly in the first 2 years of the
administration--and Fritz Ermarth has made that argument--that
it did not raise a sufficient ruckus soon enough over not
merely the rise of corruption within Russia, but what I would
call the criminalized state, which is a very different problem.
And it is the one that Jim Moody began to focus on, which
is the heart of the matter, not just corruption or organized
crime, or syndicates or many of the elements that were in
Senator Kerry's paragraph from the book, but a criminalized
state. And that is not what we have been talking about up to
this point, how you address it.
One could argue that the administration can be criticized
because it did not stop, that it merely dissented from a
malignant step like the 1995 loans-for-share deal, which
contributed so much to the growth of this fundamental problem;
or one could even argue in a different vein that the
administration should have, but failed to encourage devaluation
of the ruble in the fall of 1997 and, therefore, contributed to
the August crisis of 1998 and everything that has followed from
it.
I would be inclined to make most of these arguments. But I
also believe that honest people could disagree over each of--
each of these points.
But more important are two other considerations. First of
all, even if these charges have merit, I have no way of
assuring you that had we followed another course implied by
this, that the outcome would have been materially different on
any large scale. And that is worth thinking about.
And second, and more important from my point of view, they
are not the central point. The core problem today is not that
we have misengaged Russia, though that is very important and
for the reasons that you have already been given on this panel
and that you already know based on the comments that you have
made.
It is that we are disengaging from Russia. I have heard
everyone around this panel and this table say that we do not
disagree over remaining engaged. The truth of the matter is
that this country is in the process of disengaging from the
Russian challenge.
Let me be more concrete. I will finish that first thought.
When I say, ``We are disengaging from Russia,'' the
administration is a part of the ``we.'' But it is by no means
the worst part of the ``we'' in this instance.
Let me be more concrete. A month ago, the last week in
August at the Ashuluk test range in the Astrakhan region of
Russia, Russia, Belarus, Armenia, and Kazakhstan ran their
Commonwealth 1999 military exercises.
The scenario was to thwart and to destroy imitative massive
attacks by aviation and cruise missiles, with no attempt to
disguise the fact that this was inspired by what Serbia had
encountered several months before.
This, in turn, is against a background in which opinion
among a majority of the foreign policy elite, I say a majority
of the foreign policy elite in Moscow, including some of the
most pro-reform liberal elements, believe that NATO would
permit itself unilaterally to do in or around Russia exactly
the same thing. And they do not see that as a element of
protection. They see that as a threat.
It is accompanied by a tendency these days in Russia to
consider solving the problem of Russia's immense weakness in
conventional arms by introducing low yield tactical nuclear
weapons in order to strengthen conventional defense.
And in terms of addressing the issue of deterrents with
NATO expansion, continental deterrents with NATO expansion,
there are those voices now who say the answer should be
intermediate nuclear forces, INF, and if to--if to do so, you
have to scrap the INF agreement of 1987, so be it.
This in turn is part of a broader context in which Russian
policymakers and politicians stress increasingly an emerging
strategic rivalry with the United States and the West within
the post-Soviet space.
And everything from the way we exercise partnership for
peace to our support for multiple oil pipelines to the
bilateral relations that we build in Central Asia and the
Caucuses, together with the actions of NATO, are put together
in order to demonstrate what I think is a very distorted notion
of what is happening, but one to which they are responding.
And this is only a capsule version, this list that I have
given you, of what is a much more complex and large dynamic in
the relations between the United States and Russia at this
point.
This awkward chain of suspicions on the part of the
Russians, from my point of view, is distorted and wrong. But it
is also the malign product of enormous Russian weakness.
Who in this town--who in this town is arguing that this
represents a crucial danger over the long run to our national
interest, and a problem with which we should be profoundly
seized and engaged rather than disengaged?
Who in this town recognizes that this is one road to a
genuinely lost Russia, a Russia that is alienated from the West
and combative; a Russia that is set against the United States,
either alone or in league with, should it arise, an alienated
and combative China?
Nearly all--second point, nearly all of the major
candidates for the Presidency the next time around on both
sides of the aisle, Republican and Democrat, recognize that it
is crucial to our national interest over the long run that the
Russians succeed with the transformation that they undertook in
the late Gorbachev years and under independence, to a
modernized political and economic system.
But who in this town is ready to grapple with the ways we
and our allies might engage the Russians--that is, with
material support and appropriate conditionality--after we have
satisfied ourselves on the issues that are before you now in
this hearing, that would induce the political leadership, both
parliamentarians and the executive to attack the underlying
structural obstacles to reform, including the criminalized
state, which all of us agree is one of the major structural
obstacles to reform?
Rather than wrestle with these profound and difficult
versions of the Russian challenge, we have retreated to a few
marginally useful programs, not to be dismissed as they are
described, but being cut back increasingly under the pressure
of legislative decision in this country, and to relief in
facing the debt overhang, which is what the IMF business is all
about.
But when the IMF repays the IMF on behalf of the Russians,
which is a useful thing to do because we prevent the Russians
from going over the cliff, we are not doing anything to lead
the Russians or encourage the Russians to address the
underlying structural obstacles to reform that are leading to
contraction of the economy and all the rest of it.
That is, we are not doing nothing to attack, to briefly
conclude now, the criminalized state, ineffective commercial
banking, the liquidation of value destroying industry, and the
creation and protection of real property within that--within
that system.
If the economic failure continues--of the last 8 years,
continues and deepens within Russia, that leads to the
possibility of another kind of lost Russia.
That other lost Russia--and I do not say the possibility--I
do not say the inevitability. I say the possibility of another
lost Russia, is a failed state, Russia in ruins, Russia as a
vortex of instability, of violence and of deadly contaminants
beyond our wildest imagination.
I think we got to this point--I say all of us, this body,
my kind of people in the outside world as analysts, the media,
our leadership within this country--through inattention, except
for moments of spasms of interest as we are going through right
now.
And I think that this spasm of interest has been caused and
sustained by what would appear to be a widespread sense that
the stakes for us are not all that high, where we can afford to
disengage from the Russian challenge.
The words of our public figures say otherwise, but the
actions, including much of the way in which we are shaping this
current debate, I think, move in the other direction.
They suggest that in the Congress you have a bipartisan,
veto-proof majority in favor of walking away from the Russian
problem in its hard form.
Thank you.
The Chairman. Thank you.
And my question is to Mr. Ermarth. Do you have any
explanation satisfactory to yourself, sir, about the President
and the Vice President having met with figures associated with
corruption and organized crime in the former Soviet Union? I am
talking about Vadim Rabinovich, or figures like that.
The President and Vice President met him in 1995 at a
fundraiser in Miami, and there is a photograph somewhere of
that. It was a 1995 fundraiser in Miami and that photograph
just being posted right now, was taken at that fundraiser.
Do you have any opinion about that?
Mr. Ermarth. Well, I have an opinion. I think it is rather
careless. I am sure that had the--the true business profiles of
these gentlemen been known to the planners of those occasions,
things would have been done differently.
I think the point that--to be taken from these episodes is
the one I was making very briefly in my remarks, namely that
these guys by influence, you know, insinuating their money and
their--and their influence into our political processes comes
naturally to them.
We should not make it natural to receive it. As to the
particular instances you are querying me about, Mr. Chairman,
I--I cannot illuminate it further. I do know about what Mr.
Loutchansky was up to.
The Chairman. Very well. I have a followup question. Do you
believe that IMF money was diverted improperly into private
foreign bank accounts?
Mr. Ermarth. The diversion of IMF money?
The Chairman. Yes, sir.
Mr. Ermarth. I believe Mr. Skuratov is telling the truth
and providing additional detail about something that was widely
known in Russia in August--August, September 1998 and even got
some coverage in the Western press.
The IMF lent Russia about--about $4.5 billion in a tranche
of a larger package of $20 billion to support the currency and
stabilize the financial markets during the crisis of summer
1998.
It bought--it used those--the--the Russian central bank
used those dollars to buy rubles. That is what you do when you
stabilize a currency, but rather than going through the Central
Interbank Currency Exchange with about $3 billion of those
dollars, it bought them directly from--it bought the rubles
directly from the commercial banks and the commercial banks
ended up with the dollars. The dollars ended up in New York,
just like that.
Now, maybe the IMF is telling us that unless they ended up
in the private pockets of certain individuals, it is not
diversion. But the banks are in the private pockets of certain
individuals. I defy you to sell the IMF version of this to any
of your constituents.
The Chairman. I think you are right.
Mr. Merry.
Mr. Merry. Yes, sir.
The Chairman. You were stationed at the American Embassy at
Moscow, is that right?
Mr. Merry. Yes, sir.
The Chairman. Could you elaborate on the suppression of
information, given that experience? Was information about the
corruption of senior Russian Government officials suppressed
and--let me ask the whole question; then you can answer it in
one lump--was such information about a Viktor Chernomyrdin, was
that suppressed, and was such information available to anybody
in the administration, e.g., the Vice President?
Mr. Merry. The questions of corruption almost all took
place after my years in Moscow. I left in the summer of 1994.
The case you referred to took place after that time. I have no
information about that.
What I would say is that what took place was not
suppression of information, so much as there were, I think,
very sharply conflicting views within the embassy about the
appropriateness of the market reform policies that we were
forcing on the Russians, and the degree of success they were
experiencing.
And I think there was certainly a considerable problem, in
my view, that people who were institutionally responsible to
the Gore-Chernomyrdin commission mechanism were also
responsible for overseeing the evaluation of the success of the
policies, and this constituted a conflict of interest.
I can only say that in my own section of the embassy, what
was called the Internal Political Section that dealt with
internal Russian affairs, I received nothing but the fullest
support from both of my Ambassadors and their deputies in
sending out messages which frequently made our readership in
Washington extremely unhappy, telling Washington things it did
not want to hear.
I have to tell you that I think that in other parts of the
embassy, there were a lot of very energetic, mostly junior
reporting officers who were trying to get out the message, as
they saw it, the information that they gained from their
travels around the country. And their message traffic never
went out.
The Chairman. Thank you very much. My time is up.
Senator Biden.
Senator Biden. Thank you very much. Mr. Chairman, with
regard to that picture, it reminds me--I remember in, I think
it was, 1976--I am not positive; I think it was 1976--seeing a
picture using the campaign of Jimmy Carter with John Wayne
Gacy, you know, the guy who chopped up and ate those folks, you
know, buried them under his--I am serious. You all--are you
reporters old enough to remember that?
And I remember the same implication being drawn from that,
that Jimmy Carter really wanted to have the support of a guy
who molested, killed and ate children, just as Vice President
Gore wanted to have the oligarchs support him.
I mean, that is the thing that every living politician,
because of the corrupt political system we have here and not
having public financing of elections--every one of us lives in
fear of.
We live in fear. Seriously, we live in fear, and we do not
have the FBI sitting next to us and tell us everybody who comes
in. I would like you to vouch for every contributor you have. I
sure in hell am not going to vouch every one that I have.
But at any rate, it is--it is kind of amusing, but--to me,
anyway.
Mr. Merry, the irony I find--and I do not disagree with
much of what you said. The irony I find in what you said is I
remember Jeffrey Sachs, who--who shocked Poland through its
renewal. There was a great debate. Conservatives in this town
and on this committee were saying Russia should go the Sachs
route, Russia should go the Sachs route, shock treatment.
The irony is: you are being critical of this administration
for its shock treatment, when they were getting beat up now--
the very people who are beating them up now are the very people
that said the reason they are in trouble is they did not have
the shock treatment.
You do remember that debate, do you not?
Mr. Merry. Yes, sir.
Senator Biden. Yes. So I--I find this incredibly ironic,
the very people who are talking about the failure here of the
way we--we engaged Russia economically are saying we failed for
the very reason that--totally different reason than you are
saying we failed.
I happen to agree with you, because I was on the side
saying, ``Hey, you cannot expect these folks--they do not have
anything remotely approaching Poland's circumstance, and it
will not work. It will not work in Russia.''
And I--the irony is that the bulk of the criticism that you
are getting--that we are getting from--not from within the
Congress, but outside the Congress and from your colleagues,
Mr. Legvold, who are being critical, is that, you know, they
were the very guys back then who were saying, ``Shock, shock,
shock. Sit--sit him in that chair and turn up the pressure,
because that is the only way it is going to happen.''
I just put--I will put that down as a historical footnote
here, because I was here for that debate.
Mr. Legvold, one of the things that I find absolutely
compelling about what you said is: I just got back from a trip
to Kosovo and the region, and I recently have been in other
parts of Europe and the Middle East.
And I was astounded, as you seem not to be, by the reaction
of our allies as well as our adversaries, if we can call it
that, by what went on in Kosovo.
Our allies walked away thinking, Oh, my God. What an
incredible display of power by the United States, military
power. And guess what? We're not even close technologically to
the capacity they displayed.
It has caused political eruptions in France. It is causing
difficulty within NATO. The NATO alliance is in a position now
where after having observed what we have been telling them all
along, that you should be spending more money to increase your
technological capability to keep up with us, now are having
this--mark my words. I am not an expert like you, but I have
been doing this for 27 years.
Mark my words. You are going to see an increased move
within western Europe to disengage with NATO, because there has
got to be a different way to do it because the only way to stay
in it without us totally dominating it is to spend money they
are not willing to spend and take the years it takes to catch
up.
So the irony, I found, was here you have our very allies
going, Oh, my God. Look what those Americans can do, even
though they allegedly knew it.
Every other part of the region I went to whether it was the
Middle East or Russia, it was, My God. If they can do that here
for a violation of human rights, they can do it anywhere.
And we actually had people in China, in Russia, in Beijing,
in Syria, in small and large countries being chastened in a way
that leads them, I think, to the proliferation of cheaper means
by which to be able to deal with what they believe to be an
inclination of ours and a capacity we demonstrated to do them
great harm.
Chemical weapons, biological weapons, theater nuclear
weapons, intermediate range nuclear weapons, in the case of--
of--of the Russians.
What is your suggestion? Step out of what you academics
love to do. Give us a concrete suggestion as to what we should
be doing now.
The Chairman. In 30 seconds.
Dr. Legvold. Mr. Chairman----
Senator Biden. Submit it in writing, because I am really
interested in what you have to say.
Dr. Legvold. OK. I will submit it in writing, because I
cannot do justice to the question in 30 seconds----
Senator Biden. I understand.
Dr. Legvold [continuing]. And it is fundamental to the
overall structure of the problem that I was laying out.
Senator Biden. That will be my question for you to respond.
The Chairman. All right.
The Chairman. Senator Hagel.
Senator Hagel. Mr. Chairman, thank you.
Gentlemen, thank you, each of you. We are grateful for your
insight and your time.
As a matter of fact, I--I do want to really attach myself
to what Senator Biden was asking.
But I would like to ask each of you the general question--
we heard some very insightful thoughts from each of you, coming
from different perspectives, different experience basis.
And my question following along Senator Biden's question
really is from each of you: What do we do now? Where do we go
from here? What is the policy we should--we should follow with
this administration just a year out?
You heard me ask the question of the Secretary of ``What
changes do you plan or intend to make based on a year, only 1
year before a new administration takes over?''
So I would like to hear from each of you. Thank you.
Mr. Ermarth.
Mr. Ermarth. Well, sir, I believe we have to start in going
from here with a thorough audit of our policy of a sort that a
few hearings cannot accomplish.
I mean, we have got a--we have got to tally what happened
to the nuclear weapons on the front end of those missiles that
were dismantled, and what happened to the dollars that were
expended in achieving that. How much went to U.S. contractors?
How much went actually into Russia? A thorough audit of our
policy on practical matters, to preserve and identify the good
as well as things that we did not want to see.
Then I believe we can craft a more constructive policy for
dealing with the next Russian administration, and what will
probably be the next American administration as well.
And it is going to have to be more therapy than shock. It
is going to have to be a--a policy that puts much more emphasis
on the legal, institutional, even cultural foundations of
capitalism.
The principles expressed in what this--the chief economist
of the World Bank said, ``Capitalism will not work, if
everything is for sale, including the state.''
Now, some of that is going to involve some policies that
are not very popular, particularly on the Republican side,
state controls of various things, controls on the movement of
capital in some respects, a kind of industrial policy.
But remember, we are dealing with a very disheveled, in
some ways very primitive economic scene there, and different
policies than are orthodox here are required there.
Now, we cannot impose them, but we need them as a checklist
for ``What are you doing right in our eyes? What can we support
with our taxpayer money, and with our applause,'' so that we do
not repeat the mistakes we have committed in the past.
Senator Hagel. Thank you.
Mr. Moody.
Mr. Moody. If I may, I am a businessman by background. And
I believe that you have to set up a plan, and the whole time I
was in government I never knew or never saw a U.S. Government-
Russia policy.
And I believe that you have to establish a plan. You have
to identify the issues as Fritz just set out. Then you are
going to have to articulate the policy on each--each issue; for
instance, supporting the proposed legislation they have today.
Then you need to make sure that everybody in government
understands what the policy is within the entire organization
so everybody is marching along the same way. And I think that
way we can be successful.
Senator Hagel. Thank you.
Mr. Merry.
Mr. Merry. In my view, the most important U.S. national
interest with Russia during the remainder of the current
American administration is that the upcoming Russian
Parliamentary and Presidential elections actually take place,
that they are legitimate and that the results of the elections
are respected, and that we have a constitutional transfer of
both legislative and executive power in that country.
