[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
U.S. POLICY TOWARD RUSSIA, PART II: CORRUPTION IN THE RUSSIAN
GOVERNMENT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
THURSDAY, OCTOBER 7, 1999
__________
Serial No. 106-76
__________
Printed for the use of the Committee on International Relations
U.S. GOVERNMENT PRINTING OFFICE
62-963 CC WASHINGTON : 2000
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa TOM LANTOS, California
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey ENI F.H. FALEOMAVAEGA, American
DAN BURTON, Indiana Samoa
ELTON GALLEGLY, California MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California ALCEE L. HASTINGS, Florida
PETER T. KING, New York PAT DANNER, Missouri
STEVE CHABOT, Ohio EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South BRAD SHERMAN, California
Carolina ROBERT WEXLER, Florida
MATT SALMON, Arizona STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York JIM DAVIS, Florida
TOM CAMPBELL, California EARL POMEROY, North Dakota
JOHN M. McHUGH, New York WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina BARBARA LEE, California
PAUL E. GILLMOR, Ohio JOSEPH CROWLEY, New York
GEORGE RADANOVICH, California JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
Richard J. Garon, Chief of Staff
Kathleen Bertelsen Moazed, Democratic Chief of Staff
Mark Gage, Professional Staff Member
Jill N. Quinn, Staff Associate
C O N T E N T S
----------
WITNESSES
Page
Mr. Richard Palmer, President, Cachet International, Inc., U.S.
Central Intelligence Agency, Retired........................... 4
Mr. Keith Henderson, Co-Director, Trans-National Crime and
Corruption Center, American University, Former Senior Adviser
on Rule of Law, Crime, and Corruption, U.S. Agency for
International Development...................................... 7
Mr. David Satter, Visiting Scholar, Johns Hopkins School for
Advanced International Studies, Senior Fellow, The Hudson
Institute...................................................... 11
Mr. Matthew Murray, President, Sovereign Ventures, Inc........... 14
The Honorable Konstantin Borovoi, Deputy, Russian State Duma,
Chairman, Economic Freedom Party............................... 17
APPENDIX
Prepared statements:
The Honorable Benjamin A. Gilman, a Representative in Congress
from New York and Chairman, Committee on International
Relations...................................................... 34
The Honorable Christopher H. Smith, a Representative in Congress
from New Jersey (In lieu of appearance)........................ 94
Mr. Richard Palmer............................................... 36
Mr. Keith Henderson.............................................. 49
Mr. David Satter................................................. 72
Mr. Matthew Murray............................................... 75
Deputy Konstantin Borovoi........................................ 83
Additional material submitted for the record:
Statement by Professor Lynn Nelson of Virginia Commonwealth
University, submitted by Representative Gilman................. 87
Excerpt from Dr. Michael Waller's testimony of October 6, 1999,
with referenced e-mail attached, submitted by Representative
Campbell....................................................... 92
U.S. POLICY TOWARD RUSSIA, PART II: CORRUPTION IN THE RUSSIAN
GOVERNMENT
----------
Thursday, October 7, 1999
House of Representatives,
Committee on International Relations,
Washington, D.C.
The Committee met, pursuant to call, at 10:15 a.m., in Room
2172, Rayburn House Office Building, Hon. Benjamin A. Gilman
(Chairman of the Committee) presiding.
Chairman Gilman. The Committee will come to order.
I have no doubt that the corruption within the Yeltsin
government and within Russia is extensive. Our hearing this
morning will seek to assess just how widespread that corruption
is, and how high it goes. I suspect that it goes to the top of
the Russian government. I will cite just a few cases and
reports that would lead one to that conclusion:
The Swiss investigation into the financial links between
top Kremlin staff and President Yeltsin's family and a little-
known Swiss company called Mabetex.
The Swiss investigation into links between the Russian
airline Aeroflot, whose vice president is President Yeltsin's
son-in-law, and Swiss companies set up by Russian tycoon Boris
Berezovsky, to which Aeroflot's hard currency revenues have
been diverted.
A decree issued by Mr. Yeltsin in the early 1990's granting
a sports foundation set up by a close friend an exemption from
export and import taxes that, in turn, allowed that foundation
to retain an estimated $4 billion or more that would otherwise
have gone to the government in tax revenues.
As reported in a comprehensive review by U.S. News and
World Report magazine, an investigation was begun by our FBI in
1994 into the activities of a company called Golden A.D.A.,
which was set up by a top official and a close associate of
President Yeltsin's in San Francisco. After its establishment,
that company shipped tens of millions of dollars worth of
diamonds, gold, and antiquities out of the so-called ``Kremlin
vaults'' and sold them, with the money allegedly disappearing
into high-priced real estate and foreign bank accounts.
The 1996 arrest of a top aide in Yeltsin's re-election
campaign who was caught leaving the Russian Government House in
the company of a reputed Moscow Mafia figure and holding half a
million dollars in cash in a briefcase, an arrest that never
resulted in any prosecution.
Then the notorious ``loans for shares'' privatization
program of 1995 and 1996, under which the crown jewels of
Russia's oil and metals companies, such as Sidanko and Norilsk
Nickel, were sold to Russia's tycoons for a mere pittance.
Then there were allegations linking a former Yeltsin
government representative at the International Monetary Fund to
the ongoing investigation into the possible laundering of
billions of dollars of Russian moneys through the Bank of New
York.
We have also learned recently of the use, by the Russian
Central Bank's top officials, of an offshore company called
FIMACO for financial purposes that may yet not be fully
understood.
Then the alleged massive corruption in the Russian military
that cost the lives of, first, a young reporter and, second, a
member of the Russian parliament, both of whom sought to bring
that corruption to light.
I should note that this is by no means a full or
comprehensive list.
But let me turn to another question we should be
considering. In a hearing this Committee held yesterday, one of
our witnesses, a former analyst for our intelligence community,
stated his suspicion that there may be American partners having
some self-interest to make certain that IMF moneys continue to
flow to Russia, as Russian moneys are siphoned out of its
government and economy and into western banks and accounts.
That suspicion is something we should be looking at with great
concern.
As our Members may know, our Department of Justice is now
investigating allegations that personnel of a top AID
contractor in Russia, the managers and overseers of our U.S.-
financed privatization program in that nation, engaged in
personal investment activities while carrying out their work
for our government in Russia.
In 1996, before that Justice Department investigation
began, I commissioned an investigation by the United States
General Accounting Office into the work of those managers in
Russia out of concern that the Administration may have
channeled $40 million in noncompetitive grants to them. As the
Justice Department's investigation was beginning, we also asked
the GAO to look into the activities in a key subgroup of the
Gore-Chernomyrdin Commission of one of those allegedly under
investigation by AID and Justice. At the request of the Justice
Department, however, we later suspended that GAO investigation.
I now note, however, that press reports have alleged that
another American under investigation in this matter by Justice
has been named in a lawsuit that alleges that a pricing
conspiracy was organized to siphon off millions of dollars from
a Russian company into offshore accounts.
I mention this matter today because I believe we should be
interested and willing to learn whether we have not just a
Russian corruption problem, but whether, in fact, there may be
something of an American problem as well.
As one Russian analyst has stated, it is interesting that
one American firm managed to obtain over 10 percent of the
vouchers that were issued under the Russian privatization
program set up with American assistance in the early 1990's.
The question is how such things have come to pass.
[Prepared statement of Chairman Gilman appears in the
appendix.]
Before I recognize our Ranking Minority Member, Mr.
Gejdenson, for any opening remarks he might like to make, I
would like to briefly introduce our distinguished panel of
witnesses.
First, we will be hearing from Mr. Richard Palmer, who is
retired from the U.S. Central Intelligence Agency Operations
Directorate. His last assignments for the agency were in the
region of the former Soviet Union.
Our next witness, Mr. Keith Henderson, is Co-Director of
American University's Transnational Crime and Corruption
Center, and served as the U.S. Agency for International
Development's Senior Adviser on Rule of Law, Crime and
Corruption, with the Agency's Bureau on Europe and the
Independent States.
Our third witness, Mr. David Satter, is a visiting scholar
at the Johns Hopkins School for Advanced International Studies,
Senior Fellow at the Hudson Institute, and has written
extensively on the issue of corruption in Russia.
Our next witness, Mr. Matthew Murray, is the President of
the firm Sovereign Ventures, which has offices in Washington,
DC and St. Petersburg, Russia.
Finally, our last witness, Mr. Konstantin Borovoi, is a
member of the Russian parliament whom I am pleased is able to
be here with us today to give us a Russian perspective on this
issue, which is important not just for Russia, but for America
as well.
I now recognize our Ranking Minority Member, Mr. Gejdenson,
for any opening remarks he might like to make.
Mr. Gejdenson. I think it is clear that there is no
surprise that a society which, for 50 years, lived under a
totalitarian regime has had serious adjustment problems in
trying to develop a civil society and democratic institutions
with transparent laws dealing with accountability.
We have some of those problems in our own country, of
course. A citizen of my State just left with $200 million of
investors' money and ended up in, I think, Germany for a short
stay before our government convinced him to come back.
If you talk about losses--I forget the name of the company,
again not in my district in Connecticut but in the western part
of the state--there was a hedge fund that seemed to have lost
somewhere to the tune of $3 billion. So the fact that there is
crime, corruption, and thievery in a society that has gone
through the transitions that Russia has gone through shouldn't
shock us.
Given that, and I will do something I generally don't do, I
am going to quote something from a former Secretary of State,
James Baker, who said that it clearly follows that engagement
with Russia is the only sensible approach in dealing with the
problems she faces and the strains in our relationships. A
peaceful, democratic, and prosperous Russia is strongly in our
national interest, and it is clear we need to continue to work
on the numerous initiatives that we have begun.
We need to make sure that when there are assistance
programs, that the money really goes where it is intended to
go. We need to make sure that the Russians set up a law
enforcement system that functions with the kind of judicial
code and criminal code that most of the civilized world
functions in. We need to make sure that development occurs not
just by who is politically connected, but by who has the best
chance economically.
