[Senate Hearing 106-260]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-260


 
                          CORRUPTION IN RUSSIA

=======================================================================

                                HEARINGS

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                        SEPTEMBER 23 AND 30, 1999

                               __________

       Printed for the use of the Committee on Foreign Relations

                               

 Available via the World Wide Web: http://www.access.gpo.gov/congress/senate


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                     COMMITTEE ON FOREIGN RELATIONS

                 JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana            JOSEPH R. BIDEN, Jr., Delaware
PAUL COVERDELL, Georgia              PAUL S. SARBANES, Maryland
CHUCK HAGEL, Nebraska                CHRISTOPHER J. DODD, Connecticut
GORDON H. SMITH, Oregon              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                PAUL D. WELLSTONE, Minnesota
CRAIG THOMAS, Wyoming                BARBARA BOXER, California
JOHN ASHCROFT, Missouri              ROBERT G. TORRICELLI, New Jersey
BILL FRIST, Tennessee
                   Stephen E. Biegun, Staff Director
                 Edwin K. Hall, Minority Staff Director

                                  (ii)



                            C O N T E N T S

                              ----------                              

                           September 23, 1999
              Corruption in Russia and Recent U.S. Policy

                                                                   Page

Biden, Senator Joseph R., Jr., prepared statement................    11
Ermarth, Fritz W., former CIA and NSC official...................    24
    Prepared statement of........................................    26
Legvold, Dr. Robert, professor of political science, Columbia 
  University.....................................................    40
Merry, E. Wayne, former State Department official; and director, 
  Program on European Societies in Transition, Atlantic Council 
  of the United States...........................................    35
    Prepared statement of........................................    38
Moody, Jim E., former Deputy Assistant Director, Criminal 
  Investigation Division, Federal Bureau of Investigation; and 
  founder of Jim Moody and Associates, L.L.C.....................    28
    Prepared statement of........................................    30
Talbott, Hon. Strobe, Deputy Secretary of State, Department of 
  State..........................................................     3
    Prepared statement of........................................     5
        Response to additional question for the record from 
          Senator Helms..........................................    15
        Response to additional question for the record from 
          Senator Hagel..........................................    16

                           September 30, 1999
              Corruption in Russia and Future U.S. Policy

Finckenauer, Dr. James O., professor of criminal justice, Rutgers 
  University (currently on leave) Washington, DC.................    76
    Prepared statement of........................................    82
Graham, Dr. Thomas E., Jr., senior associate, Carnegie Endowment 
  for International Peace, Washington, DC........................    66
    Prepared statement of........................................    70
Reddaway, Dr. Peter, professor of political science and 
  international affairs, George Washington University, 
  Washington, DC.................................................    57
    Prepared statement of........................................    61
Smith, Senator Gordon H., prepared statement.....................    56

                                 (iii)


              CORRUPTION IN RUSSIA AND RECENT U.S. POLICY

                              ----------                              


                      THURSDAY, SEPTEMBER 23, 1999

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 3:36 p.m., in 
room SD-419, Dirksen Senate Office Building, the Hon. Jesse 
Helms (chairman of the committee) presiding.
    Present: Senators Helms, Hagel, Smith, Biden, Kerry and 
Wellstone.
    The Chairman. The meeting will come to order.
    I have been instructed by the distinguished Senator from 
Delaware, Mr. Biden, the ranking Democrat on the committee, to 
proceed. He is on his way. Like all the rest of us, he has a 
busy schedule.
    The subject of today's hearing, as is well known, and I am 
glad to see so many people here today, is corruption in Russia 
and recent revelations about the diversion of billions of U.S. 
taxpayers' dollars into the pockets of corrupt Russian 
officials.
    Now, the committee's purpose is to examine if the Clinton-
Gore administration contributed to this problem, and if so, how 
so, and also whether the administration was aware of this 
corruption, but chose to ignore it.
    We are pleased to have Deputy Secretary of State Strobe 
Talbott with us to discuss the administration's position, 
following which we will hear from a distinguished group of 
former officials of the State Department, CIA, and FBI, as well 
as a noted scholar.
    Now, let me stress at the outset, our purpose today is not 
to debate the wisdom of supporting or engaging Russia. We are 
here to discuss how the administration managed or mismanaged 
the United States' relationship with the Russian Government, 
and specifically what happened to the $5.2 billion in grants 
and $12.8 billion in loans that were entrusted to the U.S. 
Government by the American taxpayers to support our Russian 
policies.
    Now, the administration's defenders have argued that, yes, 
the United States' aid was stolen, but they say that was a 
small price to pay for the nuclear stability our assistance had 
bought. Now, these defenders and their logic, it seems to me, 
lean on a weak reed, to say the least.
    A program for deconstructing and preventing the 
proliferation of Russian nuclear weapons accounts for a mere 
eight percent of the U.S. assistance to Russia. Now, our 
purpose today is to try to determine what happened to the rest 
of that money, which was supposed to facilitate Russian reform.
    I confess deep concern that the policies pursued by the 
President and Mr. Gore, through the so-called Gore-Chernomyrdin 
Commission, may have abetted corruption in Russia.
    It has been widely reported that in 1995 the CIA sent a 
memorandum to the Vice President discussing corruption in the 
Russian Government, and warning that foreign aid funds were 
being diverted into the pockets of Russian officials, and the 
Vice President is said to have sent the memo back with a 
scatological epithet scrawled across it. Emblematic of the 
administration's policy, apparently he did not want to know.
    Just last week the Washington Post reported that the First 
Lady's two brothers were involved in a nut-growing venture with 
a crooked Georgian warlord, whose goal is to overthrow our 
friend and ally, President Eduard Shevardnadze.
    Worse still, the Rodham brothers' partner in this venture 
was a man named Gregory Loutchansky, and we'll hear about him 
later today, a known organized crime figure, involved in the 
smuggling of nuclear materials.
    Now, the question is inevitable, why would the Rodhams do 
business with a thug like Loutchansky? The better question, I 
guess, is: Why wouldn't they? After all, Loutchansky was 
invited to attend a 1995 fund-raiser, you know where, and he 
had his picture taken with the President in 1993, and I guess 
that's the one over there.
    Loutchansky was invited to that fund-raiser the same year 
the President went to Moscow and called for, quote, ``an all-
out battle to create a market based on law, not lawlessness.'' 
Uttering that worthy phrase, while simultaneously consorting 
with a corrupt figure like Loutchansky, surely sends the wrong 
signal to President Yeltsin and Russian leaders of today. How 
can the United States ask Russian Government officials not to 
consort with such criminals at home when our own President and 
Vice President appear to have done so?
    I hope our witnesses today will address why the 
administration has failed to make a priority out of ending the 
theft of U.S. aid, and of excising corruption from the highest 
levels of the Russian Government.
    The administration's defense has been a declaration that 
the alternative to looking the other way was to abandon our 
policy of engagement with Russia. I contend that the opposite 
is true. By not pressuring Russia's leaders to expunge 
corruption, the United States has led the Russian people to 
lose faith in market economics and democracy.
    It is patently dishonest to suggest that the only policy 
choice is between forsaking engagement and giving Russian 
kleptocrats a carte blanche to pick the American taxpayers' 
wallets.
    It is my hope that this hearing, and one next week, will 
provide new thinking about ways the United States can help the 
Russian people get rid of irresponsible leaders who are 
stealing from us and them.
    I would like to welcome in the audience today a delegation 
from the Russian Parliament, led by Alexander Kulikov, 
conducting their own investigation on the corruption in Russia.
    Gentlemen, I want you to know wherever you are seated that 
I look forward to cooperating with you to get to the heart of 
this matter.
    I will tell you what I am going to do, Mr. Talbott. We will 
give Joe Biden the alternatives of making his opening statement 
when he gets here or after you have completed, if that is all 
right.
    Secretary Talbott. As you wish, Mr. Chairman.
    The Chairman. I wish you would let me recognize your lovely 
wife, if she would just wave at us.
    Thank you very much.
    You may proceed, sir.

