Free-For-All

The Post-Soviet Transition of Russia

Dr. Gary K. Busch

EXCERPTS FROM THE TEXT

Excerpt One: Initial Background

Once our meeting with a Soviet energy minister was called off at the last minute. I was to fly to Helsinki for a meeting with him but they called me from Helsinki to say I shouldn't fly. The Minister had been arrested while leaving Leningrad; he was found with a handful of uncut diamonds in his toothpaste tube. We didn't know whom he had offended but, as a civil minister, he was as vulnerable to the Organs as anyone else. When we dealt with the state trading companies we dealt with ministry officials, party officials and the 'control' ministries. Occasionally we had to deal with the military (both the defence ministry and the GRU). There were at least three people for every important job in the USSR; one from the civil administration; one from the party organisation, and one from the control agencies. The power was not divided equally among them. This was even more complicated in the regions with local party and civil administrators participating and offering advice.

This was monumentally inefficient. No one had sufficient individual responsibility to run anything. There were phantom factories, phantom workers and phantom transport links. These were sufficiently well documented that they passed for reality and got their budget allocations and requisitions. In one year in the 1970s, the most efficient and productive facility in the USSR was a shoe factory near Lake Ladoga which had never been built. It did so well because there was no real factory and no real person was working, and they thus avoided the shortfalls and quota delivery problems which plagued existing companies.

The USSR economy was capable of producing the same quantities of aluminium, steel, coal, aircraft, oil, natural gas and even grain as Russia produces so profitably today. However, they didn't achieve anything like these levels of production. The system was skewed, corrupt and inefficient; primarily lacking in investment capital. The people who were running the USSR economy were incapable of making it fit the needs of the twentieth century. If it weren't for the Afghan War the USSR might well have crumbled six years earlier. It was a command economy with the inmates of the asylum in command. What did function was the military with its ability to annihilate the world. Russia was a Great Power but only militarily. It would have had a hard time competing economically with several Third World countries. Communism contained the seeds of its own destruction. Even if there were competent people in charge of key ministries or state trading companies, the fabric of the economy was threadbare. They had no resources or systems to make the needed changes. So they did their best to try to fit reality into an unreal system.

This system functioned in Russia from about 1964 to 1988. Then there were three crises which occurred. The first was Gorbachev's order to disband Gosplan (the centralised state planning organisation); over 60,000 people lost their jobs. They didn't go quietly. They set about sabotaging the system so they would be needed to restore it to order. I was doing some business with Razno, one of the state trading companies, who told me that in the three weeks before their dismissal the workers at Gosplan ordered the wood for door frames from Krasnoyarsk, the wood for the actual doors from near Chelyabinsk, and had these sent to a factory in the Caspian Region near Rostov-on Don for assembly. The attendant cost and delays of shipping components thousands of kilometres were astronomic. This was mirrored across the Soviet economy; inefficiency was compounded by sabotage.

The next shock was the order to close up the state trading companies. This was an enormous wrench to the system, not only because people lost their jobs and control of industries, but because these state trading companies had joint ventures around the world which suddenly were also out of business. Who was able to market Soviet products on the world market when these trading companies disappeared? No one had a clue as how the goods should be priced as no one had an idea of the real costs (including transport, wages, etc.).

The other shock was the removal of the Communist Party from its place of monopoly in the political system. This had many political ramifications, but the economic effects were devastating. As the Party made up a third of the triumvirate of power in every factory or shop or agency, the vacuum was created into which no one dared enter.

When I was asked to look into the suitability of the ports I was well aware that there was much more involved than logistics even if this was not apparent to the businessmen. It was always a surprise to me how these talented, intelligent, successful traders had no interest in or patience in learning about the political dimensions of what they were doing. This was matched by the childlike, ideologically coloured view of the politicians and intelligence officials about how international trading companies actually functioned. They knew about each other, as my grandmother used to say "...as much as a pig knows about noodles." They knew when it was time to eat. It wasn't too hard to find out the needed information if one knew whom to ask.

I started my investigations by concentrating on finding the right sea port and rail line. I chatted with a number of ship owners at the Baltic Exchange at the weekly Monday assembly when cargoes were advertised and traded. None really had any extensive knowledge of the Russian trade or ports. I avoided Russian owners as I expected they would be competitors. I then went to the journals and the reports on Russian business without much success. I decided that I should go to the horse's mouth. I asked myself who would know about Russian ports and railroads? There was one obvious answer, the U.S. Department of Defence; especially Naval Intelligence. Surely they knew all about Soviet sea defences and the layout of the railroad systems. I was lucky in that I had had some prior contacts with the Defence Intelligence Agency (DIA) and went to Washington where I had a meeting set up with them and some friends from the CIA. There were three specialists on Soviet port and transport operations. I was advised to go to the U.S. Department of Commerce to buy copies of the Operational Navigation Charts (ONC) and the Tactical Pilotage Charts (TPC) for the parts of Russia in which I had an interest. These were detailed maps produced by US satellites which showed road and rail links, the contours of the land and the radar sites and their frequencies.

