Russia is no longer an empire but not yet a "civic" nation - into this vacuum have stepped institutionalised corruption and criminality. John Lloyd traces the roots of the problem to Russia's Soviet past and its transition to the market economy, and says the situation is getting worseby John Lloyd / January 20, 1998 / Leave a comment
Many of the world’s most significant and powerful countries-the US, Italy, Japan-have high crime rates and/or apparently undefeatable organised crime networks. They have, however, corralled their criminal worlds into more or less defined sectors of the economy or society. By contrast, Russian crime permeates society from top to bottom-especially the top. Much of the way business gets done, and much of the way the country is governed, is criminalised to some degree. In September 1997, Judge William Webster, a former director of the CIA who chaired a committee investigating organised crime in Russia, wrote: “If the forces of organised crime are not stymied, Russia will complete its devolution into a criminal-syndicalist state.” Ironically, such a state would pose more of a danger to the west, and to the rest of the world, than it did when Russia was the core of the Soviet Union.
The west has commonly held that Russian crime will diminish as capitalism takes hold; that Russian business will cleanse itself of the worst excesses of criminality and violence because it will have to conform to international rules. This may happen. The new monied class may demand clear property rights-and the development of a judicial and policing system which is capable of enforcing them. Maybe the law will advance. Maybe the demands of the market and of mass democracy will wash away the enclaves of lawlessness to the point where crime becomes, if not marginal, at least not the defining characteristic of most business life.
But it is not happening yet. Indeed, by the end of 1997-six years after the reforms of the Yeltsin era began-Russians seem to believe that crime and corruption are endemic, omnipresent and eternal companions of their lives. Hardly surprising: in February 1993, their own president had described his country as “a mafia state on a world scale,” “eaten by corruption from top to bottom,” and so gripped by organised crime that it “posed a direct threat to… strategic interests and national security.” Lawlessness has become steadily worse since then, according to Russian as well as foreign statistics.
There are a few optimists, and some even argue that the criminals are serving a greater good. Edward Luttwak, the American-based writer on international affairs, said recently in the London Review of Books that organised crime groups “resist the excessive concentrations of economic power brought about by government corruption… They are, in effect, competitors which use physical force, usefully, to offset monopolistic market power in a lawless economy.”
The pessimistic view, however, is catching on, even among former optimists. It is summed up by Federico Varese, the Italian writer, who asks whether Sicily is the future of the Russian state. In this view, the emerging commercial classes’ need for protection from each other-and from the state-has given birth to an organised criminality which has developed huge and expanding criminal activities in narcotics, international prostitution, arms trading and even nuclear smuggling. The pessimists argue, with some force, that the combination of Russian history and the circumstances in which the market economy was established in the early 1990s, make Russia a candidate for the world’s first significant mafia capitalist state.
private property came late to Russia. Until almost the 19th century, no effective distinction was made in law or in the public perception between the property of the tsar and of the state: the tsar effectively commanded and could dispose of both. In theory the private citizen, even the aristocrat, had no land of “his own.” De facto distinctions were made in the 19th century (although in theory all land was still owned by the tsar): property, ownership rights and revenues derived from it were generally respected by the state. No mafia-in the sense of gangs offering protection-seems to have been called for. If there was a specifically Russian form of pre-revolutionary crime, it was in the combination of criminal gangs with political protest. The brigand-like quality of Russian criminals, and their capacity to become popular heroes, was more powerful than in most other societies. The revolutionaries of the 19th and early 20th centuries found a tradition of violence into which they could comfortably insert themselves: Stalin organised robberies in the Caucasus.
The harshness of communist rule did produce a society relatively free of many of the types of urban crime common in the west. But it also accentuated the enclosed, state-rejecting world of the criminals, dominated by the figures of the vory v zakone (thieves in law): gang bosses-often elected to the post in prison or camps-who controlled their followers from their cells. If their own testimonies are to be believed, they followed a relatively ascetic life of criminality which observed certain rules towards women and children, and-according to the accounts of the Soviet policemen who dealt with them-sometimes exercised an authority even greater than the formal power of a local party boss.
The economic base of this world changed under Brezhnev, a shift as large as-though less obvious than-the shifts which occurred under Gorbachev and Yeltsin. State terror was lifted: belief in communism at all levels faltered, disappeared, turned to cynicism; a subterranean passion for consumption grew among those who learned something of the explosion in living standards in the advanced capitalist countries. The example set by the highest in the land was increasingly-and increasingly brazenly-corrupt.