 STATEMENT OF HON. STROBE TALBOTT, DEPUTY SECRETARY OF STATE, 
                      DEPARTMENT OF STATE

    Secretary Talbott. Thank you, Mr. Chairman. If it is all 
right, Mr. Chairman, in order to leave maximum time for our 
discussion, I will submit the full statement for the record, 
and offer some compressed opening remarks here.
    The Chairman. Very well.
    Secretary Talbott. I welcome the opportunity to discuss 
with the committee not only developments in Russia, but U.S. 
policy toward Russia. Mr. Chairman, I think you have chosen a 
very good time for this hearing.
    Russia is much on our minds these days, and rightly so. 
Secretary Albright has spent this week up at the United 
Nations, and she has heard repeatedly from our friends and 
allies around the world that Russia is much on their minds, 
too.
    You referred in your opening remarks to President 
Shevardnadze of Georgia. I left a meeting at the White House 
between President Shevardnadze and President Clinton, and I can 
assure you that the general subject that we are discussing 
today is much on President Shevardnadze's mind.
    All of our friends, and allies, and partners around the 
world are counting on us, very much including the executive and 
legislative branches of the U.S. Government working together, 
to manage this relationship with skill, foresight, and clarity 
of purpose.
    Now, Mr. Chairman, not for the first time, and not for the 
last, the Russian people are undergoing what many of them call 
the time of troubles. Those troubles pose a complex set of 
challenges to American, foreign, and national security policy.
    Now, as you point out, the trouble that has received the 
most attention of late is a state of allegations and 
revelations about large-scale financial malfeasance, including 
charges of money laundering through American banks.
    The challenge to us is three-fold. First, to ensure that we 
are enforcing our own laws and protecting Americans from 
international organized crime; second, to ensure that we are 
doing everything we can to protect the integrity and 
effectiveness of our bilateral and international assistance 
programs; and third, to intensify our supportive and 
cooperative work with those Russians who realize, as Foreign 
Minister Ivanov stressed in New York when he met with Secretary 
Albright on Monday, and with President Clinton yesterday, that 
their country and their people are suffering from rampant crime 
and corruption, and that we must continue to work with those in 
Russia who are committed to fighting back against that scourge.
    Now, Russia has other troubles, too, continued fighting, 
which has intensified today, we understand, between insurgents 
and Russian troops in the North Caucasus, claiming hundreds of 
lives. Terrorist bombings in Moscow and two other cities in 
Russia have exceeded the death toll of Oklahoma City and the 
World Trade Center combined.
    Like crime and corruption, terrorism is not just a Russian 
problem, it is a global one, and like crime and corruption, it 
will not prove susceptible to just a Russian solution. On both 
issues, the Government of Russia has sought help from us and 
from others.
    One of the several issues that we and the executive branch 
are discussing in our current consultations with the Congress, 
including, I hope, in this hearing today, is the terms of our 
ability to provide that help and the strategic goals that our 
support for Russian reform is meant to serve.
    Let me, before going to your questions, and those of your 
colleagues, suggest an overall context for that discussion. 
First and foremost, our policy must advance the national 
security of the United States, both in the short term and the 
long term.
    The test that we must apply day in and day out, year in and 
year out, from one administration to the next, is whether the 
American people are safer as a result of our policy. This 
administration's Russian policy needs that test. When we came 
into office, there were roughly 10,000 intercontinental nuclear 
weapons in four states of the former Soviet Union; most were 
aimed at the United States. Today, there are about half that 
many, some 5,000. They're only in Russia, and none are targeted 
against us.
    We are discussing significant further reductions in overall 
numbers, and further steps to diminish the nuclear threat in 
all of its aspects.
    Mr. Chairman, would you like me to pause so that Senator 
Biden can deliver his opening statement, or shall I continue?
    Senator Biden. No. Please continue, Mr. Secretary.
    Thank you, Mr. Chairman.
    Secretary Talbott. The issue of controlling nuclear weapons 
and reducing the threat to the United States is one of several 
issues of vital importance to the U.S. that Secretary Albright 
and Minister Ivanov grappled with this week, along, by the way, 
with the subjects of peace in the Middle East, in the Balkans, 
and in the Caucuses.
    My point, Mr. Chairman, is simply this: Corruption is an 
important issue that we are taking very seriously, but as we 
probe its cause, and as we refine our response, we must keep in 
mind that it is part of a much larger process under way in a 
vast and complex country, a country whose nature is a state and 
whose role in the world will have a lot to do with what sort of 
twenty-first century awaits us.
    For a decade now, Russia has been undergoing an 
extraordinary transformation. In fact, it has been undergoing 
three transformations in one, from a dictatorship to an open 
society, from a command economy to a market, and from a 
totalitarian empire and ideological rival toward becoming what 
many Russians call, and aspire to as, a normal, modern state, 
integrated into the international community of which we are a 
part.
    We have been helping to keep that process going. Just as 
one example, the FREEDOM Support Act, another program supported 
by the Congress, has helped Russia make dramatic improvements 
in the protection of human rights and religious freedoms.
    All of us are realistic about the difficulties. Russia's 
transformation has encountered plenty of obstacles, none 
greater and more challenging than the crucial need to create 
the laws and institutions that are necessary for fighting crime 
and corruption in an open society and a market economy. Still, 
the transformation continues, and so must our commitment to 
stay engaged.
    I am gratified, Mr. Chairman, to hear you say that there is 
really no debate about whether to stay engaged, the question is 
how, to what end, and with what rules and standards.
    While there are no easy answers, and no quick answers to 
what ails the Russia body politic today, there is one 
overarching principle that is fundamental to creating the 
forces for change that will drive the scourge of corruption out 
of Russian society, and that is democracy. I think it is 
particularly appropriate, Mr. Chairman, that our proceedings 
today should include the participation of a delegation of 
parliamentarians from Russia.
    When I was in Moscow two weeks ago, I was struck yet again, 
as I so often am, by the preoccupation of virtually everyone I 
met with the upcoming parliamentary and Presidential elections. 
For the first time in their history, Russian citizens are now 
voters. They can register their grievances, express their 
aspirations through the ballot box, or for that matter, on a 
soap box.
    Their grievances prominently include disgust with 
corruption. Their aspirations prominently include good 
governance, honest governance. If they and the leaders they 
choose can stay on the course of constitutional rule and 
electoral democracy, not only will Russia's own people be 
better off, but so will we.
    That is the hard-headed essence of why we must continue to 
support them in coping with the difficulties they face, notably 
including those that are in the headlines today. That is also 
why Russia's current problems with crime and corruption are 
different from the corruption that was so entrenched under 
Soviet communism.
    Indeed, one way to look at today's troubles in Russia is 
part of a legacy of an evil past, and as a result of the 
incomplete, but ongoing transition to a better future. The 
solution to those troubles is for them to keep moving forward 
and for us to support them as they do.
    For our policy of engagement with Russia to be effective, 
they must have the backing of the American people and, of 
course, of this body, and it is very much in that spirit that I 
look forward to our discussion today. Thank you.
    [The prepared statement of Secretary Talbott follows:]

               Prepared Statement of Hon. Strobe Talbott

      russia: its current troubles and its on-going transformation
    Thank you, Mr. Chairman. I welcome the opportunity to discuss with 
the Committee developments in Russia and U.S. policy toward that 
country. You have chosen a good time for this hearing. Russia is much 
on our minds these days, and rightly so. Secretary Albright is at the 
United Nations this week, and she has heard repeatedly from our friends 
and allies around the world that Russia is much on their minds too. 
They are counting on us to manage U.S.-Russian relations with skill, 
foresight and clarity of purpose.
    Not for the first time and not for the last, Russia is undergoing a 
time of troubles. Those troubles pose a complex set of challenges to 
American foreign and national security policy.
    The trouble that has received the most attention of late is a spate 
of allegations and revelations about large-scale financial malfeasance, 
including charges of money-laundering through American banks. The 
challenge to us is threefold: first, to ensure that we are enforcing 
our own laws and protecting Americans from international organized 
crime; second, to ensure that we are doing everything we can to protect 
the integrity and effectiveness of our bilateral and international 
assistance programs; third, to intensify our work supportively and 
cooperatively with those Russians who realize--as Foreign Minister 
Ivanov stressed in New York when he met with Secretary Albright on 
Monday--that their country and their people are suffering from rampant 
crime and corruption, and who are therefore committed to fighting back 
against that scourge.
    Russia has other troubles too. Continued fighting between 
insurgents and Russian troops in the North Caucasus is claiming 
hundreds of lives. Terrorist bombings in Moscow and two other cities 
have exceeded the death toll of Oklahoma City and the World Trade 
Center combined.
    Like crime-and-corruption, terrorism is not just a Russian 
problem--it's a global one; and like crime-and-corruption, it won't 
prove susceptible to just a Russian solution. On both issues, the 
Government of Russia has sought help from us and from others. One of 
the several issues we in the Executive Branch are discussing in our 
current consultations with the Congress--including this hearing today, 
Mr. Chairman--is the terms of our ability to provide that help and the 
strategic goals that our support for Russian reform is meant to serve.
    Let me, before going to your questions, suggest an overall context 
for that discussion:
    First and foremost, our policy must advance the national-security 
interest of the United States--both in the short-term and the long-
term. The test we must apply--day in and day out, year in and year out, 
from one Administration to the next--is whether the American people are 
safer as a result of our policy. This Administration's Russia policy 
meets that test. When we came into office, there were roughly 10,000 
intercontinental nuclear weapons in four states of the former Soviet 
Union; most were aimed at the United States. Today, there are about 
half as many--some 5,000; they're only in Russia; none are targeted at 
us; and we're discussing significant further reductions in overall 
numbers and further steps to diminish the nuclear threat in all its 
aspects. That's one of several issues of vital importance to the U.S. 
that Secretary Albright and Minister Ivanov grappled with earlier this 
week, along with peace in the Middle East, in the Balkans, in the 
Gulf--and in the Caucasus.
    My point, Mr. Chairman, is simply this: corruption is an important 
issue that we are taking very seriously, but as we probe its cause and 
as we refine our response, we must keep in mind that it is part of much 
larger process under way in a vast and complex country--a country whose 
nature as a state and whose role in the world will have a lot to do 
with what sort of 21st century awaits us.
    For a decade now, Russia has been undergoing an unprecedented 
transformation. In fact, it is undergoing three transformations in one: 
from a dictatorship to an open society; from a command economy to a 
market; and from an totalitarian empire and ideological rival toward 
becoming what many Russians call--and aspire to as--a ``normal, modern 
state,'' integrated into the international community of which we are a 
part.
    We've been helping keep that process going. Just as one example, 
the FREEDOM Support Act and other programs have helped Russia make 
dramatic improvements in the protection of human rights and religious 
freedoms.
    All of us are realistic about the difficulties. Russia's 
transformation has encountered plenty of obstacles, none greater and 
more challenging than the crucial need to create the laws and 
institutions that are integral to fighting crime-and-corruption in an 
open society and market economy. Still, the transformation continues, 
and so does our commitment to stay engaged. And while there are no easy 
answers and no quick answers to what ails the Russian body politic 
today, there is one overarching principle that is fundamental to 
creating the forces for change that will drive the scourge of 
corruption out of Russian society, and that is democracy. When I was in 
Moscow two weeks ago, I was struck, yet again, by the preoccupation of 
virtually everyone I met with the upcoming parliamentary and 
presidential elections. For the first time in their history, Russian 
citizens are now voters; they can register their grievances and express 
their aspirations through the ballot box--or, for that matter, on a 
soap box. Their grievances prominently include disgust with corruption; 
their aspirations prominently include good governance.
    If they and the leaders they choose can stay on the course of 
constitutional rule and electoral democracy, not only will Russia's own 
people be better off, but so will our own. That's the hard-headed 
essence of why we must continue to support them in coping with the 
difficulties they face, notably including those that are in the 
headlines today. That's also why Russia's current problems with crime 
and corruption are different from the corruption so entrenched in 
Soviet communism. Indeed, today's problems are a result of an 
incomplete transition to democracy and market reform. The solution to 
today's problem is to keep moving forward to realize the full promise 
of the transformation Russia has begun.
    Since the Cold War ended, the United States has, as Secretary 
Albright pointed out in her speech last week in her speech before the 
Carnegie Endowment for International Peace, pursued two basic goals in 
our relations with Russia. The first is to increase our security by 
reducing Cold War arsenals, stopping proliferation and encouraging 
stability and integration in Europe. The second is to support Russia's 
effort to transform its political, economic and social institutions. 
Both of these goals are very much works in progress.
    In the years since Russia helped bring the Soviet system to an end, 
our work with that nation has helped secure some breakthroughs that are 
clearly in the national interest. First, the Soviet Union dissolved in 
a largely peaceful fashion with its nuclear weapons in secure hands, an 
outcome that was not foreordained. Imagine the chaos the world would 
face if the Soviet Union, and its nuclear arsenal, had come apart in 
the same way Yugoslavia has. First the Bush Administration and then the 
Clinton Administration worked assiduously to ensure that such a 
nightmare did not come to pass.
    Second, Russia helped dismantle the apparatus of the Soviet system 
and has rejected the forcible reformation of the Soviet Union or the 
creation of a new totalitarian super-state. It has no practical option 
to turn back the clock.
    Third, the people of Russia, and their leaders, have embraced 
democracy and have held a series of free and fair elections at the 
national and local levels, followed by a stable transition of offices 
and power, and more broadly, are assembling the building blocks of a 
civil society based on public participation.
    Fourth, Russia has made important strides in replacing central 
planning with the infrastructure and institutions of a market economy.
    Fifth, and equally important, Russia remains committed to working 
as constructively as possible with the U.S. and other nations of the 
international community.
    International support is an essential part of helping Russia take 
difficult internal steps to restructure itself.
    The President, the Vice President, Secretary Albright and the rest 
of us have always understood that in transforming itself, Russia has 
been tearing down dysfunctional Soviet structures, but it has only 
begun to put in place the mechanisms of a modern state.
    This is an enormous and time-consuming task. Russia, after a 
millennium of autocracy and more than 70 years of communism, had little 
or no historical memory of civil society, of a market economy or the 
rule of law. The Soviet system itself was in many ways 
institutionalized criminality. I first heard the phrase ``kleptocracy'' 
used to describe the Soviet state. There are no ``good old days'' of 
real law and order or legitimate private enterprise to which Russia can 
return.
    In short, crime and corruption are part of the grim legacy of the 
Soviet Communist experience. The rampancy of that problem has impeded 
Russia's own progress and impeded our ability to help Russia move 
forward. Moreover, as Russia dismantled communism and sought to create 
a new market economy, the weaknesses inherent in its new economic 
institutions created vulnerabilities to corruption. That is why, in his 
1995 visit to Moscow, President Clinton called for ``a market based on 
law, not lawlessness.''
    Yet, just as we cited these dangers, we were also engaged in 
finding solutions. U.S. assistance, as well as that of multilateral 
bodies such as the International Monetary Fund, have focused on 
building the broader structures that will allow the democratic citizens 
of Russia--who have the most to lose from corruption--to bring 
transparency and accountability to both government and business 
dealings.
    We have consistently emphasized the need for transparency and 
accountability in our dealings with Russia, and in the dealings of the 
international financial institutions working with Russia. When problems 
have arisen, we have insisted on full and complete investigations and 
will continue to do so. In instances where there have been concerns 
about Russian practices, the Fund has tightened controls, preformed 
audits and reduced lending levels.
    The IMF has conditioned further tranches on effective safeguards 
that lending will not be misappropriated, a satisfactory accounting of 
relevant Central Bank activities, and genuine broad-based 
implementation of reforms that go beyond simple commitments. Both 
multilateral and bilateral support for Russia will be shaped by this 
kind of realism. A Russian interagency law enforcement team headed by 
Federal Security Service Deputy Director Viktor Ivanov was in 
Washington last week to meet with Justice, FBI, Treasury and State 
officials. By the way, while this visit was primarily to deal with the 
Bank of New York case, the Russian team also met with FBI Director 
Freeh and State Department counter-terrorism officials to discuss the 
recent bombings in Russia.
    I have referred several times to the sheer size of Russia. In that 
connection, I would like to emphasize that three-quarters of FREEDOM 
Support Act assistance is spent on programs that do not involve the 
Russian government, as part of our effort to help build grassroots 
support for change. The U.S. government has worked to build 
relationships with Russian law enforcement and judicial entities and 
helping them increase their capabilities to operate in a professional 
and ethical manner. We have also promoted the rule of law at the 
grassroots level by working with non-governmental organizations, human 
rights advocates, and independent media watchdogs, and by promoting 
ethical business practices.
    For example, USAID's Rule of Law Project, which was developed in 
response to a presidential initiative that arose out of the 1993 
Vancouver Summit, works with core Russian legal institutions on 
judicial and prosecutorial training, legal education reform and 
strengthening legal non-governmental organizations. The project has 
assisted the legislative drafting and the training of hundreds of 
judges from the commercial courts.
    In addition, several U.S. law enforcement agencies have 
representatives based in Moscow who are working directly with their 
Russian counterparts on issues of mutual concern. There are three FBI 
attaches in Moscow working on ongoing criminal investigations and 
prosecutions. The U.S. Customs Service, DEA, U.S. Secret Service, DOJ 
and INS also have representatives in Moscow.
    Law enforcement agreements with Russia allow us to share 
information on cases and cooperate on investigation, prosecution and 
prevention of crime. The current Mutual Legal Assistance Agreement 
between the United States and Russia allows each side to request 
information, interviews and other background material to support 
investigations. In June 1999, the U.S. and Russia signed a Mutual Legal 
Assistance Treaty which, when ratified and brought into force, will 
replace the Agreement. The Treaty will expand and strengthen the scope 
of cooperation, facilitating investigation and prosecution of 
transnational criminals.
    In addition, in the recognition of the transnational dangers posed 
by the increased crime in the NIS and Central Europe, the U.S. 
government established the Anti-Crime Training and Technical Assistance 
Program. An interagency effort administered by the State Department, 
this effort is designed to help law enforcement officials develop new 
techniques and systems to cope with crime while simultaneously 
strengthening the rule of law and respect for individual rights. A 
major goal of this program is to develop partnerships between American 
and New Independent States law enforcement agencies that will enable 
them to combat organized crime and prevent organized crime in the New 
Independent States from spreading in the U.S.
    In conclusion, Mr. Chairman, Secretary Albright has asked me to use 
this occasion to reiterate the case that she has made to you and your 
colleagues for the resources we need in order to defend and advance 
American interests. Congress is currently proposing a cut of between 25 
and 30 percent from the President's FREEDOM Support Act budget request 
for programs in Russia and elsewhere in the New Independent States. The 
Secretary believes such cuts would be dangerously short-sighted, 
because the purposes of this assistance--from building an independent 
media to promoting small businesses--are fundamentally in our 
interests. She hopes that engagement with Russia should be something 
Republicans and Democrats can agree on. Engagement is a bipartisan 
foreign goal because it serves the long-term interests of the American 
people.