I can think of nothing that would better set the stage for
whoever is in power in the United States after our next
election than to have a government in Russia which enjoys
electoral legitimacy.
And I think this time, our administration should really
communicate in ways that are available to it that we expect no
less. We went along with unconstitutional actions in 1993. That
may have been necessary. That is a long debate. We went along
with the war in Chechnya. I happen to think that was totally
unjustifiable.
In 1996, Boris Yeltsin through his own immense energy
actually did win the election, but it is pretty clear our
administration would have settled for an outcome which was not
constitutionally legitimate.
I think this time we have to put constitutional legitimacy
and the rule of law at the absolute top of our platform.
Whatever government emerges will obviously want to demonstrate
its nationalist credentials. It will want to demonstrate a
break with the past. It will want to demonstrate that it is not
the vassal of the United States. That is going to lead to some
fairly difficult rhetoric, perhaps on both sides. And I think
it is going to lead to the Russians being more inclined to rely
on their own internal resources and their own capabilities
rather than assistance from the West. And I think that is going
to be a good thing.
Senator Hagel. Thank you.
The Chairman. Mr. Legvold, please proceed for 2 or 3
minutes.
Senator Hagel. Thank you, Mr. Chairman.
Dr. Legvold. Thank you.
Well, first of all, I want to begin by--by re-emphasizing
what Mr. Merry started with. I think it is absolutely crucial
that not merely the U.S. administration executive branch, but
that you in your dealings with the parliamentarians, stress the
importance of going ahead with no confusion, obsfucation or
circumvention of the elections, both sets of elections in
December and in--in--in July, the Presidential elections.
Second, I agree with what Fritz had said about doing the
audit.
Third, I think clarifying all of the issues that are before
you around the current matter of corruption, malfeasance, money
laundering, so on, is very important for the reasons that you
mentioned, Senator Hagel.
I think we cannot mobilize political support for engaging
the Russians materially, unless we can demonstrate that it is
not simply down a black hole or that we are being taken for a
ride on it.
But then I come back to the agenda that I laid out, that we
are missing, that we are failing to engage. The sad part about
this story--implications of Senator Biden's point about Kosovo
and the way others other than our allies are responding, the
Russian reaction that I began to describe in only bits and
pieces, is how warped and distorted and inappropriate it is for
the Russians in terms of their security agenda.
The same week that they did that Commonwealth 1999 exercise
that I referred to, a month ago in August, Shamil Basiath was
bringing 2000 or more Chechens across the border into Dagestan,
seizing villages and the Russians were then tasked with this
military contest, a series of terrorist bombings that many
people associated with that.
The Russians have a very different security agenda from
addressing a kind of threat, so-called Serbian threat, within
their own territory.
And yet by not wrestling with these problems together and
the way we are seeing one another's behavior, whether it is in
how we go about building ballistic missile defense in the
context of preserving the ABM agreement, the degree to which we
do that by imposing it unilaterally or the extent to which we
are or are not engaged in a serious discussion with the
Russians about our respective positions in Central Asia--we are
not doing that now--or in the Caucuses, or the extent to which
we are utterly insensitive to the way our politically motivated
approach to multiple pipelines in the Caucuses comes across, we
simply--we simply reinforce this warping of the way in which
they do their security agenda.
And we create this prospect of the lost Russia I was
referring to in the long run, a genuinely alienated Russia,
because for all their frustration and anger, if you look at
their behavior in the last several years, the Russians in the
end have remained constrained.
And in the end they have not turned over the furniture. In
the end, they have not turned out to be spoilers for all
international enterprises among the great powers in the United
Nations.
And then we get to the fundamental question of the degree
to which we are prepared to engage them on that most crucial
issue that the administration is right to focus on from the
beginning, and that is a successful domestic transformation to
democracy and economic reform, and a series of things that we
need to think about, not merely as the U.S., because we cannot
do it as the U.S. effectively unless we are leaders of the G-7,
the industrialized democracy. But that would take more time
than I should.
The Chairman. Thank you, sir.
Senator Hagel. Thank you.
The Chairman. Senator Kerry.
Senator Kerry. Mr. Chairman, thank you.
I think there has been a great deal of wisdom from this
panel. And I want to thank all of you for your comments here
today. I think there has been more wisdom from you as a panel
than there has been from the Congress in its recent
politicization of some aspects of this issue.
Now, gentlemen, you, Mr. Ermarth, Mr. Moody, and Mr. Merry
have focused more on the criminal transition that has taken
place.
And I think you have appropriately placed some blame on a
combination of naivete and what Professor Legvold has called
inattention which, candidly, has combined to minimize the kind
of impact that we might have had that might have implemented
some of what the professor just talked about.
And you are correct, I think, in the picture you draw. I
certainly agree with you.
I--just to amplify, Mr. Moody--also did write about the KGB
plundering that began with the vision of the demise that was
coming, and the great plundering that has taken place since,
which is why a place like Estonia can boast about being the
greatest metal producer in the world, yet there is not a metal
factory in the country. It has all come from Russia. It is all
smuggled. And it has all gone elsewhere. There has been a
plundering of Russian assets.
And indeed the Apparatchki were able to transition
themselves from Communist Apparatchki into the oligarchy and
into the criminal authorized group that you talk about.
But--and here is the ``but''--there are good things that
have happened. And the professor has referred to them. There
have been acts of responsibility. Yeltsin himself has tried to
walk a line in a dangerous atmosphere.
And so the question is really not ``How can we in the
Congress find ways to make this a political football,'' and
chew each other up over who did or did not do something.
I would agree with the criticisms that someone must have
known there was a level of criminality that was such that these
transfers of money and other things we were trying to achieve
were threatened without other safeguard in place.
The issue for all of us now is: What should those
safeguards be? How do we proceed? How do we undo this
combination of criminality and all of the other forces that are
loose in this country? The perception of America and American
capitalism is considerably less than we would like it to be
today because of what has happened.
So a lot hangs in the balance. And I think that--I thought
the professor's summary of it was really superb, when he talked
about the combination of these challenges, the criminality, the
lack of structure, the laws and the inattention that may have
led us here and the spasms of focus that we have on this.
I think it is essential that we not let this become
political because our national interest is so entwined in it,
and that may be a useless plea in a city that is increasingly
more partisan and politicized.
But, professor, maybe you want to lead off, and each of you
might share with us. You say do not disengage. Clearly, some
moneys have been essential to the de minimis stability levels
that we want to continue to maintain, and even to some of the
connections and good faith exchanges that people rely on that
do not empower the more radical nationalistic forces that would
clearly take us down a very different and more dangerous road.
So how do we manage that now in your judgment? I mean, what
is the order of priority as to how we can establish the law and
order, the legal structure, the system that inspires the
confidence that helps build the other things we want to do,
without giving in to the lowest common denominator here that
threatens everybody?
Do you want to begin that, professor?
Dr. Legvold. Well, I--I--again, in a brief compass, I
cannot--or in a short time, I cannot do justice to the
question, Senator Kerry, but I would say the following, and
maybe especially since I am the one that has strayed farthest
from your--the--the core issue of these hearings, that on the
issue of corruption and malfeasance, the way I would bring it
together is the following:
First to underscore a point, Mr. Chairman, in particular,
given your interest and concern about this point I have made of
the criminalized state: It is implicit in the way Fritz Ermarth
phrase the issue and it was explicit in what Jim Moody had
said. There is a fundamental difference between countries that
have corruption and even at times corruption in government.
This country has corruption, organized crime. It has even
had corruption at local and state and Federal levels.
Italy has corruption and often corruption that penetrates
in the government.
That is very different from a criminalized state. That
means that when you sit down with Chernomyrdin or when you sit
down with Putin these days, or when you sit down with
parliamentarians and you talk to them about fighting corruption
and you are willing to join forces with them and you beg the
question that they are themselves the problem, who really are
missing the boat.
That means that the issue of--of fighting corruption in
this case, the criminalized state, is very tough. It is very
difficult.
And I think it is probably wrong to assume that it is
emerged largely because of our neglect or the things that we
did or what international financial institutions did.
I would, however--to come back to your question, Senator
Kerry--say that in the future if we were really going to try to
influence the structural obstacles to reform--and we agree that
one of the major ones is the criminalized state, not just
corruption, but the criminalized state--then the degree to
which we enter into the bargain with material commitments and
the conditionality will be the degree to which national leaders
and parliamentarians attack the criminalized state, not just
corruption.
And if we have to give a percentage point or two on
stabilization packages in order to maintain budgets in the way
in which we give money, I would argue that we should, in order
to get at that underlying structural problem.
I do not know whether it will work. I do have the
impression, perhaps mistaken, that when--when Primakov was
prime minister, that he was somebody who might have been
willing to attack the problem of state corruption or the
criminalized state.
The Chairman. Thank you so much.
Senator Kerry. Can the others comment, Mr. Chairman?
The Chairman. Well, I tried to warn against asking a
question that ended on the caution light, but, yes, we will
hear from the others.
Senator Kerry. Thank you, Mr. Chairman.
Mr. Merry. In my own view, as we look ahead we should
really be concentrating on things where we do not judge the
value of our programs by the number of dollars we spend.
I think the greatest positive accomplishments in Russia in
my lifetime have been in the area of civil liberties. I lived
in Russia under Brezhnev. And I think the state of civil
liberties in Russia today exceed anything I ever would have
dreamed I could live to see.
I think encouraging things like that do not necessarily
cost a lot of money. Some of the kinds of exchange programs the
Librarian of Congress James Billington has put forward, are not
going to cost a vast amount of taxpayer money. And we are going
to get immense returns for them.
I think also we should greatly increase our support for
some of the private American programs in rule of law and legal
reform, particularly in commercial law.
I think, beyond that, we should get out of the habit of
regarding Russia as a welfare case. It is still eminently a
very rich country. It has lots of resources. And the best way
for it to learn to use its own resources is by not providing
opportunities for those resources to be strip-mined by a bunch
of robber-barons. And there is nothing that encourages people
to look to their own resources than knowing they are not going
to get bailed out from abroad.
I do think, however, that in the next few years, the West--
and I do not mean just the United States, because other
countries actually have more interest in this than we do--the
Soviet era debt is almost certainly going to have to be
disposed of. I just cannot imagine that money is ever going to
really be repaid.
Beyond that, I think it is very important and I would
commend this administration for its efforts in this regard, to
keep Russia engaged in many areas of the world, even when they
do not have much of a contribution to make, even when they are
sort of a pain in the neck to have around, but just to give
them the sense that we treat them as a great power.
Now, this is an empire that has failed. It is not the only
empire that has failed in our lifetime. I know a lot of French
people who still have not gotten over the loss of Algeria. I
know English people who still get very upset when people talk
about Gibraltar reverting to Spain. The Russians----
Senator Kerry. I thought you were going to say Delaware,
North Carolina and Massachusetts.
Mr. Merry. That, I would not touch, sir.
The Russians are going through what is a deep psychological
problem. Keeping them engaged in many areas even when their
objective strength does not justify it is its own reward.
The Chairman. Very well.
Mr. Moody.
Mr. Moody. I--I think that the first issue I would address
right at the moment is the fact that the oligarchs are
purchasing the news media. They are purchasing the televisions.
They are purchasing the magazines. They are purchasing the
newspapers to have effect on the next election. Now, we ought
to at least speak up about that.
The second thing I would do is--it does not work with my
children, so I do not believe it should work in other ways. I
do not believe in giving money away. It is never appreciated.
And it is never spent like you want.
But anyway, especially when the Russian Government auditors
at the same time, even prior to this, were saying, ``Do not
give us anymore money. It is just going to be stolen anyway.''
The third thing I would say is the United States has an
enormous wealth of expertise and information out there that is
not being used today, and by that a lot of retirees.
And I think it would be very good for, maybe a kind of a
Peace Corps type operation to go on in the former Soviet Union
using a lot of these retirees to go over, show them how to set
up businesses on a real grass root level, work with them on--on
legislation and things like this.
American retirees should love to do that, because it is a
great country to go see. It is--you know, it is magnificent to
be there and to understand the--the people over there. And I
think in the long-term it is a nice cheap way to build things
from the grass roots up.
The Chairman. Mr. Ermarth.
Mr. Ermarth. Senator Kerry, let me answer your question by
sketching very briefly a rosy scenario. It may be smelly, but
at least rosy. And we ought to support it.
They get through the elections. Whoever wins--and we should
not be calling favorites on this. Whoever wins is going to--I
mean, is going to have some prospect, some stability, some
creditability.
And then I suspect there will be an opportunity for that
winner, in alliance with possibly the leftovers of the Yeltsin
official family and the power ministries, to turn to the
oligarchs, to the opposition, to the regions and say, ``OK,
guys. Let us have a deal here. Let us start out by fixing the
Constitution so the President is accountable, the--the Duma is
responsible and the government is responsible to the Duma. Then
let us start the long agenda of tamping some law and order into
place.''
Big complicated problem, but it means like going back and
passing that money laundering bill that Yeltsin vetoed and
getting it passed.
Then comes the hard part, the money, working out how much
you give back and how much you got to--you get to keep. It is
not going to be clean and neat. But it is the least worst
scenario.
I posed this scenario to General Kulakoff, the former chief
of the--of their national police force. He says, ``Yes. That is
it. That has got to be something like that.''
Now, if they go on that course, we have to be in a position
to know what is real, what is phony, what we can support and
what we--what we cannot.
The Chairman. Gentlemen, I thank you very much. We have
kept you here longer than I had anticipated, but you have made
such a difference in this hearing and I appreciate it
personally, and I know my colleagues do.
Now, if I may ask you to submit to written questions from
members of the committee who were here and committee members
who were not here, because they will have an interest in it
too.
And I thank you again.
Senator Biden. Mr. Chairman.
The Chairman. Yes.
Senator Biden. Before you close, 30 seconds. I want to tell
Mr. Moody, you and I and others of this committee have
supported a thing called the International Executive Service
Corps of Retired Executives.
Thousands of them have participated. They are ready to do
it. They are not--they come away disillusioned sometimes, but
also come away with some contributions.
So that--that is well under way. I do not know how to make
it better. If you have any ideas, we would like to hear them.
Thank you.
The Chairman. Thank you. If there be no further business to
come before the committee, we stand in recess. Thank you again.
[Whereupon, at 5:47 p.m., the committee adjourned, to
reconvene at 10:30 a.m., September 30, 1999.]
CORRUPTION IN RUSSIA AND FUTURE U.S. POLICY
----------
THURSDAY, SEPTEMBER 30, 1999
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met at 10:42 a.m., in room SD-419, Dirksen
Senate Office Building, Hon. Gordon H. Smith presiding.
Present: Senators Smith and Biden.
Senator Smith. Good morning, ladies and gentlemen. We will
convene this hearing of the Foreign Relations Committee.
Senator Biden will join us shortly, but he is literally
speaking on the floor right now, and so his staff has suggested
we go ahead in the interest of time and out of respect for our
witnesses today on this very important topic.
This is the second of two hearings this committee has held
devoted to the subject of corruption in Russia. These hearings
could not be more timely, given that 80 percent of an IMF
bailout in 1998 did not even reach Russia, that enormous sums
of money have been laundered through the Bank of New York, and
that President Yeltsin may--and I emphasize ``may''--have
received kickbacks from a Swiss construction company.
In our first hearing on the subject a week ago, this
committee learned first about a pattern of organized crime and
officially-sponsored crime in Russia and, second, about
administration policy in light of that pervasive pattern.
Unfortunately, at that hearing the administration was not
able to give us details regarding what the administration knew
about specific corrupt figures in the Russian elite. We were
able to have somewhat of a dialog about the need for engagement
as a policy with the Russian Federation. It's a policy I agree
with. We must engage Russia.
But it's impossible to perceive United States policy as
containing only two paths to our relationship with Russia:
isolationism on the one hand or blind engagement on the other.
I reject the isolationist tendency too prevalent in politics
today and firmly believe that we need to help consolidate
market economies and democratic governance in today's Russia.
We do this by sharing American values, by democracy building,
by teaching how a court system works, and by the rule of law.
In turning to the question of future U.S. policy regarding
corruption in Russia, we have in today's hearing an opportunity
to explore precisely in what fashion the United States should
further pursue engagement.
As I pointed out in our hearing a week ago, I'm a strong
supporter of funding for international affairs. We do some good
things in Russia, in particular, work in the area of the Nunn-
Lugar program assisting Russia with the safe and secure
transportation, storage, and elimination of nuclear weapons. I
am, however, concerned that American taxpayers underwriting
other, perhaps not as well-known, assistance to Russia have a
right to ask how those other funds are being used.
For example, they need to know whether the Russian
officials with whom we are dealing are trustworthy. They have a
right to know that the administration will insist on the
accountability and commitment to the rule of law of those
officials when we offer our assistance to Russia, consisting to
date of over $5 billion obligated in grants and almost $13
billion in loans from the United States.
In today's hearing on corruption, we will examine, one, the
prospect for change and reform in Russia; two, the relative
impact U.S. policy is likely to have on Russian reform; and
three, what policies the United States should pursue given the
experience of what has worked and what has not during the
Clinton administration.
I hope, in particular, that we will focus on what needs to
be done on the ground in Russia and what the United States can
do to facilitate it.
Among our witnesses today, we have Peter Reddaway,
professor of political science and international affairs at
George Washington University. He is the co-author with Dimitri
Glinski of a book to be published in January entitled ``The
Tragedy of Russia's Reforms: Market Bolshevism Against
Democracy.'' The very title of the book shows how appropriate a
witness Dr. Reddaway is for today's hearing. And we welcome
you, sir.