The result was a society in which crime was a curious m?nge of straightforward commercial activities which were forbidden by Soviet law; of pervasive corruption in which bureaucrats, doctors, teachers, shop and restaurant workers had to be bribed to carry out their jobs; of corners cut by managers who had to keep production going and who therefore hijacked or bartered for the goods they needed; of a growing habit of removing property from the workplace and using it for private purposes; of large-scale networks engaged in million dollar scams; of underground criminal empires including factories, distribution chains, protection agencies and even punishment systems, complete with prisons and executions.
Alexander Gurov, a senior Soviet policeman who assisted in the creation of the first anti-organised crime unit, told a western reporter: “In the west, the mafia rose out of purely criminal activities such as extortion or bootlegging; but with us even normal activities, such as making profits, creating associations without asking permission from the state were illegal. That’s why crime organisations have been part of our Soviet society for a long time. “
In 1972, when Vasili Mjavanadze was deposed as first secretary of the Georgian Communist party by Eduard Shevardnadze, he commanded a very large network which, among other things, supplied him and his family with a stream of tribute that included diamonds, furs and large dachas. The name of Pyotr Shelest-the Ukrainian party’s first secretary at about the same time-was a byword for corrupt practices, stretching through every level of the administration of a country as populous as Italy. The most famed of all the party crime lords was Sharaf Rashidov, first secretary of Uzbekistan from 1959 until his death in 1983. During this period, he milked the state of billions of roubles through false accounting, degraded the governing and intellectual ?te by corrupting the higher edu-cation system, ran the republic through nepotistic and clan networks and promoted a mafia which offered protection, punishment and assassination services. A similar level of corruption in the neighbouring republic of Kazakhstan, under the secretaryship of Dinmukhamed Kunayev, resulted in the appointment of a Russian first secretary-and the earliest explosion of ethnic resistance to Russian central rule, in 1986.
Soviet society came to know a limited amount about these figures because Yuri Andropov, the KGB chairman who succeeded Brezhnev in 1982, was willing and-at first-able to take action against some of them; and because Gorbachev, who was Andropov’s prot?, continued the attack. That it was limited, linked to political objectives and unable to reach or even call into question some of those at the very top of the pyramid, went without question. Nevertheless, real abuses were opened up to the public gaze and real criminals were sentenced.
The explosion of crime since the late 1980s and into the 1990s might thus seem rather odd. The Soviet ?te had shown itself capable of an effort at cleansing; once communism had collapsed, the need to operate a parallel economy had disappeared. The answer to this puzzle can be found in how the Soviet economy was privatised; in the way in which the society struggled to become a civil one; and the way in which the state lost, and sought to regain, its monopoly of violence.
russia’s descent into crime was rapid, its effects shocking. Few societies, other than those traumatised by war, have gone through a similar process. As soon as the Gorbachev decrees on state enterprises and co-operatives were promulgated, and managers and others realised that what had been criminal was now shakily legal (or what was still illegal could more easily be undertaken) there was a burst of entrepreneurial activity. With that went a demand for (and supply of) protection. The source of funds for the new businesses were, in many cases, from capital accrued in the black economy-and so by definition illegal. The other main source was from the state, but this was still illegal in many cases, because the uses to which capital was put were not those which had been declared. Thus the early business class operated in a semi-criminalised world from the start. In the same way as many countries permit possession of drugs but not peddling, or permit the act of prostitution but not the necessary advertising or soliciting, so Russian capitalism permitted enterprise without legalising capital. In operating outside the law, the new business people needed to provide-or buy-their own security: not only would the state not do so, but it could actually arrest businessmen for precisely those activities which required protection.
So the world of enterprise was instantly sleazy. A survey in 1990 by the Russian Union of Industrialists and Entrepreneurs claimed to show that 49 per cent of the co-operatives’ capital was “black” and that over a quarter of the co-operators had criminal records when they entered the movement. Such statistics become more dramatic. In January 1997 Anatoly Kulikov, the interior minister, following the recent Russian tradition of presenting the worst possible face on the country’s crime problem, claimed that criminal dealings accounted for nearly half of all economic activity. This may be an exaggeration. But the pervasiveness of illegal business may help to explain why the government’s tax revenues amount to little more than half the budgeted figure-which is having a disastrous effect on the population’s living standards, health and pensions.
Other (western) estimates point to some 5000 big mafia gangs operating in Russia, controlling 40,000 businesses including more than 400 banks. The latter claim is made more plausible by the testimony of Vyacheslav Zakharov, vice president of the association of Russian banks. In 1995, he said that mafia leaders gave bank managers a choice: launder their money or be shot. The ministry of finance has estimated that in 1994 between 3 and 10 trillion roubles of credits were misappropriated: much of this made up the $1-2 billion a month illegally exported from Russia to foreign bank accounts.