Russian corruption is a serious problem. We cannot minimize
it, but I certainly hope that the hearings that this Committee
and the Banking Committee are holding are not some attempt to
politicize what is an obviously difficult transition that no
one should be surprised would occur.
We have important issues at stake here. We want to make
sure we stay engaged. We want to make sure that, like many of
the things done in the Gore-Chernomyrdin meetings, we deal with
the issues of setting up bureaucracies that are responsible,
that follow the law, and that carry out the interests of the
Russian people. We are better off with a Russia that works than
one that doesn't work, and I hope we will learn, from these
hearings, more of what we can do to be helpful.
Chairman Gilman. Thank you, Mr. Gejdenson.
Do any other Members seek recognition?
If not, we will proceed with the testimony.
Before we begin with our testimony, I ask unanimous consent
that a written statement on the issue of corruption in Russia,
submitted by Professor Lynn Nelson of Virginia Commonwealth
University, be inserted in the record at the end of our
witnesses' testimony. Without objection. Professor Nelson has
written extensively on the subject, but was unable to appear
before the Committee this morning.
Chairman Gilman. We will now hear from our witnesses.
Mr. Richard Palmer holds a Master's Degree in international
relations from the University of Southern California. He served
over 5 years with the U.S. Army, including service as an
infantry officer in Vietnam, and then served with the U.S.
Central Intelligence Agency's Operations Directorate for 20
years, with his last assignments with the agency focusing on
the former Soviet Union. Mr. Palmer now heads up an
investigative firm specializing in asset recovery, business
intelligence, and due diligence work.
Welcome, Mr. Palmer. You may summarize your written
statement, which, without objection, will be inserted in the
record. Please proceed.
STATEMENT OF RICHARD PALMER, PRESIDENT, CACHET INTERNATIONAL,
INC., U.S. CENTRAL INTELLIGENCE AGENCY, RETIRED
Mr. Palmer. Thank you, Mr. Chairman, and other Members of
the Committee. I welcome the opportunity to address this
Committee on a subject that presents serious threats to Western
nations, as well as involving the use of U.S. taxpayers' funds
to continue the looting of the Russian state.
After 25 years' government service, I retired from the CIA
in 1994 and I then spent another 2\1/2\ years in the former
Soviet Union. I felt that the subject of Russian organized
crime, official corruption, and the peculiarities of their
developing financial system deserved more attention, and we
needed more information on it. Therefore, I spent 2\1/2\ years
researching that.
I worked briefly in training, as a training director for a
Russian bank--nothing to do with accounts, nothing to do with
their business--and then I worked on behalf of some Russian-
European banks in the former Soviet Union.
I can say that during that period of 1994 until I returned
to the United States at the end of 1996, finding information
about Russian organized crime was not difficult. Indeed, I
gathered hundreds of pounds of documents. Now, this was outside
of any official capacity after my retirement, as basically a
normal businessman, a normal person. What I am saying is the
information was there if anyone wanted to look.
You must remember that when I returned to the United
States, I felt that I had something particularly valuable
because I had direct insight into corruption, not only in
Russia, but some of the former republics, and I had some
detailed knowledge of how Russian organized crime worked and
also how Russian organized crime worked in moving not only
funds to the United States but creating companies in the United
States through which to transfer their funds back to Russia.
Now, I am speaking here of only a small amount of funds.
There is a gentleman at Brookings Institute who has done a
thorough study of money laundering and capital flight, and he
agrees with my findings--although he has done much more
research--that an extremely small percentage ever goes back to
the country that it left. He asked a Russian official once does
any of this money ever come back, and the Russian official
immediately answered nyet, nyet. Then he thought a moment and
he said, well, there was one idiot who brought some money back
to buy GKOs, but very small amounts.
When we talk about some of the American investment in
Russia, sometimes we are talking about Russian organized crime
funds that are going back under the guise of the U.S.
corporations, which is then looked at as U.S. investment and
also as, then, a responsibility for the U.S. Government to
protect.
There has been very little research into that area. In
1996, when I returned, I offered to talk to U.S. intelligence
agencies, U.S. law enforcement agencies, and I was told that
this was not a problem, there had been corruption, but the
problem had been basically solved and that, boy, if you had
come in 1992, this would have been interesting. Now, the
problem is solved. We would not be here today if the problem
were solved.
Very quickly, this is a current problem that is going to go
on into the future. The idea that this is like Chicago in the
1920's, and this will also evolve into good legitimate money
like our robber barons is nonsense. As I mentioned in detail in
my testimony before the House Banking and Financial Services
Committee, this would be as if they controlled the entire
government, the Federal Reserve, all the police, the Congress.
Why should they change?
I can tell you that they are not only not going away, if we
look at the subject of spent nuclear fuel for which the United
States has set aside hundreds of millions of dollars, there are
Russian organized crime-connected groups, companies, right now,
who are getting ready to bid for that money. They are looking
to the future. Unfortunately, we have not been as far-seeing as
them.
In watching the recent television hearings--and I must say
I don't vote regularly, and this is not a partisan hearing--but
I was watching the TV show about the biography of President
Reagan, and he kept referring to this term of ``trust but
verify,'' and I think we have lost track of that. We have not
verified where the funds have gone. We have not tied our funds
to a quid pro quo. We don't even have a treaty to protect U.S.
investors at a time the government is still promoting U.S.
investment in Russia and the former Soviet Union. The European
Union has one, because they said you don't get investment from
us until we have the treaty.
As you are aware, there has been no movement on a money
laundering law in Russia. In fact, the last two attempts have
been vetoed by President Yeltsin. I am rather reliably informed
that there has been a decision in Russia that, following the
scandal of the Bank of New York and money laundering in the
United States, you will see a watered-down money laundering
bill before the end of this year. There is a cause-and-effect
relationship here.
The Russians have a phrase that says, the guy who pays for
dinner picks the meal. I think we should be able to put some
requirements on this. Like our food assistance program, the
Administration did everything possible to make sure that that
food was not traced. Frankly, large amounts of that are going
to go for graft, and that is very easily shown.
The last thing I want to say is that we now see a
government that, I think, Yeltsin and the circle around him, it
is rather well documented, the level of corruption. You have
the new Prime Minister, Putin, who allegedly left the KGB a few
months after the KGB issued a directive asking its officers to
go out and found companies to move money.
One of a few ways of moving money was the sale of what they
call tolling, using intermediary firms to buy Russian
resources, particularly nonferrous metals. Mr. Putin's first
job was giving permits to sell nonferrous metals. After that he
worked for Mr. Borodin, which was the office in charge which
had the contracts with Mabetex. I believe he was chosen because
if any of those areas are prosecuted he also is in danger.
What I am saying is that the corruption is rampant through
the government. It has been obvious for a long time. I hope we
will focus on it. I am not calling for disengagement. Russia is
too large, it is too important. But we have to take a closer
look. We have to be honest, and we have to be objective.
Corporate America has tried to look the other way as well.
Corporate America has also said, well, we can assume that we
can continue to make 200 percent a year on GKO bonds and, if
anything happens, IMF funds will bail us out, so it is a
protected investment. I am afraid that there has to be an
investment site like any other. We have to be more realistic
and depersonalize this. This is not a matter of a few officials
on the other side having a personal relationship. This is
something where our Congress should literally have more direct
contact with their government. We have to work together with
them.
The last point I want to make is, when we consider Russia,
we must also remember that not all of the former republics
became instant democracies overnight. In fact, some of the
former republics are literally more corrupt than Russia. While
we are on this downhill race to bring these people into the
European Union and to bring them into NATO, I think that we
should seriously stand back and look and see if we should not
ask for more development in these countries, and more proof
that they are on a democratic path before we bring them into
organizations they can weaken or dilute.
I thank you very much for allowing me to make these
comments today.
Chairman Gilman. Thank you Mr. Palmer.
[The prepared statement of Mr. Palmer appears in the
appendix.]
Chairman Gilman. Our next witness is Mr. Keith Henderson,
Co-Director of American University's Transnational Crime and
Corruption Center. He served as the U.S. Agency for
International Development's Senior Advisor on Rule of Law,
Crime and Corruption in the Agency's Bureau for Europe and the
New Independent States. Mr. Henderson has also participated in
the State Department's Policy Working Group on Corruption, he
has written on corruption, and is a member of the United
Nations' Expert Group on Corruption.
Mr. Henderson, you may summarize your written statement
which, without objection, will be inserted in the record. You
may proceed.
STATEMENT OF KEITH HENDERSON, FORMER SENIOR ADVISER ON RULE OF
LAW, CRIME, AND CORRUPTION, U.S. AGENCY FOR INTERNATIONAL
DEVELOPMENT, CO-DIRECTOR, TRANS-NATIONAL CRIME AND CORRUPTION
CENTER, AMERICAN UNIVERSITY
Mr. Henderson. Thank you, Mr. Chairman, and Members of the
Committee.
I first want to apologize. Our computer system crashed
yesterday at American University, and I was unable to provide
some final edits to the testimony. I notice some grammatical
errors, and it arrived late. Again, apologies, but we will make
those changes. The good news is that there were too many
students on-line, but some of us are wondering exactly what
those students were doing on-line.
But I am very pleased to be here today. I will try my best
to share my candid thoughts and reflections on my past and
current anticorruption work, and welcome your questions.
My main interest is in advancing the global and Russian
anticorruption agenda, and in sharing lessons learned during my
tenure at USAID and my current activities at American
University.
You may know that our center is the brainchild of my
esteemed colleague, Professor Louise Shelley, who formed the
center in 1995 with seed money from the MacArthur Foundation.
Our main objective is to undertake academic and applied
research on global crime and corruption problems through
creative multidisciplinary partnerships with scholars and
practitioners in targeted countries. With support from the U.S.
Department of Justice and others, we have now established four
centers in Russia and one in Ukraine.
With the Chairman's permission, I will now summarize my
testimony as requested.
In 1997, Elena Bonner, former dissident, human rights
activist, and widow of the Nobel Peace Prize laureate, Andrei
Sakharov, made an observation that I believe sums up the
current general state of affairs in Russia: ``The
intelligentsia seems to have abandoned its historic calling of
compassion and assistance in the favor of grabbing crumbs
dropped by the corrupt and powerful.''
