Russia’s Ruble Shakedown

Natasha Gurfinkel had moxie. Nothing if not aggressive as a senior vice president in charge of the Bank of New York’s East European division, the Russian-born, Princeton-educated businesswoman charmed and cajoled, wined and dined her way to the forefront of the correspondent banking business in the heady days of Russia’s breakaway from communism. Muscling out American rivals through her web of Moscow connections, she turned the Bank of New York into the biggest U.S. servicer of Russian accounts, moving along the flood tide of cash rolling out of the ebullient new economy in return for lucrative bank fees. When she wanted to snatch the business of the rich Moscow-based Inkombank away from Republic National Bank in 1992, says Emanuel Zeltser, a lawyer who worked for the Russian outfit, “Natasha said the Bank of New York would not be so inquisitive” about Inkombank’s massive money transfers through New York to obscure offshore companies. “This is how she got a lot of the Russian banks to do business with her,” he says. “It was an open secret over there.”

On April 23, 1996, under the letterhead of the venerable bank founded by Alexander Hamilton, which made the very first loan to the fledgling U.S. government in the 1780s, Gurfinkel wrote a fulsome letter to Federal Reserve chairman Alan Greenspan, urging the Fed to let Inkombank open a representative office in the U.S. Never mind that 14 months earlier some of the bank’s largest shareholders had filed suit charging Inkombank with outright theft of $40 million in capital. Or that just a month before, the Russian central bank had issued a harshly critical audit of Inkombank irregularities.

Inkombank never got the license. But it was not until Republic National Bank turned the tables on Gurfinkel by filing a suspicious-transactions report on the extraordinary Russian cash flows through its bank to the Bank of New York in the summer of 1998 that anyone at Hamilton’s respected house paid attention to what was going on. And it was not until last month, when the New York Times reported that an investigation was in progress, that the U.S. woke up to some ugly truths about Russia. With the bank’s cooperation, the Feds are on the trail of at least $4.2 billion that may have flowed through these accounts.

The Bank of New York irregularity is only one on a list of scandals, involving alleged money laundering, mob operations and corruption in high places, that are suddenly in the spotlight. The stories are old news in Moscow, where the highway robbery that has stripped the country of assets and enriched a handful of crony capitalists has been going on ever since “reform” arrived in 1991. An impoverished, disillusioned populace long ago lost its capacity for outrage. With bombs exploding around their country, looming war in the Caucasus and rumors of a political crisis to worry about, Russians have written off the money scandals as dirty business as usual. But in the U.S. the corruption seems to symbolize reform gone wrong, a wholesale failure of Russia to transform itself into a working free-market democracy. And as the partisan Campaign 2000 machinery in Washington revs up, what better rallying cry for challengers than “Who lost Russia?”

So get ready for a spell of demagoguery. The question is both wrong and arrogant–Russia was never ours to lose–and the real issue is what to do now. But it’s already a pundit’s dream topic, since it’s more fun to lay blame than confront facts and complexity. The “Who lost” phrase is custom cut for G.O.P. presidential contenders to score points against Democratic candidate Al Gore, tagging him as the front man in the Clinton Administration’s “failed policy.” Capitol Hill is aboil with hearings, beginning this week, aimed at flogging the Administration for everything that’s gone wrong in Russia. And the Clinton folks are fighting back with high-spin verbiage, casting the debate as a stark choice between helping Russia and abandoning it, and shifting the focus to another emotional campaign sound bite: “We’re safer now, aren’t we?”

THE SCANDALS

A number of cases with obscure names like Benex and Mabetex are under investigation in Russia, Switzerland and the U.S. They’re not connected, but taken together they seem to illustrate the remarkable variety of ways in which Russia was looted. Most so far involve sparse, unproved allegations, and it will take years before anyone knows whether any laws were broken and by whom. All the individuals whose names have surfaced deny any wrongdoing.

The scandal that set off Washington’s alarms was the one that touched home at the Bank of New York. Federal agents were tipped off in August 1998 that unusually large amounts of money were zooming through the bank from Russian sources. Over the next 11 months, with the bank’s cooperation, the Feds watched while at least $4.2 billion passed through several accounts, notably belonging to a mysterious British company called Benex Worldwide, then out to a confusing array of other banks and companies.

The Feds suspect that Benex served as a conduit for capital fleeing Russia, either legitimate or criminal profits, and want to know whether U.S. banks facilitated foreign theft. When the Republic National Bank sent an investigator out to an address in Queens that some of the Benex funds had been wired to, it found nothing there at all. “We have a company that exists only to collect dollars from Russia for transmission elsewhere,” says an investigator. “Who the hell knows who’s on the other end of the line?”

This was a question that was asked–or perhaps not asked–by hundreds of bankers dealing with Russia in the past decade. Money gushed out of the country for accounts unknown. But it is hard for investigators–to say nothing of politicians–to make a distinction between who was actively helping the Russians rob their economy and who was simply practicing don’t-ask banking.