What of violence? According to the interior ministry, in 1985 ten crimes involving explosives were committed in Russia; in 1995, there were nearly 600. Business had become the main target of criminals, but their main victims were passers-by or office workers. In 1995, the head of a company in Vladivostok delivered a bomb to the factory with which he was feuding. The bomb was packed with screws and killed three workers, horribly injuring several others.
Vladimir Mashkov, the governor of Ekaterinburg, wrote a letter to his president in 1993: “Our country is now constructing a state the world has never seen before: one run by organised crime.” Ekaterinburg, like Moscow, spent much of 1992 and 1993 in the grip of a bloody battle for power between old and new criminal gangs-a battle so comprehensive that none of the many mafia bosses who commanded slices of city territory in 1991 were still alive in 1993. Journalists who wrote about it were killed or beaten; so were policemen who investigated. The Ekaterinburg model was followed elsewhere. Throughout Russia’s cities and regions, the old vory, or crime bosses, were giving way to new men-harsher, richer, with fewer scruples and bigger purses.
In the early 1990s the shock of crime was not merely the economic numbers nor the numbers of those murdered (up from a few hundred in 1985 to 32,000 in 1994-more than twice the US rate, five times that of France and Germany, 15 times that of Britain and 22 times that of Japan); it was the criminals’ arrogance and apparent impunity. By 1992, for example, the price of flats in central Moscow had risen to levels comparable to New York. Property developers hired thugs to winkle out tenants-in flats which were often communal homes for a number of families. Where tenants would not go for a few hundred dollars, they went on the threat (or delivery) of violence. Cases of pensioners killed were publicised by the police. In mid-1995, the new tenant of a basement flat in Moscow found a corpse decomposing in a cupboard. By this time, such an incident had lost any capacity to be remarkable.
In February 1996, John Hayden, a British lawyer, was killed by a stray bullet as he waited for a client in a hotel in St Petersburg: he had the bad fortune to be a bystander at a mafia shooting. In June 1995, Andrei Orekhov, a leading broker, saw his young daughter gunned down in crossfire as he took her to primary school, in a fight between his bodyguards and assassins out to shoot him. One morning in May 1995, in the central Moscow street of Staraya Basmanya, three headless corpses were found in rubbish bins. The police said that the victims had been punished for not paying their rent. Three months later, a bomb exploded in a truck on the corner of the same street.
These are random incidents over an 18-month period-united only by the fact that I saw them or knew the victims or the main person involved in the discovery of the victims. A journalist living in central Moscow may live a more eventful life than most Russians: but in my experience, many were directly touched by this huge change. A weekend in July 1995, spent with friends of friends in the small city of Yaroslavl, revealed that in their dingy little block in the town’s 1950s suburb, they had gone out one morning to see the body of a local Chechen gangster hanging in the lift shaft-his face nearly black, his tongue lolling below his chin. Crime had become the central fear of their lives: they spent much of their meagre savings on a steel door.
the movement from state control to free-for-all was extremely rapid: from the first tentative flirtings with “the market” under Gorbachev in 1987, to the “big bang” of 1992. The crime which rose in parallel with the increase of economic freedom was seen as its consequence-with justification, because the reforms offered the powerful and the ruthless the ability to take, and to own, that which they had been denied for decades. But it created an illusion, pushed by the politicians who opposed the reformers, that crime could be curbed by controls and tougher policing. In fact, crime could only be dealt with by continuing market reforms, particularly by constructing a working market infrastructure of commercial law, financial institutions and bank regulation. Only then could the kind of behaviour which market societies define as rational-taking out loans, acquiring capital, issuing shares, observing contracts-be prised loose from its connections with crime.
The lack of a legally functioning market infrastructure in the early stages of economic reform was exacerbated by the scramble for property. First, there was the scramble to possess, and secure, state and Communist party property and funds. Up to 200 billion roubles of party funds (at the then exchange rate of 18:1) according to the television journalist Vladimir Pozner, had been exchanged and transferred to foreign bank accounts by the early 1990s. Thousands of dachas, flats and other buildings were sold through front companies to the new powers-the banks, the property developers, the traders.