I had to laugh. In 1979 when I was visiting Geneva during the talks on Zimbabwe independence (e.g. Rhodesia) I had been working on a plan for ZANU to join the rail line in Tete Province in Mozambique to the newly-built Canadian rail line in Malawi terminating at Nacala, This would take an independent Zimbabwe's trade away from the reach of South Africa. As part of my outline which I presented to them on this I displayed the ONC and TPCs for the region. Jo Tongongara, the commander of the ZANU forces looked at the maps and shouted, "Where the hell did you get these maps? We have been looking for them for four years. The Rhodies took them away with them and we couldn't steal them from them or South Africa. How did you get them?" I said that I had bought them at Stanford's Map Store in London, near Covent Garden. He said "Bought them; bought them? My God that is the only thing we didn't think of doing!".

The three specialists told me that I should not believe any Russian map. The Russians lied as a matter of course on their maps in public circulation and deliberately changed the information

Excerpt Two: The Crisis In Post-Soviet Russia

It is probably best to describe, in general, what was happening in the political and business environment. When I first went to Russia I found that the communist system had collapsed; the whole command economy had disappeared virtually overnight. Factories existed but they had no idea how to get raw materials or to sell or transport their production or how to pay their workers. They had no bank accounts, no savings and no markets. The railroads had no idea how to buy coal or electricity nor was there anyone to buy from. No one knew how to pay a wage or provide food and medical assistance to the population. The notion of price or supply and demand, which is the root of the capitalist system, was missing from the equation.

Everything was tried; barter, stealing and borrowing were the main systems. There was no law. There was no 'proper way'. There were no rules.

The remnants of the 'old order', the KGB, the GRU and the military realised that something drastic had to be done and done quickly. The First Chief Directorate of the KGB and the Sixth Directorate had been concerned about the potential political and economic collapse of the USSR for a long time. Long before the August 1991 attempted coup against Gorbachev the handwriting was on the wall. The massive state trading corporations were dissolved. The planners at Gosplan were fired, en masse, from their positions. The First Directorate (INU - Innostrannoye Upravleniey, First Chief Directorate - Foreign) which was responsible for foreign intelligence collection, analysis, offensive counterintelligence, and active measures had been assembling a large cache of hard currency in banks outside Russia. They, and the Sixth Department (which dealt with international economic programs) knew that the chaos which was about to overwhelm Russia in the wake of the political crises would leave Russia without an economic structure which could perform the tasks needed by the Russian State.

From 1988, the KGB intelligence service focused primarily on following domestic developments in the Soviet Union rather than foreign espionage. Also, it was "preparing" for future market reforms in the country. The number one priority of any KGB officer was to work on establishing new businesses or penetrating existing businesses, including the banks.

When Boris Yeltsin abolished the Communist Party's monopoly of power, the KGB rushed in to fill the political void as well. Prior to the 1990 elections for the Congresses of People's Deputies in Russia and the other Soviet republics, the KGB set up a special task force to organize and manipulate the coming electoral processes. It held political organization training courses for favoured candidates, arming them with privileged information about their constituents' problems, needs and desires. Admitted KGB officers, some 2,758 in all, ran in races for local, regional and federal legislatures across the USSR; 86% won in the first round, according to an internal KGB newsletter.

The trends were similar in Russia's business community. It was the KGB and the Komsomol that established the first stock and commodities exchanges, "private" banks, and trading houses through which the Soviets' strategic stockpiles of minerals, metals, fuel and other wealth could be sold. The West would not allow the Soviets to dump these stockpiles of raw materials and finished goods on the open market for fear of depressing world prices, so the KGB took the alternative route of selling these through organized criminal channels, to get the hard currency Moscow desperately needed.

These networks were facilitated by the strategic placement of support personnel abroad. KGB Chairman Vladimir Kryuchkov's son, as station chief in Switzerland, was implicated by a parliamentary commission in a scam to bank fortunes in hard currency for the KGB and Communist Party leaders and their families. The son of former Soviet Prime Minister Valentin Pavlov, who worked in a Luxembourg bank, was implicated in the same scandal. Even as the Russian government went through the motions of tracking down such monies, foreign intelligence chief Yevgeny Primakov blocked all parliamentary investigations from looking further, and the matter was forgotten.

By 1990 Russia stood in a very precarious position. It had vast wealth in terms of resources but no way to trade them; a mighty army but an army that was retreating from Eastern Europe without a shot being fired; a banking system with no liquidity as all funds were held in Moscow and there were no regional banks. There was a gold rouble trading at $1.20 to the U.S. dollar and a free rouble trading at $0.66. Behind all of this was a nervous and hostile West, especially the glavni vrag, the "main enemy" the U.S., who would certainly prevent Russia from dumping its products on the world market and who was refusing realistic credits to Russia. In addition, the break-up of the USSR into Russia and the CIS left many of Russia's ports in the hands of local nationalists in Lithuania, Estonia and Latvia which restricted Russian access to the markets.

There were several major crises with which the Russians had to deal all at once. The first was food. There was little food in Russia at the best of times, exacerbated by the problems of logistics and supply. Under the Soviet system the factory or place of work in rural Russia often offered most of the social services provided by the State, including food. With the end of the Soviet system these factories or places of work had no ability to fulfil these tasks using their own resources. Because their factories operated under the strictures of the command economy there were no profits, no accumulated savings or other funds upon which they could draw. They couldn't buy raw materials; they couldn't pay for utilities or services; and they had no reachable market for their goods. In the giant aluminium plants there was no way to pay for the alumina (which was derived from bauxite imports from Guinea); no way to pay for electricity; and no way to pay wages and no way to get the finished aluminium to market.

Equally there was no way to price these internal transactions as there never was anything other than notional prices for transport, notional prices for raw materials and notional prices for finished products. There was no money in the system; only a notional internal clearing mechanisms.