    The Chairman. Senator Biden.
    Senator Biden. Mr. Chairman, I would like to ask unanimous 
consent that my entire opening statement be placed in the 
record.
    My staff handed me a copy of your opening statement, in 
which the last paragraph said, ``It is patently dishonest to 
suggest that the only policy choice between forsaking 
engagement and giving Russia kleptocrats a carte blanche to 
pick the American taxpayers' wallet.'' I agree with that, and I 
am delighted that you have made clear the need to have 
engagement. The question is in how to engage.
    One of the things I hope we will not do, not you and I, but 
the Congress and the country, is engage in an argument of ``Who 
lost Russia.'' Russia is not ours to lose. Russia is the 
Russians' to lose, and Russia is the Russians' to find, but I 
do think that it is important that during this hearing we begin 
to get some perspective on some of the assertions that have 
been made in the press, and either may be true, are true, and 
if are true, may or may not have the impact that they're 
asserted to have.
    We hear that Russian corruption has put American taxpayers 
at risk, and those allegations. One troubling charge has been 
that the Russian Central Bank that received the money from IMF 
loan programs sent some of that money to an offshore bank, I 
think the acronym is pronounced--how do you pronounce it--
``FIMACO.''
    Did Russians cheat when they moved some of their central 
bank funds to this offshore bank? Yes, they did, in my view. 
Were IMF funds stolen or diverted for criminal purposes? I 
don't know.
    At the insistence of the IMF, PricewaterhouseCoopers, an 
independent accounting firm, undertook a review of those IMF 
funds, and the deal that I mentioned, and found no evidence 
that IMF funds were ultimately misappropriated. At the end of 
the day, those funds were returned to the Central Bank.
    Still, this kind of behavior is outrageous and 
unacceptable, and if Russians want to become part of the 
international community, like other normal nations, they have 
to be made to understand that.
    As I understand, the IMF is doing just that now. They're 
beginning to change the way in which they'll deal with loans. 
Have there been consequences because of this deal and other 
outcomes? The IMF will not deposit funds now in the most recent 
loan to Russia. This time, the IMF retains full control, using 
funds to pay off Russian ongoing obligations without any 
participation by the Russians themselves.
    It is something that does not ordinarily--you do not have 
to baby-sit most countries when you give IMF funds, but 
obviously, they have demonstrated they need a babysitter. That 
is on top of new additional commitments and conditions imposed 
by the IMF to clean up their public finances.
    I personally think it is time for us to consider further 
steps to restore some confidence in our ability to target and 
to track international financial assistance to Russia, and I 
hope the administration has something to say about that today 
as well. Perhaps, the most recent sensational news is the 
discovery that billions of dollars have been illegally 
filtered, quote, ``laundered'' through several U.S. banks. 
While we must ultimately demand to know the source of these 
funds, right now there is no evidence that they came from 
international assistance programs.
    Sadly enough, there is, on its face, sufficient private tax 
evasion, corruption, and racketeering in Russia to account for 
those funds.
    Finally, there is another possibility. The bilateral U.S. 
assistance to Russia has been among the sources of the mass of 
capital flows that have plagued the Russian economy, but the 
fact is that most of our aid is in the form of expertise, 
exchanges, and closely targeted projects, with a low risk for 
diversion, because there is not a high percentage of them being 
in hard dollars.
    Despite the lack of hard evidence that any American 
taxpayers' money has been drawn into the web of Russian 
corruption, the very nature of the black market economy and 
protection rackets that account for so much of Russia's economy 
these days means that neither blanket accusations nor blanket 
denials seem to hold any water.
    So let us grant the critics the worst of the claims, and 
for the sake of argument, concede that all the worst-case 
assumptions are true, but let us also look at the other side of 
the ledger. Look at the plus side of the balance sheet, and 
you'll see what the average American has received in exchange 
for these alleged wastefully diverted funds. I say alleged.
    In 8 years since the United States opened its relationship 
with Russia, this is what we have accomplished. Russia has 
reduced the number of nuclear missiles from 9,500 to 6,000.
    Over 1,500 Russian nuclear warheads have been deactivated. 
Some 300 Russian missiles launchers have been destroyed. 
Russian troops have withdrawn from Central Europe, the Baltic 
States, and more importantly, Russia has made no serious effort 
to reconstitute the Soviet Union under its denomination.
    Russia was a participant in the Gulf war, and has joined us 
in peacekeeping operations in Bosnia and in Kosovo. Russia now 
holds free elections at all levels around the country. Russian 
society is open to an unprecedented degree. Russia has opened 
its doors to the outside world, so foreigners now visit 
formerly closed cities, and Russians come here by the 
thousands.
    The Russian press, once represented by a dreary Communist 
Party-controlled Pravda, is now free and even raucous in its 
criticism of the government, and the Russian welfare state that 
the Communists were so proud of, has, albeit, painfully, begun 
to feel the effects of a global economy.
    So there is another point that needs to be stressed. U.S. 
assistance to Russia has been targeted in bringing about 
structure reforms that would be both deep and long-lasting. 
Importantly, this assistance has included components of 
fighting both crime and corruption.
    The administration, in its semi-annual meetings with 
various prime ministers, has worked to promote the rule of law 
in Russia, with not as much success as we would like, but we 
are trying.
    Topics of these meetings include a bilateral law 
enforcement cooperation, law enforcement assistance, anti-
corruption assistance at a grassroots level, ethics training, 
and dozens more programs. So I would suggest it is simply wrong 
for people, and I read it in the press, to suggest that these 
problems have been ignored.
    They have been identified as problems, they have been 
devoted time, funds, and personnel to deal with, and they have 
to be dealt with again, and we have to try new ways to try to 
deal with them.
    You might say that we have not committed sufficient 
resources to these programs, but it is not true that corruption 
has been ignored. So what are the lessons to be drawn from our 
experience? It seems to be that, obviously, there are problems. 
They are problems that we know about and cannot pretend they do 
not exist.
    That our assistance to Russia has caused problems? No 
reading of Russian history, which is full of examples of 
serious corruption, can support the claim that there has not 
always been corruption. But there has been and continues to be 
tangible progress, and it may be two steps forward and one 
back, but there is progress.
    So I agree with the Chairman, it should not be a debate 
about whether or not we engage or disengage, it is about the 
degrees to which we can engage more rationally and more 
effectively.
    I would conclude by saying, Mr. Chairman, that I can 
remember when we sat here and I was with the staff members, now 
an ambassador, a guy named John Ritch, drafting the SEED Act, 
which became the FREEDOM Support Act, and some iteration of the 
FREEDOM Support Act, or of the SEED Act, and we all said then, 
which we should remind everybody now, it has been 8 years, and 
800 years of history we are trying to turn around.
    The idea that Russia is going to get it right, get it 
straight, have no corruption, have a market economy that works 
like ours, have elections that are like ours, and have a system 
that is remotely like ours, or other Western European 
countries, in the near term, and have it all done neatly is 
beyond anyone's capacity, except the Lord Almighty himself, but 
the Russian people have to do a heck lot more, and Russian 
institutions do so.
    I am anxious to hear how we are going to strengthen our 
oversight, if you will, on our dealings with Russia, but I 
sincerely hope that everybody heeds your admonition that this 
is not about whether or not we engage or do not engage, it is 
about how to engage.
    I thank you for your time, Mr. Chairman, and I thank the 
Secretary for allowing me to follow him with my opening 
statement. It should have preceded it.
    [The prepared statement of Senator Biden follows:]