She noted that while considerable freedoms had been
achieved in a relatively short period of time, the collapse of
the education and health care systems, forced military
conscription, unconstitutional predetention law enforcement
policies, abominable prison conditions, and substandard living
conditions made many of the former concerns of dissidents look
trivial. She called upon the international community and the
Russian leadership to refocus its attention on core societal
values and goals such as freedom of the press and rooting out
corruption. I believe her comments set the stage, not only for
today's discussion, but they also argue for a global and
anticorruption summit and raise several important questions.
First, is corruption both a Russian and international
problem that requires global solutions?
I know this Committee believes that it is, but a historical
comment on corruption in Russia. I was at an old bookstore on
Capitol Hill a couple of years ago and was delighted to find a
book that outlined many of the reforms that were being
undertaken by Czar Alexander II in the 1860's, and I think this
speaks volumes.
Over 130 years ago, during the early reform era, Czar
Alexander defined Russian corruption as a centuries-old problem
that was a major deterrent to Russia's integration with the
West. The historian observed that the causes of corruption that
existed then remained applicable today. He wrote this in 1896:
First, it is a society ruled by men not laws; second, a
secretive, restrictive bureaucracy that stifles justice and the
press, and the development of strong state institutions; third,
weak civil society unable to check government action; and
fourth, a disdainful citizenry. These are the same core
problems facing Russia today.
The political, economic, and social problems facing Russia,
the U.S., and the global financial system stem in large part
from our collective failure to fully acknowledge, understand,
or respond to what is now recognized as one of the biggest
threats to global economic growth and political stability--
public and private ``grand'' corruption. This phenomenon has
greatly limited the power of the Russian State and others to
play a positive role in developing society in countries around
the world.
While the effects of grand or high-level corruption have
economic and political consequences on all countries, including
the U.S., they have a disproportionate impact on developing and
transition countries, and any subsequently emerging middle-
class. Indeed, many CEOs and policymakers now believe that
systemic corruption in developing transition countries such as
Russia makes long-term sustainable economic and political
development virtually unachievable.
However, most people in positions of power around the
world, whether in the public or private sector, have chosen to
treat grand corruption much like the global AIDS/HIV epidemic,
either under a cloak of silence, or with rhetoric. There are
still no serious concerted holistic efforts under way to
address this problem. From my perspective, most in the
international business community, the family of multilaterals
and donors as well as most public officials, including U.S.
officials, are moving too slowly and are behind the learning
curve.
In the interest of time I will now turn to the question of
when could it be said that we first knew that corruption in
Russia was a serious problem. While I think reasonable people
can disagree on this fact, I think your summation at the
beginning of your remarks outlined many incidents that should
have given people notice that this is a very serious problem
that we had to handle in a very serious way. However, I would
point to several events that, in my mind, made me believe that
we were not doing enough to address the problem.
First, was the loans-for-shares scheme in 1995, and the
1994 Yeltsin organized crime decree. In hindsight, most
analysts now identify the 1995 loans-for-shares scheme as a
clear indication that some of the reformers were working
closely with, and had ulterior, self-interested motives. That
event, coupled with the 1994 Yeltsin decree, which gave the
Ministry of Interior almost limitless powers to arrest and
prosecute individuals outside the scope of the new Russian
constitution, should have sent important signals to all that
organized crime and corruption were occurring at very high
levels within the Russian government.
I do not pretend to be an expert on the loans-for-shares
scheme and I don't know all the facts intimately. Indeed, I was
working in another office at the time at USAID but was watching
closely. However, I would like to quote Anders Aslund at
Carnegie, who is a well-known and highly respected former
Chubais protege and long-time Russia watcher, who said that
this scandal ``blemished'' both Chubais and large-scale
privatization in general.
In a recent 1999 Foreign Affairs article, Aslund notes that
a few banks were allowed to privatize some enterprises at
auctions that they themselves controlled. Many lawsuits and
volatile wars among bankers and managers of these enterprises
occurred, both during and after the process.
Aslund then goes on to observe that the barrier to
reforming Russia has never been the workers or the people, who
have been exceedingly complacent. Rather, the threat has always
come from elites who want to live on corruption. I concur with
this analysis and conclude, like he does, that the best way to
control these kinds of forces is through effective democracy.
Another telltale point, I believe, is the congressional
testimony before this very Committee in April 1996. During that
testimony, my colleague Louise Shelley; as well as the Director
of the FBI, Louis Freeh; Eric Seidel, the Deputy Attorney
General of New York; and John Deutch, the Director of the
Central Intelligence Agency; among others, were among the first
to sound the political alarm call that crime and corruption was
a very serious issue in Russia.
Director Deutch noted that: ``A link existed between the
government elite and the criminal elements that was impeding
the ability of the Russian Government to meet the population's
expectations of social justice, a quality of opportunity, and
improved living conditions.''
Chairman Gilman. Mr. Henderson, if I might interrupt, we
are in the midst of a vote in the House, and I am going to
explain to my colleagues that we will continue with the hearing
right through the vote. I have asked some of our Members to go
ahead and vote and come back so that we don't have to interrupt
the testimony. Thank you Mr. Henderson.
Mr. Henderson. Thank you.
He also noted that the law enforcement forces were
understaffed, underfunded, and plagued with corruption.
Professor Shelley, Director Deutch, and New York Deputy
Attorney General Seidel also testified that organized crime's
hold on the Russian banking community was a serious problem
that had to be addressed.
Finally, several noted that Russian organized crime was
estimated to control up to 40 percent of the Russian economy.
I would say that an awful lot of discussion ensued after I
authored a white paper in 1997 that was widely circulated
within the U.S. Government that attempted to outline the causes
of the problem, and to propose some programmatic solutions.
Since that time, as you know, several international conferences
have occurred, and many organizations are now involved in this
effort.
Finally, I would like to conclude with a few of the lessons
I think we have learned from our experience in Russia, which
incorporated some comments on the Harvard scandal which you
mentioned, and the Bank of New York case.
First, do not attempt to create big or little czars.
Putting all of your reform eggs in one basket without broad
public participation, support, and oversight is a recipe for
failure. It also undercuts fundamental democratic principles
and opens up the process to corruption.
Second, insist on transparency within the donor community.
On the giving end, the public has a right to know how their
money is being spent, and on the receiving end the public has a
right to participate in the decisionmaking process and
monitoring of this money.
Third, advance an international global anticorruption
treaty and minimum terms of conditionality such as my colleague
Mr. Palmer mentioned. Donors cannot make specified kinds of
loans or participate in certain reforms unless these minimum
terms are agreed to in full. Further, adequate support for an
independent judiciary, media, and civil society, as well as
health and education programs, must be part of this
conditionality package.
Fourth, give the OECD antibribery treaty and the OAS
anticorruption treaty some impetus and teeth. More intensive,
creative monitoring mechanisms that include civil society and
business community oversight should be part of this package. In
addition, international corporations should be held legally
accountable for corrupt complicity. Strengthening key
multilateral institutions and enhancing U.S. diplomacy and
capacity to implement foreign policy is an essential step in
this new world order.
Fifth, enhance international law enforcement cooperation
and communication through informal and formal structures and
procedures. More regional sector-focused interdisciplinary
training programs that are tied to short- and long-term reforms
and strategies are needed.
Sixth, promote the flow of corruption information among
donors and between donors in the law enforcement community.
Seventh, promote more competition in the public procurement
process and the international best practices in good government
principles in both the public and private sectors.
Eightth, promote more long-term institution building and
reforms related to entities that can provide a check on
governmental action.
Nineth, promote policies that promote more cooperation
between the executive and parliamentary branches, and more
interagency coordination.
Tenth, promote more academic and applied research related
to understanding the causes and costs of corruption.
And, eleven, enhance communication engagement within the
global and intelligence communities.
Thank you for the opportunity to speak here today, Mr.
Chairman.
Chairman Gilman. Thank you very much, Mr. Henderson.
[The prepared statement of Mr. Henderson appears in the
appendix.]
Chairman Gilman. Our next witness, Mr. David Satter,
graduated from the University of Chicago. He was a Rhodes
Scholar at Oxford University, and is currently a Senior Fellow
at the Foreign Policy Research Institute in Philadelphia.
He is also a visiting scholar at the Johns Hopkins School
of Advanced International Studies, and a Senior Fellow at the
Hudson Institute.
Mr. Satter served in Moscow from 1976 to 1982 as a
correspondent for The Financial Times, and has written
extensively on corruption in Russia, and other issues, for the
Wall Street Journal and other leading publications.
Welcome, Mr. Satter. You may summarize your written
testimony which, without objection, will be inserted in the
full record. Please proceed.
STATEMENT OF DAVID SATTER, VISITING SCHOLAR, JOHNS HOPKINS
SCHOOL FOR ADVANCED INTERNATIONAL STUDIES, SENIOR FELLOW, THE
HUDSON INSTITUTE
Mr. Satter. Thank you, Mr. Chairman.
The reports of massive Russian money laundering through the
Bank of New York have awakened Americans to the victimization
of the Russian people by their leaders and the possible
consequences for the United States if corruption leads to
Russia's social and political disintegration. This new-found
awareness, however, raises a disturbing question: How was it
possible for the Administration to depict the looting of Russia
for so long as the progress of democracy, and to back a coterie
of corrupt Russian leaders whose actions were actually
antithetical to reform?
The answer, I think, lies in the failure to understand
that, in the wake of communism, Russia's greatest need was not
a correct set of economic policies, but rather the restoration
of moral values which was only possible under conditions of the
rule of law. By ignoring moral criteria and giving our
uncritical backing to a group of leaders whom we identified as
reformers, we did not contribute to the welfare of Russia but
only to its complete criminalization.
The following is a partial list of the events which should
have alerted American policymakers that Russian reform was
being carried out in a moral vacuum, and the necessary role of
the United States was to defend the rule of law.