Dr. Reddaway. Thank you.
Senator Smith. We also have as a witness Thomas Graham,
senior associate at the Carnegie Endowment for International
Peace. As a Foreign Service officer, Dr. Graham served in
several capacities at our embassy in Moscow, including
political counselor and head of the Political/Internal Section
of the embassy staff. And we welcome you, Dr. Graham.
Dr. Graham. Thank you.
Senator Smith. Our third witness is Dr. James Finckenauer,
a professor of criminal justice on leave from Rutgers
University. He has a special expertise in the area of organized
crime and that includes organized crime in Russia. Our welcome
to you, sir, and to all of you.
Prepared Statement of Senator Gordon H. Smith
This is the second of two hearings this committee has held devoted
to the subject of corruption in Russia. They could not be more timely,
given allegations that 80 percent of an IMF bailout in 1998 did not
even reach Russia, that enormous sums of money have been laundered
through the Bank of New York, and that President Yeltsin may have
received kickbacks from a Swiss construction company.
In our first hearing on the subject a week ago, this committee
learned, first, about the pattern of organized crime and officially-
sponsored crime in Russia and, second, about the Clinton-Gore
Administration policy in light of that persuasive pattern.
Unfortunately, at that hearing the Administration was not able to
give us details regarding what the Administration knew about specific
corrupt figures in the Russian elite. We were only somewhat able to
have a dialogue about the need for engagement as a policy with the
Russian Federation.
But it's impossible to perceive United States policy as containing
only two paths to our relationship with Russia--isolationism or blind
engagement. I reject the isolationist tendency too prevalent in some
politics today and firmly believe that we need to help consolidate
market economies and democratic governance in today's Russia. We do
this by sharing American values, by democracy building, by teaching how
a court system works and by rule of law.
In turning to the question of future U.S. policy regarding
corruption in Russia, we have in today's hearing an opportunity to
explore precisely in what fashion the United States should further
pursue engagement.
As I pointed out in our hearing a week ago, I am a strong supporter
of funding for international affairs.
We do some good things in Russia, in particular, work in the area
of the Nunn-Lugar program assisting Russia with the safe and secure
transportation, storage, and elimination of nuclear weapons. This is
largely Defense Department funding. I am, however, concerned that
American taxpayers underwriting of other, perhaps not as well-known,
assistance to Russia have a right to ask how those funds are being
used.
For example, they need to know whether the Russian officials with
whom we are dealing are trustworthy. And they need to know that the
Administration will insist on the accountability and commitment to rule
of law of those officials when we offer our assistance to Russia--
consisting to date of over $5 billion obligated in grants and almost
$13 billion in loans from the United States.
In today's hearing on corruption, we will examine (1) the prospects
for change and reform in Russia, (2) the relative impact U.S. policy is
likely to have on Russian reform, and (3) what policies the United
States should pursue given the experience of what has worked and what
has not during the Clinton Administration.
I hope, in particular, that we will focus on what needs to be done
on the ground in Russia and what the United States can do to facilitate
it.
Among our witnesses today, we have Peter Reddaway, professor of
political science and international affairs at George Washington
University. He is the co-author with Dimitri Glinski of a book to be
published in January entitled ``The Tragedy of Russia's Reforms: Market
Bolshevism Against Democracy.'' The very title of that book shows how
appropriate a witness Dr. Reddaway is for today's hearing.
We also have as a witness Thomas Graham, senior associate at the
Carnegie Endowment for International Peace. As a Foreign Service
officer, Dr. Graham served in several capacities at our embassy in
Moscow, including political counselor and head of the Political/
Internal section of the embassy staff.
Our third witness is James Finckenauer, a professor of criminal
justice on leave from Rutgers University. He has special expertise in
the area of organized crime, including Russia.
Senator Smith. We will hear from Senator Biden when he
arrives from the floor. Without further delay, we will turn to
Dr. Reddaway and invite your testimony.
STATEMENT OF DR. PETER REDDAWAY, PROFESSOR OF POLITICAL SCIENCE
AND INTERNATIONAL AFFAIRS, GEORGE WASHINGTON UNIVERSITY,
WASHINGTON, DC
Dr. Reddaway. Thank you very much, Mr. Chairman.
With your permission, I would like to offer my statement
for inclusion in the record.
Senator Smith. We will receive that and do so without
objection.
Dr. Reddaway. Thank you, and I will present a brief summary
of that statement with a little bit of elaboration in one or
two places.
I would like to start with a list, that I hope is in a
logical sequence, of points which I think the U.S. Congress,
the executive branch, and also the American people need to
recognize even though most of these facts are uncomfortable and
not very welcome. I would like to start with four that relate
principally to the past and the present and then go on to
another four that relate to the future.
The first one--and I cannot state this strongly enough--is
we have to recognize that the whole Russian system, political
and economic, is in a very profound crisis of legitimacy. I
think the word ``legitimacy'' sums it up best. And it is
uncertain whether the Russians are going to come through and
develop better legitimacy in the future.
The second point is that the Russian Government is the
major player that bears responsibility for this most
unfortunate development through its ineptness, its corruption,
Mr. Yeltsin's obsession with holding onto power at any cost to
his own country. But we in the West also bear a considerable
responsibility for what has gone wrong in Russia, in my
opinion, especially since 1991 when we became particularly
closely engaged.
My third point is that--and this is particularly
uncomfortable--the United States is today viewed by most
Russians with at best indifference, more often by suspicion,
resentment, or even with outright hostility. And the hostility
side applies particularly to the political, economic, and
social elite in Russia which is on the whole more alienated
from us than the mass of ordinary Russians.
My fourth point, which is also very uncomfortable, is that
those Russian politicians with whom we are particularly closely
associated and have been over the last 7 or 8 years, President
Yeltsin, Mr. Chubais, Mr. Gaidar, Mr. Nemtsov, these are the
politicians who are at the moment most distrusted and often
hated out of all the politicians in Russia.
Looking to the future, my four points are as follows, and
they derive from what I have just said about the past. We
should, in my opinion, as a country and a Government, stop
doing what we have been doing for the last 14 years and
especially since 1991, which is advising Russia in a rather
insistent way on how to run their internal affairs. Most of our
advice over these last 14 years, and especially the last 8
years, turns out to have been inappropriate or even downright
wrong. Most of the outcomes in my opinion have been unfortunate
or even tragic. At first, of course, in the early 1990's, the
Russian Government very much sought our advice, wanted our
advice. That situation has changed in the last 2 or 3 years.
They show less and less interest in our advice and increasing
interest in opposing us in various regards.
My second main point about the future is that, rather than
go on giving advice and lectures to them, which has been the
hallmark of our policy over the last 8 years, we should, rather
than doing that, open our minds and listen. The key word is
``listen'' carefully to the internal debates that the Russians
are now deeply into and will be into for the foreseeable future
over why their system has entered into this acute crisis of
legitimacy and how they, the Russians themselves, think that
they may be able to come through and get out of that crisis.
My third point is that, after doing a lot of listening, we
ourselves listening to the Russians should extend our current
and long-delayed debate about what has been wrong with our
Russian policy and turn it into a debate about how, in light of
the Russian debate and of our own national interests, of
course, we should radically reshape our policy toward Russia.
The final stage of that debate should involve frequent
consultations with the Russians.
At the present stage, I might mention in passing that the
Carnegie Corporation of New York is just launching a major
Russia initiative which should come to fruition about a year
from now, and we will be sharing the results of that project
with the Congress through a variety of channels. Mr. Graham and
myself are some of the leaders of that Russia initiative.
My fourth point is that for a limited time, perhaps a year
or so, we need, in fact, to a certain extent to disengage from
Russia. At the same time, we need to explain carefully to the
Russians why we are partially disengaging and make it clear
that we plan to reengage on a more full scale as soon as we
have listened to their debate and carried out our own debate
and entered into consultations with them as to what the future
pattern of our relations can most fruitfully be.
Those are my broad points. Let me say why I think this is
an especially critical turning point in U.S.-Russian relations.
Some of the reasons should be clear from what I have said, but
let me add an extra dimension.
The danger does exist, in my opinion, that if we are not
extremely careful, Russia could conceivably at some point in
the next few years again turn into a rogue state. Russia was a
rogue state for 70 years under communism. We did not use the
term at that time, but that is in fact what it was.
Now, in my view history is not very often a linear process,
and especially that is true when it comes to Russia. In the
period from 1860 until 1917, Russia was steadily integrating
itself into the Western world, economically, politically,
socially, culturally, and so on. Then when we thought that
Russia was more or less part of the Western world, suddenly in
1917, what did it do? It pivoted through 180 degrees and shot
off in a totally unexpected direction, which was the exact
opposite. Instead of embracing democracy, it embraced
totalitarian dictatorship. Instead of becoming part of the
world capitalist system, it became a closed state socialist
system.
Well, by the late 1980's, the Russians had tired of
totalitarianism and state socialism, and they were interested
again in democracy and free markets. In 1991, they threw off
communism and they embraced what is often called shock therapy
as a strategy for economic reform, or the Washington consensus.
Again, the goal to integrate themselves into the world
community, into the world economy, the world political system,
international organizations, and so on.
However, that strategy of shock therapy and the Washington
consensus has turned out to be--and some of us warned that this
would happen from the start--not suitable for Russia and it
explains why Russia has landed in the present unfortunate
situation with perverted and criminalized forms of economy and
political system.
As a result, most Russians are alienated today from the
Russian state and to a considerable extent from capitalism and
even to some extent from democracy because of the perverted
forms that those important institutions have taken in Russia.
Today Russia is divided socially into a very small layer of
political and economic haves who lead lives of conspicuous
consumption, a small layer of middle class, and the great
majority of the population who are have-nots economically, 40
percent live in poverty, even by the Russians' low standards of
what poverty is, and they have no effective political or labor
union representation.
In these circumstances, it is not impossible that Russia
might make another 180 degree pivot as it did in 1917, and
instead of continuing to engage itself and integrate itself in
the world community, it might shoot off in some other
direction. That is the ultimate danger that our Russia policy
is called upon to face.
When we rethink our Russia policy, we need to face
unpleasant facts, as I mentioned before. Anti-Americanism is
now a big feature of the Russian scene. The politicians we are
closely associated with--Mr. Gaidar in the latest poll has the
trust of 2 percent of Russians and the distrust of 81 percent
of Russians. Mr. Chubais has the trust of 3 percent of Russians
and the distrust of 85 percent of Russians. Mr. Yeltsin has the
trust of 2 percent of Russians and the distrust of 90 percent
of Russians. These are the politicians that we are associated
with in the minds of ordinary Russians.
Well, I do not think, as I hope I made clear earlier that
it is appropriate for us at this stage to put out even a
tentative blueprint of what our new Russia policy should be.
Let me conclude with a few very broad principles that should
guide us, in my opinion, for the interim period.
We should not continue to meddle in Russia's internal
political processes and their top personnel choices as we have
done on over the last 8 years.
We should not lecture the Russians.
We should not allow the IMF to send large quantities of
cash to Russia because it is too uncertain what would happen
with that cash.
We should not collaborate extensively with their law
enforcement agencies because those agencies are, unfortunately,
too corrupt and unreliable.
We should, on the other hand, maintain low key but large
scale cultural and educational programs with Russians,
especially young Russians.
We should continue the Nunn-Lugar program as long as it is
politically feasible to do so.
We should prepare to help the Russians in the various
humanitarian and Chernobyl-type crises that are likely to arise
in the coming years.
I hope that the Congress will develop close relations with
the new Duma which is set to be elected in December of this
year.
We should try to develop trade as far as possible,
providing it is on a transparent basis.
And, of course, we should not lose sight of our national
interests which means openly--more openly than over the last 7
or 8 years--telling the Russians when their behavior is
something that we are not prepared to tolerate. Mr. Weldon in
the House has taken a strong lead on this. I very much support
him and indeed all his policy suggestions vis-a-vis Russia. I
think he has a very well thought out program, and it involves
being open and frank and direct with them when they do things
that we are not prepared to tolerate.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Reddaway follows:]
Prepared Statement of Dr. Peter Reddaway \1\
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\1\ Professor of Political Science and member of the Institute for
European, Russian, and Eurasian Studies, George Washington University;
formerly Director of the Kennan Institute for Advanced Russian Studies.
---------------------------------------------------------------------------
My statement aims to advance several main ideas:
1. We must recognize that the Russian political and economic system
is in a profound crisis of legitimacy.
2. We need to acknowledge that while the Government of Russia bears
the major responsibility for this crisis, the West bears a considerable
responsibility too.
3. We must face the fact that the U.S. is now viewed by most
Russians with indifference, suspicion, resentment, or even outright
hostility.
4. We need to ponder the fact that those Russian politicians with
whom we are most closely and intimately identified--Yeltsin, Chubais,
Gaidar, Nemtsov--are the politicians who are more deeply distrusted and
hated by Russians than any others.
5. We should therefore stop what we have been doing for the last
fourteen years, that is, advising the Russians how to run their own
affairs. Most of our advice has been inappropriate or wrong, and has
turned out badly.
6. We should, rather, listen carefully to the debates the Russians
are now conducting among themselves about why they are facing a major
crisis of their system, and what they should do about it.
7. When we have opened our minds and done a lot of listening, then
we should extend our current U.S. debate about what went wrong with our
Russia policy into a debate about how--in light of the Russian debate
and of our national interests--to radically reshape that policy. The
final stage of the debate should be conducted in frequent consultation
with the Russians.
8. For a limited time, then--perhaps a year or so--we should to
some extent disengage ourselves from Russia, explaining carefully to
the Russians why we are doing so, and making clear that we plan to re-
engage in accordance with goals that have been, as far as possible,
painstakingly and mutually agreed with them.
While the above prescriptions are more precisely defined than such
processes can be in real life, I attach great importance to their
essence. U.S.-Russian and U.S.-Western relations are, in my view, at a
critical turning-point, and if we are not careful, it is possible that
Russia could, at some point in the next 5-10 years, become again a
rogue state--as it was for seventy years under communism. History,
often, does not proceed in linear ways, and least of all in Russia,
which has twice in this century been the victim of false ideologies of
economic determinism.
During the last fifty years of the tsarist period Russia integrated
itself steadily into the world community--economically, politically,
and culturally. Yet suddenly, in 1917, with virtually no warning, it
pivoted through 180 degrees and sped away in exactly the opposite
direction. It embraced Marxism, which held that if the state suppressed
the ruling class and ruthlessly seized all economic assets for itself,
a Marxist utopia could be built. Thus, instead of continuing to develop
free markets and democracy, Russia's Bolsheviks built a totalitarian
dictatorship and an economy completely owned and operated by the state.
In the late 1980s Russia tired of Marxism and began to aspire again
to democracy and free markets. In 1991, at our urging, it embraced an
ideology known as ``shock therapy'' or ``the Washington consensus.''
This ideology held--as applied to Russia by the Kremlin and the IMF--
that if market mechanisms were imposed on the Russian economy with an
iron political will, and the state's assets were quickly privatized,
this economic revolution would cause new democratic institutions and
the rule of law to arise almost spontaneously. Russia would steadily be
integrated into the world community.
After 1917 and after 1991, the ``economic base'' would determine
everything. After 1917 it would produce a socialist utopia. After 1991
it would produce free markets and democracy.
Today, the mounting disillusion of most Russians with the perverted
market and democratic system they see around them could conceivably--at
some point in the coming years--lead them to pivot again through 180
degrees and speed off in some new direction as a reborn rogue state.
This is the biggest danger that our radical re-thinking of our
Russia policy is called on to avoid.
what has gone wrong since 1991?
The first and indispensable step towards fashioning a new policy is
to examine carefully and honestly what was wrong about the old one. In
highly condensed form, this, in my view, is what happened. The U.S.,
the G-7, and the IMF pushed Russia in 1991 into accepting an economic
reform strategy that was not suitable for it. Its cultural traditions
after centuries of tsarism and communism were not appropriate for shock
therapy. It did not yet have the necessary political, economic, legal,
and financial institutions. President Yeltsin's imposition of shock
therapy in unsuitable conditions soon produced widespread political
opposition, which, with U.S. agreement, was eventually, in October
1993, suppressed through the armed, violent dissolution of the
Parliament.
To compensate for his loss of popular support, Yeltsin bought the
support of the beneficiaries of the privatization of the state's
assets--the so-called oligarchs--by granting them financial and
political favors. Although rhetorically opposing the new ``crony
capitalism'' and the widespread corruption of government officials, in
practise he allowed corruption and organized crime to flourish
virtually unchecked. The outflow of capital out of Russia exceeded the
inflow of capital from trade, foreign aid, and investment by roughly
two to one. The oligarchs, the officials, and the politicians,
including the Yeltsin family, systematically plundered the Russian
state. Democracy was subverted, because the Parliament had few powers
and the extremely powerful presidency was, in practise, subject to few
serious or consistent checks. The judiciary was neglected, and became,
in almost all critical cases, a tool of the executive or of organized
crime.
Because the West and the U.S. were so closely linked to Yeltsin and
the oligarchs, they became objects of suspicion to most ordinary
Russians, 40% of whom, even by the low Russian definition of the
subsistence level, now live in poverty. The West's expansion of NATO to
the east, and its military campaign against Yugoslavia over Kosovo,
both in the face of strenuous Russian objections, deepened Russians'
alienation from the West.