The leaders of the First, Fifth and Sixth Directorates of the KGB developed a two pronged plan. The first part of the plan included inviting in foreign capitalists to prepay the expenses of the factories to get production moving. These capitalists would pay for raw materials, pay for transport and earn the right to sell the completed goods on the world market. They would pay, in addition, a fee or 'toll' to the factory for producing the goods. This system of tolling would only work if there were an internal currency which could be used to start the payment system and establish prices. There was no state mechanism capable of handling this. So, the planners decided on an ambitious, if risky, system. They would make an alliance with the small and disorganised criminal groups in Russia to develop a parallel system to the government's official currency business. They opened up the floodgates on a massive haemorrhage of roubles onto the world markets to get hard currency and to prime the rouble pump inside Russia.

In early 1990 trainloads and truckloads of roubles left Russia, escorted by KGB police guards, for Western Europe. In Italy the Mafia, the Camorra and the 'Nhdragheta purchased millions of dollars worth of roubles from their illicit profits. Russia became the greatest laundry for money that was ever known. Bankers in the West were offered letters of credit in roubles with a Russian guarantee that these could be brought back into Russia. Santo Pasquale Morabito, a notorious Italian drug dealer and launderer for Pablo Escobar of Colombia swapped US$4.6 billion for 70 billion roubles (or less than half the official rate). The main Sicilian outlets were Ciccio Madonia's family in Palermo and Nitto Santapaola's in Catania. Everyone got into the act. A Sicilian Castellamarese capo called Tommy Marsala bought half a billion roubles for the Lebanese Druse leader Walid Jumblatt, who used them to buy small arms and rockets from Russia.

The money continued to flow out of Russia. Ordinary roubles became 'gold roubles' when they passed the border. These were gold roubles- because they were backed by gold held in the Russian Treasury. Between 1990 and 1992 the Russian gold reserves had mysteriously disappeared. When Gregori Yavlinsky, the reformer, went to the September 1992 G-7 meeting in Bangkok he reported that of the 2,000 tons of gold in the Russian reserve only 240 tons were left. In November even these were gone. In a little over a year over US$22 billion in gold left Russia at a heavy discount to cover the massive rouble river costs. Europe was full of stories of this group or that offering to place $140 million with one bank or the other. What did happen is that most of this money, in roubles, returned to Moscow; albeit at a discounted rate.

When this money returned to Moscow it had to be used and directed for the urgent projects decided upon by the leaders. The KGB and its allies, under Silayev, Kryuchkov, Kasbulatov and Soskavets set up a system in which loyal and trusted members of the Komsomol system and friendly businessmen could form their own banks - Russian banks. Men like Khodorkovsky, Aven, Fridman and others were chosen from the ranks of the Komsomol and set up in the money business. They used the banks to channel the returning Mafia money into long-term businesses. With few exceptions, those chosen for this were all Jews. When Western pioneers like Marc Rich, David Reuben, Gerry Lennard or Alan Cligman agreed to work within this system by creating the 'tolling' business, they were given a kick start of roubles to help pay for the initial costs of the tolling system, They, too, were mainly Jews, albeit foreign Jews.

Between these two groups there was another layer of 'facilitators'; people who knew the parallel system. They set up the deals. They traded the hard earned cash from commodities like aluminium into cigarettes and vodka which could be brought back into Russia and sold for cash, providing liquidity to the system. These facilitators were among the first private businessmen in Russia. They had ties to the organised criminal private sector which had access to the raw materials and the internal organizations which could deliver on the agreements made; the Izmailova (the late Anton Malevksy), Soltsnevo, Lyubarsky, Long Pond groups to name but a few. The facilitators included the Chernoy brothers (Mischa and Lev), Sam Kislin, and the 'institutionals' (those set up with institutional government support) Gregory Luchansky, Semyon Mogilevich or Vadim Rabinovich in the Ukraine. Most of these, too, were Jews. Without these men the Russification of Russia couldn't have taken place. They provided the only working capitalist system in Russia. Even in the far reaches of Siberia or the outposts of the Far East one could always find someone from that fraternity "bratsky krug" who could provide what was needed.

As this worked and metals or oil were produced and sold, these companies retained a part of the hard currency earnings the foundations of Russian capitalism were laid. As these banks and investment trusts prospered, Russia became less and less dependent on the Mafia for its business. They also became less and less dependent on Western capitalists to introduce them to commodity trading. They brought the roubles home and, in the various stages of privatization, they invested these in Russian businesses. Quite often this privatization was a sham but that wasn't the point. The point was to bring the money home and take over the shares and the businesses.

One might well ask on what basis these 'oligarchs' were chosen. The main reason, in addition to their competence, is that they were mainly Jews or outsiders (Potanin's father was a trade official and he lived outside Russia for years). As Jews they were without a political base. No Russian member of the Duma would dare stand up to protect a rich Jew. These oligarchs were dependent on their KGB bosses for their security. Many of the cleverest Jews had already left. A familiar story was "How does a clever Russian Jew communicate with a stupid Russian Jew? By telephone, from New York".