First, in January, 1992, prices in Russia were freed, but
no effort was made to index savings. The result was that in a
few months, 99 percent of the savings of the Russian population
disappeared. Persons who had put money aside to buy a car or
apartment, or to pay for a wedding or funeral, were left with
nothing. Persons who had worked in remote areas of the country
where a differential was paid on salaries were now stranded
there, in many cases for the rest of their lives.
Second, as the rate of inflation reached 2,500 percent,
fraudulent commercial banks and investment companies inundated
Russians with advertising offering enormous returns on
investment. The government made no effort to limit this
advertising or to check on the firms which, in almost all
cases, were pyramid schemes, with the result that millions of
people with no experience of deceptive advertising or
capitalist investment lost their savings a second time.
Third, the government began to allow anyone to export who
could get a license. Because Russian raw materials were bought
for rubles and sold abroad for dollars, export licenses were
akin to permission to print money. In Moscow, they were issued
by the Ministry of Foreign Economic Ties which functions like a
market, granting the licenses in return for bribes, with the
fee for the license insignificant by comparison with the size
of the bribe.
Fourth, in a move described as ``people's capitalism,'' the
government gave each Russian the right to acquire a voucher
which was redeemable for a share in Russian industry. The
vouchers, however, were useful only for those who could acquire
them in great numbers, and criminal structures began to buy
them up on the street, and used them to purchase the most
desirable factories, often at giveaway prices.
Fifth, gangsters, businessmen, and corrupt officials in
Russia began to work together, in many cases becoming part of a
single economic unit.
Sixth, in 1993, President Yeltsin illegally dissolved the
Supreme Soviet and, in the wake of a massacre outside the
Ostankino television tower, which he may have provoked,
persuaded the Defense Minister to authorize the shelling of the
deputies who were still holed up in the parliament building. In
a vote which is now believed to be falsified, a new
constitution was adopted that emasculated parliament and
provided for the creation of a new, authoritarian presidential
regime.
Seventh, the government began to sell off Russia's
enterprises for cash in rigged auctions. If in a rare case
there was true competitive bidding and a powerful group was
outbid by an insistent competitor, the successful bidder could
easily pay for his tenacity with his life.
Eighth, the government launched an invasion of the self-
proclaimed independent republic of Chechnya in hopes of having
a short, victorious war. Unable to defeat the Chechen
resistance on the ground, the regime began the carpet bombing
of civilian areas, resulting in the massive loss of innocent
life. At the same time, more than 1,500 Chechen civilians were
picked up by Russian interior ministry troops, taken to
filtration camps and never heard from again.
Ninth, in 1993 to 1994, the government ceased paying for
state orders and began delaying payments on pensions and
salaries for state employees, initiating the nonpayment crisis
which became Russia's leading source of social tension.
Finally, the government, in the loans-for-shares scheme,
began to borrow money from commercial banks in return for
shares in desirable, nonprivatized enterprises. The bidding was
supposed to be competitive, but, in reality, the shares went to
the banks with the closest informal ties to government
officials. When the government failed to pay back the loans,
which was always the case, it was up to the bank holding the
mortgage to organize the sale of the enterprise. In every case,
the enterprise then became the property of the bank providing
the original loan. In this way, the crown jewels of Russian
industry were acquired for a song.
The attempt to transform Russian society without the
benefit of either moral criteria or the rule of law led to one
of the gravest crises in Russian history. In the resulting
atmosphere of moral anarchy, the country was looted. The gross
domestic product was cut by half, which did not occur under
Nazi occupation.
Russia suffered a demographic catastrophe in the period
since 1990--.
Chairman Gilman. Mr. Satter, I am going to have to
interrupt you for a moment. We have only a few minutes left for
the vote now under way in the House. As soon as one of our
Members returns, we will continue, but at this point I am going
to call for a brief recess.
[Recess.]
Mr. Bereuter. [presiding] The Chairman has asked me to
resume the sitting of the Committee.
Mr. Bereuter. Mr. Satter, please continue.
Mr. Satter. In this situation, there was a historic role
for the United States. With the fall of communism, the United
States had overwhelming moral authority in Russia and could
have insisted on moral practices and the strict rule of law,
using political pressure and our influence over international
loans. Instead, we used our power, not to advance the rule of
law, but to promote the interests of a specific group.
It is often argued that the United States had no choice but
to help Yeltsin, and that the only alternative was to help the
communists and nationalists. In fact, however, insisting on
honesty and fair dealings from the reformers would have been
the greatest favor that anyone could have done for them. The
reformers lost popularity in Russia not because they backed
democracy but because they facilitated the criminalization of
the whole country.
The answer now is rethinking our entire approach to Russia,
which must begin with an understanding of the moral vacuum that
communism left in its wake. Only by recognizing that Russia's
first requirement is a structure of law and morality valid for
everyone do we have the possibility to lay the framework for
real economic reforms capable of saving Russia from its present
desperate situation.
If we continue, however, to pretend that Russia is on the
path to reform and Yeltsin and his confederates are the
embodiment of democracy we may soon find that the growing
desperation in Russia will produce a reaction capable of
affecting not just Russia, but also the rest of the world.
Thank you. That is the conclusion.
Mr. Bereuter. Mr. Satter, thank you very much.
[The prepared statement of Mr. Satter appears in the
appendix.]
Mr. Bereuter. Next, we will hear from Mr. Matthew Murray.
He served as Legislative Assistant to Senator Edward Kennedy
from 1982 to 1984, working on national security issues, and
later worked with the law firm of Baker & McKensie from 1988 to
1991. I 1991 he founded the firm Sovereign Ventures
Incorporated, which has offices in Washington, DC and St.
Petersburg.
Mr. Murray, your entire statement will be made a part of
the record. You may summarize as you wish.
STATEMENT OF MATTHEW MURRAY, PRESIDENT, SOVEREIGN VENTURES,
INC.
Mr. Murray. Thank you very much, Congressman.
Let me start by saying that I think the reason I have been
invited here today is that I have been conducting small
business in St. Petersburg for the last 10 years. I lived in
St. Petersburg between 1992 and 1998, conducting different
types of business; and in the process, because I have insisted
on doing business legally and ethically, I have developed a
great appreciation for what are the cultural barriers to small
business in Russia.
I am also here today to share with you the knowledge that
the Russian people have already found the answer to combating
corruption, and the answer is the profit motive. It is a
powerful motive, and it is particularly powerful when you
combine it with the desire to feel good about what you are
doing. Many Russian small businesses are gravitating to the
idea that conducting business legally and ethically for profit
is much more interesting and stable than the alternative.
While it is a potentially powerful force, it also faces
huge cultural barriers, as I mentioned. One of the main
problems is that the Russian people must learn to be dependent
on each other, as opposed to being dependent on the government.
The United States can play a vital role in the future by
staying engaged and reinforcing the desire of Russian small
businessmen and women to get organized and fight to develop
accountable government institutions. The U.S. can provide a
combination of small grants and ethical business know-how that
can help unleash the powerful democratic force that is provided
by small business.
Perhaps a useful way of dramatizing this point is to start
by comparing Russia with Poland and the Czech Republic. Poland
and the Czech Republic have been very successful in removing
barriers to small business in the past 10 years. By contrast,
during Russia's transition small business has been severely
regulated. The most mundane activities are subject to licensing
and reporting requirements. Taxes are imposed not simply on
profits but also on revenues and the mere movement of capital
and goods. A small business that challenges government
authority risks sanctions and state interference.
The main element in Russian culture stifling entrepreneurs
is the unrestrained role of government, not only in regulating
the economy but also in profiting from the economy. Many
officials in Russia have an expectation of financial reward for
serving in public office. Many government positions are for
sale, and votes on legislation have an established market
price.
During Russia's transition to capitalism this expectation
of reward has led to what economists call ``rent-seeking.''
Rent-seeking is conducted by political elites in transitional
economies who use their access to power to privatize state
property spontaneously at nominal prices and turn state assets
into cash by renting them to business. At times rent-seeking
takes the form of demand for a bribe or extortion. Often,
however, rent-seeking is quasi-legal, making it harder to
detect.
The use of public position for private gain didn't start
with Perestroika or privatization, nor can it be explained
simply by Russia's low government salaries. To comprehend the
phenomenon you must first examine Russian history. Due to the
absence of a strong idea of the state, government officials
have traditionally been inclined and permitted to take care of
their personal interests first. The czar's provincial
representatives were expected to: ``feed themselves from
official business.'' Under Soviet central planning, state
resources were exploited by those with access to power, the
members of the communist party, whose positions were bought and
sold like commodities.
This government behavior takes place against a backdrop of
public tolerance and weakened institutions. Traditionally, the
Russian people have shown extreme dependency on the government
and have been reluctant to hold officials accountable.
Currently, the Russian constitution provides Duma members
with immunity from prosecution. Russia lacks an independent
judiciary capable of prosecuting government officials, or an
independent press capable of protecting investigative
journalists. While Russia engages in privatization and other
market reforms, official corruption adds a layer of rent on
economic activity. Official corruption increases transaction
costs for small business and the price of goods and services
for consumers.
By imposing an enormous number of different taxes and
collecting them arbitrarily, the Russian government extracts
additional rent from small business.
At this time in the debate over aid to Russia there is a
consensus that the introduction of capitalism needs to be
accompanied by the rule of law, but the motivation for legal
reform will not come from the Russian government. Historically,
Russia's public officials have not relinquished their
unilateral powers of interpretation and enforcement. Due to
lack of resources and political will, currently the government
is unable to enforce existing laws or adopt new legislation to
protect small business and private property. Instead, it should
be clear that small business itself is the most effective agent
for the type of social, legal, and political reform sought in
Russia.
To date, Russia's market reforms have failed to produce a
middle class. Only small business can fill the missing middle
by producing independent entrepreneurs with a vested interest
in a stable and transparent legal system and the determination
to hold government officials accountable.
I am pleased, therefore, to have the opportunity to appear
before the House Committee on International Relations at this
stage.