Today the U.S. is sufficiently unpopular that, for example,
according to a poll of 17-21 September 1999 by VTsIOM, only 27% of
Russians think that Russia should cooperate with the U.S. in the fight
against international terrorism, while 61% are opposed to such
collaboration. According to another poll by the Public Opinion
Foundation, which does some of the Kremlin's polling, the politicians
most closely linked to the U.S. have these ratings: Boris Nemtsov is
trusted by 8% of Russians and distrusted by 66%, Yegor Gaidar is
trusted by 2% and distrusted by 81%, Anatoly Chubais is trusted by 3%
and distrusted by 85%, and Boris Yeltsin is trusted by 2% and
distrusted by no less than 90%.
what does russia's future hold?
At present Russian society is divided between a small layer of
economic and political haves, a small and--since the rouble devaluation
and government bond default of August 1998--diminished middle class,
and a big majority of economic have-nots who are, in reality, without
representation by either politicians or labor leaders. The big question
is whether the alienation of the latter can be reduced without,
eventually, major revolts or even revolution. Almost all the contenders
for high office in the Duma and presidential elections are beholden to
strong private interests, and will not therefore be in a position to
put the national interest above these personal and group interests. The
tendency of the ruling class is to try to divert attention from its own
failings by blaming foreigners, whether international terrorists, as in
the current highly dangerous developments in Chechnya and Dagestan, or
the U.S. and the West. The main hope is that present and future crises
might bring the ruling class to allow the sort of frank national debate
which could end in a new emphasis on the national interest. It is the
popular longing for this to happen that accounts for the popularity of
Yevgeny Primakov, who is seen as non-corrupt and as a defender of the
national interest.
In a sentence, can the Russian system regain a measure of
legitimacy?
rethinking u.s. policy
As suggested above, I believe it is inappropriate for the U.S. to
build a new Russia policy until much rethinking has been done in both
Russia and the U.S. But there are some things we should NOT do, and
others that we can and should do in a low-key sort of way.
We should NOT:
interfere in Russian internal political and economic debates
over policy;
in general, lecture the Russians about political and
economic reform;
allow the IMF or other bodies to send the Kremlin large
amounts of cash;
collaborate extensively with Russian law enforcement bodies,
because they are mostly too touched by corruption.
We SHOULD, on the other hand:
continue low-key, but large-scale cultural and educational
programs, especially for young people;
prepare to help when humanitarian or Chernobyl-type crises
arise;
continue Nunn-Lugar assistance as long as it is politically
feasible;
develop Congressional relations with the new parliament to
be elected in December;
trade with Russia wherever this can be done on a transparent
basis, realizing that foreign markets are of the greatest
importance to the Russian economy.
counter openly actions of the Russian government that affect
our national interests: the Russians interpret anything else as
either weakness or evidence of some cunning plot.
conclusion
The American key-notes should, in my view, be patience, humility,
readiness to admit past mistakes, and understanding that the Russians
have entered a major systemic crisis: We need to listen, make clear we
do not intend to isolate Russia, while, of course, being alert to
possible mischief.
Senator Smith. Dr. Reddaway, I think you have been very
helpful. I think you have just stated, as one of your
principles, that we should draw back and we should listen to
the Russian people generally and their political debate, to
their solution, how they get out of it.
What do we do with IMF money in the meantime? I think you
said do not be just handing over cash.
Dr. Reddaway. Right. At the moment the IMF does not intend
to actually hand over any cash, but it does intend to go
forward with the present loan. They just transfer the money
from one account into the account through which the Russians
are paying back previous loans. That policy itself is open to
question in my view, but at the very least, in my opinion, the
U.S. Government should put pressure on the IMF not to hand over
actual new sums of cash. As I say, this is not on the agenda at
the moment, but just to keep that in mind.
Senator Smith. When Russia shot off in an unexpected
direction in 1917, it did so under the guise of a new ideology,
obviously, communism. Should they do that again, what do you
think that guise will be under? What will the political
drapings be? Will it just be a fascist situation?
Dr. Reddaway. I do not think it would be any sort of return
to communism. I think I would rule that out. I do not think it
would be fascism. There has been a lot of very good, thoughtful
work done by Russian and Western scholars examining the reasons
why fascism as such is not actually very suitable for the
Russian political culture. It is to do with the fact that the
Russians have always really been a multinational people, a
multi-ethnic people, and fascism does not go very well with
that.
Senator Smith. Are the Russian people capable of really
turning to the West? Is Russia part of the West? Can it ever be
part of the West, or is it a nation caught between two
continents?
Dr. Reddaway. It has had an ambivalent attitude toward the
West for the last 3 centuries, and the debate about Russian
national identity has been going on all of those 3 centuries.
The tragedy and one of the reasons why my co-author and I have
named our book ``The Tragedy of Russia's Reforms'' is that in
1991 it appeared that there was a very good chance that Russia
would at last adopt a decisively Western identity. They were
extremely open to us. They were wanting to join our world
economy. They were wanting to become democratic in the way that
the West was democratic. There was a unique opportunity, if we
had pursued more wise policies, to actually make a breakthrough
in this 3-century ambivalence that the Russians have had about
the West, and unfortunately, I think for the time being we have
blown that opportunity.
Senator Smith. Are we to be excused at least by the fact
that we were dealing with people who at least called themselves
reformers, even though apparently they really were not
reformers, they were perhaps looters?
Dr. Reddaway. I think the root of the problem was that we
decided to go along with the ideology that is called shock
therapy, or the Washington consensus. I think that that
ideology may be applicable to some countries at certain stages
in their development, but it was most emphatically not suitable
for Russia in 1991. I myself argued that actually 2 or 3 months
before Mr. Yeltsin adopted it. He adopted it very much at the
urging of the G-7 and the IMF and certain individuals, Jeffrey
Sachs and Anders Aslund, in particular. I think it was a
profoundly flawed strategy, and the trouble was that it
determined the shape of a lot of other policies outside the
economic sphere. So, I am afraid we cannot excuse ourselves
because we were very much involved in pressing that strategy on
the Russians.
Senator Smith. I guess in our hearing last week, as we went
back and forth with Secretary Talbott in the debate about ``Who
lost Russia,'' the contention from the administration is that
we are not capable of losing Russia. It is not ours. Their
defense was we were dealing with people that were
democratically elected. We had to deal with them. We were doing
as best we could. But I think you might be saying----
Dr. Reddaway. I am saying something different.
Senator Smith. You are saying something very different,
that there is a case to be made that Russia was lost.
Dr. Reddaway. Yes. Of course, I am against the formula that
we lost Russia because the ultimate responsibility did, indeed,
lie with the Russians. They decided to adopt shock therapy. Mr.
Yeltsin decided to adopt this strategy which was profoundly
anti-democratic in its essence. He turned against the
democratic support movement that had brought him to power and
he emasculated that democratic mass support, and it all came to
a head in October 1993 when he dispersed the Parliament by
force. I think those were developments that flowed, to a very
considerable extent, from the adoption of the shock therapy
strategy. I think we made a great mistake by allowing Mr.
Yeltsin--it was not for us to allow him, but by giving him
advice which led to him subverting and betraying democracy in
the interests of a, to my mind, false ideological economic
strategy.
Senator Smith. There is one final question I have. You
talked about our need to stay out of Russia's internal affairs,
and yet I wonder, on the question of anti-semitism and
religious persecution, if we can afford to be quiet in any
country.
Dr. Reddaway. I was wanting to put special emphasis on
staying out of their, if you like, macroeconomic and political
policymaking.
Senator Smith. So, your comments do not extend to our
efforts to try to urge and incentivize religious toleration of
Jews and other faiths.
Dr. Reddaway. They would not extend to that. I think we
should speak up on those issues, again not with an overly
domineering and morally superior tone, although that cannot be
avoided altogether certainly.
We have this record of involving ourselves not just in
economic policymaking in Russia, but also in personnel. It was
actually an unwritten condition of the IMF loan in 1995 of $6.8
billion that Mr. Chubais would be the person in charge of
running economic policy. It was not written into any agreement,
but it was an unspoken agreement, unrecorded agreement, but it
was let out of the bag by certain people. That is the sort of
meddling, the sort of attempt to direct Russian policy at the
macro level, and supporting Mr. Yeltsin prior to his decision
to destroy the Russian Parliament in 1993, we gave our
permission to do that. We allowed democracy to be subverted in
that way. Those are the sorts of meddling and involvement that
I think have been very much against our national interest.
Senator Smith. Any predictions on what direction these
elections will cause Russia to go?
Dr. Reddaway. I think the new elections to Parliament in
December, 3 months from now, are likely to produce a Duma that
is even more hostile to Mr. Yeltsin than the present one. It is
hard to know how much the support will be for the alliance of
Mr. Luzhkov and Mr. Primakov. It is possible they might get 20
percent of the vote, possibly even a little more. It will be a
hostile Parliament to Mr. Yeltsin. It is possible that they
might renew their attempts to impeach him, assuming he has not
resigned by the time the new Duma assembles next January.
As regards the Presidential elections, I do not know if you
were asking about those as well.
Senator Smith. Those as well.
Dr. Reddaway. Those as well in June. Those are in some ways
more important than the parliamentary elections. That at the
moment I would regard as an extremely open race. The only thing
I would say is that if Mr. Primakov runs and if he does not
make major mistakes between now and then, as things look at the
moment, he would have the best chance of winning, and I do not
think that would be bad for Russia.
The reason I say that is that he is almost the only
prominent politician in Russia who is believed by most Russians
to put the national interest above personal and private
interests. Almost all the other politicians, with the exception
of Mr. Yavlinsky and one or two others, are regarded as
representing private and personal interests, group interests.
And frankly, those interests have been concerned and still are
to plunder the Russian state for their own personal and group
interests. It is very sad to have to say that, but that is my
considered judgment.
Senator Smith. The evidence is there.
Thank you, Dr. Reddaway. Very helpful.
Dr. Graham.
STATEMENT OF DR. THOMAS E. GRAHAM, JR., SENIOR ASSOCIATE,
CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, WASHINGTON, DC
Dr. Graham. Thank you, Mr. Chairman. I want to take a few
minutes simply to summarize the statement that I have submitted
for the record.
This committee has already spent a day focused on the
nature of corruption and organized crime in Russia, and I would
like to start with just two points on that issue before turning
to the broader issue of U.S. policy.
First, corruption has deep roots in the historical
conflation of the public and the private in Russian history.
For most of Russian history, the state was either the private
property of the csar or what I would call the collective
property of the Communist Party of the Soviet Union.
What we have witnessed since the breakup of the Soviet
Union and the demise of the Communist Party is the
fragmentation of the state. The central bureaucracy is much
less coherent and disciplined than it used to be, but the one
thing that remains the same is that key parts of the state
structure remain in the hands of private individuals. They are
privatized parts of the state, and they are used largely for
private gain and not for advancing the public good.
It is this fragmentation of a privatized state that has
exacerbated the problems of corruption that grew out of the
Soviet period. Corruption is pervasive now. It is more chaotic.
The holders of state power are greedier. The Russians
themselves have a word for it. It is ``bespredel.'' It is a
world without limits, without constraints, without rules. This
corrupt state has sent much of the wealth of the country abroad
and it has watched the GDP decline by nearly 50 percent over
the past 8 years, and it has watched the standard of living for
the vast majority of the Russians deteriorate quite sharply.
Not surprisingly, according to recent polls, most Russians view
the Brezhnev period, what we used to call the period of
stagnation, as a time when life was better.
The second point I would like to make is that there are no
easy solutions to this problem of corruption, and some of the
remedies can be worse than the disease. While we understandably
want the Russian Government to move quite aggressively against
corruption, we need to appreciate the dangers of doing that in
an environment where the rule of law has not been
institutionalized in an independent, reliable, and non-
politicized court system, nor has it been internalized by the
citizens as a code of conduct. Under such circumstances, the
term ``Mafioso'' or ``corrupt official'' could easily become
the functional equivalent of ``enemy of the people'' of
Stalinist notoriety, and if this happens, an aggressive anti-
corruption campaign could become a witch hunt, and that over
time will serve only to destabilize Russian society, erode
support for democratic principles, and deepen the lawlessness
that we see in Russia today.
Combating corruption is going to take political will,
imagination, patience, and money over many years, and even then
corruption is only going to be tamed. It is not going to be
eradicated. This campaign against corruption has to proceed
simultaneously with efforts to rebuild the capacity of the
state to govern effectively, to separate the private from the
public sphere, to make the state an autonomous entity that
works for the public good, not for private gain, and at the
same time we have to instill within the citizenry as a whole
respect for the rule of law. This is going to take a great deal
of time.
Now, this is not counsel for moving slowly against
corruption, nor is it counsel for being lenient toward the
Russian Government. It is counsel to proceed with full
awareness of the difficulties involved, of what is
realistically possible. We need to pay attention to the down
sides of an anti-corruption campaign so we can minimize them.
At the very least, we can and we should insist that the Russian
Government cooperate in the current investigations. But as
Peter has already pointed out, need to proceed with caution. As
any Russian will tell you, the law enforcement agencies in
their country are deeply politicized and corrupt themselves.
And as a result, even as we cooperate, we will need to verify
repeatedly the information we receive from the Russian side,
and we are going to need to reassess the motives of our Russian
interlocutors.
So, Mr. Chairman, how do we deal with Russia? What
principles should guide U.S. policy? Like you, Mr. Chairman, I
would add my voice to those who have warned against
disengaging. That is not an option given the importance of
Russia, what happens in and around Russia to our own security
and well-being and to the security and well-being of our allies
and partners around the world.
That said, we also need to appreciate the difficulties of
engagement. To put it simply, it takes two to engage, and the
Russian Government has increasingly lesser capacity to engage
productively because it is fragmented and privatized. So,
rather than broad engagement, which we have been practicing
over the past several years, I would urge pragmatic engagement,
that is, engagement on those issues that are priorities to the
two sides. Strategic nuclear stability, for example, is a
shared top priority, even if we differ on the solutions. On
this matter, engagement is both necessary and natural.
Nonproliferation of weapons of mass destruction is,
however, another issue. There is a shared interest but the
priorities that we attach to this are quite different. For us
it is a top priority, one of the few real threats to our
security over the next decade and beyond. For the Russians,
however, the immediate security threat arises from socio-
economic decline in their own country, not from proliferation.
For this reason, Russians tend to be lax on technology export
controls because the sale of technology provides desperately
needed money for dealing with domestic ills.
So, the challenge to the United States is to develop ways
in which we can provide incentives to Moscow to raise the
priority of nonproliferation for them, and I think that is
going to mean that we are going to have to engage them on
issues of high value to them that might be of lesser
significance to us, say, something like debt relief. Now, I am
not saying that this is the appropriate linkage or the only
linkage. All I am saying is that we are going to have to make
some serious and tough tradeoffs if we are going to engage
Russia to our benefit.
Now, on the more specific issue of dealing with Russia,
knowing what we do know now about corruption, I want to make
five recommendations.
First, we need to ensure the integrity of our own
institutions. I think the steps that the Congress is taking to
ensure better oversight of our banking and financial system are
steps in the right direction. We need to make them less
vulnerable to money laundering operations.
Second, we need to continue our efforts to integrate Russia
into the global economy. To succeed globally, Russian
businessmen will have to adapt to the values and principles of
the world economy where corruption is, or at least can be,
punished more harshly than it is within Russia today.
Integrating Russia will entail that we continue to provide
properly safeguarded IMF funding to the Russian Government, at
least to cover debts, and moving it from account to account,
not simply handing it over to the Russian Government. I think
it is also going to require that we consider some form of debt
relief, but then again, only in exchange for a Russian
commitment to move forward on micro-economic restructuring.
Third, we need to refocus some of our technical assistance.
To date, we have spent relatively little on rule of law
programs, preferring to spend the money on economic reforms and
business practices. I think we need to remember, as we do this,
that our influence, as Peter has already pointed out, is going
to be on the margins. The demand for a rule of law society has
to originate within Russia itself. The demand has to come from
Russians themselves. At best, we can help nurture and channel
these desires.
Fourth, we need to do a much better job of selling America
and our values in Russia. As Peter has pointed out, over the
past 8 years, we have squandered a vast reservoir of goodwill
toward the United States by our close identification with an
increasingly enfeebled Yeltsin, by our support for the
increasingly unpopular so-called radical reformers, and by our
unwavering support for shock therapy, or the Washington
consensus, for an economic policy that the vast majority of
Russians believe led their country to ruin.
There are two ways at least in which we can improve the
image of the United States while imparting values to Russians
in a non-patronizing fashion and laying the foundation for the
development of rule of law over the longer term.
First are exchange programs. We have already done a
considerable amount in this area, and many observers have
pointed out that these programs are the best payoff in
imparting values and winning friends for the United States. As
we look toward the future, I would suggest that we focus less
on passing technical information and skills through these
exchange programs, even in the areas of democracy-building.
Rather, what we need to do is give a greater number of Russians
the opportunity to enjoy a liberal education in the United
States. Longer-term exchanges will allow them to experience
firsthand how our society functions. They will become
acquainted with the values that are essential to building an
effectively functioning rule of law society. This approach has
the advantage of allowing Russians to adapt our experience to
their society, to Russian conditions, rather than our telling
them how they have to be adapted.