Excerpt Three: The Chekists

The role of the Chekists is crucial to the understanding of how Russia moved into the era of private capitalism. One of the difficulties in understanding the role of the Chekists, especially the KGB, in the modern era (post 1980) is that there should be a clear distinction made between the KGB thugs and the KGB planners. A large portion of the KGB was engaged in the security of the state; they did this by acting as border guards, as surveillance officers (7th directorate), transport officers (4th Directorate), security officers at government installations (15th Directorate), government protection service (formerly 9th Directorate), protection of the constitution (formerly 5th Directorate), Many were engaged in technical functions: communications and cryptography (8th Directorate), in technical operations (OTU), sigint (16th Directorate) archives (10th Directorate) and schools. These were active, almost entirely within the boundaries of the Soviet Union.

On the other hand the First Chief Directorate (Foreign Intelligence-FCD) was made up of a different type of professional. Most of these were engaged in the normal business of spying (illegals, case officers, counter-intelligence, 'active measures', disinformation, covert action, communications, codes, computers and technical services.) and were engaged in essentially covert work. These professionals were mainly chosen from the ranks of the party elite and were the graduates of universities and technical schools. A few others were part of the Directorate of Intelligence Information and had been principally drawn from the ranks of many who had served abroad and were familiar with the political and economic operations of Western and Third World countries and academics. These were the 'academics' of the service and the thinkers. They were a 'different' KGB than the border guards and security people; they were engaged in mainly overt work.

However the heads of these KGB directorates and departments were often drawn from the Party rather than from moving up through the KGB ranks. They reflected the political directions and loyalties of the Party leadership, If that changed they were often replaced. Their task was primarily in fighting for budgetary allocations and following the 'Party line'. The production and evaluation of intelligence lay elsewhere. Over the years I got to know several of these overt KGB intelligence officers who had been stationed or served abroad. They were often quite sophisticated analysts of the world scene and very well-informed. They frequently recognised the Emperor's lack of clothing but, as they were employed by the Emperor's tailors, they restricted their fashion analysis in missives home.

The reason why this is important is that in October 1988, with the replacement of Chebrikov as the head of the KGB, Vladimir Kryuchkov became its Head. General Kryuchkov (to give him his quasi-military rank) was not a career intelligence officer but a Party bureaucrat. He was put in charge of the First Chief Directorate of the KGB in 1974 by Andropov. He was an Andropov man who had worked with Andropov in the Komsomol and the Party, He later became friendly with another Andropov man, Mikhail Gorbachev who in 1988 raised Kryuchkov from the First Chief Directorate to the Head of the KGB. This was the first time in the history of the KGB that someone from the First Chief Directorate (Foreign Intelligence) had risen to the top of the agency. It also marked the spread of the "Saratov Mafia" of Andropov and his friends.

Kryuchkov, although learning a great deal from listening to his staff, was as paranoid as the rest of the Soviet leadership. With the US maladroit handling of the shooting down of the airplane KAL007 over Russia the Soviets became obsessed that this was the precursor to a NATO first strike with nuclear weapons on the Soviet Union. They postulated an Operation RYAN in which scenario the Soviet Union would be premptively bombed with nuclear weapons. This happened on Andropov's watch and involved Kryuchkov, then still in the FCD, as the chief analyst. Andropov issued blistering denunciations of Reagan's policies and took to his bed in a prolonged period of vituperative decay. The Soviet government was in turmoil. In October Lech Walesa had just been given the Nobel Prize and the U.S. invaded Grenada. The next week NATO began a routine exercise, Able Archer 83, which the KGB took as proof of an imminent surprise attack. Nothing happened and, as Able Archer 83, concluded and everyone went home tensions lessened. However, the arrival in the UK and Germany of Cruise and Pershing missiles drove the tensions back up again.

These were relieved slightly at the death of Andropov in February 1984 and the accession (for a year and a bit) of Konstantin Chernenko as General Secretary of the Party. Kryuchkov's FCD kept up the pressure internally within the KGB to find out more about Operation RYAN, with little success largely because there was no Operation RYAN. The dismissal of Army Chief of Staff and Defence Minister, Marshal Orgarkov and the death of Marshal Dimitry Ustinov (two of the most obsessed with the nuclear war scenario) led many in the Politburo and the Central Committee to believe that RYAN was not an urgent matter. This is the context in which Gorbachev took over at the death of Chernenko. The Soviets had passed through a major crisis in the belief that the West was about to attack. The concern was not only for the safety of the USSR but a deeper concern that there was very little the Soviets could to stop it other than Mutual Assured Destruction. It was too expensive to continue on this path and they were rapidly running out of options.

One of the reasons that it was too expensive was that the Soviets were fighting a desperate and debilitating war in Afghanistan. In defence of a Communist government which the Soviets had installed in Kabul, the Soviets sent its troops across the Afghan border on Christmas day 1979. They rapidly occupied the area around the capital but their opposition, the mujahidin scattered to the rural areas. Initially the Soviets had overwhelming firepower and air supremacy. However, with the introduction of "Red-eye" and "Stinger" missiles and modern equipment the mujahidin were able to shoot down Soviet helicopters and to destroy Soviet tanks. These were largely supplied by the U.S. in Operation Cyclone ("Charlie Wilson's War"). The mujahidin began a war of attrition with the occupying Soviet troops. This was very expensive in men, material and propaganda. It was bleeding the Soviet military dry and winning no friends around the world. Equally as important it distressed the parents and families of these soldiers who were suffering and dying in Afghanistan, creating a major gulf between them and the Andropov, Chernenko and Gorbachev Governments.