To reduce official corruption and otherwise sustain market
reform in Russia, the Russian people must be empowered to
remove all barriers to small business. Russia doesn't need
western financial capital as much as it needs social capital--
that is, the trust and shared values among individuals,
businesses, and government officials which are the very
foundation of a market economy. Social capital accrues at the
grassroots level through the creation of voluntary
organizations such as business, trade, and professional
associations, rotary clubs, church groups, charities and
nongovernmental organizations. As small business must work
together to break down market barriers, they are a natural
catalyst for the formation of such voluntary organizations.
Due to the special value Americans attach to small business
and the rule of law, the United States has already been acting
to create social capital in Russia by helping to build
voluntary organizations, to reinforce traditional Russian
ethics, and to shape government institutions which are
accountable. For example, in September 1998, the Eurasia
Foundation, a nongovernmental foundation funded by AID,
provided Sovereign Ventures an $88,000 grant to begin a private
sector initiative to promote business ethics.
The grant helped St. Petersburg small businesses create the
Declaration of Integrity in Business Conduct, a voluntary
statement of international business principles and practices.
Between June and September 1999, over 100 businesses
voluntarily signed the declaration. All the major business
associations in the city, which have a combined membership of
over 1,200 companies, have supported the declaration and have
presented it to their memberships for signature. By adopting
the declaration, each company takes a no-bribery pledge, and
must implement a code of business ethics.
After a decade of rent-seeking capitalism, Russians are
beginning to accept the fact that government corruption is
endemic, a historical burden on economic and political
modernization. Russians are beginning to find their own path to
root out corruption using a multitude of positive values and
ethical traditions found in Russian culture. The St. Petersburg
Declaration of Integrity is one example of a process whereby
Russians are creating social capital by integrating their
strong moral traditions with international standards of
business ethics.
Faced with the evidence of endemic corruption in Russia,
many in the United States are shouting, ``let's call the
game,'' as though punishing or sanctioning this powerful nation
will enable it to throw off a complex history, as though many
other nations are not similarly infected by crony capitalism.
Instead, we should recognize that the process of rooting
out corruption is long-term, and that Russians must find their
own path toward this objective. Under these circumstances it
would be a mistake to isolate further the Russian people by
depriving them of U.S. support and know-how and moral
leadership. On the contrary, the United States should seize
upon the evidence of endemic corruption in government to
increase aid directly to small business and microenterprises
and the nongovernmental organizations and business associations
which are needed to lobby their interests. In the process, the
U.S. can help Russian citizens prosper and form the social
capital needed to protect individual private property from
rent-seeking capitalists.
Thank you very much.
Mr. Bereuter. Thank you, Mr. Murray.
[The prepared statement of Mr. Murray appears in the
appendix.]
Mr. Bereuter. Next, we would like to hear from Mr.
Konstantin Borovoi, who is able to join us today. He is a
member of Russia's parliament, the Duma, to which he won
election in 1995. He holds a degree from the Mechanical
Mathematical Faculty of Moscow State University, and began a
career in business as the former Soviet Union began to allow
the creation of some private businesses in the late 1980's. In
1992, he established the Economic Freedom Party.
Welcome, Mr. Borovoi. We look forward to your testimony.
STATEMENT OF KONSTANTIN BOROVOI, DEPUTY, RUSSIAN STATE DUMA,
CHAIRMAN, ECONOMIC FREEDOM PARTY
[The following testimony was presented with the assistance
of an interpreter.]
Mr. Borovoi. Thank you, Mr. Chairman, for giving me an
opportunity to speak to you.
It is actually one of the problems and one of the issues I
work on in Moscow, the problem of criminalization of political
power and the economy, and it is actually the main motive of my
statements in Moscow, my press conferences and legislative
requests that I make.
I would like to touch on a few issues that I think are
important for me to make a point of here. Corruption in Russia
is a part of a more complex problem, the problem of loss of
direction of democratization in our country. What we call
uncontrollable growth and expansion of corruption is more
characteristic of what we had in 1995 and 1996. Today, we have
a new phase of growth of corruption, where corruption now is an
integral part of the government. At the same time, this current
status of corruption is very convenient for the current rulers
of Russia, and they are very happy with it.
Today's corruption and criminalization of power structures
in government in Russia is influencing not only its domestic
and economic policy but also its international foreign policy.
The testimony of this process is the current events in the
Caucasus and Chechnya, as well as the position of animosity
toward NATO, toward the United States, and as well as a number
of other initiatives taken on the international arena and also
the support for the different rogue regimes in different parts
of the world.
In 1991, good conditions were created for the forms of
democratic Russia, but not all the government and economic
structures were abolished, and it was clear for us already in
1992 when we met with the American policymakers and explained
to them these negative trends and dangers in Russia. Actually,
at a place not far from here at the State Department I was
attempting to convince the officials there that there is a
danger of uncontrollable development of corruption in Russia,
as well as serious threat to development of democratic
principles. But they actually accepted a concept of self-
propelled, independent process of democratization of Russia,
and this process created a paradoxical situation in Russia and
a paradoxical situation in the relations between Russia and the
United States.
As a matter of fact, American taxpayers are financing
projects that are implemented in Cuba, Iraq, Iran, and in
Belgrade; and, as a matter of fact, right now Russia is not a
friendly country toward the United States.
As a matter of fact, the American taxpayers' money is now
spent on organizing of anti-American, anti-NATO propagandist
campaigns. As a result of this anti-American propaganda
campaign led by the Russian government, almost 85 percent of
the Russian population was willing to support sending Russian
volunteers and weapons systems, even advanced anti-aircraft
missile systems, to Milosevic.
Unfortunately, humanitarian and even food product
assistance for Russia is also a matter of increased corruption
in Russia, and I think that the following steps are necessary
in order to stop the development of this dangerous situation:
First of all, we need to say good-bye to the illusions
about democratic development of Russia. Right now the only
direction of development I see in Russia is the development
toward forming of a small evil empire, adversarial to the rest
of the democratic world; and I think in order to understand the
process we need to have good professional expertise.
Unfortunately, here in the United States I frequently
encounter very naive views on the situation and process that is
happening in Russia. I think that all the programs of support,
including the financial support and cooperation progresses,
should be halted or stopped, and there should be a coordination
between this type of assistance and the political process.
Otherwise, the United States can find itself in the situation
as it evolved when it will closely resemble what was happening
in the events preceding to the tragedy at Pearl Harbor.
Also, I think it is important not to lose the hold of the
pulse of Russia. I think it is necessary to keep and expand the
forms of work that promote further democratization of Russia.
Thank you.
Mr. Bereuter. Deputy Borovoi, thank you very much for your
testimony and for the disturbing information that you give to
us. We are very pleased, however, that you took the time to
participate with this panel.
[The prepared statement of Mr. Borovoi appears in the
appendix.]
[The prepared statement of Professor Lynn Nelson appears in
the appendix.]
Mr. Bereuter. We will now move to the question period under
the Committee's 5-minute rule.
I will begin by mentioning that, in the course of the
comments from Mr. Murray, I heard a degree of optimism--
selective, of course--and, at any time, I would like any of you
to comment upon his orientation and his comments.
I would like to focus in, Mr. Palmer, on you first. Any
other persons are welcome to make a contribution as well.
We have heard comments in the past--perhaps other Members
of the Committee will pursue this--that U.S. policymakers were
discouraged from presenting information which suggested the
various U.S. programs were being subjected to corruption; and,
in fact, information, therefore, was suppressed. Have you seen
any evidence of corruption during the course of your time as a
U.S. official, or after that point?
Mr. Palmer. I can only say that I cannot really discuss my
time when I worked for the CIA. I think the fact that I took
retirement from what had been a very rewarding career and went
on to devote 2\1/2\ years of my life to studying this onsite
shows that I believed that there was much more that could be
done in looking at the problem.
I do know, from some of the programs I saw after
retirement, that U.S. officials were constantly told that they
had to show progress, that negative comments would only reflect
poorly upon the U.S. facilities involved, and that they would
only serve to restrain democracy. And so that was a general
thread.
Mr. Bereuter. How did you pick up that kind of sentiment?
Mr. Palmer. Simply in talking to some of the U.S. officials
also involved in USAID projects after I retired, and these were
just personal comments that they made to me, that they had
gotten the word from the country team meetings that there was
only room for good news.
Mr. Bereuter. Would you encourage us to ask you to come to
an executive session or is that--.
Mr. Palmer. That could become problematic, actually, sir.
But you do have some very good witnesses from State Department
officers, Mr. Wayne Merry and Mr. Tom Graham, who both can
speak to that with no legal difficulties, and they can speak in
open session. I think you might find it more useful.
Mr. Bereuter. The former has spoken to one of our
Committees. I have forgotten which Committee that I heard him
on.
The Duma was removed in 1993 by President Yeltsin. Some
would say that he substantially reduced the Duma's authority to
conduct oversight on the revenues and expenditures of the
Russian government, and I would like to ask the Americans here
as well as the Russian Duma delegate if, in fact, they believe
that today the Russian parliament is in a position to reassert
its oversight over the government budget. That would be my last
question. I would like to ask any of the gentlemen if they
would care to respond, and then I would turn to the Deputy.
Mr. Palmer. If I could just say one thing, and you have
more expertise sitting here than myself, but the Duma is
riddled with corruption to the point that organized crime
members are now running for the Duma. Frequently, members of
organized crime will pay Duma members large amounts of money so
they can be named as staff members for the Duma so they can't
be stopped by the police and they can't be searched for
weapons.
That said, there are honest members of the Duma, and I
think we have to encourage that, and we have to work with them.
Trying to focus all of our attention only on the presidency of
the country is, I think, going in the wrong direction. That is
putting all of our eggs in one basket.
Mr. Bereuter. Thank you. We hear that frequently, and we
have an advocate in the person of Mr. Weldon of Pennsylvania.
Who would like to comment on the Duma's ability to conduct
oversight on government affairs? Deputy Borovoi?
Mr. Borovoi. I absolutely agree with the statement of the
gentleman that corruption is an integral element in the work of
the Russian parliament. Actually, I had one press conference on
the illegal way of lobbying in the Russian parliament, and the
theme of this press conference was the state Duma as a private
joint stock company. The issues of corruption were raised at
the sessions of the joint Duma-Congress commission; and,
unfortunately, the majority of the Russian members of the
parliament took the formal position that these allegations have
nothing to do with reality. It is just the allegation and
pretext for some accusation.