Second are our information centers. Now, Peter has said
that there is growing anti-Americanism in Russia, and he is
certainly right on that score. But I would also point out that
there is an abiding curiosity about the United States as a
successful and powerful country, and we need to play to this
curiosity. One of the unsung successes of the past several
years have been information centers that we have set up in
major cities across Russia. These centers provide printed
material and access to the Internet. As such, they have become
valuable sources of information about the United States, both
our political system and our legal system.
Senator Smith. Are they highly utilized?
Dr. Graham. That is the next point I was going to make.
They are highly utilized, and more important, what we have
noticed over time is increasing numbers of Duma deputies and
other officials at both the national and regional level are
turning to these centers for information about the United
States, particularly about legislation that is under
consideration in the Duma. They want to know how we do it, how
it is done in a normal and successful country, and then they
try to adapt those principles to their own legislation. This, I
think, is a way in which legislation within Russia has improved
over time. So, I think as we move forward, one of the things we
might consider is expanding the collections of these centers
and also expanding the network across Russia.
Now, the last point I would like to make is that as we
proceed, our senior officials of this administration and any
future administration should seek to establish what I would
call a respectful distance from their Russian counterparts. The
problem was not that this administration over-personalized the
relationship with Yeltsin, although that in fact did happen,
but rather that a relatively small circle of senior
administration officials entered into what I would call a
partnership with a similarly small circle of senior Russian
Government officials for the purpose of transforming Russian
society. Like all partnerships, this one required a high level
of interaction and a high degree of trust among the individuals
involved. The result was that senior administration officials
were tempted to turn more to their Russian partners than to the
intelligence community and the Foreign Service for insights as
to what was happening in Russia and how to proceed. Moreover,
the success of their partners became critical to the success of
the enterprise itself, and slowly the political survival of
specific individuals, Mr. Chubais in particular, became a
symbol of the success of overall reform effort. This close
association with Russian senior officials led to a great
misreading of the political situation which led to the
administration's being caught off guard by the financial
collapse of August 1998.
Now, this example that senior administration officials set
I think had a pernicious influence down the line. Lesser
government officials began to see their Russian counterparts in
a similar fashion, as partners and not, first of all, as
representatives of a foreign government with its own motives
and its own agenda. As a result, over time we as a Government
tended to see Russia through the eyes of our official Russian
partners who had a vested interest in persuading us that they
alone knew what was happening and what needed to be done.
To guard against this tunnel vision, I think we as a
Government need to engage a broader range of Russian contacts
in serious discussion. There are, of course, limited
possibilities for senior officials. There is the press of time,
time constraints. But what we need to do is utilize to the
maximum the opportunities afforded to embassy and consulate
officials and official Washington visitors to engage Russians,
not only to argue our point of view to represent our interests,
but as Peter has said, to listen attentively to what they are
saying about their own country, about where it is headed, and
what needs to be done. This is a task that we have not taken
seriously enough to date, but it is critical to the success of
our policy and I think we need to begin to do a much better job
in this regard.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Graham follows:]
Prepared Statement of Dr. Thomas E. Graham, Jr.
Mr. Chairman, I deeply appreciate the opportunity to speak before
this committee on the issue of corruption in Russia and U.S. policy
responses.
This committee has already spent a day focused on the nature of
corruption and organized crime in Russia. I only want to stress two
points on this matter, before turning to the question of U.S. policy.
First, corruption has deep roots in the historical conflation of
the private and the public in Russia. For most of Russian history, the
state was for all practical purposes the property of the Tsar. There
was no formal distinction between sovereignty and ownership, between
the public sphere and the private sphere. Almost by definition, public
positions were exploited for private gain. This situation was beginning
to change in the nineteenth century, but the Bolshevik coup d'etat put
an end to this positive evolution in 1917. The Communists reverted to
the old tsarist tradition, with one distinction: The state became the
collective property of the rigidly hierarchical Communist Party of the
Soviet Union, not the sole property of a single ruler.
What we have witnessed since the breakup of the Soviet Union and
the demise of the Communist Party of the Soviet Union is the
fragmentation of the state. Much power has flowed out of Moscow into
the regions. The central governmental bureaucracy has become less
coherent and disciplined. But the important point is that various key
pieces of the state remain the private preserves of specific
individuals, managed primarily for private gain rather than for the
public good. Moreover, unlike the Soviet period, when ``property
owners'' derived profit from the state's strength and control of
society, today's proprietors find it more advantageous for the state to
be weak and incapable of mobilizing resources for its own projects at
home or abroad. They enrich themselves by preying on the weakness of
the state, by stripping assets from property that once belonged to the
state as a whole.
This fragmentation of the state has exacerbated the problems of
corruption that grew out of the Soviet period. Corruption has become
pervasive, more chaotic; the holders of state power greedier. The
Russians have a word to describe the situation: bespredel, or a world
without limits, constraints, or rules. The corrupt Soviet state was in
some ways better for the population as a whole. It may have squandered
resources on excessive military production, but it did keep wealth
within the country and slowly raised living standards. The new Russian,
fragmented state has overseen the collapse of production--GDP has
plummeted by nearly a half since 1991--and sent much of the country's
wealth abroad, while the standard of living of most Russians has
sharply deteriorated. Over 37 percent of the population now lives below
the official poverty line; five years ago, the corresponding figure was
just over 20 percent. Should it be surprising that, according to recent
polls, Russians look back to the Brezhnev period, once known as the
``time of stagnation,'' as a time when life was better?
Second, there are no easy solutions to the problem of corruption in
Russia, and some remedies can be worse than the disease. While we
understandably would like the Russian government to move aggressively
against corruption, we need to appreciate the dangers of doing so in a
country where the rule of law has not been institutionalized in a
reliable, independent, and non-politicized court system or internalized
by most citizens as a code of conduct. Under such circumstances,
``Mafioso'' or ``corrupt official'' could easily become the functional
equivalent of ``enemy of the people'' of Stalinist notoriety. The only
difference would be that whereas most of the charges against ``enemies
of the people'' were absurd, those against ``mafiosi'' or ``corrupt
officials'' would have a certain ring of credibility. An aggressive
anti-corruption campaign could easily turn into a witch-hunt, which in
the long run would only serve to destabilize Russian society, erode
support for democratic principles, and deepen lawlessness.
Combating corruption will demand political will, imagination,
judiciousness, patience, and money applied over many years, and even
then corruption will not be eradicated but only reduced to manageable
proportions. The campaign against corruption has to proceed
simultaneously with efforts to rebuild the capacity of the state to
govern effectively; to separate the public from the private sphere and
make the state an autonomous entity for the promotion of the public
good; to construct an independent and reliable court system; and to
instill respect for law within the political class and more generally
across society. Both Russian and Western leaders must pay close
attention to ensure that there are no excesses, no dangerous
encroachments on human rights.
This is not counsel for slow movement on corruption or leniency
toward the Russian government. It is counsel to proceed with full
awareness of what is realistically possible and the potential
downsides, so that we can take steps to minimize them. At the very
least, we can--and should--insist that the Russian law enforcement
agencies cooperate with us in the investigation of cases such as that
involving the Bank of New York. But even here, we must proceed with
caution. Any Russian can tell you that his country's law enforcement
agencies are themselves corrupt and highly politicized. Much of the
mud-slinging, or kompromat wars, now escalating as Russia enters an
electoral cycle, has at its origins information obtained from these
agencies. As a result, even as we cooperate, we will need to verify
repeatedly the information we receive and reassess the motives of our
Russian interlocutors.
So, Mr. Chairman, how do we deal with Russia? What principles
should guide U.S. foreign policy? I would add my voice to those who
have warned against disengaging. That is not an option, given the
importance of what happens in and around Russia for the security and
well-being of the United States, as well as of our allies and partners
the world over. Moreover, we cannot reliably isolate or contain the
problems arising from the breakdown of governance and the rise of
corruption in Russia. We need to deal with the problems at their
origins.
That said, we also need to appreciate the difficulties of
engagement. It takes two to engage. And Russia in its current state has
an increasingly lesser capacity to engage productively. We need to take
care not to overburden the circuits or impose engagement on the
Russians where they are not ready for it. Rather than broad engagement,
we need pragmatic, engagement on those issues that are priorities to
the two sides. Strategic nuclear stability, for example, is a shared
top priority issue for both sides, even if we differ on the solutions.
On this matter, engagement is both necessary and natural.
Non-proliferation of weapons of mass destruction is another matter,
however. There is a shared interest, but the priority each side
attaches to it is different. It is a top priority for us, one of the
few real threats to our security. For the Russians, the immediate
security threats arise more from socio-economic decline than
proliferation. Russians are more lax in their technology export
controls in part because the sale of technology brings into the country
desperately needed resources for dealing with urgent domestic problems.
The challenge for the United States is to create incentives for Moscow
to give non-proliferation greater attention, and that will only occur
if we begin to address issues of great value to them that might be of
lesser priority to us, say, debt relief, restrictions on imports of
Russian steel, or repeal of the Jackson-Vanik amendment. This is not to
say these are the right or only possible linkages, but rather that we
will have to be prepared to make tough trade-offs if we are to engage
Russia to our benefit.
On the more specific issue of engaging Russia, knowing what we now
do about corruption, I would offer the following five recommendations.
First, we need to ensure the integrity of our own institutions. The
Congress is to be commended for introducing legislation that will
tighten the supervision of our own banking and financial system to make
it less vulnerable to money laundering operations. At the same time, we
need to press ahead with the investigation of the current charges,
taking care to distinguish criminal actions from capital flight, not
accepting allegations against specific individuals as fact, and
refraining from generalizing from this case to all Russian businessmen
and officials. There are thousands of honest and decent Russians
engaged in business or trying to make government work for the welfare
of the people.
Second, we need to continue our efforts to integrate Russia--and
Russian business--into the global economy. To succeed globally, Russian
businessmen will have to adapt to the values and principles of the
world economy, where corruption is--or at least can be--punished more
harshly than it is within Russia. Integrating Russia entails that we
continue to provide properly safeguarded IMF funding to the Russian
government (at least to cover past debt to the IMF) and that we
consider debt relief, but only in exchange for Russian movement on a
genuine program of micro-economic restructuring. Finally, this means we
have to take a tough look at our own practices to determine whether we
can open our own markets up further to competitive Russian products.
Third, we need to refocus some of our technical assistance. As
others have noted, the United States has spent relatively little on
programs designed to advance the rule of law and other democratic
practices, choosing to concentrate instead on economic reforms and
business practices. These programs can range from developing programs
to train judges to assisting in the development of civic education
courses for schools and universities. Our goal should not be to impose
our system on Russian society, but to help Russia develop one that fits
its own conditions, while meeting international standards.
At the same time, we need to remember that, like the rest of our
assistance programs, our influence will be only at the margins. The
demand for a rule of law society must emerge from within Russian
society. At best, we can help nurture and channel it. This is true of
democracy-building more generally. In the ongoing debate on where
Russia is headed, the Administration and others have pointed to regular
elections, a vigorous media, and respect for basic democratic freedoms
as signs of progress and the success of Administration policy. It is
important to remember, however, that the origins of the great
democratic opening of Russian society occurred under Soviet leader
Gorbachev when there were few credible promises of Western assistance.
It happened because the Russian elites and society more broadly saw
these developments as critical to restoring the country's vitality and
turning it into a ``normal country.''
Fourth, we need to do a better job of selling America and our
values in Russia. Over the past eight years, we have squandered the
vast reservoir of goodwill Russians had for the United States through
our close identification with an increasingly enfeebled Yeltsin, strong
backing of profoundly unpopular ``radical reformers,'' and unwavering
support for economic policies, which Russians believe led their country
to ruin. Preaching to the Russians about the evils of corruption now
will do nothing to restore that reservoir. There are two ways, however,
in which we can restore some of this goodwill, while imparting values
to Russians in a non-patronizing fashion and laying the foundation for
the development of rule of law over the longer term.
Exchange programs. We have already done a considerable
amount in this area, and many observers have pointed to these
programs as the best payoff in imparting values and winning
friends for the United States. As we look toward the future,
there is less of a need to impart specific technical skills in
democracy-building, NGO-building, and so on. Rather, we need to
give a greater number of Russians the opportunity to enjoy a
liberal education in the United States. Longer-term exchanges
will allow them to experience first-hand how our society
functions, as well as to become acquainted with values that are
essential to the building of a rule of law society. This
approach has the added advantage of letting the Russians
themselves adapt our experience to Russian realities.
Dissemination of information and information centers. There
remains a critical need for information about the United States
and the West in general in Russia. One of the unsung successes
of the past several years has been the information centers we
have set up in several cities across Russia (Moscow,
Vladivostok, St. Petersburg, Rostovon-Don, Tomsk, Nizhniy
Novgorod, and Yekaterinburg). These centers play to the natural
curiosity Russians still have about the United States as a
prosperous and successful power. They provide not only books
and other printed material but also access to the Internet. As
such, they are a source of valuable information on the United
States, including our political and legal systems. Over the
years, Duma deputies and local officials from across the
political spectrum have routinely requested information on U.S.
legislation from these centers on a range of issues that were
under consideration in the Duma and other legislative bodies.
This information has improved the overall quality of Russian
legislation. For these reasons, we should consider building up
the collections of these centers and expanding them into other
cities.
Last, senior officials of this and future Administrations need to
establish and maintain a respectful distance from their Russian
counterparts. The problem was not that this Administration
overpersonalized the relationship with Yeltsin--although that did
happen--but rather that a relatively small group of senior
Administration officials entered into a ``partnership'' with a
similarly small group of senior Russian officials to push forward an
agenda focused primarily on the domestic transformation of Russia. Like
all partnerships, this one required constant interaction and a high
level of trust to function effectively. The result was that senior
Administration officials were tempted to turn more to their Russian
partners than to the Intelligence Community and the Foreign Service for
insights as to what was happening in Russia and how to proceed.
Moreover, the success of their partners became critical to the success
of the enterprise as a whole, and slowly the political survival of
someone like privatization czar Chubais became a symbol of the success
of reform as a whole. This ultimately led to a grave misreading of the
political situation, which resulted in the Administration's being
caught off guard by the financial collapse of August 1998.
The example senior Administration officials set had a pernicious
influence down the line, as lesser officials began to see their
counterparts in the Russian governments in a similar fashion, as
partners, rather than as first of all representatives of a foreign
government with its own agenda. The goal was to push forward the
domestic transformation of Russia, not to provide critical assessments
of the policies themselves. These official contacts became the primary
sources of information about what was happening in Russian society, in
part because dealing with policy issues left little time for nurturing
contacts elsewhere in Russian society. As a result, we developed as a
government a tendency to see Russia through the prism of our Russian
partners, who had a vested interest in persuading us that they alone
knew what was really happening and what needed to be done.
To guard against such tunnel vision, we need as a government to
engage a broader range of Russian contacts in serious discussion. There
are, of course, limited possibilities for doing this at the highest
levels; the time constraints and press of other business leave little
time for serious grooming of contacts. But we need to utilize to the
maximum the opportunities afforded to Embassy and Consulate officials
and official Washington visitors to engage Russians, not only to argue
our policies and represent our interests, but to listen attentively to
what they are saying about their own country. This task we have not
taken seriously enough to date.
Thank you, Mr. Chairman.
Senator Smith. Thank you. You have been very helpful.
I wonder if you can speak to some specifics. You had some
great suggestions, but in our hearing last week, we were trying
to draw out what has gone on really in all of this. The former
Deputy Assistant Director of the FBI in charge of criminal
investigations, Jim Moody, testified before this committee that
a Russian law enforcement official he spoke to estimated that
90 percent of his officers were corrupt. How can the United
States collaborate with Russian law enforcement and security
services if large numbers of them are just simply corrupt?
I love your idea about more and more engagement, but it
seems to me the Clinton administration has tried to engage. And
I am saying this as a Republican, trying to be fair. They have
tried to engage but they have met with folks whose motives are
not to the benefit of the Russian nation.
Dr. Graham. Yes. The point that I would make on that is
that if 80 percent are corrupt, then there is a 20 percent that
is not corrupt. The real challenge for us, as we try to engage
Russia, is to find those 20 percent--I would suggest that it is
somewhat more--who do have an interest in dealing with
corruption in an equitable fashion in Russia today.
Senator Smith. We would have to be careful because it seems
to me that it may allow sensitive information to get to
criminal hands.
Dr. Graham. Obviously. So, this is why I urged that we have
to treat these relationships with extreme caution. We have to
know whom we are dealing with. But simply not to engage because
of the possibility of the leakage of information I think is the
wrong approach. What we need to do is to check as carefully as
we can who we are dealing with, proceed cautiously as we
develop the level of trust that we need in order to engage
productively across a range of issues, particularly in criminal
investigations.
Senator Smith. I think that is right.
It is alleged that the intelligence community and our
diplomats in Russia were discouraged from fully airing
information about systematic corruption in Russia. You spent
some time there. You can tell us whether that is the case or
not. They were discouraged from giving information about the
lack of transparency in the Gore-Chernomyrdin Commission. Is
that fair? Is that accurate?
Dr. Graham. I would argue that that is not an accurate
picture of what the embassy did at least. I cannot speak to the
intelligence community, but you have had people who could
address that issue.
My experience in over 3 years of supervising all reporting
on domestic political matters in Russia is that there was no
systematic attempt to prevent us from sending back what we
thought needed to be sent back no matter what official it
concerned, no matter what the charges were, whether it be
corruption or something else.