The longer-lasting movement of property went under the title of privatisation. Its first phase saw the sale of shops and workshops: often capital acquired in the black market was laundered through such purchases; the Moscow police believe that by 1993, more than 30 per cent of the shops were owned by organised criminal groups. The second phase was mass voucher privatisation, in which the beneficiaries were largely the workers and managers, with others taking a share of companies through the exchange of vouchers. In this phase, too, black market capital was alleged to be extensively involved, according to numerous police and other reports. The third phase was post-voucher privatisation, in which a group of finance companies and banks were given insider deals on large shares of some of the most attractive Russian companies.
It was in the state’s powerful grip on private transactions that crime flourished. The privatisation of Moscow’s property offers a classic case of senior officials, property developers and banks creating a web of mutual self-enrichment. In 1992, Yuri Luzhkov, the mayor of Moscow, decreed that land could not be bought and sold freely. This left all final decisions on allocation of property to city hall-an incredible source of kickbacks. The normal method was for a developer to strike up an alliance with a senior official; for the official to sell to his ally an apartment building at a low price; for the developer to renovate and sell at up to 100 times the purchase price; and for the two-and others involved in the deal-to split the large profits. Figures such as Andrei Stroyev, who “privatised” the state building corporation Mosinzhstroi in the late 1980s, flourished. He formed a joint venture with a US company in Atlanta to create a firm called Perestroika which became the dominant supplier of luxury offices and homes for the foreign business community. The link man with the Moscow government was Andrei Resoin, who sat on the Mosinzhstroi board and was also head of urban development in Moscow.
All this needed protecting: and that protection has been largely private. The police’s failure to bring the new commercial activities under their authority has been total. In the late 1980s they gave away authority when they began to charge for extra protection. (This meant that businessmen not paying would get less protection-a state of affairs in which no police force of any dignity could acquiesce, let alone propose.) But even if they had not done so, police demoralisation, lack of technology, miserable salaries and thus vulnerability to (as well as a tradition of) taking bribes would all have ensured that the new business class had to hire additional private protection-an important source of the new criminality, and the main parallel with the mafia-dominated societies of Sicily, some Latin American states and some US inner cities.
By the middle of the decade, the new businesses at the respectable end of the spectrum took secu- rity very seriously. Sergei Rodionov, chairman of the large Imperial Bank, reckoned that 60 per cent of his staff costs were paid to security personnel. Vladimir Gusinsky, chairman of Most, hired a former KGB general to head his 2,500 strong security force-which had its own training school and firing range. Alexander Smolensky, the chairman of Stolichny Bank, employed members of the KGB’s Alpha squad-the ?te of an ?te-to be his guards. About 80 per cent of the banks-dispro-portionately the smaller ones, who could not afford Rodionov’s or Gusinsky’s private armies-paid protection money. This could amount to 20-25 per cent of their profits.
the german interior ministry recently estimated that foreign companies in Russia also pay heavily, handing over up to 20 per cent of profits to criminals or legitimate protectors. This is one reason why investment per head in Russia is only one seventh of that in Poland. Larry Summers, the US deputy treasury secretary, told the US-Russian Business Council in April that, with such uncertainty, investment will not come.
But foreigners have bigger worries than not being able to invest in the new Russia. In the first half of the 1990s, foreign countries became aware that Russian organised crime had become international. One of the first to voice the fear was Giovanni Falcone, the anti-mafia judge murdered by Sicilian mafiosi in May 1992. He saw the emergence of the Russian mafia as a link in a girdle of mafia organisations round the earth: the Sicilian and Neapolitan families, the Colombian drug lords, the US gangs, the Japanese Yakuza, the Hong Kong and Taiwanese Triads-and now the Russians. Louis Freeh, head of the FBI, set up an office in Moscow to try to assist the militia in controlling the epidemic; he has described the Russian networks as “a new transnational enemy.” David Veness, an assistant commissioner of London’s Metropolitan Police force, says that Russians might control much of Britain’s inner city crime by the end of the century.
The Russian criminals’ international trading networks were established on the old staples of protection and drugs. (Russia had been a relatively “under-narcotised” country, but the 1990 estimate of 130,000 Russian addicts is predicted to become 7.5m by the end of the century.) But most worrying is the new trade in military and nuclear goods. In the mid-1990s, western secret services were paying particularly close attention to Grigory Loutchansky, a Jewish-Ukrainian who was a former economics professor at Latvia’s state university. In the late 1980s, Loutchansky went into trading agricultural fertilizers; showing a talent for the task, he was encouraged by the Communist party to found a company named Nordex. Nordex, like other such companies, was officially a medium through which joint ventures with foreign companies could be concluded, to advance the modernisation of industry. In fact, these ventures were conduits for funds taken out of the country and placed in foreign bank accounts for subsequent use by senior party and state officials.