The Afghan War, in particular, engaged most of the resources and efforts of the other major Soviet intelligence agency, the GRU or Glavnoye Razvedyvatel'noye Upravleniye is the acronym for the foreign military intelligence directorate of the General Staff of the Armed Forces of the Russian Federation, The full name is GRU GSh (GRU Generalnovo Shtaba i.e. "GRU of the General Staff"). The GRU was founded by Leon Trotsky in 1918. The GRU, which is subordinate to the General Staff, is organized into Directorates, Directions, and Sections. Most of the work of the GRU concerns military intelligence (gathering information about foreign armies, orders of battle, communications links, etc.) The tasks are divided operationally by function and by area (e.g. Africa, Asia, etc.) An area with which I had some contact was the Institute of Information which studied open source materials. I also met several people who were part of the Army, Navy and the Air Force as officers in their services who co-operated with the GRU specialists.

Its headquarters, the 'Aquarium' is located in Khodinka Airfield, right near the Ilyushin Design Bureau, just outside Moscow. The GRU has always been independent of the KGB. Indeed the KGB had to ask permission to visit the GRU or to attend its functions. The GRU was larger than the KGB and had its own "Special Forces" spetznaz troops. Unlike the KGB, it has been largely unchanged in the post-Soviet era. Since it was less 'political' it had offended fewer people. It kept its structures, its officers and its tasks. Despite the dissolution of the USSR at the start of 1992 and the reduction in manpower within the GRU engendered by Russia's reduced economic might, the GRU remains largely unchanged from the Soviet era. In the former Communist bloc their military intelligence arms also remain largely unchanged despite becoming democracies. The GRU today is a cohesive, highly efficient, and professional military intelligence agency. There was a good esprit de corps between the regular military officers and the GRU. I remember entering the Main Airforce Building for a meeting in 1996 with some friends. Standing on the steps was a young man, slightly chubby, in an airforce uniform without a hat. He was being greeted and cheered on by almost everyone who walked in the door. I was introduced and shook his hand. I asked my friends who this hero was. They told me he was the guy who traced the satellite phone of Dzhokhar Dudayev, the Chechen leader, which allowed the Air Force to send two laser-guided missiles to where Dudayev was speaking on his phone and blew him to small pieces.

By the time of Gorbachev's accession to power the war in Afghanistan was deteriorating badly. Resources were draining from the USSR budget and military progress had stopped and containment was the policy. Gorbachev told the military that they had a year to sort things out. They embarked on a policy of creating an Afghan Army which would notionally take over from Soviet troops, who would then be free to return home. This did not work so, at the end of 1986, they prepared to bring their troops home. The first contingent returned to the USSR from May to August 1988 and the rest from November 1988 to February 1989. It was an expensive and humiliating experience.

Excerpt Four: The Origins of 'Tolling'

The Russians were in a dilemma. They needed to buy, in hard currency, the alumina it needed for the aluminium smelters. It didn't have these reserves or the mechanism to guarantee the purchases. The individual smelters (Bratsk, Krasnoyark, Irkutsk, Sayansk, Kandalaksha, Nadvoitsky, Bogoslovsk and Novokuznetsk) had no cash reserves to fund the purchase of alumina (or coal or electricity), nor did they have a line of credit established at any bank which could give them the working capital to produce the aluminium. As a result of this their offers of metals to the world market were not believed; the metal buyers and traders knew that if they agreed to purchase the aluminium and put letters of credit in place the Russian smelters could not be guaranteed to perform, nor could they issue Performance Guarantees as compensation. Still less could they arrange the shipment of the aluminium from the factory to a port as they couldn't pay the railroads or the ships which would produce the bills of lading.

The Russian Government could offer no help. They could offer tax breaks, exemptions from customs duties, etc. but no cash. However the desperate situation in which the Russian aluminium industry found itself was not new. There were many precedents in the aluminium industry when the cash requirements could not be found within the transaction.

The solution to the Russian dilemma can be found in an important chapter of the history of the world aluminium industry, but not in Russia. In 1985, when the world aluminium industry was depressed, Alcoa shut down its Jamaican plant which refined much of the island's plentiful supplies of bauxite into alumina. The export-hungry Jamaican government was desperate to reopen the plant. Alcoa agreed to lease it to the government and keep it running. But Jamaica needed to find a buyer for the output. It found Marc Rich, who had established close ties to Jamaica as part of Phillip Brothers for whom he had worked. Mark Rich agreed to lend Jamaica US$200 million which the Jamaican Government could use to pay Alcoa to keep the plant running and employment steady. As a result, in early 1986 Marc Rich was able to sign a ten-year agreement to purchase most of the output of the Jamaican Alcoa plant which annually produced some 800,000 tons of alumina. The price was reduced to reflect his loan so he was effectively buying the alumina at a discounted price.

Much of this alumina he delivered to the US market. Mark Rich agreed to let Manny Weiss, his metal trader, work with the US affiliate of Marc Rich, Clarendon, to supply US smelters with the alumina. At that time the U.S. aluminium industry was suffering from the high costs of electricity and a depressed market. Many of the aluminium majors, Alcoa and Alusuisse were losing money and were keen to sell their U.S. smelters. The local governments were anxious to keep the smelters going and to maintain employment there. Manny Weiss saw an opportunity. Rather than buy the U.S. smelters and go into the aluminium producing business Marc Rich and Clarendon would assist those who bought the smelters. Clarendon would negotiate good rates for electric power and a reduced wage rate for the labour and would supply the smelters with the cheap Jamaican alumina. In short, for a tiny investment, Clarendon would supply and pay for all the inputs into these smelters and would take the primary metal for sale at a subsidised rate. It would pay a fee, or "toll" to the smelter for the processing.