           Prepared Statement of Senator Joseph R. Biden, Jr.

     There is a lot of clamoring right now--most of it driven by U.S. 
election hysteria--about ``Who lost Russia.'' This is absurd. Russia is 
not lost--it is right there where it has always been.

   In any case, it was not ours to lose. It still belongs to 
        the Russians. They control Russia's destiny--no one else.
   No one--not the IMF, not the United States, not the G-7 
        countries--was ever going to influence Russia's policy except 
        at the margins.

    What has been ``lost'' however, is a rational perspective on the 
pace and ease of the current transformation of Russia. No one said that 
change from a Communist system to a free market, democratic society 
would be easy.
    Change will take generations; we have always known that.
    This country, first under George Bush, now under Bill Clinton, has 
done the right thing in trying to ease Russia's transition from 
Communist bully to responsible member of the world community.
    And the successes are remarkable. We must remember that the Soviet 
Union came apart less than eight short years ago. In that brief time, 
Russia has reduced its nuclear arsenal and slashed its military 
spending. It has held democratic elections and resisted a return to 
Communism.
    It has opened its doors to the outside world so that foreigners now 
visit formerly closed cities, and Russians by the thousands come here. 
The Russian press--once represented by the dreary, Communist party-
controlled Pravda, is now free and even raucous in its criticism of the 
government. And the welfare state that the Communists were so proud of, 
has--albeit painfully--begun to feel the effects of the global economy.
    Obviously, there have been, and will continue to be, frustrations 
and missteps. Corruption is one of the most visible ones.
    The current hysteria on this topic misses the main point--that 
corruption, while unpleasant for those of us in other countries to 
contemplate--harms the ordinary, decent Russian more than it does us.

   Russia has the biggest stake in getting its house in order.

    I must admit to some puzzlement about this focus on corruption in 
Russia right now. Corruption is always deplorable, anywhere that it 
occurs. But it is an ugly fact of life in many countries that we do 
business with every day.
    U.S. assistance to Russia has been carefully targeted at bringing 
about structural reforms that would be both deep and long-term. This 
assistance has included components on fighting both crime and 
corruption:

   Vice President Gore, in his semi-annual meetings with the 
        various Russian prime ministers, has worked vigorously to 
        promote rule of law in Russia.
   Topics of these meetings included: bilateral law enforcement 
        cooperation, law enforcement assistance, rule of law 
        assistance, anti-corruption assistance at the grassroots level, 
        ethics training, and dozens more programs.

    It is patently ridiculous, therefore, to say that this 
Administration has ignored these problems. On the contrary, this 
Administration has not only identified the problems, but has devoted 
time, funds, and personnel toward addressing them.
    So, what are the lessons to be drawn from our experiences in 
Russia?

   That there are problems? Of course there are problems. We 
        knew there would be.
   But there is tangible progress. It may be two steps forward 
        and one step backward. But there is progress.

    Should we disengage because of these problems?

   Certainly not. The world needs a stable, prosperous, 
        democratic Russia. There is simply no alternative to that.
   We, the other G-7 members, and other industrialized nations 
        must continue with our assistance programs, IMF loans and other 
        measures to cushion Russia's transition to democracy and free-
        market capitalism.

    Does this mean that we should not be careful of how we spend our 
assistance money there?
    No, of course not. If more controls are needed on U.S. assistance 
and IMF money, then let's put those controls into place.
    But under no circumstances can the West abandon Russia. Russia 
truly will be ``lost'' if we do that.

    The Chairman. Very good.
    Now, before we proceed, I want to call attention to the 
second panel, and I want them to be accorded adequate time to 
testify and to be questioned, but I am going to set the time 
for the first round, and maybe the only round of questioning, 
at 5 minutes.
    The second panel is Fritz Ermarth, the former CIA and NSC 
official, Jim Moody, the former Deputy Assistant Director of 
the Criminal Investigative Division of the FBI, and founder of 
Jim Moody and Associates, Mr. E. Wayne Merry, former State 
Department official and director of programs on the European 
Societies in Transition of the Atlantic Council of the United 
States, and Dr. Robert Legvold, professor of political science 
at Columbia University, New York.
    Now, bear in mind that, Mr. Talbott, at the last minute 
after the red light has come on, if you are asked a question, I 
want you to have time to answer it, but I do not want to run 
very far over 5 minutes per Senator.
    Now, my first question is: Was information known to the 
United States that former Prime Minister Viktor Chernomyrdin 
was involved in corruption or failed to use his power to stop 
corruption by Russian officials?
    Now, without divulging any classified material, I wonder if 
you can confirm whether the CIA did produce a memorandum on 
corruption by the Prime Minister of Russia, and did Vice 
President Gore, in fact, read and dismiss that CIA report?
    Secretary Talbott. Mr. Chairman, let me start----
    The Chairman. That is a mouthful, I know.
    Secretary Talbott. Sir?
    The Chairman. I said that is a mouthful of a question, but 
you may proceed.
    Secretary Talbott. Let me start by respectfully declining 
to comment on anything whatsoever to do with intelligence 
matters or the product of the intelligence community. I hope 
you will permit me that.
    In appropriate closed sessions we can, of course, go much 
further than we can in open session, and nothing whatsoever 
should be inferred about the specifics of the question that you 
raised from my inability to say anything about intelligence 
matters.
    Let me say that the issue of corruption has been very much 
on the agenda of U.S.-Russian relationships at all levels, 
including at the level of President Clinton and President 
Yeltsin, and certainly including at the level of Vice President 
Gore and former Prime Minister Chernomyrdin for quite a number 
of years.
    In fact, one of the many offshoots of the Gore-Chernomyrdin 
Commission, to which you referred in your opening comments, was 
a sub-group to deal with the problem of organized crime and 
corruption.
    We have been pursuing that issue directly with the Russians 
for quite a number of years. If and when either our 
intelligence community or our law enforcement community comes 
into possession of information with regard to specific 
individuals or specific cases, we make sure that the process is 
in place for those investigations to go forward, and we deal 
with the facts as they emerge, but the short answer is that 
with all Russian leaders we have been pushing the issue of 
corruption, and incidentally, a number of Russians have been 
quite eloquent themselves, including the Foreign Minister this 
week, on the harm that corruption has done to Russia.
    The Chairman. Sir, you agree with your colleague, 
Ambassador-at-Large Stephen Sestanovich, who testified on May 
20, 1998 before this committee regarding the IMF bail-out funds 
flowing into Russia, and we have that on the poster there 
somewhere.
    He said, ``What people did with those dollars, I do not 
know. I would not be a bit surprised if some of them went into 
Swiss banks, but it is what tends to happen when you have a run 
on the currency. People get their money out of Russian banks.''
    Now then, the IMF, as I understand it, puts its funds into 
the Russian central bank, is that correct?
    Secretary Talbott. Yes. That has been true in the past.
    The Chairman. If a Russian Government official subsequently 
steals money from the bank, is that a theft of IMF funds, in 
your judgment?
    Secretary Talbott. There are two issues here, of course. 
One is Russian law and the other is American law, and for that 
matter, laws governing the other contributing countries of the 
IMF. If there is a credible allegation that laws are broken, 
then the issue becomes a law enforcement matter, and we pursue 
it vigorously as such.
    With your permission, could I comment on two points that 
you just touched on----
    The Chairman. OK.
    Secretary Talbott [continuing]. And what you said? First of 
all, the IMF, with the, of course, vigorous participation of 
the Department of Treasury, has taken very seriously over the 
past year, well before these recent allegations hit the press, 
any suggestions, whatsoever, that there was misappropriation of 
IMF funds. For nearly a year after the August, 1998, financial 
crisis in Russia, IMF lending was suspended to Russia.
    In July, there was a new program, but the money for that 
program, which goes to partial financing of past IMF loans, 
does not go to Russia at all, it does not go to banks in 
Russia. It remains here, and simply moves within the IMF to 
cover that refinancing.
    Could I comment on the quoted statement of my friend and 
colleague----
    The Chairman. Sure.
    Secretary Talbott [continuing]. Steve Sestanovich here? I 
think it is----
    The Chairman. Go ahead.
    Senator Biden. Mr. Chairman, with your permission, I yield 
you my 5 minutes, and you continue, because I will get plenty 
of chances to ask him questions later.
    Secretary Talbott. Mr. Chairman, I thank you for providing 
the only setting in Washington where I can crash a red light. I 
appreciate that very much, and I will try to be brief.
    We have to distinguish between different forms of the 
problem here. What I think Steve was talking about was the 
issue of capital flight, that is, money getting out of Russia. 
That might be money that Russians have earned, and they may 
have earned it legitimately. It may also be money that foreign 
investors had put into Russia.
    One of the problems that Russia has coped with over the 
last--well, actually, inadequately coped with, is failing to 
develop a banking system, a set of tax laws, and an investment 
climate that will allow capital to remain in Russia. Not all of 
the capital that has left Russia, whether for Swiss bank 
accounts, or New York bank accounts, or real estate in the 
Riviera is necessarily laundered money, or ill-gotten gains.
    Part of our goal in our continuing engagement with Russia 
on these issues will be to get them to, for their own sake, 
improve the climate for investment in Russia, so that the money 
will stay there. So we should not assume that all of the money 
that we are talking about over here is necessarily symptomatic 
of corruption.
    The Chairman. Do you agree or disagree that IMF money has 
been subject to massive capital flight? Yes or no?
    Secretary Talbott. Well, first of all, money is fungible. 
There is no question that Russia has suffered generally from 
the problem of capital flight, being able to keep money of any 
kind in the country.
    An awful lot of it goes into mattresses, literally, in 
Russia, because Russians do not trust banks, and a lot of it 
has fled the country. As for the IMF money, the indications so 
far are that there is no evidence that IMF money, per se, has 
been misappropriated.
    The Chairman. There has been no flight of IMF funds, is 
that your answer?
    Secretary Talbott. Well, again, when money leaves, it hurts 
Russia.
    The Chairman. It is all right for you to say you do not 
know, but do not give me a convoluted answer to it.
    Secretary Talbott. Well, it is an attempt at just 
recognizing an economic reality, which is the fungibility of 
the money.
    The Chairman. What do you know about the assertion by the 
fired Russian Prosecutor General Yuriy Skuratov, reported in 
the press that $3.9 billion of the $4.8 billion IMF bail-out 
for Russia in 1998 never entered Russia? Do you deny that?
    Secretary Talbott. I certainly cannot vouch for that. Both 
the IMF external auditors, PricewaterhouseCoopers, in 
particular, the U.S. Government, are all seeking to establish 
the facts, and we will rely on the facts as our own agencies 
establish.
    The Chairman. You do not know. You say you do not know.
    Secretary Talbott. I say that I certainly cannot vouch for 
his assertions.
    The Chairman. Do you not believe that it was sent by the 
Russian Central Bank directly to commercial banks, bypassing 
the currency market, is that not a matter of fact?
    Secretary Talbott. I would really prefer to confine myself 
to what our own authorities have been able to establish.
    The Chairman. Well, is that the official answer of the 
administration? Is that all you know about it?
    Secretary Talbott. Well, let me--I think probably the best 
way to both do justice to your question and make use of our 
time is the following. You have put before me a specific 
allegation, and I will provide you promptly for the record our 
analysis of and reaction to his allegation.
    The Chairman. Very well. Senator.
    [The following response was received subsequent to the 
hearing:]