That said, you have to remember that as Government
officials and embassy officers, we had a responsibility I think
to be quite careful and cautious in the way we treated specific
allegations against specific individuals. We, as Foreign
Service officers, did not have the ability, I would say, to
investigate these charges fully. They were rumors. What we
tended to do was to present these as rumors back to Washington
in the hopes that there was someone else in our Government,
whether it be in the intelligence community, the FBI, or
elsewhere, who would find this a useful piece in a puzzle that
they were trying to put together. But we were always very
careful to give some assessment of the source and what we
thought might be the possible validity of the information.
The second point I would like to make is that for most of
the time that I was in Moscow, I had the authority to sign
cables out of the embassy. I did not have to give them to the
Ambassador for prior review. I can tell you that we sent out
what we thought needed to be sent out, and at no point did the
Ambassador come back and say, stop sending that information
back to Washington, they do not want to hear it. We were
encouraged to do that.
The point I would like to make on the Gore-Chernomyrdin
Commission is that I think this falls into a somewhat different
category. The problem with the commission was not so much its
original design. I think it served a useful purpose in bringing
together government officials on both sides to discuss a range
of issues that were of interest to both governments. There were
some, I think, productive and useful exercises, particularly in
working on some business exchanges within that commission.
The commission, however, came to meet too frequently, and
anybody who has served at an embassy knows that when you are
bringing over hundreds of senior U.S. officials, eight or nine
cabinet officers, all demanding the attention of a senior
administration official, this is a tremendous burden on an
embassy. We would have to close the embassy down for other
business, by and large, 3 to 4 weeks before these delegations
arrived. Obviously, that puts a limit on what we can do in our
real job, which is interacting with Russian society. It puts a
limit on what we can do in reporting on Russian society. So, I
think the frequency and also the nature of high level meetings
like this, that is, to look for success stories, ultimately had
a pernicious influence on the reporting out of the embassy.
That is not to say we should not have done it. I think we
should have done it, but we should have stretched out the time
between sessions and had them not so much on a regular basis
but ad hoc when there was real business to be discussed and
business to be concluded.
Senator Smith. Can you speak to the IMF managing director
who told the Washington Post in February 1996 that in a real
sense the IMF was financing Russia's military efforts in
Chechnya? Do you think that is accurate?
Dr. Graham. I think you have already had a discussion over
whether money is fungible or not, and I think that is the point
that I would make. Obviously, the Russian Government chose what
to do with the money. You will never be able to demonstrate
that there were bills that were printed and received from the
IMF that were spent on the Chechnya effort.
Clearly I think we should have been much harsher in our
judgments against the Russian Government at that time. It was a
time when it was probably wise for, again, political reasons to
withhold the tranche of an IMF agreement precisely because we
knew that money was fungible and that any money that we would
put in at that time would allow the Russians to use other
sources to conduct the war against Chechnya.
Senator Smith. What should our policy be with respect to
Russia and Chechnya, and Russia and Kosovo, in providing
financial resources?
Dr. Graham. The Russians have a tremendous problem in the
north Caucasus now. It is not only Chechnya, but it is
Dagestan, it is elsewhere. I think, unfortunately, they are
going down the wrong track in seeking a military solution to
what is largely a socio-economic problem. Of course, the
problem is that Russians do not have the resources in order to
engage in a broad political and socio-economic program aimed at
pacifying the region by giving the people of that region a
reason to stay within the Russian Federation.
I also think that you have to see this crisis within the
context of the broader Caucasus. It is not only instability in
Russian regions, but there is instability in Georgia, Armenia,
and Azerbaijan. I would submit that there is no solution to
Chechnya outside of a broader solution to the whole Caucasus
situation.
What is probably called for at this point is something
along the lines of an international conference on the Caucasus
where we bring together the leaders and the political actors,
both Russian from the Trans-Caucasian region, Chechen leaders,
Dagestani leaders, and so forth, and look to see whether it is
possible to make broad tradeoffs that will satisfy both sides.
Clearly for this to succeed, it is going to require
financial resources, and that is where the West comes in. We
are the only people who have the resources that could be used
for a solution of this kind. Now, I do not know what the
details are of it, but as I said, I would submit that solving
this problem simply between Russia and Chechnya is impossible
at this point. Our national security does, I think, call for
stabilizing the region, and I think it is at least worthwhile
pursuing this option at this point to see what can be done.
Senator Smith. Thank you very much, Doctor. I appreciate so
much your testimony.
Dr. Finckenauer, we appreciate your being here and look
forward to hearing your views on how we deal with corruption.
STATEMENT OF DR. JAMES O. FINCKENAUER, PROFESSOR OF CRIMINAL
JUSTICE, RUTGERS UNIVERSITY (CURRENTLY ON LEAVE), WASHINGTON,
DC
Dr. Finckenauer. Thank you very much, Mr. Chairman, and
thank you for giving me the opportunity to speak with you
today. I certainly agree with your comment at the outset, that
this is a very important and timely topic.
I would like to divide my presentation roughly into three
areas, and some of what I will say will echo what my two
colleagues have already spoken about. I think it is important
to have a little bit of a historical overview to give us some
context for understanding what is going on today. I will talk a
little bit about the current state of affairs and then also
offer just a few recommendations for some future strategies and
policies.
With regard to this history, I think it is important to
understand that what we see called today crony capitalism and
patrimonialism not only in Russia, but also in other of the
former Soviet Republics, are not new phenomena. I think it
would be wrong and remiss to assume that this sort of symbiotic
relationship among crime and the government and the economy all
began after the collapse of the Soviet Union in 1991. As I
think Professor Reddaway alluded to, corruption and corrupt
bureaucrats in Russia go back to the time of the csars. What is
particularly important to understand about the historical
period is that so too does a very blase attitude about the
legality of stealing from the state as being accepted as normal
behavior. I think it is important to understand that that very
much shapes the kind of mentality that exists in Russia today,
given the economic situation and the corruption situation.
Senator Smith. Doctor, Secretary Talbott was here and he
said last week--and I quote--``Russia's current problems with
crime and corruption are different from the corruption so
entrenched in Soviet communism. Indeed, today's problems are a
result of an incomplete transition to democracy and market
reform.'' I think you are saying that is not the case.
Dr. Finckenauer. I think they are different in the sense of
the differences in the economy that exist today and the
opportunities for corruption that exist today. I do not think
they are different in the sense of a mentality about taking
advantage of opportunities and, in a sense, having a sort of
historical perspective to this.
I think other elements of the history are the role of
organized crime that began very early in the Soviet Union, the
linkages, the growth out of the Gulag system of organized
crime. We had the Communist Party that took on the trappings
and characteristics of a sophisticated criminal organization,
and then we had, as was also mentioned, the Brezhnev period in
particular in the Soviet Union that was a period in which
corruption sort of rose to its zenith. So, we see certain
historical legs that provide the foundation for what has
happened in Russia since 1991.
I think a critical characteristic of that Soviet period is
what the Russians call ``blat.'' It means use of informal
personal networks to obtain goods and services that are in
short supply. As we will remember, lots of things were in short
supply in the Soviet Union. If we draw a contrast with the
United States--and my area of specialty in criminal justice is
organized crime, and I have spent a lot of time studying
organized crime in the United States--we see that organized
crime arises principally to provide goods and services that are
in demand, but that are either illegal or in short supply
because they are being regulated. What we saw in the Soviet
Union was that the response to the shortage of goods and
services was a black market, a shadow economy, and this system
of blat, the system of informal social networks and
connections.
Senator Smith. How do you spell that word?
Dr. Finckenauer. B-l-a-t.
Senator Smith. Blat.
Dr. Finckenauer. Blat.
I think that is the foundation which has evolved into what
we see as today's more formal or more, say, sophisticated,
higher level kind of corruption. Things like insider trading,
preferential licenses, rigged auctions, illegal banking of
state funds are all new examples of the same phenomenon, this
phenomenon of blat.
I just recently read a book called ``Collision and
Collusion'' by Janine Wedel in which she talks about how the
informal networks in Russia and Ukraine and also in Eastern
Europe diverted and subverted massive amounts of the Western
aid that has come into Russia and Ukraine in the 1990's.
Subverted because it got linked into this personal network
system that people were accustomed to. This is the way they did
business. This is the way things operated in the Soviet Union.
In the work I am now doing in Ukraine, I see some of the
same practice, but I think it is what we would call cronyism.
The people that I deal with in Ukraine see nothing wrong with
this. They do not understand that we are looking to develop,
for example, a merit-based system to award grants to
researchers or to award Internet contracts. They want to deal
with the people they know because they trust them because they
have some track record with them. It is not hard to see how
this can get elevated to a much larger scale and bring in many,
many more people who do not essentially see this as wrong. This
is the way we do business, and this is the way a sort of
interpersonal trust operates in this area.
I think that, as other people have said better than I, we
need to understand this history. We need to look at the impact
of that history on what we have done and also need to draw
lessons for what we do in the future and learn from that
experience.
As my colleagues have also said today, in Russia we see a
very feeble commitment to the rule of law. And maybe feeble is
overstating the commitment. In part it flows from the kind of
background that I have just sketched out. Whereas, in most of
the countries of the world, crime is something that is outside
the state and the society and sort of in opposition to them, in
Russia crime is inside the state and the society. It is
insidious. It is pervasive, but it is also mainstream in a way
that we in the West do not quite understand. The kind of
centrality, if you will, of official crime and its relationship
to what is taken to be normal political activity is a carryover
of this blat system that I described.
As a result of this, we see in Russia state institutions
that are very protective of their own vested interests, but are
very negligent and deficient when it comes to defending the
interests of ordinary Russian citizens. One of the results of
this is to breed disrespect and distrust of legal and political
institutions among the Russian people, and it also opens the
door to opportunities for Russian organized crime because what
happens is when the state falls down on its job of providing
protection and employment and social services, other mechanisms
begin to move in to fill that gap. Russian organized crime is
one of those mechanisms.
To give you another Russian word, there is a word
``krysha'' which in Russian means roof. Practically every
business operating in Russia today has to have a krysha, or
roof. This is a form of protection, a form of insurance, if you
will, to protect businesses from extortion. Now, why is there
this role for the krysha? It is because the state and state
institutions do not have either the will or the capacity to
protect businesses. So, for example, if somebody wrongs you in
a business deal, who do you go to in order to get redress of
your grievance? There is no mechanism to go to. There is no
mechanism that is trusted by Russian people and by Russian
businesses, so they turn to organized crime to resolve that.
What that does is simply continue to promulgate and strengthen
the role of organized crime in Russia.
Senator Smith. Doctor, can that explain perhaps why an
American businessman named Paul Tatum was slain over a dispute
over a hotel? We may never find out who did that. Is that what
you are telling me?
Dr. Finckenauer. That is correct. Let me put on my social
scientist hat and say I think that is a plausible hypothesis.
Given that we know that these kinds of activities go on and
given that we know organized crime is in fact being paid to
protect the interests of businesses, it is not hard to make the
next step and say, well, that killing was a step in protecting
somebody's business interest. Certainly, as I say, a plausible
hypothesis.
One other thing about these so-called kryshas, often they
are made up of police types who may be active duty police
officers who are working in protection rackets--and I will call
them rackets--on the side as a way of making extra income. They
may be ex-KGB agents who have skills in the areas, or they
simply may be traditional organized crime types. But it is a
pervasive operation that permits business and facilitates
business practices to continue.
Senator Smith. But you are not describing a system that is
going to attract a lot of U.S. or European capital.
Dr. Finckenauer. No, I do not think so. I think that early
on there was a naivete and an ignorance about the way business
was done in Moscow and elsewhere in Russia, and I think
American businesses, as they are oft to do, looking for
opportunities--they are entrepreneurs. They were looking for
opportunities. But I think there have been some hard-learned
lessons out of the last 10 years of trying to bring business
practices into the Soviet Union.
Senator Smith. But if it is as pervasive as you suggest,
maybe I should be more pessimistic about it. I have tried to
remain optimistic. I am not sure I should be if there is the
system of blat and what was the other word?
Dr. Finckenauer. Krysha.
Senator Smith. Krysha. If that is the way it is done, there
are other places to invest.
Dr. Finckenauer. But if I jump ahead to propose an
alternative, I think that the krysha system, the roof system,
the protection racket system is related to the weak role of the
state. So, therefore, one needs to think about how do you begin
to build--and my colleagues have already mentioned it--a rule
of law? How do you build a viable judicial system and legal
system that would provide the avenues for businesses to turn to
if they have grievances or they have other problems that they
want to be worked out? That is obviously the way we do it in
the United States. We do not turn to organized crime--or at
least most of the time we do not--to resolve those kinds of
disputes. So, one is related to the other.
I think that the development of the legal system and the
judicial system is very much intertwined with the attempt to
develop a viable economic system, and among the aspects of that
development is trying to do away with this krysha system, do
away with the need for that kind of a system.
Senator Smith. Is it fair to say, though, that this existed
even with a dominant, heavy state under the Soviet Union with
central planning? This existed anyway because that state--even
though to the outside world it was a powerful, centrally
planned super power--was really a very weak state when it came
to protecting its citizens. Therefore, this kind of thing
predated the collapse of Soviet communism.
Dr. Finckenauer. But I do not think you had this kind of
krysha system in the economic role. You had a black market and
you had a shadow economy, but by and large, those were
permitted by the state because the state well knew that the
state economy was unable to meet the needs of the Russian
people.
Senator Smith. And it has just grown.
Dr. Finckenauer. So, they sort of allowed, if you will--not
only allowed, but in part benefited from allowing--the black
markets to exist.
But now we see this explosion of other kinds of economic
enterprises that did not exist before. You have pizza joints,
for example. I have a colleague. We were standing on a corner
in Moscow and just looking around, and she said to me every one
of these businesses, including this local little pizza place,
is paying a krysha in order for them to operate.
I had another colleague describe to me how an individual
that he knew set up a small kiosk, literally on a sidewalk, in
Moscow selling rugs that he was bringing in from Central Asia.
He very quickly was approached by some individuals who said to
him, this is our territory. We will, in effect, allow you to
operate on this corner or in this area in return for 10 percent
of your profits. When this same friend of mine talked again to
his colleague who is still in the rug selling business, this
percentage had grown to 80 percent. So, the challenge to the
business person is how much is that 20 percent worth to me? Is
this still a viable business that I will pay the other 80
percent simply to be allowed to operate?
But the point is that the individual has nobody to go to.
There is no recourse. Who does he go to to complain about this,
who is actually going to come in and take some action? No one.
So, we see, I think, a system that has bred distrust and
disrespect of legal and political institutions in Russia.
We do, by the way, have an analogous situation that I think
we could learn lessons from, and that is in Sicily where the
Sicilian Mafia, also in the instance of there being a weak
state, came in and essentially ran an extortion racket and a
protection racket. But we now see strong measures being taken
to combat the Sicilian Mafia, often driven by grassroots
efforts to support that. And I think that perhaps we could look
to that as a model or as an example of where we could apply
some of those lessons in the Russian situation.
The nature of organized crime in Russia is quite different
than it is in the United States. It is much more, I would say,
professional, much more adept at what we call white collar
crimes as opposed to the traditional crimes of prostitution and
gambling and drugs and so on, not that they are not engaged in
those, but they are also involved at much higher level, more
sophisticated kinds of crimes, electronic crimes, defrauding
banks and other financial institutions, money laundering.
They are also engaged in supporting political candidates.
There were questions about what is going to happen with the
elections. I would be interested in where the money is coming
from to support candidates in the elections and how much of
that is dirty money perhaps coming out of organized crime.
They are buying mass media. They make charitable donations
to very considerable degrees.
They are also a global phenomenon, and I think it is very
important that since we are sitting here in Washington, DC, we
not lose sight of the fact that we have other reasons to try to
engage in what is going on in Russia and to help bring about
reform that go beyond the altruistic and philosophical reasons
of, for example, supporting democratic governance. Beyond Bank
of New York type problems, we see threats of trafficking of
arms, drugs, women and children, cybercrime, counterfeiting,
economic espionage, et cetera, all of which are threatening to
the United States, in the United States. It is not just what
are the United States' interests in Russia per se. My point is
we have other reasons to want to be engaged and stay on top of
this in an attempt to encourage and bring about reform.
Let me quickly turn to the future and premise this by
saying, given this sort of dark and gloomy scenario, what can
be done about any of this? Again, I think first of all, we have
to recognize what our limitations are. There is only so much
the United States is going to be able to do. The major
solutions--I agree with my colleagues--rest with the Russians
themselves.
But I would take a little bit different tack on that, and I
would say the Russian people have got to become disgusted--
disgusted--with the system that they see. Unless and until that
occurs, those who are benefiting from this will continue to
operate business as usual.
Senator Smith. But I think we have heard it is not
disgusting yet. It is normal.
Dr. Finckenauer. That is correct. Lest we think that this
notion is naive, I would again offer the example of Sicily and
Palermo and particularly Mayor Orlando Leoluca in Palermo who
started out as sort of a one-man band in taking on the Sicilian
Mafia, not a small task in Sicily. But what we now see is
grassroots efforts of teachers and mothers in a variety of
strategies to begin to combat the Sicilian Mafia and
essentially shame the government and shame the political system
into moving against that Mafia.
I think the thing is how could something like that begin to
be done in Russia. We know that the Russian people do not like
this. I talk to lots of Russians. They do not like it, but they
see themselves as being sort of powerless in making any efforts
in this regard. And I think there are things that we can do to
encourage them to show that they are not powerless, to provide
them with examples. I would echo the notion of exchanges. I
would echo the notion of how do we get more supportive
information out to the Russian people.