I don't think that cooperation with the Russian parliament
can be an effective or efficient tool in fighting corruption in
Russia.
Chairman Gilman. [presiding.] Mr. Sherman?
Mr. Sherman. Thank you, Mr. Chairman.
One preliminary comment, and Mr. Bereuter's comment brought
this up. I am disturbed that it is difficult for this Committee
to get testimony in executive session from CIA agents and
former CIA agents, and that while we are concerned about the
transparency and honesty of the Russian government here in
these hearings we should never spare effort to assure the
honesty of the U.S. Government. Perhaps whatever we could do to
get clear and honest executive session testimony from former
CIA agents would be a step in that direction.
Deputy Borovoi, it is indeed shocking to hear your
comments. I wouldn't be shocked if any of these other gentlemen
said them, but you are an official of the Russian government
and even the Chairman of a party. How many seats in the Duma
does your party have, and do you think that your comments
reflect the views of a few other parties in the Duma as well?
Mr. Borovoi. My party has two seats in the Duma. Fifty
percent of the state Duma members are communists. For you to
better understand the balance of forces in the state Duma, I
can give you the results of the vote on the resolution of
support, political and military support, of President Milosevic
that was taken in the Russian Duma--372 votes in favor, against
1.
Mr. Sherman. I understand. I don't know if the vote for
Milosevic just reflects misplaced nationalism or whether it
reflects corruption. I do know here in the United States we
will get criticism for voting for aid for Russia or, frankly,
for any foreign aid. I am convinced that at least half of what
we send to Russia is wasted, and I am convinced that it is the
most important thing we could possibly do with our dollars, to
send aid to Russia, if even half of those dollars are used
effectively, because I think the peace of the world depends
upon many things which are easy to predict, and one thing which
we cannot predict, and that is the future of Russia.
Corruption is not unknown here in the United States, and we
have adopted a number of laws, techniques, and procedures to
try to control corruption. These are costly both in terms of
dollars and in terms of flexibility. I wonder if the Deputy and
perhaps some others could comment on whether Russia has
studied, or even implemented American or Western European laws
in the following areas: competitive bidding on outside
contracts; independent audits of government agencies; civil
service protection for the vast majority of government
employees; a public documents act to require that any citizen
can obtain a copy of public documents for only the copying
charge; and, finally, an independent judiciary.
I realize that changing the law does not necessarily change
culture, but it can be helpful, and I wonder whether there has
been adequate attention in those areas.
I would like to hear from the Deputy first.
Mr. Borovoi. Unfortunately, the entire theme of the fight
against corruption is a political theme. I have a very simple
example.
Mr. Stepashin was Prime Minister of Russia around 3 months
ago, and now he is the head of the anticorruption commission.
He talks of things during his Prime Minister activity, a lot of
things that cannot be in Russian government now, any form of
corruption. He is maybe the most active fighter against
corruption. It is nonsense. Sometimes some vehicles, some
discussions about corruption in Russia can be used for the
purpose of corruption. I spoke before that it is an element, a
structural element--corruption is a structural element of
Russian power. It is maybe the most dangerous thing we faced
since the beginning of democratization in Russia.
I have a lot of experience, European experience. We have
some laws adopted now, but they are on the subject of political
fighting against communists and democrats.
Mr. Henderson. A comment. I would say that all the laws
that you mentioned are extremely important. In fact, I tried to
highlight some of them in my written testimony.
In response to your question, only one of these laws to my
knowledge exists and it exists by decree, not through
legislation which, of course, is a large part of the problem in
Russia. Many of the laws are issued by decree, and they are
never implemented.
That really leads to my last and most important point. All
of these laws are under consideration. I know that, for
example, a Russian Freedom of Information Act law has been
under debate for many years. There still seems to be no hope of
passing it, according to people I know involved with it.
So the short answer really is that even if all of these
laws were passed, none of them would be implemented in today's
environment. There is no political will to implement any of
these kinds of laws. I think that is a serious problem.
I did want to go back to one of the initial questions
asked--in response to the question as to is there any evidence
of the U.S. Government failing to correct problems and
procedures that might lead to corruption. I think that might be
the way I would ask the question. I would point to the HLID
scandal as an example of a situation where I know that there
was collusion within the U.S. Government not to properly
oversee the way that very sensitive, important program was
being implemented.
I talked to virtually everyone involved with that program
during the time I was at AID because I was floored that there
was very little government oversight, and I was finally told
that that was intentional by people who know. And that, of
course, is what led to the GAO investigation as requested by
this Committee.
As far as the parliament is concerned, I am glad that issue
was raised because the current Russian constitution, at least
as seen by many analysts who have been studying this, Russian
politics and the development of the law for many years, is
fatally flawed. It gives the presidency too much power. The
1993 constitution really decapitated the role of parliament,
and it is now not able to serve an effective monitoring
function within the Russian government.
For more on this subject there are several new books that
have just come out, one by Eugene Huskey at the University of
Virginia, and another by Robert Charlotte at Union College.
They are long-time Russia watchers, real legal scholars. One
has been following developments in the presidency and the
parliament for many years, and I would encourage anyone to read
them who is interested in this subject.
Chairman Gilman. Thank you, Mr. Sherman.
Dr. Cooksey.
DD. Cooksey. Thank you, Mr. Chairman.
Mr. Palmer, I would like to direct these questions at you.
I had a friend that had done some work over there some
years ago, and had gone back and forth, and it was something
for the Russian people, not a business deal, just trying to
help them out. But he reached the point that he said he was
told that he would not be safe because he was not giving a
portion of the goods that he was giving to these people,
donated goods, to the Mafia people or whatever the underworld
people were called.
How safe are Americans over there today in Moscow and St.
Petersburg, or in the outlying areas like Ekaterinburg, for
example?
Mr. Palmer. If we leave the Caucasus areas out of the
obvious danger areas, and we talk about the major cities,
largely, Americans are rather safe.
I recently did a study for a U.S. corporation on how much
risk was involved in trying to collect debts from Russian firms
even with direct organized crime ownership, which you would
think would be one of the most dangerous things you could
become involved in. What we found was that there really had not
been a recorded case, at the time of the report, that any
American had been killed or even injured because he tried to
exercise his legal rights.
So far this year, there were, I think, four Americans who
died. One was a T-shirt salesman. The only businessman was a
used car salesman. I am saying it is not like any executives or
anything of this because of their work.
The one case that everyone will point to is the case of
Paul Tatum, who owned the Radisson Hotel and had the dispute
with the city of Moscow, Mayor Luzhkov's office, one of the
front runners for the next president. You can argue that he
brought some of the difficulties on himself because he tried to
imitate some of the business techniques of organized crime. So
it was danger to himself.
I suspect that there is normal street crime that you would
have in a city like New York. Other than that, I have not seen
any more serious risks to Americans.
Mr. Cooksey. Good. That answers my question.
For several years there have been some allegations that
some of the top people in the Russian military have been
involved in some of the massive corruption and theft of the
government funds, including Yeltsin's First Minister of Defense
Grachev. There are also reports that a young reporter that was
killed in October 1994--1998 was also linked to this type of
corruption.
Do you have any views about these allegations that you can
share with us in an open session? I mean, do you think that, in
fact, people in the military are involved in this corruption
and the killings?
Mr. Palmer. Graham Turbeville, who works at the National
Defense College, wrote an excellent 50-page paper detailing the
corruption in the military. It is widespread.
I cannot speak to the case of the journalist who was
killed. There have been other journalists who were killed by
nonmilitary. I would say that probably the stories are true.
What we do know, and I can tell you I know for a fact, is
that almost every Russian soldier has to give a percentage of
his salary to his commanding officer. It works its way up. They
rarely ever get the rations they are supposed to. They
frequently sell off weapons. I watched as the Russian army was
pulling out of the former Soviet Union and they would come up
and offer you AK-47s, grenades, and even anti-aircraft missiles
offered to me after I retired. What I am saying is it is a very
common thing.
The other thing I should tell you is that you will notice
that Spetsnaz, the Russian special forces, which are involved
in more assassination and sabotage than the type of our special
forces are involved in, are reported very reliably to have
started training Russian organized crime hit men about 3 years
ago as a way to make extra money, and they are now one of the
leading employers of ex-Spetsnaz people. That is why when they
kill people they don't blow up city blocks, they are more
likely to get the right guy. That is a leading indicator that,
indeed, the military is corrupt.
Mr. Cooksey. There is a Russian analyst named Glakena who
reported that 13 percent of all the vouchers issued under the
U.S.-financed privatization program in Russia ended up in the
possession of one American firm. Do you know anything about
this allegation, and do you believe that such accumulation of
vouchers could have indeed been carried out by one American
firm? Do you know who the firm is?
Mr. Palmer. I have read the same articles. I am familiar
with the background on the firm. I do not have direct knowledge
of it. I do know that a Russian government study said that a
minimum of 85 percent of all the privatization shares came into
the possession of organized crime. Whether they would deal with
an American firm, I would say that is not even a serious
question. Of course they would. The American firm would not
necessarily have to know, in a legal sense, that they were
dealing with organized crime, but that is the only way that you
could control such a large amount of vouchers.
Mr. Cooksey. Mr. Satter from Johns Hopkins, it is reported
that a Russian tycoon, Vladimir Pontanin, sold an oil company
called Sidanko for $2 million in 1996, and later sold 10
percent to BP for $570 million. It has also been reported that
the Russian automobile company Vaz was sold at voucher
privatization auction for an estimated $45 million even though
Fiat had offered $2 billion for it in 1991. Do you feel that
some of these industries have indeed been sold for less than
what they are really valued at?
Mr. Satter. Unquestionably. The examples that you cite are
two among many of the way in which the most valuable
enterprises in Russia were practically given away, and they
were given away through a variety of means. One of them was the
voucher privatization that we just talked about.