Clarendon was active in tolling in many smaller smelters as well and took a subsidised interest in others, either in ownership of a minority share or as the off-taker. By 1987, with the boom in aluminium prices, Marc Rich was making a lot of money in aluminium tolling. At that point March Rich, whose metal trading in the Soviet Union with the Soviet state trading company Razno had led to Marc Rich becoming one of its biggest customers for Soviet zinc and lead. Marc Rich was convinced by Felix Posner, a partner in the company, to make a deal with Ivan Russov, Razno's man in London, to offer the same kind of tolling deal for the Russian aluminium industry that Rich was performing with the U.S. smelters. Marc Rich introduced tolling into Russia and the Russian aluminium started to flow into the world markets.

As Mark Rich started to import alumina into Russia he soon found, as in the U.S., that importing alumina on its own was only a partial solution. His company had to make sure that the Russian smelters had electricity, money to pay wages, transport facilities etc. In his co-operation with the Russian authorities they pointed out that they were allowing a new group of Russian entrepreneurs to establish themselves and their Russian companies to help develop the infrastructural needs of the economy outside the state's direct control. Rich had interacted with these Russian traders and middlemen earlier in the late 1970s when he started doing business in the lead and zinc industry; becoming the largest foreign trader in Soviet metals. His expansion involved an association with Grigoriy Luchansky of Nordex (a steel trading company based in Vienna which ultimately had an important presence in almost every Russian port) and with Semyon Mogilevich, active in the trading of Russian and Ukrainian energy supplies. These two were operating as semi-official agents of the Russian leading politicians and were seen as 'institutionals' as opposed to purely private entrepreneurs The introduction of tolling was a major boost to the production and sale of Russian aluminium.

Mark Rich initially prospered in his tolling of aluminium but fell afoul of the Soviet authorities when they completed an audit of Razno's trade with Rich in the lead and zinc market. The KGB investigation demonstrated the Soviets had paid Rich far more for lead and zinc concentrates than Rich's customers in Western Europe had paid. Rich had to pay a penalty and Ivan Russov was removed from his post. The Russian authorities decided it would be wiser to allow in additional Western companies to do tolling as well as Marc Rich. Two Western groups were invited by Russian intermediaries to take part in the tolling of aluminium; Trans World Metals (David Reuben) and the American International Ores Company - AIOC (Alan Clingman). Smaller firms like the Belgian Euromin had minor trading operations with finished aluminium; WORALCO concentrated on Tajikistan and the Balli Group traded primary aluminium it bought from the smelters. However, Marc Rich, Trans World and AIOC were the key players. With the murder of AIOC's main contact with Russia, Felix Lvov, AIOC was driven out of the business and filed for bankruptcy in 1996.

Tolling was successful because the Russian banking system was woefully under-developed and the history of seventy years of communism was an inhibitor of effective commercial trust in the new private enterprises. When Marc Rich and Trans World took on the responsibility of tolling it took on a wide range of problems which had never previously had a solution in the Soviet Union or Russia. While Marc Rich had its ready-made supply of alumina from its Jamaica operations, Trans World had no regular source of supply. Through its Russian partner, Lev Chernoy, Trans World had an important relationship with Achinsk Refinery, a domestic producer of alumina and located by rail near both the Krasnoyarsk and Bratsk smelters. However, Achinsk was not immune to the difficulties of the other recently privatised companies in Siberia so it was clear that some other, external source of alumina would have to be made available to the smelters by Trans World. Trans World decided that the abundant source of supply of alumina in Australia would become its major focus.

Excerpt Five: Finding a Krysha

With the beginnings of privatisation the increased levels of regional autonomy grew. The governors had their own budgets which were gleaned by imposing local taxes and duties, instituting a wide range of taxes and fees for government services which they often made up on the spot. The police and criminals established a good symbiotic working relationship in which the protection racket thrived and the cash sales of vodka and cigarettes saw a piece of each transaction find its way into the regional and municipal coffers. The government agencies sold licenses and permits and the criminals shook everyone down and sold everything na leva (outside the normal channels). Moscow had no money to pay the regions nor harboured any great intention to do so. Traditionally, Moscow took; it didn't pay.

It was in the early 1990s that blat became moneterised. The exchange of favours and mutual protection was no longer done exclusively for mutual assistance. By 1990 everything had a price. As the use of cash spread out across the regions it became the means of achieving commerce and trade, although barter was often used as well. In Moscow and St. Petersburg it was unusual for large businesses to accept roubles at all. We had an account at the Moscow Olympic Hotel. Everything was priced in Deutschmarks. Roubles would do you no good. Later they gave up on Deutschmarks and went to dollars. It was bizarre. The national telephone system worked on a jeton or a 15-kopeck piece. These were hard to get so one had to pay 5 roubles for 15-kopeck piece to make a call.

The most obvious aspect of the monetarisaton of blat was the concomitant development of "kryshas" ('roofs') which served to provide a parallel economic and legal structure to the post-Soviet system which had suffered a stunted growth. For Russian businessmen there was no security that contracts could be enforced; no way in which supplies or materials could be guaranteed; no security measure that would allow finished goods to reach the customer. There was no guarantee that the cash reserves which were building in the banks could be secured. Bankers were an endangered species. From 1992 to 1996 the Association of Russian Banks tallied one hundred and twenty attempts on the lives of Russian bankers and their workers, or one every few weeks. Eighty or so were successful and the assassinations completed. Less than eight percent of these killers were ever apprehended and brought to trial. Willy Sutton's epigram translated well into Russian.