In particular, I would mention a small, tiny, little
program called Developing a Culture of Lawfulness. This
includes a curriculum that has been developed, and presently
being pilot tested in southern California and in Mexico. The
goal of this curriculum is to create a hostile environment for
bribery and corruption among school children. The idea is if we
could begin to turn around these young people's minds that they
would see the harm, they would see the pervasiveness and the
insidiousness of corruption and crime and they would become our
allies, they would become our ambassadors, first of all, within
their own families, within their own classrooms, with their own
teachers, and out of this little, tiny pebble in a puddle, if
you will, that could radiate out, we could begin to see the
foundation of support for the notion of building a rule of law
society. They are doing this in Sicily. They have done it in
Hong Kong. If this notion can work in southern California where
they have got all kinds of kids being drawn into street gangs,
et cetera who then get into drugs and then link up with adult
criminal activities, this is not unlike what we see going on in
Moscow and St. Petersburg and other places. This is an idea I
think that is like an egg. We should warm it. We should protect
it. We should let it hatch. We should watch it grow and see how
it develops. And if it works, we should move that egg to Moscow
and to other places and see if we cannot do it there.
I would also say that we need to think about providing
additional equipment and training and technical assistance for
law enforcement. I was taken with your point about Jim Moody's
comment on the degree of corruption among Russian law
enforcement, an enormous problem. But I would draw a contrast,
and I hope you will not view this as splitting hairs, but I
would like to differentiate among different types of
corruption. There is a kind of venal corruption and then there
is something called situational corruption.
We have Russian police officers who are making money that
puts them below the poverty line, lots of them. They are in
this situation at the same time where they have the authority
and the power of being a police officer. Do those police
officers all like the fact that they have viewed themselves as
having to take money or take bribes, be involved in corruption?
I suspect they do not, but what is their alternative? How could
we, for example, sort of weed out the venally corrupt ones, who
we could write off and forget about? If we could provide the
right opportunities, increase their salaries, increase their
professionalism, increase their training, give them equipment
to do the kind of jobs they want to do, would they still be
corrupt? I suspect a lot of them would not.
So, I think we need to think about those kinds of
strategies, not simply say, well, we cannot deal with them
because they are all corrupt. We should not be naive. And we
should understand that if we share information, we had better
be very careful with the kind of law enforcement information we
are sharing because we do not know what might be done with it.
But I think there are avenues there that we could pursue.
Finally, I would say that for the whole system of
administration of justice, we have got to look to build an
independent and incorruptible legal and judicial system because
that is now the weakest link in the Russian governmental
system. It is being overpowered by the legislature and
particularly by the executive. There is no avenue, as I have
mentioned, for citizens to turn to for redress of grievances. A
prominent judiciary would undercut the role of organized crime
in these krysha respects that I have talked about.
I think projects like the ABA/CEELI program need our
encouragement, they need our support. We need more of that to
be done.
Finally, I think all of this presents enormous challenges,
but also opportunities for the United States, but what we must
understand is that this is not a sprint. This is a marathon,
and we are only going to be ultimately successful if we are
willing to stay the course. I think that is probably the most
important lesson that we can learn out of all of this.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Finckenauer follows:]
Prepared Statement of Dr. James O. Finckenauer
Thank you very much for giving me this opportunity to speak with
you today. The topic of our discussion is not only important but also
timely. I would like to make clear at the outset that I am speaking
here, not as a representative of the Department of Justice nor of the
National Institute of Justice, but rather as a Professor of Criminal
Justice at the Rutgers University School of Criminal Justice in New
Jersey. It is in that role that my research, which provides the basis
for my statement, was conducted.
I will divide my presentation into three parts: (1) a brief
historical survey to provide a context for current events; (2) a
description of the current state of affairs; and (3) some
recommendations for future assistance and strategies. I would be happy
to try to expand upon any of these should you so desire.
the past
The so-called crony-capitalism and patrimonialism that we see in
Russia and other former Soviet Republics today are not new phenomena.
We would be both wrong and remiss to assume that the kind of symbiotic
relationship among crime, government, and the economy we are now
hearing about all began after the collapse of the USSR in 1991.
Corruption and corrupt bureaucrats in Russia date back to the time of
the czars; and so too does the blase attitude toward legality that
accepted stealing from the state (in that case the czar) as normal
behavior.
Crime, and more particularly organized crime, became closely linked
with the Soviet government after the October revolution--especially so
under Stalin. The 75 years of Communist rule created the prism through
which we should view today's developments if we want to understand why
things are the way they are today. The foundation for the current
problems rests upon several historical legs. Stalin's Gulag prison
system spawned a professional criminal class known as the vory v zakone
or thieves in law; the all-powerful Communist Party took on the
trappings and character of a criminal organization; and, the Brezhnev
period (1964-1982) that immediately preceded a series of reform efforts
was a time when corruption, stagnation, and disillusionment reached
their zeniths.
A critical characteristic of this Soviet period was the important
role of blat--informal personal networks that were used to obtain goods
and services that were in short supply. And many things were in short
supply. In the United States, organized crime responds to the demands
for goods and services that are either illegal or in short supply
because of regulation. In the Soviet Union, in contrast, it was the
black market, the shadow economy, and blat that fulfilled this
function. It is this blat--this social network system--that has evolved
into the more sophisticated forms of corruption we see now. Insider
trading, preferential licenses, rigged auctions, and illegal banking of
state funds are all examples of the new forms of blat. In her new book
``Collision and Collusion,'' Janine Wedel describes how these informal
networks diverted and subverted massive amounts of Western aid coming
to Russia and Ukraine in the l990s. In my own work in Ukraine, I see
examples of this unusual reliance upon personnal relationships--what we
in the United States would call cronyism--to award grants and other
aid. My point is that this is normal and accepted behavior founded upon
a peculiar cultural history. We perhaps had little reason to know this
before, but we should know it now, and we should understand what its
implications are for our future policies and assistance.
the present
What we see in Russia today is a very feeble commitment to the rule
of law. This flows in part from the background I have just sketched
out. Whereas in most countries of the world crime is something that is
outside the state and the society, and in direct opposition to them, in
Russia crime is very much inside. It is insidious, not only pervasive
but mainstream. There is a centrality of official crime and other
illegality to what is taken to be ``normal'' political activity, a
carry over of the blat system.
Because of this centrality, this linkage, we see State institutions
that are very protective of their own vested interests, but very
negligent or deficient when it comes to defending the interests of
ordinary Russian citizens. This breeds distrust and disrespect of legal
and political institutions among the people. It also opens the door for
Russian organized crime, in all its varieties, to assume what would
otherwise be State roles--for protection, for employment, for social
services. This State weakness is one of the reasons behind the growth
of the krysha system. Krysha in Russian means roof. Nearly every
Russian business has to have a krysha or roof. This is a form of
protection or insurance policy against extortion. Because businesses
cannot turn to and depend upon the State to protect their interests,
they must turn to this alternative form. Roofs are provided by private
security firms that may actually employ the police, by former KGB
types, or by more traditional organized crime. The result is a
pervasive protection racket. This kind of lawless and stateless
environment is similar to that of Sicily some years ago; an environment
that lead to the growth of the Sicilian Mafia.
Russian organized crime has penetrated business and state
enterprises to a degree that is unfathomable to most Westerners. It has
also shifted more and more away from such traditional forms as the voiy
v zakone mentioned earlier, to become more professional and adept at
white-collar types of crimes. These include the kind of electronic
crimes, the defrauding of banks and other financial institutions, and
the money laundering that have recently risen to the fore. In addition
to its already intertwined relationship with business and government,
organized crime continues to extend its reach by supporting political
candidates, by buying mass media, and by making charitable donations.
The transnationai crime emanating from the former Soviet Union has
also become a global phenomenon. This means that in addition to any
altruistic or philosophical reasons (for example, supporting democratic
governance) the U.S. may have for helping Russia engage its problems,
there are also pragmatic and self-interested reasons for doing so.
Besides the Bank of New York type problems, which are actually quite
benign in many respects, there are threats from trafficking in arms,
drugs, women and children, from cybercrime, from counterfeiting, and
from economic espionage.
the future
Given this dark and gloomy scenario, what might be done about any
of this? First, we should recognize that there are limitations, perhaps
severe limitations, on how much the United States can do about it. The
major solutions rest with the Russians themselves. The Russian people
must become so disgusted with what they now see that they begin, from
the grassroots level, to change it. Lest one think this is extremely
naive, we can look at the example of Sicily and the city of Palermo in
particular. There Mayor Orlando Leoluca has lead a counteraction
against the Mafia. Mothers and teachers and children have taken up the
cause to achieve real successes.
Russia, and other ex-Soviet republics such as Ukraine, lacks an
aware and active civil society. There are not traditions of democratic
governance, of peaceful resolution of disputes in accordance with
accepted rules, and of a rule of law. This is why the U.S. could
survive the impeachment of the President by the Congress, and continue
to function. In Moscow, a dispute between the president and the
parliament ended in armed conflict and the shelling of the Parliament
building. Stephen Handeiman, in his book ``Comrade Criminal,'' argues
that it was a fundamental mistake to attempt to develop free markets in
Russia without first having a strong civil society in place. It was
that ordering that led to the continued ascendancy of blat.
One small approach to building this necessary civil society would
be to adopt what has been called the ``culture of lawfulness''
curriculum for school children. The intent is to create a hostile
environment for bribery and corruption. This idea is currently being
pilot tested in schools in Mexico and southern California, and builds
on practices in Sicily and in Hong Kong. If this approach bears fruit,
it could be adapted and extended to Russia.
Also needed are equipment, training, and technical assistance for
law enforcement. Each of these is already being provided. We need now
to assess the effectiveness of our current efforts in these areas and
build upon the successes. Training, for example, might be more
efficient and better targeted though the use of distance learning and
web-based techniques.
Finally, and perhaps foremost among the areas where we can help is
in respect to the administration of justice. Russia sorely needs an
independent and incorruptible legal and judicial system. This is now
the weakest link in the system of governance. There is no brake on the
excesses of the executive and legislative branches. There is also no
avenue to which ordinary citizens and businesses can turn for redress
of grievances and for dispute resolution. A strong judiciary would
undercut the predominant role now being played in this area by
organized crime. Projects such as those of ABA/CEELI are critical in
helping achieve this goal.
All of this presents enormous challenges as well as opportunities
for the United States. We must, however, understand that this will not
be a sprint, but a marathon. Ultimate success will be achieved only if
we stay the course. I thank you for your attention and for this
opportunity to engage the debate. I would be happy to answer any
questions you may have.
Senator Smith. Thank you very much, Dr. Finckenauer. Very,
very helpful. Very insightful.
To any of you, in the current environment, do each of you
think it is appropriate for the Ex-Im Bank to issue its largest
loan guarantees ever to Russia? Is it appropriate, Dr.
Reddaway?
Dr. Reddaway. To what entities?
Senator Smith. The Russian Government.
Dr. Reddaway. To Russian Government.
Senator Smith. Yes.
Dr. Reddaway. I think that is not appropriate. I think that
although different parts of the Russian Government are corrupt
in different degrees, the great majority of Russian Government
is, to one degree or another, corrupt and making large loans in
cash to entities of the Russian Government is a very, very
dubious proposition, indeed. I would want the particular cases
to be looked at very, very closely indeed.
Senator Smith. Let me clarify. It is to a U.S. company
investing in a Russian enterprise.
Dr. Reddaway. That is different. Again, I would say that
the exact circumstances and the exact people involved need to
be looked at very, very closely. I agree with what both my
colleagues have stressed. It is certainly wrong to think that
all Russians are corrupt, and I very much agree with Dr.
Finckenauer that there are these different types of corruption:
outright venal corruption and situational corruption. If the
company that the Americans wanted to invest in was a relatively
non-corrupt company----
Senator Smith. It is a highly questionable enterprise.
Dr. Reddaway. Oh, if it is highly questionable, then----
Senator Smith. Dr. Graham, do you know what I am talking
about?
Dr. Graham. I do not know about the specific case, but I
would argue along the lines that Dr. Reddaway has. You have to
take a very close look at the specific enterprise, the
activity. What we need to do is due diligence. We need to know
whom we are dealing with, what type of activities they have
conducted in the past before we issue loan guarantees of this
sort.
Senator Smith. You would argue high caution right now.
Dr. Graham. High caution, particularly at this point.
Dr. Reddaway. If I could add, it is also important to look
very carefully at the local political leaders, the mayor of the
city, the Governor of the region, and see what his record has
been over how that individual has handled major investments by
U.S. and Western companies in his city or region because some
mayors and Governors encourage investment and then when the
investment starts to produce some profits, they introduce new
taxes, new regulations that make it possible to skim off a lot
of the profits for the benefit of the local administration.
That is something that is impossible to foresee. The only guard
against it is what the track record of that local political
leader has been up to now.
Dr. Graham. If I remember correctly, this concerns an oil
company----
Senator Smith. It does.
Dr. Graham [continuing]. That is engaged in trying to
purchase an asset from another oil company that is in
bankruptcy. There have been accusations that the oil company
that is the subject of the deal is in fact engaged in illegal,
or at least unethical, practices in its effort to purchase this
other oil producing facility.
The problem here is that we have got two American companies
involved now. I forget the name of the one who got the loan
guarantees, but BP-Amoco is also involved in this as well. It
seems to me that it is inappropriate at this time for the Ex-Im
Bank to be guaranteeing a loan so that an American can enter
into a partnership with a Russian oil firm to take over an oil
production facility that is in dispute and when one of the
litigants is another American oil company.
Senator Smith. A final, sort of general, question. If we
desire to help and we want to leverage the rule of law to
encourage its creation, is that leverage best applied with the
incentive of loans and cash and these kinds of things that the
Ex-Im Bank is on the verge of doing?
Dr. Graham. If I could take a first shot at that. No, I do
not think so. I think money sent to Russia now, particularly
without proper safeguards, is money that will wind up in the
West sooner as opposed to later.
The way you help encourage, I think, a rule of law society
is, as I said, by trying to encourage activities that integrate
Russia into the outside world, but I think also by simply
providing an environment in which Russians can learn about how
our society functions. I do not think that you can stress too
much the extent to which they are curious and envious of how
successful our country is, and what they are looking for is
ways to repeat that success in their own society.
Senator Smith. Cash in almost any form, however you dress
it up, maybe just reinforces the worst kind of lessons, the
wrong kind.
Dr. Reddaway. As a general proposition, I think that is
true. I do, however, think that we have accumulated some
experience in the West about small grassroots organizations
which are not corrupt. Small amounts of money sent to small
grassroots groups which have a track record to my mind is still
feasible and desirable. But large sums of money are another
matter, and I think one has to be very careful.
Can I take a couple of minutes to make a few more remarks?
Senator Smith. Sure.
Dr. Reddaway. I think that one of the things that we should
be uncompromising about is saying quietly but insistently and
repeatedly to the Russians, you want us to come and invest. We
would like to come and invest. You are an attractive country
ultimately for us to invest in, but we cannot. We simply cannot
invest on any scale today because of the political and legal
conditions in your country. We should not pull any punches
about that. As I say, we should not do it in a lecturing tone
in big public forums, but we should insistently give that
message through every possible channel we can because that is
an argument that every Russian will understand.
The second point is that I very much endorse Dr.
Finckenauer's eloquent description of how in the long run the
way to develop a rule of law society is from the grassroots up,
and if we can persuade members of the young generation partly
by bringing them over here, as Dr. Graham said, for prolonged
visits so that they can absorb our values and understand them,
then we have some hope.
We should not, however, be blind to the difficulties
involved. Ultimately, this sort of approach logically leads to
promoting revolution in Russia against a corrupt regime. Now,
that may be desirable. It may be the only way that you are
going to get an improvement in the Russian situation. But
obviously it involves very tricky political and diplomatic
problems, and we need to look those problems squarely in the
face and not flinch from them. Again, there are not easy
answers.
And a final point. Tom Graham said we should cooperate with
the honest legal enforcement people. In principle, I agree with
his argument, but in practice it is very difficult to do. I
think Dr. Finckenauer was suggesting the same thing.
Let me give just two interesting examples.
There is an honest--or there was an honest--policeman in
Moscow who testified in a court case against an oligarch.
Almost immediately after he testified, he got threats against
his life, and he and his family are now living in Switzerland
and will probably stay there for a long time.
A second example is a U.S. reporter who went to Russia and
did extensive research about one of the most prominent Russian
oligarchs, Mr. Berezovsky, wrote a big article in the U.S.
press, and was very quickly threatened with his life, although
he was living in the United States. On the advice of the FBI,
he went to live in Europe incognito for about 6 months until
the fear that he might be assassinated had diminished. He had
got his information from honest police officials in Moscow, and
those honest police officials--of course, he kept them
anonymous in his story for the U.S. press, but quite possibly
those officials are also in a position of great danger.
So, the principle is right. We need to identify and work
with the honest minority, even if it is a small minority, but
we have to realize there are huge risks involved for those
honest Russians. In addition, there are risks involved even for
the Americans involved.
Senator Smith. Gentlemen, you have been terrific and very
enlightening. Joe, as I mentioned, has been on the floor doing
battle, and we welcome him here. Unfortunately, I have to go
and so I am going to leave this committee in his care.
Senator Biden [presiding]. Thank you. I will be brief, Mr.