When I was living in Moscow in late 1992 and early 1993,
voucher privatization was at its height. At every metro station
and at many bus stops, there were people with signs reading,
``I will buy a voucher.'' These persons bought vouchers for a
few U.S. dollars or for a bottle of vodka from alcoholics and
other persons who didn't know what the vouchers potentially
meant. Then the vouchers were used to purchase enterprises at
fire sale prices.
Another reason why this was possible was because once the
voucher privatization had ended and money privatization began,
the auctions at which enterprises were sold were rigged. The
victor in the auction was determined in advance. In some cases
there never was an auction. It took place only on paper. In
situations where an auction was held, if someone was brave
enough to bid against the pre-determined winner, he was putting
his life in danger. This is the reason for those low prices.
Mr. Cooksey. I will give you my opinion. I assume there is
someone here from the Russian Embassy. You can send this
message back from the Fifth Congressional District in
Louisiana. I was in the military 30 years and a month ago. We
have people in my district and districts across the United
States that are paying taxes. I still have confidence in the
goodness of a lot of the Russian people, but we do not want to
pay taxes to this government, to our government, our own
government and then have it given to the Russian people and
squandered or taken by outright theft.
Yesterday, in a hearing on this same subject, we were
advised that approximately $200 billion has been spirited out
of Russia in the last several years. I am sure some of that was
American taxpayer dollars and, if we had that, we could have
balanced the budget and been home 2 weeks ago. That is a
concern that I have no matter what my district is.
My concern about this Administration, if there is anyone
here from the State Department, is that at times you get the
feeling that there is--well, to their credit, I think some
people in the State Department are stronger than the people
over in their boss's office--but they just want to try to make
everybody feel good. If they go have a meeting and drink a
little vodka, we will give them everything and throw in the
kitchen sink. But still, that is American taxpayers' dollars,
and we just don't want to continue doing that. That is my
personal opinion.
Mr. Satter. I just want to make one observation. The
Russians are very smart people and do not need to be taught by
the United States how to invent the wheel. The problem with the
truthful revelations about corruption in Russia is that they
may turn public opinion against any aid for Russia, and Russia
right now is in a desperate situation.
While I was completing a book that I wrote about the fall
of the Soviet Union, I did a little bit of work for Reader's
Digest. One of the articles I had to write was about kids who
die in Russia because they don't get timely heart surgery. They
have defects that are easily correctable over here. The reason
these children are not operated on is that, although there are
talented surgeons in Russia, Russian hospitals don't have the
necessary equipment.
If we had only had the wit at the beginning of this process
to orient our aid toward genuine humanitarian needs in Russia
and not toward teaching the Russians how to be capitalists--a
process which enriched our own consultants and led us to
cooperate with a lot of people who spoke English very well and
made a good impression on us but turned out to be totally
corrupt--we could have done some good there.
In the reaction now to what we did do and what, of course,
the Russians did for themselves--I mean, after all they are
adults--we may turn against the idea of helping Russians in any
way, even in those situations where we can help and where our
help is badly needed.
Mr. Cooksey. There is no question that we could reach that
point, and I think that is unfortunate. I am a surgeon, and
there are some similar talented, bright people in Russia, good
physicians, good surgeons.
Anyway, it gets back to the same problem that is a problem
the world over. Sometimes you don't always have the best and
the brightest in government. There are a lot of bright, capable
people, particularly the Chairman and myself. I am being
facetious. He is, for sure. But then you get people that just
don't do the right thing, and it is a problem. It is a problem
in Russia, and I hope that they can evolve to an era where they
will have more integrity and do the right thing for their
people instead of for themselves.
Mr. Palmer. Briefly, but it supports some of your earlier
comments, the Russian Ministry of Interior did a study and, as
of the end of 1998, from 1991 to today they estimated that
total theft out of Russia had been over $300 billion, and
Interpol agreed with those figures. That may be a low figure.
Chairman Gilman. Is that with a ``B,'' billion?
Mr. Palmer. That is with a B, billion, sir.
Mr. Cooksey. So that is $100 billion more than we were told
yesterday.
Mr. Palmer. Those are Russian Ministry of Interior figures,
and Interpol supported them. Other estimates run higher.
The argument is made, well, there were not that many
dollars in Russia. I would make two comments. This also
includes Russian resources that go out at low prices for high
profit on the outside. And, second, I would remind you that,
through 1996, we had weekly planes going to Russia, 747 cargo
aircraft carrying $100 dollar bills. At one time, Russia had
more U.S. $100 bills in circulation than the United States.
Mr. Cooksey. I have heard that. Is that a correct
statement?
Mr. Palmer. That is correct, and one could assume that
those dollars didn't stay in Russia. That is the loss.
But in 1998, prior to that last IMF tranche going to
Russia, I was at a discussion group here in Washington and we
were talking to the Russian desk officer and some of the
administrators, and we said why are we sending this money? It
will disappear. And they said absolutely not. Corruption has
really been beaten. On top of that, they have a new tax
collector and he is going to increase tax collections. So,
actually, in 2 years time they will have a surplus.
Well, everyone there had a laugh about that, but there was
no stopping the money. It was going to go. That money went and
is gone, and now we are going to replace it. The point is this:
The taxes that they do not collect are being made up by money
that comes from the U.S. taxpayers. They are stealing that,
moving it out for personal gain. We are making up the
difference. I think something is wrong with that picture, and I
think the average American taxpayer will see it that way too.
On the other hand, Mr. Satter said, we cannot shut
everything off in our dealing with them, but we have to have
more control. It has not come from the Administration thus far.
I think it has to come from Congress.
Thank you, sir.
Mr. Cooksey. One question for Mr. Borovoi. It has been
alleged that Russia's Chief Prosecutor, Yuri Skurotov, that the
Yeltsin administration had tried to remove from that position,
that the government recently brought the investigation in
connection between the Kremlin and the Mabetex Construction
Company in Switzerland. Is this true? This was in the paper
about 60 days ago. I remember seeing it, that there was an
allegation that there was a connection between perhaps
Yeltsin's entourage and the Mabetex Construction Company that
had paid some of his credit card bills. Is that true? Have you
heard about that? Are you familiar with that?
Mr. Borovoi. I am familiar with this situation. I have no
doubt that Pavel Borodin profited from construction and
restoration work contracts in Moscow.
But I would like to go back to the problem that I have
pointed out about the competent professional expertise about
the situation in Moscow.
The resignation of the chief prosecutor--general prosecutor
happened when Mr. Primakov was Prime Minister in Russia. As a
matter of fact, that event was the result of a fight between
the entourage of Mr. Primakov, which we call the KGB group,
with the entourage of Mr. Yeltsin. The process is much more
complicated or complex than it is seen from here.
Dr. Cooksey. Thank you.
Chairman Gilman. Thank you, Dr. Cooksey.
I would like to address this question to all of our
panelists. We all recognize that there is an extensive amount
of corruption in Russia, but what do you recommend now? How
should our policy toward Russia change or be revised in order
to address this worsening situation? And let me start with Mr.
Palmer.
Mr. Palmer. Thank you, sir.
It seems to me the first thing we have to do is
depersonalize the foreign policy. There are some quarters in
this town that believe that our relationship with Russia
depends on good contacts between a few officials on both sides.
I think that has to be broadened. I think we have to deal with
all aspects of the Russian political scene. That certainly
includes the Duma. That means we cannot focus on only one group
or one party. Everyone talks about this. I have seen no change
in that.
Second, we cannot support one group blindly. Imagine from
the American point of view if the Russians sent us 30 election
experts to help run the 2000 elections and sent us several
million dollars to help organize them. I don't think that we
would take that well, no matter which candidate won, and that
is precisely what we did with Russia. We sent experts. We sent
money. I don't think we can do that. I think we have to stand
back a little farther from that. We cannot take sides quite so
often.
The next thing I think we have to do is make every bit of
the not only aid, but loan money, a quid pro quo. That means,
yes, we will support investments in Russia after you have come
up with a bilateral U.S.-Russian investment treaty. This is a
normal thing between states. If we are going to encourage
investment, let's protect our investors. I think that is not
only prudent, I think it is responsible.
I think that we should have audits. If we look at the food
aid that has just gone to Russia, that food aid was meant to
disappear. Marcy Kaptur argued constantly for more controls on
that. They didn't happen.
I looked into this with the Department of Agriculture, and
they said, well, we are thinking about things, but when we hear
something that we like we will let you know. That is not how
the government sets the pace. They paid the contractor to come
up with the idea of let's distribute information about food
delivery on the Internet so that people could track them. The
people that we are concerned about don't have enough money to
eat. I am sure they don't have computers at home and Internet.
They do not have power. Let's be realistic in these things.
This food aid is an example. We purposely said we don't
want to audit it. Right now we are completely dependent on the
Russians bringing us once a week statements that this food was
delivered. I know for a fact some of these statements of food
being delivered were signed in February and March although the
first shipments didn't arrive until May.
What I am saying is, let's take a reasonable bipartisan
look at this and try and do this government to government like
we would anywhere else.
Thank you very much.
Chairman Gilman. Thank you.
Mr. Henderson, would you comment?
Mr. Henderson. Sure. I concur with Mr. Palmer's comments
but would say that one of the most important issues facing the
global community is the security of the world's financial
system. I think the Bank of New York case, again, only begins
to illustrate that this is a very serious problem for not only
the United States, but for the international community. I know
there are separation hearings under way on that matter, and
there are a lot of discussions that need to be held.
But on that point, I think whether you are talking about
the banks, private banks, or the World Bank, or the IMF, or
USAID, or even corporations, private corporations, much more
emphasis needs to be placed on know your customer rules and
know your employee rules and when is an employee obligated to
report on suspicious, corrupt transactions? Until this culture
of silence is broken within the corporate community and within
the multilateral donor community and at other donor agencies
around the world, I think you are going to see very little
progress on any of these fronts. Right now, no one is really
reporting on corrupt, suspicious transactions. It is
questionable how well written the bank's rules and regulations
are in this regard--that is private banks. So this is a very
serious issue that must be addressed very promptly.
I think, again, the other thing that we could do, as Mr.
Palmer was mentioning, is to get our own house in order. We who
have been studying the corruption problem for some time see an
awful lot of corporate complicity in the corruption process.