Response of Deputy Secretary Strobe Talbott to the Question of Senator 
                                 Helms

    Question. What do you know about the assertions of the fired 
Russian prosecutor general, Yuri Skuratov, reported in the press, that 
$3.9 billion of the $4.8 billion IMF bailout for Russia in 1998 never 
entered Russia? Do you deny that?

    Answer. IMF funds were handled in a manner reflecting standard 
operating procedures for U.S. dollar clearing operations--whether from 
Russia or any other country. When the Central Bank of Russia sells 
dollars in the Russian foreign exchange market, the actual transfer of 
dollars from seller to buyer takes place in U.S. dollar clearing 
accounts--all of which are located in the United States.
    The report by PricewaterhouseCoopers regarding the July 1998 IMF 
disbursement to Russia summarized the process which took place as 
follows:
    The Government of Russia informed the IMF on July 23 that it would 
like the IMF payment to be made in dollars and deposited in the Russian 
Central Bank's account at the New York Federal Reserve Bank. Some of 
the money was then invested in U.S. T-bills, while the remainder was 
transferred to the Central Bank's U.S. dollar clearing account at the 
Republic Bank of New York.
    Over the course of July and August, the Central Bank made trades in 
the Russian foreign exchange market. Most of these trades were directly 
with 30 or so large Russian banks, with the remainder conducted through 
domestic currency exchanges such as the Moscow Interbank Currency 
Exchange (MICEX). At the end of each trading day buying and selling 
transactions were netted out, and dollars were transferred between the 
Central Bank's dollar clearing account at Republic Bank of New York to 
the dollar clearing accounts of the Russian Banks that bought the 
dollars. True, the dollars never left the United States. This is normal 
financial practice.

    Senator Hagel. Mr. Chairman, thank you. Mr. Secretary, 
welcome. A little off the mark here, but I noted in your 
testimony the progress that we have made regarding nuclear 
weapons with the Russians. It may be ironic, but one of the 
most significant tangible measurements of the relationship we 
have with the Russians over the last 10 years after the 
implosion of the Soviet Union has actually been the military 
relationship.
    You note in here, Mr. Secretary, that now we are dealing 
with about 5,000 Russian nuclear weapons, and you say they are 
only in Russia now, and you further say none are targeted at 
us. Who are they targeted at?
    Secretary Talbott. Let me give you my best attempt at an 
answer on that, with the proviso that I would like to check 
with our technical experts to followup. I believe, in effect, 
they are simply not targeted. Whether that would be true of all 
of them, I do not know. Russia has other countries that it 
thinks about in terms of deterrence.
    Re-targeting a weapon takes a relatively short period of 
time. I believe that they are currently simply not targeted, 
and await re-targeting in a crisis of some kind, but I have 
some friends at the Pentagon I would like to check with on 
that.
    [The following response was received subsequent to the 
hearing:]

Response of Deputy Secretary Strobe Talbott to the Question of Senator 
                                 Hagel

    Question. The Administration has stated that no Russian nuclear 
weapons are targeted at the U.S. What are these weapons targeted at? 
How long would it take to re-target them against us?

    Answer. The detargeting initiative was a confidence-building 
measure that symbolizes the improved relationship between the U.S. and 
Russia. In this regard, it is one of a series of such measures adopted 
in the aftermath of the Cold War, including discontinuing strategic 
bomber ground alert and continuous airborne command post operations, 
and withdrawing and eliminating certain tactical nuclear weapons.
    For Russian ICBMs, detargeting means that the launch control system 
has been set with a zero or null set. Targeting data, however, could be 
reloaded in a missile's on-board computer if so ordered. Russian press 
reports have stated that Russian systems remain on alert and that in a 
matter of 15 minutes, at most, Russian ICBMs can be retargeted to their 
main targets.
    If a missile without targeting data loaded into its guidance system 
were to somehow be launched, it would almost immediately go into an 
uncontrolled flight and crash back to earth.