Chairman. Thank you very much.
Gentlemen, I apologize. We have been having an ongoing
debate about whether or not we should bring up the ABM Treaty.
Excuse me. We have been debating that as well, but debating the
Comprehensive Test Ban Treaty. There was an offer made by the
Republican leader to be able to bring that up on very short
notice, which is fine by me, without any hearings. A minor
issue. So, we were discussing that on the floor, and that is
the only reason I was not here because the three of you are
very knowledgeable, and I am told by staff, as well as the
chairman, this has been an excellent exchange you have had so
far.
I very much wanted to be here because all three of you know
better than I do that we had better get this relationship right
somewhere along the way here. To state the obvious, not
referring to the three of you, but at least on this side of the
bench, there can be an awful lot of politics engaged in this
issue over this Presidential campaign, and I hope we can sort
of get through the din and the fog here of the political
rhetoric on both sides we are going to hear to try to come up
with a rational policy and understanding of how to get there.
As I understand it--well, let me not characterize what you
have said so far. Let me ask my question. If it has been asked
already, please just indicate it and I will read it in the
record. OK?
Unlike the IMF assistance, U.S. assistance has not passed
out big chunks of money. We do not decide to send $5 billion to
a central bank in Moscow. Our programs are basically thus far
exchange programs, technical assistance programs, technical
expertise, equipment of various kinds, with the exception of
the programs we have had to dismantle nuclear arsenals, which
has, I think, been remarkably successful and money very well
spent.
But notwithstanding this, the way in which we have gone
about it since the Bush administration through the present
administration, how sure do you think the U.S. Government can
be about where and how its assistance is being used?
I am used to dealing with the criminal justice system here
in the United States and used to be chairman of the Judiciary
Committee. We had oversight hearings. We could track, not
always well as we should have, how the money being sent out for
programs is working and make a judgment about whether or not it
made sense to continue it or not.
How do we, in light of the way in which our aid has been
forthcoming, to the extent it has, gain any confidence or
certainty about what is working and what is not working and
what makes sense and what does not make sense? We will start,
Doctor, with you, however you would like to proceed.
Dr. Finckenauer. Well, if I could respond from my
experience with Ukraine. The assistance is very similar. The
problems are very similar. We are presently engaged in an
assessment process to look at the effectiveness of the delivery
of law enforcement training by the United States in Ukraine.
Obviously, there have been considerable resources devoted to
this over the last 10 years, and there is little knowledge at
this point about how well all that is working. Who is being
trained? Are the right people being trained? Is it having any
effect in terms of what they are doing?
So, what we are in the process of doing is developing what
we call a template by which we could look at how training needs
are being assessed and whether the subjects that are being
taught in these training programs are, in fact, the appropriate
ones. Are they the ones that are really needed given what the
concerns are?
Not surprisingly, there has been a very haphazard process
by which these training needs have, in the past, been assessed
and been matched up with what we offer. It is very much off-
the-shelf items. We have people who can teach about this topic.
They must need to know this. So, we go there. We teach on that
topic.
I think people more and more have become aware that that is
not the way to do this. Let us look at what we are doing and
see if we cannot do a better job. I would simply suggest that
that same model could be employed in Russia or in any other
place where the United States is doing law enforcement
training.
Senator Biden. Dr. Graham.
Dr. Graham. Look, this is a very difficult question and
very difficult to assess.
Senator Biden. That is why I asked you. If I knew the
answer, we would not call you guys experts. We would not pay
any attention to you at all.
Dr. Graham. That is right.
Senator Biden. Except how you voted.
Dr. Graham. Right, exactly.
Part of the problem, of course, is that we give assistance
to vast numbers of individual Russian entities, and it is
physically impossible for us as a Government to evaluate all of
them. Some of this we take on faith that the programs are going
in the right direction.
The second point I would make is that I think there is a
danger in trying to determine whether something has been
successful in the short run or not. In many of our programs,
what we are looking for is a payoff that is going to come 5 to
10 years down the road in the change in attitudes. So,
something that focuses on whether the money spent has given us
a return already or not many times is going to miss what is
most important for us to do in Russia. I think part of the
problem we have as a Government is that we tend to focus on the
short term. In order to get additional money for programs, we
have to demonstrate short-term success. That is very difficult.
I think that is the wrong way to approach it.
The third point I would make is what we really need to do
on some of these programs that are aimed at developing rule of
law democracy is devising some way of conducting a sociological
research that would demonstrate or at least help us determine
whether we are seeing changes in political attitudes and social
attitudes among the people who participate in our programs.
Setting up an efficient program to evaluate that is a major
project in itself and will cost some money, but I think that is
something that we ought to consider.
Senator Biden. Thank you.
Dr. Reddaway.
Dr. Reddaway. If I could add. We have had some discussion--
and I think the three of us are agreed--that the elite in
Russia today has become so corrupt that real change in Russia
is probably only going to come from the grassroots of Russian
society over a long period of time. That has some direct
relevance to your question.
On the one hand, in my opinion we should be extremely
cautious and in general not give sums of money to government
entities, whether at the Federal or the regional level. We
should not give money to big Russian companies.
On the other hand, we can, with much better chance that the
money will not be abused, give it to grassroots groups, small
sums of money to large numbers of grassroots groups, across
Russia and the former Soviet Union. If particular groups abuse
the money, then OK, it is lost, but it is just a small sum of
money. Other groups will not abuse it and will put it to good
use, and you will eventually get a culture of rejection of
corruption that Dr. Finckenauer was talking about earlier, a
culture of believing that Russia must renew itself from the
grassroots upwards, which is I think the only real hope for the
long-term future of Russia.
Senator Biden. Can I ask any of you to cite for me, if you
have any in mind, examples of where we have given large sums of
money to individuals, companies, and/or a government that you
believe has resulted in inappropriate confiscation of that
money or aided and abetted the corruption, et cetera? Are there
any? If you had to list just the number of direct grants of
dollars that you consider large to the Government of Russia or
any entities, because we keep hearing people talk about this.
We should not give these large amounts of money, like you said,
to the government. What large amounts of money have we given to
the government for the record? Can you think of any?
Dr. Reddaway. I can give one example, which is not exactly
in response to your question, but it is I think relevant. The
World Bank has given large sums in order to try to help the
Russians restructure their coal industry. I think there have
been at least two major grants or loans over the last 3 or 4
years.
Senator Biden. That is true.
Dr. Reddaway. There has been extensive and growing evidence
that a lot of this money has been diverted into private pockets
in Russia. I read an article last week by John Helmer in the
Journal of Commerce in which he detailed how this money had
been embezzled in St. Petersburg. That is one example.
Senator Biden. Well, let me be more precise. I think if you
go home this evening and ask your next door neighbor, assuming
they are not engaged in the same academic pursuits that you
are--they are automobile salesmen or own a local company or
work for a large outfit or work for the Federal Government--and
you ask them what they think all this thing about the waste--
the ``Who lost Russia'' and all the money we are wasting in
Russia, they think that, when you use phrases like we should
not give large amounts of money, you mean taxpayers' dollars
directly. Now, can you think of any bilateral program where we
have given large amounts of money that has been wasted?
Anybody.
Dr. Graham. Look, I think the answer to that question is
no.
Senator Biden. Good.
Dr. Graham. I cannot think of any.
Senator Biden. Bingo.
Dr. Graham. The issue has been more the money that has been
provided through the IMF.
Senator Biden. Good. Now, why do we not say that? I do not
mean you, but why do we not all say that? Why do we not stop
this malarkey about these large Government programs that we are
funding? We are not alone funding any that I am aware of.
And you understand--I need not educate you I am sure,
Doctor--how the World Bank works and how the IMF works and how
our money is put at risk and how we have not lost any money.
Would you not be prepared to acknowledge that?
Dr. Graham. That is a much more difficult question to
answer----
Senator Biden. Give it a shot. I have patience.
Dr. Graham [continuing]. Because the question is not
whether IMF money has been returned or not or not lost at this
moment. The question is the impact of that lending on
government practices.
Senator Biden. That is your question. That is not my
question.
Dr. Graham. No.
Senator Biden. And I get to ask the questions. OK? You have
got to run for office to get to ask the questions.
Dr. Graham. I understand that and perhaps I should.
Senator Biden. I think that would be a good idea. It is
always a salutary experience.
Dr. Graham. But the point is when you have to make the
payment and what form. You may get your taxpayers' money back
on the IMF. We have not lost any money in that regard. No IMF
money has been lost. But if what the IMF money has done is
facilitate corrupt practices among high ranking government
officials and then we have to spend more money, taxpayers'
money, in investigating that and in setting up defenses against
that, then I would submit that this is perhaps not----
Senator Biden. Good. Now, we are getting somewhere.
Dr. Graham. So, we need to focus on what the real tradeoffs
are----
Senator Biden. See, all I am trying to do is I think there
has been--I think this is a corrupt society in Russia. It has
been from my first meeting after Gorbachev's fall. I went over
and met with all the major political party leaders, literally
every one of them, ranging the whole spectrum. All of those who
you would call democrats with a small D said do not give them
any money. So, we started defining it. That is why when the
seed program was written, that became the FREEDOM, whatever the
heck we call it, Act, that is why we did not do it that way
with direct, big, bilateral----
Now, what has happened, though, is--we have to cut through,
as I said, the fog here a little bit. We have a little bit of
honesty in academia, honesty in advertising here. Everything
you read, you read the headlines that say--not that any of you
have written, but you read the headlines that say, billions in
American tax dollars lost. That is what one of the articles
said that everybody quotes around here. Billions in taxpayer
dollars lost.
Now, people at home are pretty smart. They divide it into
two ways. They say, look, if you are pouring my money down a
rat hole, like you would if the local corrupt mayor is taking
the money and keeping his mistress and four other people, and
they are raising my property taxes to do it, then that is one
thing.
If you are saying that, although I am not losing any money,
I may be, as a consequence of decisions made by my Government
participating in them, causing a circumstance where we ``may
lose Russia,'' where we end up generating and perpetuating or
invigorating a culture of corruption, where we enable it to
happen because of what we are doing, then that is an equally
serious problem in my view.
But I think one of the obligations that I have at least as
a United States Senator is to articulate as clearly as I can
with as much precision as I can what is at stake, what the
issue is. I just want somebody, for a change, to say sitting
there, experts, what is at stake is a policy we have engaged in
in two administrations through the so-called IFF'ies--I love
the way the foreign policy guys use that phrase--the
international financial institutions that we are talking about,
the World Bank and the IMF and others, whether or not our
policies relative to those institutions and how we vote in
those institutions has created a circumstance that is
detrimental and not positive or has not been used with as much
efficacy as it should or could have been. That is a legitimate
debate I want to engage in, and I want to solve, I want to be
part of.
But as long as it is confused with the debate and the
assertions that are not true and a perpetuation of the notion
that we are taking large, direct grants in foreign aid of U.S.
taxpayers' dollars and pouring them down a rat hole so that
Yeltsin's daughter can shop at Paris fashion shows, then you
know what we do when you guys are not honest enough to put it
in the way we should phrase the debate? Then we lose support
for all foreign aid. Then we find ourselves in the position
like we have in this foreign aid bill. And I will end my little
diatribe here.
We are cutting by $3 billion--hang on, Doc. You will get a
chance. We are cutting by billions of dollars not only aid to
Russia, we are not funding the Wye Agreement--we--we, the
United States of America--because there is an attitude over in
the House that I am not going to vote for foreign aid in this
atmosphere, man. I am not going home and explaining to anybody.
I am not going to vote for that. That is a killer for me
politically.
So, I think if we are going to be responsible adults and
inform foreign policy experts, of which I consider myself one,
we should be accurate and precise in the way in which we
discuss the issue. That is the only point I am trying to make,
and that is why I asked the question.
Now, I will conclude my thing and hear what you have to
say, Doctor, and not trespass on your time anymore, any of you.
I think there is a big problem here, a gigantic problem. I
think the culture of corruption in the Soviet Union and Ukraine
I might add--forget Belarus. I mean, that is a different deal--
is extreme, is something that has existed from csar through
commissar, back to what do they call themselves now? The elite.
The oligarchs. From csar to commissar to oligarchs, not much
has changed except we have a clearer view now--a clearer view.
So, we have got to do something about it, and that is what I am
here about, trying to figure out what we do.
Doctor, the floor is yours.
Dr. Reddaway. I have had time to think up a good response
to your question. The U.S. food program----
Senator Biden. Food, f-o-o-d?
Dr. Reddaway. F-o-o-d program for Russia is in my opinion a
major scandal--and I hope that you will find ways to
investigate it--partly because it, I think, has directly fed
Russian corruption and----
Senator Biden. In what way, Doctor? I am not doubting you.
Dr. Reddaway. I will explain in a moment. And second,
because it seems that it is entirely possible that we will go
through a new round of this unneeded, corruption-feeding food
aid program in the next year, sometime in the next year. There
are people pushing for it on both sides, both in the United
States and in Russia.
The program that was launched about a year ago, if I
remember rightly, had a price tag of about $1.3 billion--
billion dollars. That food aid went ahead. The program was
launched last fall, early winter against the objections of
almost all the independent food experts in Russia, against the
wishes of important people within the Russian Government. It
was pushed by our Government because we wanted to help U.S.
farmers and it was pushed by corrupt elements in the Russian
Government who wanted to benefit directly from it themselves.
The food was eventually sent late, too late to be of any
use, not that there was in fact a shortage of food in Russia.
So, the whole thing in that sense was corrupt from the start.
Senator Biden. There was no shortage.
Dr. Reddaway. There was no serious shortage of food. It was
not actually needed. They got through the winter. The first
food arrived in the spring.
The terms of the deal were that the Russian Government was
supposed to sell this food to the Russian people at, roughly
speaking, market cost, and the money was supposed to go into
the Russian pension fund, which is dramatically underfunded.
Virtually nothing has gone into the Russian pension fund. The
money has disappeared into the hands of corrupt Russian
officials, in particular, the former Deputy Prime Minister, Mr.
Kulik, in charge of food in Russia, no longer I believe now. It
has already been documented in the Russian press the corrupt
ways that he benefited from this food aid.
And now we are apparently considering another food program
despite the fact that it is not needed in Russia and despite
the fact that the last time we fed Russian corruption with it.
Senator Biden. A very good point.
Dr. Reddaway. Now, this is with direct American taxpayers'
money.
Senator Biden. If you can, in addition to your cogent
explanation of the waste of that money and how it impacted on
corruption, supply additional detail, it would be very useful
because I think you are absolutely right. We should be looking
at that. That is a concrete example and it is something that
obviously, as you point out, will be back on the agenda again.
If you are correct, we should not be going forward with such a
program.
Dr. Reddaway. I will be happy to supply documentation.
Senator Biden. I appreciate it very much.
Well, gentlemen, as I have said, I have gone beyond the
time that you expected to have to stay here. I would like to
ask your permission to be able to submit two questions to each
of you in writing. Again, no urgency in responding. If after
the fact you think of anything that you wish you had said or
issue that was not brought up or you want to in any way expand
on any explanation you have given, with the permission of the
chairman, who is not here--but I am sure he would not object--I
would invite you to do that for the record. It would be very
useful.
I for one believe that this is an area where we should let
the chips fall where they may because I believe if we do not do
it, if we do not address this problem straight up, honestly,
and thoroughly, we are going to not only undermine our
engagement with Russia in any prospect for a positive
engagement, that is, that has a positive impact, we are going
to undermine our engagement with other nations as well. In a
political context, this is a very porous issue. People do not
make distinctions very clearly between one type of foreign aid
and foreign aid and international institutions where there is,
in effect, in the minds of people, foreign aid, but it is a
policy decision we make to help or not help. And they do not
make a distinction in what parts of the world it occurs.
So, I think your testimony--I am told from my staff, as I
walked in, the first thing that they said to me was this is the
best hearing we have had so far. These guys really know what
they are talking about. That was the comment made. I hope you
do not view that as being solicitous. It was seriously stated
and I look forward to reading the record. I also look forward
to your expanding on anything you have said, as I said before.
And, Doctor, if you could specifically on the food program
because I think that is a very good example because I would
note for the record as well that this time last year I was
given assessments about the state of the agricultural
commodities and availability and food that would not be on the
shelves in Russia that were fairly bleak. As a consequence of
that, I was one of those people who sat down with--if they give
me any more notes, I am going to shoot them. I was one of those
people who sat with some of the agriculture community and said,
now, are you willing to participate in getting food there? How
do we get it there and so on and so forth? And the issue we
were talking about then was the physical capacity to lift the
food there. So, to that extent, I was involved in that because
I must tell you I had been convinced that not that there was
not the capability of producing all the food they needed, but
because of the lack of any infrastructure that they have within
the country. More food gets wasted and lost in the fields in
Russia than ever gets into the towns and cities, to overstate
it slightly. But I had become convinced that this was a serious
potential humanitarian problem. I quite frankly thought it
would be better to run the risk on losing our food than direct
dollars to the Russians. So, it would be very helpful because
the point you make is a very, very valid one.
Again, I thank you very much.
I would like to keep the record open until the close of
business tomorrow to allow Senators to offer additional
questions for the record, if they have them, and again invite
you to submit anything you would like, and particularly you,
Dr. Reddaway, on this issue of food. Unless anyone has any
comment they would like to make, I will adjourn the committee.
Committee adjourned.
[Whereupon, at 12:37 p.m., the committee was adjourned.]