[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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