The problem was that Russia’s bankers were playing the same game, possibly with loans from the International Monetary Fund. In the mid-’90s Russia’s central bank transferred more than a billion dollars of hard currency to an overseas company called FIMACO. After Russia’s chief prosecutor leaked word of the suspicious off-shore company, the bank eventually apologized, explaining politely that the money had been hidden to protect precious Russian assets from foreign claims and insisting that no laws had been broken. But Russian Duma Deputies charge that the central bank hid the reserves to lure more cash from the INF. The INF has so far uncovered no evidence of illegal diversion of its loans, but is now looking hard at how Russia has managed the entire $21 billion it has been lent since 1991.

Swiss and Russian officials are investigating two other cases with far smaller dollar values but with huge political stakes. In one instance Swiss authorities raided two companies, named Andava and Forus. They were allegedly used by Boris Berezovsky–one of Russia’s richest titans and an intimate of Yeltsin who helped bankroll his 1996 re-election, and reputedly handles the Yeltsin family finances–to misappropriate hard-currency receipts diverted from the Russian airline Aeroflot. In the other instance a Swiss-based construction company called Mabetex allegedly paid bribes to government officials, notably Pavel Borodin, another Yeltsin intimate and manager of the Kremlin’s vast properties, to win lucrative renovation contracts. One witness has told Swiss authorities he saw credit-card receipts for personal purchases made by Yeltsin and his daughters paid by Mabetex. Yeltsin, Borodin, Benex and Mabetex all deny the accusations. And the Russian President even repeated his denial two weeks ago directly to Clinton.

WHO ROBBED WHOM?

Americans naturally feel outraged at crime and corruption, but never more so than when these acts seem to undermine our best intentions. We wanted to help Russians build a government, society and economy just like ours, but we don’t like to feel swindled in the process. And we don’t like it when their crooks use our banks to do it.

What gives the scandals political resonance here is the way they refract the shock that our own effort to stage-manage Russia’s successful transformation might have failed. The expectation of quick and miraculous success was naive when applied to a country with a scant history of capitalism, no experience with democracy, and no tradition of the rule of law. Whatever Washington did was a crapshoot. Russians have always cheated the system to survive or thrive, first the Czars, then the Party, now the elected government. Men who were once at home in the old regime hold power in the new, leaving little ground for reform to take root. Since the whole economy collapsed in August 1998, Russian politicians have been more interested in whom to blame than how to get out of the mess.

That may explain why there are virtually no pro-West candidates in the running to replace Yeltsin when a new President is elected in what everyone hopes will be the first-ever peaceful transfer of power next June. The scandals are potent political fodder not only because they discredit Yeltsin but also because they fit into a popular Russian myth that the U.S. somehow engineered the country’s woes. As eager as Russians are to blame their own tainted leaders, they also point an accusatory finger at Washington for their failures.

The scandals are only tangentially about what Russia might have stolen from the West. Most of the billions looted or laundered belonged to Russia. The real victims have been the millions of Russian workers and pensioners who are often paid late by a government without the cash to function. The most chilling consequence of that for Americans is not financial but psychological. When Russia repudiated communism in 1991, Western values enjoyed immense admiration and influence. That has vanished as millions of Russians have learned to equate reform with corruption and free markets with theft and misery. The hostility to the U.S. that has built up is genuine and pervasive.

There is much to debate about what the U.S. did well or poorly to encourage Russia’s transformation. The Clinton Administration hurt itself by steadfastly overlooking Russia’s failures. Officials complained privately to Moscow from time to time about rampant corruption, but to listen to them now you’d think it had been at the top of their list for years. Suddenly they are trumpeting Clinton’s stern warning recently to the latest Russian Prime Minister that corruption “could eat the heart out of Russian society.” Last week Secretary of State Madeleine Albright acknowledged that the “Herculean task” of transforming Russia has not been “fully achieved.”

Al Gore had hoped his work on Russia would serve as Exhibit A in proving his readiness to step into the President’s job. Now it makes him accountable for the Administration’s decisions. He will face questions about where the money that he helped pump into Moscow actually went and about his friendship with Viktor Chernomyrdin while the former Prime Minister was suspected of stashing away millions. Administration officials concede that they underestimated the groundswell of corruption that came with Russian privatization. They had plenty of intelligence about the kleptocratic shenanigans, but didn’t want to let it derail more important business like nuclear security and preventing any rollback to communism.

It all has the smell of political red meat. Except when you ask the Republicans what they would do differently, the answer is: not much. They offer no fresh ideas, just stricter oversight of loans, more criticism of bad behavior, greater caution toward leaders. No one, not even firebrand Jesse Helms, who is about to launch Senate hearings, would stop all aid or cut Russia adrift. Candidates like George W. Bush don’t disagree with the basic notion of engaging Russia either, so he’s left to look for traction with the mushy “I’d manage it better” argument. Even the most skeptical voter can see that it is not in the national interest to let Russia fail and that the U.S. has nothing to gain by abandoning the great, unfinished experiment in reform now. Then Russia might really be lost.

–Reported by S.C. Gwynne/New York, Massimo Calabresi and Douglas Waller/Washington and Andrew Meier, Paul Quinn-Judge and Yuri Zarakhovich/Moscow