    Senator Hagel. If that is the case, is that not a little 
misleading to say that they are not targeted at us, when in a 
matter of seconds, they are retargeted, as you suggested.
    Secretary Talbott. I understand your point, but by the way, 
I am not sure if it is a matter of seconds, but it is not a 
matter----
    Senator Hagel. It is pretty fast, is it not?
    Secretary Talbott [continuing]. Of days.
    Senator Hagel. I think we give maybe the wrong impression, 
I have heard the President say this, too, like this is kind of 
a benign threat. They may have 5,000 nuclear warheads, they are 
not targeted at us, so, therefore, life is good. I think that 
does not accurately reflect the situation.
    Secretary Talbott. Well, let me, with respect, suggest 
another way of looking at it, while taking your point that the 
pure military significance of de-targeting may be at the 
margins.
    First, if you couple it with the other statistics that you 
referred to and that Senator Biden referred to in his opening 
statement, namely the overall reduction in levels of Russian 
strategic weaponry, it requires more significance. But the main 
point here is political, and that is that the United States and 
Russia do not now regard each other as enemies in the way that 
they did during the cold war.
    So I think if you look at it in that context, it has 
significance, but I would not--I take your point, we should not 
overstate the military significance of de-targeting.
    Senator Hagel. Thank you. Now, on to the subject at hand. 
In light of the present revelations concerning corruption and 
other problems, this is an imperfect world, but obviously, 
reality dominates here. This being the last year of the Clinton 
administration, you look at the FREEDOM Support Act, and other 
programs that the United States has with the Russian 
Government, Russian people, in light of these revelations. What 
changes is the administration intending to make, anticipating 
to make, or will make, or are making, to try and focus this 
assistance, paid for by the American taxpayer, in areas where 
we have some more reasonable assurance that this money is doing 
what we intended it to do?
    Secretary Talbott. Well, let me, if I could, divide the 
question into two parts. First, as I hope I have already 
indicated, and want to reiterate, we learn from experience as 
we go along.
    We have certainly learned from the experience of the past 
year, since August 1998, and every time we either see ourselves 
an opportunity to tighten up the controls, the stringencies, 
the protections, particularly when it comes to international 
financial institutions, and what they do, we do that. We 
institute those changes.
    Secretary Summers, in testifying on the House side earlier 
this week, detailed some of those measures that the Treasury 
and the IMF are undertaking.
    With regard to our bilateral assistance, as I think Senator 
Biden alluded to, our bilateral assistance, by and large, does 
not put money into Russian pockets or into the Russian treasury 
or banks. Most of our bilateral assistance is much more in the 
area of technical assistance, know-how, and that kind of thing, 
but the program you referred to, the FREEDOM Support Act, gives 
us numerous ways to help the Russians deal with the problems of 
crime and corruption through our grassroots organizations, 
better banking laws.
    Since my time is out, I will just sort of point over my 
shoulder to our colleagues from the Russian Parliament as the 
bearers to the ultimate answer to your question.
    The real answer to Russian crime and corruption is for the 
Russian people to elect legislatures who will pass laws and 
establish enforcement mechanisms that will get a grip on the 
problem.
    Senator Hagel. Mr. Chairman, thank you.
    Mr. Secretary, thank you.
    The Chairman. Senator Kerry.
    Senator Kerry. Thank you, Mr. Chairman.
    Mr. Secretary, welcome. We are glad to have you here today.
    Secretary Talbott. Thank you, Senator.
    Senator Kerry. Mr. Chairman, on the subject of money 
laundering and international crime, thanks to this committee 
and to your indulgence Mr. Chairman, and at other times with 
Senator Lugar and Senator Pell, I have had a chance to really 
be involved in this issue for a long time, and I know it is 
always very dangerous to use one's self as a reference, but 
notwithstanding, I wrote a book 2 years ago called ``The New 
War,'' in which I dedicated a chapter to the subject of Russia, 
and I called it ``The Hijacking of the Russian Bear.''
    I just want to read one thing to you, to share with you 
sort of a sense of what already was happening 2 years ago, and 
then I want to ask the Secretary, because I do not think there 
is a better expert on Russia in our country than the Secretary 
to perhaps comment on it.
    I wrote 2 years ago that ``What is happening in Russia 
today is more than simple frontier-style robbery,'' referring 
to what George Soros had talked about as a period of robber-
baron, capitalist transition.
    ``It is the hijacking of the nation's entire economy by 
increasingly organized criminal groups through systematic 
racketeering, murder, fraud, auto theft, assault, drug 
distribution, trafficking, and weapons, and radioactive 
material, prostitution, smuggling, extortion, embezzlement, and 
the infiltration and purchase of Russian banks.
    ``Russia's criminal class has evolved from the black 
marketeers, minor thugs, and fixers that existed at the fringe 
of the old Soviet state, into the sophisticated power brokers 
and money men who are pushing the one vast and powerful empire 
into wholesale criminality and corruption. Russians describe 
the current period as a `smuta,' or time of troubles, a chaotic 
interregnum like that of the early 17th and 20th centuries, 
when anarchy ended only with the establishment of yet another 
autocracy. Russia is going through a revolution, a depression, 
and a gold rush simultaneously. Everything is up for grabs, and 
might makes right.''
    I might add to that, Mr. Chairman, that at the time, I 
quoted Mr. Yeltsin, who acknowledged publicly that the Mafia is 
the single greatest threat to the survival of Russian 
democracy, at a statement that was underscored by the 1994 
Mafia contract killing of Dmitri Kolodoff, the investigative 
reporter, who was looking at what was happening in Moscow at 
the time.
    But then I also said, and I want the Secretary to comment 
on this, I said, ``A brief glance into Russia's past shows the 
current criminal chaos was a long-time in the making.''
    The fact is that when all of the barriers fell down with 
the fall of the Berlin Wall and the transition, there was this 
enormous rush into capitalism, a free market system, with no 
controls, no capacity, and no understanding, no regulation at 
all, and it was only in 1994 that we got an FBI office finally 
into Moscow.
    I would ask the Secretary, given his superior knowledge of 
the transitional processes of life under the first 70 years of 
communism, but even prior to that, under the czar, whether or 
not we are not going through a process of evolution. Do you 
believe that the debate about losing Russia is entirely 
inappropriate, the debate about how we get at the elicit 
transfer of our tax money, or how we further regulate and 
cooperate, and put in place their capacity to survive as a 
democracy, is the real debate, and is that where we ought to be 
focusing our attention?
    I wonder, Mr. Secretary, would you comment on the 
historical background, realities, life in Russia, how we ought 
to be looking at it from our national interests.
    Secretary Talbott. Senator, I had, before coming up here, 
hoped very much that nobody would use the phrase, ``we lost 
Russia,'' and I certainly vowed not to use it myself, and I am 
now--you and Senator Biden have both used the phrase, and I 
read the book. I read the book.
    Senator Kerry. In a very different context.
    Secretary Talbott. The following is the best line I have 
heard, which I hope I can just get onto the record quickly, and 
then respond to one or two other things that Senator Kerry 
said.
    Jim Collins, our very fine Ambassador in Moscow, likes to 
say, ``Who lost Russia? The Communists lost Russia.''
    Now, what he means by that is the Communist Party of the 
Soviet Union. They lost the Soviet Union, and the process that 
the Russian people have put in place, including the one 
represented by the parliamentarians here, is really a matter 
about the Russian people getting their country back.
    Now, the essence of what the Senator said is that it is a 
very messy process, even dangerous, and sometimes bloody, but 
the only quarrel I have with your overall depiction in the 
passage that you read is that it is very bleak.
    It does not take account that amidst all of those clouds 
there is some sunlight, including the sunlight that is the best 
disinfectant for the problem of corruption. You referred to 
investigative reporters. The Russian press is very lively, and 
vigorous, and aggressive now.
    The Russian Parliament, anybody can get up and say 
anything, including shaking his fist at the President of the 
country. The election process is ongoing. That is where the 
hope is.
    The Chairman. Thank you, sir.
    Senator Smith.
    Senator Smith. Thank you, Mr. Chairman.
    Mr. Secretary, we welcome you to this committee.
    I think it was Senator Biden, who said Russia is not ours 
to lose, and I agree with that. But U.S. tax dollars are ours 
to lose, and I suspect that we are losing them. And what I most 
want to know is when we are going to stop losing them. And I do 
not know that you have a date certain where you can tell us 
that.
    But I--I am an author, along with Senator Sarbanes, of a 
letter to President Clinton asking him to be tough with the 
Congress in negotiations on the budget to try to increase the 
150 account.
    It is not a politically popular position to take in this 
body to be for foreign aid spending, but I know that the State 
Department, frankly, very much cares about our succeeding in 
increasing that budget beyond what the appropriators have 
allocated.
    But I have to say if a further distribution goes out, I 
believe it is the end of September from the IMF to Russia--and 
the public generally does not get the distinctions of these 
various columns of accounts.
    And I believe that the State Department is playing with its 
own future when we see stories where money never gets to 
Russia, but just simply is funneled off in some corrupting 
scheme.
    So I do not know whether--what Senator Sarbanes and I have 
done is wise or not, but I do want to say on the record that I 
think that the--the State Department's ability to get more out 
of this Congress depends on what happens in Russia.
    I wonder if you have a comment on that.
    Secretary Talbott. I do indeed. And my first comment is on 
behalf of Secretary Albright, very personally, I would like to 
thank you and Senator Sarbanes for your support for increasing 
the foreign affairs account of the budget.
    And I think it is a very sound position indeed and one that 
can be argued from the standpoint of the national interest, 
which she has done on numerous occasions.
    I also totally agree, Senator, with the proposition that we 
who bear responsibility, both for the formulation and the 
implementation of policy owe it to you and, through you, to the 
American people to provide accountability for the funds.
    As we have discussed earlier in this hearing, with regard 
to the funds that have been used for macroeconomic 
stabilization, support of Russia in the past, there is no new 
money going to Russia under the current IMF program.
    It is--the phrase that the Treasury uses is that it is 
involved in a lockup, which means that it is here in Washington 
to help with this refinancing.
    Larry Summers, earlier this week, detailed additional 
protections that will be put in place to govern any future 
programs, with regard to what is actually under the--part of 
the function 150 account, and that is the FREEDOM Support Act.
    I think that we can come up here and meet with you and your 
colleagues at any time and argue two points very convincingly: 
No. 1, that we have maintained the highest degree of 
accountability and protection for the money itself. And second, 
a lot of those programs are helping the Russians to deal with 
this problem.
    Senator Smith. Well, I just--I would say in an open mike to 
everybody at the State Department, I wish you could come with 
me to any town hall that I hold in Oregon, and you would find 
invariably that somebody mentions foreign aid as a waste of 
money.
    I try to describe it as waging peace, not waging war, but I 
do say it is in the interest of the State Department, the 150 
account to--to shepherd this money in a way that does not end 
up in the headlines we see in newspapers right now.
    Let me--looking backward with the remaining time--perhaps 
one more question. I have a question about a Pavel Lazarenko, 
and wonder if before he was detained at--at the Kennedy 
Airport, he had met with President Clinton prior to that. He 
was detained for corruption. What did the administration know 
of his corruption?
    I have a question about Anthony--Anatoliy Chubais. Did 
the--was he--is he corrupt? What has happened with him? What 
does the administration know of his dealings?
    And finally what does the administration know about payoffs 
benefiting Boris Yeltsin and his family? I am specifically 
referring to credit card accounts provided to Yeltsin and his 
two daughters by a Swiss construction company, and I also 
wonder about a Yeltsin son-in-law, Leonid D'Yachenks and a--and 
an apparent money laundering scheme involving the Bank of New 
York, which has been documented recently in the Washington 
Post.
    What does the administration know of these things and have 
we been complicit in any way in these things? I think the 
public really needs to know.
    The Chairman. Right. The Chair is going to let the witness 
answer the question, but I warn at the outset not to start a 
question at--when the yellow light is on.
    But go ahead and answer the question, because it is a good 
question.
    Secretary Talbott. Thank you, Mr. Chairman. I hope you and 
Senator Smith will understand that I am really constrained from 
commenting on specific allegations, particularly about 
individuals, especially when their--the integrity and 
confidentiality of our own investigative processes are 
involved.
    And for the second time in this hearing, I would ask that 
nobody infer from that any comment whatsoever on the 
individuals that you have mentioned.
    Now, if--if I am--if I understood you correctly, the first 
gentleman you mentioned, Mr. Lazarenko, is a former prime 
minister----
    Senator Smith. Correct.
    Secretary Talbott [continuing]. Of Ukraine.
    Senator Smith. Correct.
    Secretary Talbott. Mr. Chubais has held various positions 
in the Russian Government.
    Senator Smith. Correct.
    Secretary Talbott. A number of us, including the President 
in some cases, have had dealings with these gentlemen. I 
certainly met with Chubais numerous times in recent years in 
their official capacities.
    And I can put it this way succinctly, we have been doing 
the Nation's business with them, which is to say developing 
U.S./Russian relations in a way that would serve the American--
the American people. That goes for all of the ones that you 
mentioned.
    That said, our investigative agencies and other agencies 
that are in the business of establishing facts, particularly 
where criminal law is concerned, do their work; and when their 
work produces something that either merits public attention or 
bears on the foreign policy of the United States, they tell us 
at the State Department. We react accordingly.
    The Chairman. Good. Thank you.
    Senator Wellstone.
    Senator Wellstone. Thank you, Mr. Chairman.
    First of all, Mr. Secretary, I am glad you are here. 
Welcome.
    Second of all, on a personal note, I have said it to you 
before, you know, my father grew up in czarist Russia. His--he 
fled the Communists, never could go back. I think probably 
Stalin murdered his family.
    And I think for personal reasons and, more importantly, for 
reasons having to do with our country, I think what happens in 
Russia will crucially affect the quality of our lives and our 
children and our grandchildren's lives, so I am in complete 
agreement with your focus on engagement and I think it is very 
short-sighted to be cutting the FREEDOM Support Act budget. I 
think it would be a big mistake.
    I have two pointed--rather, two pointed questions for you. 
One of them, the New York Times--I do not think we have gone 
over this--just reading from the New York Times, September 8, 
first paragraph, ``The Clinton Administration learned of the 
Federal investigation into allegations of Russian money 
laundering at the Bank of New York 5 months earlier than it 
previously acknowledged, senior Administration officials said 
today.''
    Then they go on and say, ``Then Treasury Secretary Robert 
Rubin''--this is not in the spirit of bashing. I just want to 
try to get an answer to the question--``and Deputy Treasury 
Secretary Larry Summers both knew about the investigation 
before our Government approved a $640 million installment of 
loans to Russia in July.''
    And my question is: Are--are you concerned that--that the 
administration may have concealed what it knew about the 
investigation? Could this have been----
    Secretary Talbott. May I--I'm sorry. Just----
    Senator Wellstone. Are you concerned that the 
administration may have concealed what it knew about the 
investigation? Could this have been done to avoid having to 
answer questions about approving the loan without considering 
money laundering as an issue? And should not money laundering 
at least have been a consideration in deciding whether or not 
to approve the loan?
    Secretary Talbott. I understand your question.
    I believe, on the basis of some knowledge of the facts 
here, that the administration--and that means both the State 
Department and the Treasury Department--handled this very 
delicate matter absolutely appropriately.
    Senator Wellstone. Yes.
    Secretary Talbott. As so often is the case in government, 
one has to strike a balance between various considerations, and 
objectives and principles.
    There is a very important principle operating in our 
Government, which is the sanctity of the grand jury process. 
And whenever information is at play, as it were, in an ongoing 
judicial process of that kind, all officials who know about it 
are very constrained in what they can do about it.
    Now, the facts here were the following: It is true that--
that what I would call the upper middle levels of the State 
Department, somebody did find out about the fact that there was 
a judicial inquiry or a criminal inquiry elsewhere in the 
United States having to do with the Bank of New York.
    That individual and the State Department did exactly what 
the book requires. They made sure that the Justice Department 
was aware of this.
    And the procedure here is that the Justice Department will 
then brief the State Department at an appropriate level when 
the facts and the case are developed to the point where they 
are felt to have some kind of foreign policy relevance. And 
that happened in August, and I was part of that briefing.
    So the--we originally--we, the Department, originally found 
out about the Bank of New York case in the spring. It was 
briefed to me, Ambassador Sestanovich and some others, a few 
weeks ago in August.
    Now, how would this have affected our posture with regard 
to money laundering? First of all, we were already pushing, as 
we felt effective and appropriate, our Russian partners and 
colleagues to put in place a money laundering law.
    In fact, that is one of the themes that Vice President Gore 
had been developing in his work with Prime Minister 
Chernomyrdin. And, in fact, the Duma did pass a money 
laundering law, and the Yeltsin administration vetoed it. We 
were critical of that decision.
    Senator Wellstone. Mr. Secretary, what I was really asking 
was how it--how it affected our posture vis-a-vis the granting 
of the loan, knowing about this. Should it not have been more 
of a consideration?
    Secretary Talbott. The loan you referred to--the loan that 
would have been in the timeframe here would have been the loan 
in July, the IMF loan in July, which is covered by this--this 
lockout provision that I referred to earlier--lockup, excuse 
me. Lockout is something else. That is, protecting the money so 
that it remains in a closed circuit within the IMF.
    So I--you would have to ask Treasury. Secretary Summers did 
address this case in some detail earlier in the week, but my 
impression is that it would not have had any effect on that.
    Senator Wellstone. OK. Thank you.
    Secretary Talbott. But what it does underscore is the need 
for us to keep pressing, and I hope the issue will come up when 
you meet later with the Russian Parliamentarians, the 
importance of Russia having a money laundering law.
    Senator Wellstone. Yes, absolutely.
    The Chairman. Mr. Secretary, it was nice of you to come up, 
and you are an old hand at this. I think you kind of enjoy 
sparring with Senators.
    Bear in mind that a lot of Senators are absent today who 
would be here if they were not tied up on appropriations 
conference reports and that sort of thing.
    But we thank you for being here, but I hope it is not too 
much to ask that I allow Senators who are not here, and 
Senators who are here, to file additional written questions 
with you, and you would expedite your answers to us. Would you 
do that?
    Secretary Talbott. I will.
    A question--could I say, Mr. Chairman, in addition to 
thanking you for the chance to be up here that I know several 
of the individuals on the next panel.
    I have profited from my association with them. In Bob 
Legvold's case, as a long-time mentor of mine; and in the 
others, as--as colleagues. And I will study very closely the 
proceedings that are about to follow.
    The Chairman. Very good. I do not like for the second panel 
to be postscripts. And these are, as you say, very talented, 
interesting individuals.
    Thank you, sir, for coming. And thank you for bringing Mrs. 
Talbott with you.
    Secretary Talbott. Thank you, Mr. Chairman.
    The Chairman. The second panel will assume their positions.
    Let me say at the outset that the committee thanks you so 
sincerely for being here this afternoon.
    As I said, I am trying to get away from this thing where 
distinguished witnesses, like yourselves, amount to postscripts 
and I want the media to hear you, too.
    So that is the reason I was sort of expediting and if I 
might suggest we are going to print in the record your entire 
remarks. And to the extent that you feel inclined to do so, let 
us move it along so we could have some back and forth with the 
members of the committee.
    Mr. Ermarth, you may begin.