In every town, village, city, region and oblast there were kryshas formed out of the existing symbiotic relationships between local government and local criminals. Sometimes they were competing and sometimes they were co-operative. They took their 'bite' from every transaction. In the same way the post-Soviet bureaucracy at every level took their 'bite' for every piece of paper, permit, license or governmental form that was issued. By 1995 there were more than double the numbers of bureaucrats in Russia than in 1989; almost every one of whom had to improve their poverty-line wages by extorting fees from the public they served.

The penalties of falling foul of the kryshas were severe and, quite often, terminal. I was sitting in a Korean restaurant in Khabarovsk one evening with some gentlemen in leather jackets, short hair and gold teeth. They were offering me two truckloads of aluminium ingots they had happened to find at some company's yard and would deliver these to Vanino for us to sell overseas. After our negotiations they had a drink and were chatting about beating up a bunch of Japanese businessmen that afternoon who had tried to deliver some televisions from the railroad station without making provision for the financial improvement of the krysha. I asked them why they were so violent. A Japanese was seriously wounded in the affray. They said that these foreigners and many of the new Russian businessmen were unaccustomed to the traditional practices so they were obliged to set an example. They assured me that, after a while, they would only have to threaten violence and that would suffice. I asked how they knew that the Japanese would be importing these televisions. They told me that the railroad administration gave them lists of everything that was coming into Khabarovsk and the city offices gave them lists of everyone who sought and obtained a permit. These sources would, of course, get a reward.

Excerpt Six: Vampire Communism

Despite the notion that Communism died with the fall of the Soviet Union, the state, its agencies and its companies are populated by the Undead; the unreconstructed nomenklatura of the failed communist system. In his book, Capital, Marx wrote that 'capital is dead labour which, vampire-like, lives only by sucking living labour' He coined the term "Vampire Capitalism"; of corporations whose exploitations 'only slightly quenches the vampire thirst for the living blood of labour', and that 'the vampire will not let go while there remains a single muscle, sinew or drop of blood to be exploited'. What Putin has created is a society of Vampire Communism where the Undead suck the life blood from private corporations and government agencies; leaving drained and powerless structures behind them.

The new and powerful people ('siloviki') have been almost exclusively drawn from the ranks of the 'Chekists'.. Under Putin, these new 'siloviki' have been firmly installed in the corridors of power.

Under Putin, the Chekists, primarily the St. Petersburg flavour of Chekist, openly took power as ministers, government advisors, governors, bankers and politicians. There may be as many as six thousand of these Chekists in powerful positions in the Russian state. There is no mystery about who they might be; Nikolai Patrushev, FSB director; Igor Sechin, Yuriy Zaostrovtsev, FSB deputy director (and a director of Sovkomflot and first deputy chairman of the board of directors of Vneshekonombank); Viktor Ivanov, deputy chief of the Kremlin administration (who succeeded Nikolai Patrushev as the Head of the Internal Security Department of Russia's FSB and a director of the Antey Corporation and Almaz Scientific Industrial Corporation, developing and producing air defence systems and the Chairman of the Board of Directors of Aeroflot); Boris Gryzlov Minister of the Interior (chief of police); Sergei Ivanov, Foreign Minister; former Prosecutor General, Vladimir Ustinov; Sergei Stepashin, chief of the Audit Chamber; Sergei Pugachov, president of Mezhprombank Bank; Nikolai Negodov, deputy transportation minister; Vladimir Yakunin, first deputy president of the Russian Railways Co.; Konstantin Romodanovsky, chief of internal security at the Ministry of the Interior; Viktor Cherkesov, formerly head of the Tax Police (Deputy Director of FSB under Vladimir Putin and Nikolay Patrushev and now the Chairman of the State Committee for the Control of the Circulation of Narcotic and Psychotropic Substances of the Russian Federation); to name but a few. To this list must be added the names of Viktor Alekseyevich Zubkov, the former Prime Minister (having served with Putin in Sobchak's St. Petersburg) succeeding Fradkov who was named the new head of Russia's Foreign Intelligence Service. Perhaps the most important of the new siloviki is Rosboronexport CEO Sergei Chemezov. Chemezov has a long, personal history with Vladimir Putin, dating back to their KGB days in Dresden.

Well, one may well ask, where's the harm in concentrating power in the hands of the siloviki? The unelected 'vlasti' have always lived like parasites on the backs of the Russian people, from the days of serfdom, to the boyars to the political commissars to today's oligarchs. Well, the answer is that today it is Western investors and economies which are suffering along with the Russian people. Western energy security is at risk. This is a different type of stew. While it is interesting to see the continuity of the 'siloviki' in historical context, it is their present activities which cause concern. There is little unity in the 'siloviki' position. There is no one united plan that they follow. These 'siloviki' are in competition with each other and form cliques, alliances and temporary groupings to further their aims. In doing so, they often attack other members of the clan and do serious damage to Russia. There are more factions of siloviki than there are factions of Trotskyites. The Medvedev succession changed almost nothing. These factions are engaged in an ever-spiralling war with each other.