Everyone knows that it takes two to tango, and it doesn't
appear as though the laws that we have on the books, not only
the U.S. but in other countries, are properly being enforced.
The OECD antibribery treaty is going to have little meaning
unless we find ways to enhance the way that it is implemented.
The last and maybe most important point in my mind is that
you hear a lot of rhetoric now about the need to work more with
civil society and small business associations and the private
sector. This is the kind of conversation going on now within
the World Bank and within other donor agencies, including AID.
But the reality is that most of these institutions don't have
the mechanisms or policies in place to begin to work with civil
society. Until civil society becomes more involved in
corruption oversight, if you will, and providing a real check
on governmental action, again, I think you will see little
progress on this front.
Chairman Gilman. Thank you, Mr. Henderson.
Mr. Satter?
Mr. Satter. Policy must be based on principles, not
personalities. Russia is a country which has suffered a 70 year
assault against its moral sensibility. Therefore, what the
country needs and what it is often incapable of generating
internally is an appreciation of right and wrong and a sense of
fidelity to law.
If we enter the Russian situation and, irrespective of the
morality of its actions, back the political faction that we
consider to be progressive, we actually further undermine the
moral fabric of society. We did this many times. We did it over
the war in Chechnya. We did it at the time of the forcible
dispersal of the Russian parliament in 1993. We continue to do
it when we close our eyes to the corruption in Russia and the
way in which organized crime is terrorizing the ordinary
Russian citizen.
Russians were inculcated for 70 years with the idea that
capitalism and criminality are more or less the same thing. Now
they are living in a state which is largely run by criminals to
whom we give our rhetorical support. Therefore, we confirm them
in their previous prejudices.
The first thing we have to do is sever the link in the
minds of the Russian people between capitalism and crime, and
to do that, we need to insist on fidelity to law and fidelity
to ordinary moral principles and stop making excuses for the
people that we describe as ``progressive'' and who, in fact,
are not progressive.
To implement this idea further, there are a couple of
concrete steps that we can take. First of all, we should take
care with our rhetoric. We should not say that President
Yeltsin, when he is authorizing the carpet bombing of civilian
areas in Chechnya, is comparable to President Lincoln defending
the American union. We should not endorse the forcible and
illegal dispersion of the Russian parliament. We also should
not try to interfere in the Russian elections.
But, beyond this, we can make it clear that people who have
obvious ties to organized crime figures are not welcome in the
United States and that the organized crime figures also are not
welcome here. Since these two categories include many of the
leading people in government, such action will have
psychological significance both for the government and for the
Russian population.
In general, rhetorically and with our influence over
international loans we need to, in every concrete situation,
back crime-fighting techniques, back institutions which will be
resistant to crime and end the previous tolerance that we have
shown over the last 7 years for those people who believe an
economy is organized stealing and behave accordingly.
Chairman Gilman. Thank you, Mr. Satter.
Mr. Murray?
Mr. Murray. Yes, Chairman Gilman.
In my view the best way to both combat corruption and
otherwise sustain market reform in Russia is to reduce the
barriers to small business. To date, this has not happened. As
I indicated in my earlier testimony, in fact, the barriers to
small businesses have increased over the last 10 years due to
rent-seeking behavior on the part of the government.
If barriers to small business are reduced, we will see the
creative business potential of the Russian people unleashed for
the first time. We haven't witnessed that yet. Small
businessmen have not been allowed to create wealth and to
create a middle-class without being extorted or preyed upon by
the tax authorities.
The best way to help them do this is not by simply throwing
money at Russia, of course, but rather by helping the emerging
small business community create what is called ``social
capital'' which is to say the values and the mores that are
needed to run businesses honestly.
Earlier, Congressman Bereuter commented that I sounded very
optimistic and that it was unusual. The reason I am optimistic
is that, to date, business and moral aspirations have been kept
in quite separate categories during this reform period in
Russia. They are treated as being two separate endeavors. In
this project we have conducted on behalf of the Eurasia
Foundation to create the Declaration of Integrity in St.
Petersburg, we have found that when moral aspirations and
business are combined, there is a new level of enthusiasm and
determination to conduct business on the part of the average
citizen. I believe that once the barriers to small business are
broken down you will see people with the profit motive take
care of this corruption problem efficiently, more efficiently
than it has been addressed to date.
Chairman Gilman. Thank you, Mr. Murray.
Mr. Borovoi.
Mr. Borovoi. First of all, it seems dangerous to me, the
trend of stepping back from involvement in the political
process in Russia or being bystanders and just observing what
is going on. If this point of view was prevalent in 1948, then
70 percent of German parliament would consist of Nazis. I think
that the major highlights of democratization of Russia are
programs targeted for development of education and
democratization. I think that the $600 million that was spent
on the procurement of food products would much better be spent
on purchasing mass media and providing programs for education
and enlightenment of the Russian population on economics and
democracy, free market economy.
Chairman Gilman. Thank you.
Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman.
I would like a member of our staff to give this to Mr.
Henderson if you could, kindly. I am telling you what this is.
At yesterday's hearings on the same subject, Dr. Michael
Waller, Vice President of the American Foreign Policy Council
testified. He put into the record this e-mail--and I am going
to read to you what he said about it--you were in the e-mail,
but I am going to take a second and explain it.
The suggestion is that the principal contractor for USAID
for the rule of law project, ARD-Checchi--and I am quoting from
Mr. Waller's testimony--tried to suppress a noted expert in
Russian crime and corruption from voicing concerns about the
USAID-sponsored privatization program. That expert, Professor
Louise Shelley of the American University, and a colleague of
Dr. Waller's at Demokratizatsiya journal, had early evidence
that organized criminal elements had exploited the U.S.-backed
privatization program.
In June, 1994, ARD-Checchi rule of law project director
David Bronheim sent an e-mail notice to offices in Moscow, Kiev
and elsewhere with a warning about Dr. Shelley that appears to
be intended to suppress and discredit her, and he then quotes
the e-mail, a copy of which I have given to Mr. Henderson.
``Professor Shelley. Please treat this with enormous care.
If I had known what Shelley was up to I would have resisted
Henderson's instruction to put her on the consulting contract.
She is a bomb with a lit fuse. Her hobby horse is that the AID
privatization program has been exploited by organized crime.
``The privatization program is the showpiece, the flagship,
et cetera, of the AID program in Russia. Shelley, without
understanding what she is doing, is trying to sink the
flagship. Under no circumstances can we be seen as helping that
effort. We have no interest whatsoever in damaging the
centerpiece of the AID program in Russia.'' end quote of the e-
mail.
I continue with Dr. Waller's testimony: ``there you have
it, as frank an admission as possible that experts concerned
with corruption of U.S. assistance programs were simply not
welcome. A copy of the e-mail is attached.'' .
That copy is what I have just supplied to Mr. Henderson.
[The information referred to appears in the appendix.]
Mr. Campbell. As you might guess, I am interested--knowing
that you were on the witness list today, I brought this--I am
interested in your advice to us as to whether, much more
importantly AID, but not trivially, whether a contractor of AID
actually tried to suppress an expert as was described by Dr.
Waller in his testimony.
Mr. Henderson. Thank you. I am familiar with this
situation, and I would provide by way of background a note that
this memo was written in response to internal memos at AID by
some in the privatization office. They were concerned that
Professor Shelley, as well as myself, were beginning to raise
some questions about their privatization program. David
Bronheim, who is a brilliant analyst, a former AID employee,
and he is now deceased--he was actually killed in a car wreck
in Georgia working on an AID program--was, I think, mainly
trying to respond to this concern within the privatization
office at AID that its centerpiece program was going to be
called into question by folks. They were not at all happy with
the fact that people like myself and the democracy and
governance office were giving her the opportunity to, at least,
express her opinion.
I did not know at the time, to be honest with you, whether
the information she was provided was completely accurate or
not, but I felt like, as did some others at AID, that this was
an issue that needed to be openly discussed, and encouraged her
to provide testimony to Congress when called to do so.
I guess the good news is that she was retained for a
limited amount of time, even after this occurred, that the
contractor's opinion had no impact on her employment or her
ability to speak out on this issue. But this memo and in
particular, the memos that I saw that were circulated by people
in the privatization office were of great concern to me because
they were clearly trying to stifle any discussion of this
issue.
Mr. Campbell. Then let me ask the most important question,
to me at least; and I am going to put it in a way that sounds
leading, but you are an intelligent person, able to address it,
so don't say anything you wouldn't otherwise. But I take your
testimony to be that, to the best of your knowledge, USAID did
not attempt to suppress research indicating corruption of the
privatization program; is that correct?
Mr. Henderson. I was trying to say that some employees
within AID were, in fact, trying to suppress research and open
discussion on this issue. I am referring to discussion that
occurred at the programmatic level. I know of no intervention
on the part of high-level AID or State Department employees.
These were people operating more at a senior programmatic
implementation level.
Mr. Campbell. Thank you.
I have one last question for Deputy Borovoi. I would like
to ask what the prospects are for the Economic Freedom Party
and other members of the Duma who believe, as you do, in the
upcoming elections?
Mr. Borovoi. Unfortunately, Russian politics today is
dominated by nationalistic and isolationist forces. In the
current composition of the Duma there are about 50 percent of
these forces. I think that after the next election there will
be about 80 percent of them. This is the result of a very
powerful, mighty antiwestern campaign that was modeled after
Soviet-style propaganda campaigns trying to picture western
community as an enemy. The examples of these campaigns, there
was a campaign of support for Iraq and a campaign of support of
Milosevic and a campaign against NATO expansion. So, if this
trend is going to continue, I don't think there are any
prospects of any democratically inclined parties in Russia.
Chairman Gilman. I think we have overstayed the patience of
our experts. We want to thank our witnesses for their
participation in the hearing today. I am certain that your
thoughts and your comments will assist the Members of our
Committee as we seek to better understand developments in
Russia today and as we make recommendations for the direction
of U.S. policy toward that important country in the future.
This hearing of the Committee on International Relations is
now adjourned.
[Whereupon, at 12:25 p.m., the Committee was adjourned.]
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A P P E N D I X
October 7, 1999
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