   STATEMENT OF FRITZ W. ERMARTH, FORMER CIA AND NSC OFFICIAL

    Mr. Ermarth. Thank you, Mr. Chairman. I am deeply grateful 
to you, sir, and to the committee for this opportunity to speak 
on an agenda so important to our Nation and to--to Russia.
    You have my written testimony. I will confine my remarks to 
a handful of short but, I think, very important points----
    The Chairman. Very well.
    Mr. Ermarth [continuing]. Which I think represent a 
foundation of the critique of people like me and others who 
have been critical of our administration.
    It is true, first, the roots of Russian crime and 
corruption go way back in--in Soviet--in the Soviet past. This 
applies especially to the lack of the rule of law. It is 
particularly important to understand that the plundering and 
capital flight we have been talking about, characteristic of 
today's Russian economy, were really initiated by the Communist 
leadership and the KGB back in the late eighties. That is where 
the short gentleman standing with Mr. Clinton--with President 
Clinton got his start.
    That is not, however, an excuse for wrong-headed policies 
on the part of Russia subsequent to the collapse of communism 
or on our part.
    Second, what we have called economic reform in Russia has 
not created market economy or capitalism as most hoped. Rather, 
it--it created what I would call crony capitalism, without 
capitalism.
    Insider privatization in alliance with corrupt officialdom 
has produced a system dominated by a very few powerful 
individuals and entities who strip wealth out of the country, 
and send it abroad, rather than investing to create wealth and 
prosperity at home.
    The result has been impoverishment and profound 
instability. And now a battle royale is going on among the 
stakeholders in this system for the control of the Kremlin and 
the Presidential succession.
    So what we are talking about is more authorized crime than 
organized crime--official crime than organized crime.
    But organized crime is there. And it interacts with this 
plundering system as both a beneficiary and as a facilitator, 
through such activities as protection racketeering and money 
laundering.
    Now, these realities have been completely visible from the 
start, although the administration has not been saying so until 
in the last few weeks. They have been amply reported by a host 
of Russian and Western observers.
    No failings of American intelligence can be blamed for any 
failure to see these realities. There were some failings, and 
they need to be corrected.
    The historic failing of American policy, however, in this 
period was that it gave support too uncritically for too long 
to this phony crony capitalism in Russia. It did so 
rhetorically, politically and financially, chiefly through the 
IMF.
    The result has been that prospects for true economic reform 
in Russia have been made in many ways more difficult than they 
were initially. And worst of all, we have lost much respect and 
admiration among the Russian people, as have the very ideas of 
democracy and capitalism.
    This in no way ignores what has been achieved under the 
Nunn-Lugar program, for example. But I believe Secretary 
Talbott misrepresented that balance sheet somewhat. And I would 
be happy to respond to questions on that, if you wish.
    The problem with the IMF has been more perversion of 
funds--perversion of funds than diversion of funds. Rather than 
encouraging the stabilization and growth of the Russian 
economy, it has served to legitimize the extraction of wealth, 
the plundering.
    But there does seem to have been something that sure looks 
like diversion to me in the summer of 1998. And that is what 
Prosecutor General Skuratov was talking about.
    Now, why the administration pursued the policies it did for 
so long in the face of these realities is still not entirely 
clear, because its belated explanations I do not find terribly 
persuasive.
    There were alternative strategies and tactics for reform 
available to the Russian regime, which we could have supported 
more honestly and effectively.
    That our national security objectives required us to 
support the--the Yeltsin regime and its policies so 
uncritically is hardly persuasive, because our security 
interests in Russia are arguably in worse shape now and face a 
more problematic future than the very positive and very 
optimistic atmosphere that existed in 1992 and 1993.
    The influx of vast sums of Russian money into our economy 
during this period, probably amounting to hundreds of billions 
of dollars, poses serious questions for law enforcement, for 
banking regulation and so forth.
    Now, whether that money was stolen by crime or just by 
corrupt businesses, laundered or just deposited, it inevitably 
created American stakeholders in the process that brought it--
brought it here.
    Whether such American stakeholding in this phony crony 
capitalism and the capital flight it produced exerted an 
influence on U.S. policies that helps explain the otherwise not 
easily explainable, and thereby abetted the process, is a valid 
question for this committee.
    Finally, Russia is not lost. It is stuck. It is stuck in a 
swamp between a Soviet past and alternative future 
possibilities, which range from the bright and friendly to the 
dismal and threatening, from our point of view and from their 
point of view.
    Our task here is to assay the past, reassess our policies, 
and get ready for the possibility that a window of real reform 
in Russia will reopen if and after they get through their 
impending elections.
    At the very least, we must quit repeating past errors. 
There are better paths available to the Russians and for our 
policy.
    If this committee can illuminate them, I--as I understand 
it intends to do in future hearings, Russia and America will 
both be grateful to you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, sir.
    [The prepared statement of Mr. Ermarth follows:]

               Prepared Statement of Fritz W. Ermarth \1\
---------------------------------------------------------------------------