From these beginnings, Nordex grew into a trading and financial company with an official turnover (in 1993) of $600m a year; it had headquarters in a palace in Vienna and links all over the former Soviet Union. Many of its deals were in trading commodities-metals, oil, gold-from the former Soviet Union to the west, sometimes in transactions relieved of export duties. Working through presidents and prime ministers, Nordex organised huge trade deals with the more resource-rich of the former Soviet republics.
The most alarming allegations-those which made Loutchansky (in the words of Time, which published a dossier on him in July 1996) “the most investigated man in the world”-was evidence that he was smuggling Scud missiles to radical middle eastern states, and that he was exporting components for nuclear bombs to Iran and North Korea. These allegations were never proved: but in the mid-1990s, Nordex’s income shrank as foreign governments denied Loutchansky a visa and cracked down on deals he tried to broker with their companies. He blames both former Soviet and western intelligence agencies for the rumours-“disinformation”-and says they are pursuing him to justify their existence.
russian politics is a clan system; representatives of interests, such as oil, gas, military industry, the security services, finance capital, co-operate to keep the system going, but fight viciously-up to and including assassinations-for the spoils. Formally, all Russian politicians should be poor; their salaries are a few hundred dollars a month. In fact, it is impossible to operate in high politics without access to millions of dollars; so one must acquire backers. The large financial-industrial groups, in which an assortment of industrial companies are grouped with banks and service companies, “own” politicians in a frank manner-and just as frankly expect them to serve their paymasters’ interests. Some economists predict that in a few years time, about 20 of these “parasite cartels” will have most of the economy in their grip-suppressing competition and integrally linked to criminal activity.
The 1996 presidential election revealed the crude nature of the link between money and politics. In February 1996, just a few months before the election, a (now celebrated) meeting of Yeltsin’s closest advisers took place. They should have been downcast: the communists were getting impressive support in the polls and Yeltsin had become a widely derided figure. But most participants remained confident that victory could be bought. Early in the meeting General Alexander Korzhakov, head of Yeltsin’s personal security, rose and said: “Money will be no problem at all in this campaign. Everyone in Russia who has made one rouble, has made it because of Boris Nikolayevich (Yeltsin).”
Yeltsin attracted an estimated $100m to defeat the communists. But the debts have been called in. Western intelligence believes that organised crime syndicates in Russia enjoy the protection of the ruling oligarchy which rose to prominence during the election and then consolidated its power during Yeltsin’s illnesses.
Then, in the last months of 1997, Russian reform was dealt what was described as a serious, even fatal blow: a group of reforming ministers were fired for accepting an “advance” for a (never written) book about privatisation, from a finance company with a very big interest in privatisation. The first deputy prime minister, Anatoly Chubais, also took an “advance.” He has so far survived, although he has lost the finance brief which gave him his influence. That the usual cause of Russian ministerial resignations-allegations of corruption-should have seeped upwards so far as to humiliate a man who had long advertised himself as one of the rare clean politicians in Russia does great psychological damage both to the small band of liberals and to their western supporters.
The “advance” was revealed by one of Russia’s best known investigative reporters, in a newspaper owned by a financier who was in conflict with the ministers’ own benefactor. Russian journalism has long been a target for corruption: articles about politicians and businessmen are routinely bought; reporters are paid to write glowingly. Now, with the media mostly in the hands of the big Moscow financiers, reporters are paid better wages and do not have to rely on hawking their pen piece by piece-but the price for this is that their proprietor’s enemies are their enemies, his friends their friends, in a much more direct way than in the west. So the press blows the whistle rather as it did in Soviet days-when it is told to.
Russia’s economy may grow next year, if the ripples from southeast Asia are not too rough on the fragile signs of recovery. It has a relatively well educated population, many figures of great talent and one of the world’s richest cultures. It is hard to conceive of Russia as a criminalised state. But it is also increasingly hard, as the evidence mounts, to see how it can shake itself free of a corruption which grips the country by the throat.
The hope that the problem will “wash out” as capitalism becomes more transparent now struggles to be convincing. The parallel with the raw and lawless phase of American capitalism is too optimistic. Drawing on both religious and secular codes, the US always had a strong, honest, business ethic with solid foundations in government, law enforcement and business itself. In Russia-no longer an empire but not yet a “civic” nation-such an ethic was and remains weak. The old morality has been discredited: a new one struggles feebly with the tide of greed, fear and cynicism.