The siloviki have established a pattern of behaviour which they have followed to expand their economic strength. The best example was the case of Yukos, but it didn't start there. One of the first battles, a kind of test case, was the effort to prise the railways from the grasp of Nikolay Asenenko, the Railways Minister. Asenenko was a long-serving Minister, associated with the Yeltsin Family, who was active in instituting reforms in the aging and poorly maintained Russian railroad system. After a long period of resistance the railway system agreed to be reformed. After long debate, the government agreed to Asenenko's plan to split the railway into two entities, a managerial state-run system and a private operating railway business. As soon as this was agreed the 'siloviki' moved in to prevent Asenenko from carrying on the reforms and putting himself at the head of the railway monopoly. The then Prosecutor General, Vladimir Ustinov (himself once a Yeltsin man) began to find 'tax errors' and underpayments by the Railways. He purported to find almost seventy million roubles in unpaid taxes. Asonenko prepared his resignation and Putin fired him (3 January 2002). The new people who were moved into the railways were 'siloviki', led by Vladimir Yakunin. Aksonenko was ousted by a temporary alliance between his old enemy, Stepashin, and his new enemy Ustinov. Since then, reforms have been blocked in the railways.

These alliances have had a devastating effect on Russian banking as well, especially the alliance between Ustinov and Ivan Sechin against Alfa Bank. It was Sechin's faction of the 'siloviki' which has been credited with creating and exploiting the banking crisis of June-July 2004. In mid-May, the Central Bank revoked the license of SodbiznesBank. This was strange as SodbiznesBank was one of the largest known contributors to President Vladimir Putin's re-election campaign. The Central Bank revoked its license for what it said was money laundering activities. This was followed by the closure of other, larger banks. The method was simple; the 'siloviki' promoted a general lack of confidence in Russian banking through the circulation of 'blacklists' of banks purportedly in danger. Most bankers were certain the crisis was provoked by the Kremlin, by Sechin and Ustinov in particular. Since Sechin's daughter is married to Ustinov's son they could plot this over dinner. The real target was Mikhail Fridman's Alfa Bank.

The question of why they wanted to attack the Alfa Bank reveals even more about the 'siloviki'. The origin of the problem was the efforts by Leonid Reiman, the Minister of Communications, to keep control of the mobile telecommunications in his own hands and that of the 'Petersburg Group'. Reiman, although he had no security background, had a better trump card. When he was working in St. Petersburg in the private sector in a company he formed, Telecominvest, one of his employees and co-workers was Ludmilla Putina, soon to be the first lady. He helped form the third largest mobile phone company, MegaFon in conjunction with a major Swedish player. The biggest state-owned (except for a large stake owned by Alfa Bank) telephone company, Svyazinvest, was scheduled for privatisation and Reiman wanted to prevent Alfa Bank from taking it over, and to take it over himself. Alfa owns Vimpelcom, the second largest mobile phone provider as well. The Bermuda registered investment company, IPOC, was in negotiations with MegaFon, the third largest mobile phone company. It thought it had an option to buy a 25.1% stake in MegaFon from LVF (the owners of the minority stake - Leonid Rozhetskin). Before the option could be brought to fruition, LVF was merged into Alfa-Eko, the Alfa Bank telecommunications arm. Since then, IPOC has been suing Alfa Bank in every forum it could find and undertook arbitration with LVF in Sweden and Switzerland. Until recently, no one knew who the owner of IPOC was; it was assumed to be Reiman himself. However, it was alleged in court that the true owner was a Danish lawyer, Jeffrey Galmond. When faced with the high Danish taxes which went with it, Galmond soon admitted the beneficial owner was Reiman.

This dispute is important in that this conflict was generalised into an attack on Alfa Bank per se. Alfa is one of Russia's leading banks and has a positive reputation for adopting the best western practices and transparency in its operations. Attacking Alfa has damaged the international faith in the Russian banking system. Combined with the well-documented attack on Yukos, the view of Western investors is that Russia has been moving backwards. It is not a safe place to invest because the 'siloviki' have no controls or self-discipline on their activities. This is not democracy, it is "Bonapartism". Marx wrote a popular pamphlet called the "Eighteenth Brumaire of Louis Bonaparte" demonstrating how the class struggle in France created circumstances and relationships that made it possible for a grotesque mediocrity to play a hero's part. Bonapartism has been used to describe a government that forms when a military, police, and state bureaucracy intervenes to establish order. There are parallels to today's siloviki Russia.

The real question is why these 'siloviki' are so determined to move into business and take over control of public companies and take others back into public ownership. The answer is very simple - greed. There are no laws against insider trading in Russia. Putin actively promoted the creation of oligarchs in epaulets. There were phenomenal sums of money being earned in Russia as a consequence of the Yukos case. There is no insider trading law which prevents this. The government knew when it was going to make an announcement about Yukos; an announcement that would send its shares up or down dramatically. It knew when it would announce news about stopping or starting oil flows; an announcement that would send oil prices up or down. There is a principle, known as Occam's Razor to guide us. This is a logical principle attributed to the mediaeval philosopher William of Occam. The principle states that one should not make more assumptions than the minimum needed. There is increasing evidence that foreknowledge of government intentions led to trades in Yukos shares and oil futures, betting on a 'sure thing', by the same groups of people who were making the decisions. They were milking the Yukos cash cow for months. Much of these profits come from foreigners or private investment funds. If Occam is right, there is little need to look further for motivation.

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