    \1\ This prepared testimony is a significantly amended version of 
that provided by the author to the hearing of the House Committee on 
Banking and Financial Services on 21 September.
---------------------------------------------------------------------------
    Mr. Chairman, I deeply appreciate the opportunity to testify before 
this committee on Russian corruption and the challenge it poses to US 
foreign policy.
    I would like to focus my testimony on the larger context of Russian 
developments that have spawned this challenge. This is because we must 
keep the most important issue in the forefront, namely, the fate of the 
political and economic reforms within Russia upon which more than 
anything else rest our security interests with respect to Russia.
    We must consider how our country's future security and well-being 
will be threatened if, once again, Russia fails in the historic task of 
finding her way to authentic, stable democracy and a just, prosperous 
society with a market economy.
    My bottom line is this: Russia is not lost. Russia is stuck in a 
swamp between the Soviet past and several alternative future 
possibilities, some invitingly bright, some ominously dark. The larger 
purpose of these hearings, in this and other committees, and of the 
debate now, finally, taking place in our political arena about Russia, 
is to understand her condition and prospects better and to inform 
better American policies for encouraging the brighter prospects of 
democracy and capitalism.
    The threat from Russian crime and corruption springs from two 
fundamental and interrelated realities: first, the grave weakness of 
the rule of law in Russia, and second, the perversions of what we have 
called economic reform.
    The Soviet communist system was itself a kind of structured 
lawlessness. To be sure, the Soviet Union had myriad laws. But they 
were not rules for regulating relations among the members of a self-
governing society. Rather they were tools for maintaining power, to be 
used, abused or ignored by those who held power. They afforded ample 
space for official and unofficial criminality. In the later Soviet 
period, the manifestations of this--ranging from petty thievery, to 
organized crime, to enrichment of the partocracy--expanded as the 
structures of Soviet power decayed. The collapse of communist rule gave 
free rein to these phenomena in a new setting.
    The new setting is something for which I have not found a good 
definition. It has important features of democracy and capitalism, but 
it is not authentic democracy and capitalism. Focusing on the economic 
side, I would use the term crony capitalism without much capitalism. It 
lacks firm property rights and good corporate governance. It is about 
the distribution and especially concentration of wealth, but far less 
about investment and the creation of wealth. And, above all, it is 
about the extraction and expatriation of wealth.
    This came about in large measure because of the manner in which the 
reformers of the post communist regime tried to create capitalism 
amidst the wreckage of the Soviet order. As one analyst I've read put 
it, they proceeded in good communist fashion to create a new capitalist 
class by basically appointing them. Relying largely on privileged, 
insider relationships, vast resources and enterprises were placed into 
private hands, often old communist hands, at less than fire-sale 
prices. Enterprises were sold off at less than cash value of annual 
revenues in some cases. Export and import privileges were handed out to 
cronies.
    Thus, the process of privatization was from the outset a rip-off at 
the expense of the state and society. This, along with the destruction 
of people's savings through gratuitous inflation in the early 1990s, 
deeply blighted the public's view of capitalism from the outset. The 
reformers took a course certain to alienate society; and they 
deliberately ignored the task of building public understanding and 
support.
    It still might have worked out had the new owners proceeded to 
manage their new wealth as real capitalist entrepreneurs by investing, 
building, and creating. Far too often, however, they did not. Lacking 
confidence that their new wealth could be profitably invested in Russia 
or even that they could hold on to it, they all too often extracted it, 
stripped it, plundered it out of Russia and sent it abroad where it 
could be safe and productive. In this manner a country rich in natural 
resources and productive potential saw its state and society 
impoverished. The society and domestic economy reacted with various 
coping strategies, from barter trade to moonlighting work. The state 
reacted with measures that went beyond very creative financing, like 
simply not paying its bills. Among other things, it created what 
appeared to be a no-lose casino in short term debt by which Russian and 
then foreign speculators essentially were allowed to plunder the state 
budget until it collapsed in August 1998.
    What we've seen here is not so much organized crime as authorized 
crime intertwined with corrupt government and politics at all levels. 
And it has abetted and been abetted by organized crime with its money 
laundering skills and protection racketeering.
    The fundamental misdemeanor of Western, including American, policy 
was that it bought into this phony-crony capitalism too uncritically 
and for too long. So did the mainstream media, and the mainstream 
foreign policy establishment. The protests of Russian and Western 
observers who knew what was going on went unheeded.
    Let it be noted here that the kleptocratic or plundering nature of 
Russian so-called reform was obvious from the start. You did not need 
exotic CIA analysis to see or understand it. It was lavishly reported 
in the Russian press. Moreover, you did not need to read Russian. There 
was plenty of English language analysis out of Russia and from Western 
analysts. And you did not need a lot of time: Anyone who cared about 
Russia and was willing to take one half hour a day could get the whole 
story from Johnson's Russia List, an heroic one-man compilation of 
daily reporting by David Johnson of the Center For Defense Information, 
a source known to all Russia watchers.
    One of the sad consequences of US policy, so persistent in the face 
of reality that one has to suspect intent, was that IMF lending, while 
ostensibly aiming to stabilize the economy and encourage investment, 
actually lubricated and legitimized this process of stripping and 
expatriation of wealth. It was more perversion than diversion of IMF 
money. This perversion of the IMF into a cover for Russian kleptocracy 
was hugely injurious to Russia and to our interests. It raises 
questions as to whether the IMF should be the central institution for 
financial aid to the transition economies in Russia and the rest of the 
former Soviet Union.
    Defenders of current US policy have not even addressed this charge 
of perversion of the IMF directly. As to the charge of diversion, they 
are basically saying, ``We did no wrong and we are not going to do it 
again.'' In other words, they are saying diversion has not been proved, 
but new IMF lending will not go to the Russian central bank but rather 
from one IMF account to another to service Russian debt.
    Perhaps not proved conclusively, the charge of diversion is very 
compelling with respect to events of summer 1998. Anatoly Chubais, the 
leader of Russia's dream team of reformers, has said ``we conned'' (my 
kinuli) the IMF into that round of lending to support the ruble and 
crisis ridden Russian financial markets. The IMF lent the Russian 
Central Bank some $4B for that purpose. The IMF bought rubles in the 
Russian market with those dollars, and the dollars immediately escaped 
to the West, in fact never really left the West. This was widely 
reported in the Russian press at the time, in some Western reporting as 
well. And now the embattled former Russian prosecutor, Mr. Skuratov, 
undoubtedly relying on investigative data fully accessible by him, has 
described what happened. The Russian Central Bank used at least $3B to 
buy rubles, not from the Interbank Currency Exchange, but directly from 
Russia's most active kleptocrats, its so-called commercial banks. They 
immediately deposited the dollars in Western correspondent accounts. 
What is diversion if not this?
    Why have American policymakers bought into this plundering system 
so uncritically? Perhaps we shall have to await their departure from 
office for candid answers to this question. To date, their explanations 
have been most unsatisfactory. They claim to have known about Russian 
crime and corruption all along. This is true; but then why the 
persistent support for and misrepresentation of this system? They claim 
that they have always known the development of Russian democracy and 
capitalism would take a long time. This is also true; but then why 
support a system that in many ways makes successful development of 
Russian democracy and capitalism even more difficult than it was at the 
beginning? They claim they had no better alternatives. This is NOT 
true; they had the alternative of honesty about what was happening. And 
the Russia regime had alternatives to what they did--among others, the 
democratic opposition was offering them--and they were open to Western 
recommendations because they needed Western money. Finally, the 
defenders of American policy claim that we had to give the Yeltsin 
regime the support we did because your security interests on such 
matters as arms control, proliferation, and the Balkans demanded the 
support of that regime. Yet our security relations with Russia are in 
worse shape today than they were at the beginning of the current 
administration. And worst of all, we have lost the respect and 
admiration of much of the Russian people.
    I cannot adequately explain the motives behind the policies we have 
seen except as a toxic combination of political and economic naivete, a 
cynical belief that a continual misrepresentation of Russian realities 
could be sold to most audiences, and a certain amount of selfishness on 
the part of influential American stakeholders in the great outflow of 
Russian wealth.
    If one includes the period of the late 1980s, when much of this 
activity accelerated under the aegis of the KGB and the communist 
leadership, one might guess that from 200 to 500 billion dollars have 
left Russia in what is very loosely called capital flight. Some of it 
is derived from plain crime, like drug traffic, stolen cars and 
weapons. Some it is entirely legitimate except for tax evasion. I 
strongly believe that most of it is in the gray zone in between, that 
is, the product of phony-crony capitalism. Some of it gets laundered 
because its owners need to disguise its origins to all observers. But a 
lot of it just gets deposited and invested. And not much of it stays in 
Cyprus or other tax havens. Much of it, probably most of it, has come 
into the biggest, safest, most accessible, and profitable investment 
target in the world, the United States.
    Here it undoubtedly goes in several directions. Some stays liquid 
for future use. Some returns to Russia for business, political, or 
criminal purposes. Some gets invested in portfolios, real estate, and 
business. And I am sure that some of it goes to political contributions 
of various kinds. Why can I permit myself this seemingly inflammatory 
statement? First, because of the logic of the situation; that's normal 
behavior for this kind of money. And I am sure it is quite bipartisan, 
because this kind of money doesn't care about the values, the issues, 
the candidates or the parties. It cares about influence. Second, 
because there have been some examples in the press. And, third, because 
knowledgeable FBI specialists in this area have said so. This is, I 
believe, a proper subject for the investigations of the Congress.
    I would assign greater weight, however, to a more general problem. 
Money on this scale acquires patrons, protectors, and leverage. How 
much leverage and with what effects on government policies? I would ask 
for example: Did those Americans heavily invested in the Russian GKO 
market, by which vast profits were extracted from the Russian budget 
and vast losses risked, exert influence on the US Government to 
encourage more IMF lending last summer? Mr. Soros and others have 
strongly implied so.
    Mr. Chairman, let me state that the picture I have painted so far 
is unfair. There is real capitalism and real democracy in Russia. There 
are decent businesses, honest policemen, and clean politicians. Which 
returns me to my first point. Russia is stuck, not lost. If the 
Russians can somehow get through the current crisis of terrorism, 
conduct their elections, and create a somewhat stable and legitimate 
government, I believe there is a possibility that a window for real 
reforms will reopen. I hope then we shall be ready to be supportive 
with policies more perceptive, more honest, and more constructive than 
they have been in the past. At least we must avoid repetition of past 
errors. That I see as the most important purpose of our inquiry here. 
Thank you, Mr. Chairman.

    The Chairman. Mr. Moody.

 STATEMENT OF JIM E. MOODY, FORMER DEPUTY ASSISTANT DIRECTOR, 
      CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BUREAU OF 
 INVESTIGATION; AND FOUNDER OF JIM MOODY AND ASSOCIATES, L.L.C.

    Mr. Moody. Thank you very much, Mr. Chairman. I would like 
to thank you and the committee for having me here.
    The Chairman. It is our pleasure. Thank you.
    Mr. Moody. As for my statement, I will be pleased that you 
will accept that. I will even cut down the one I have just to 
make sure that everybody gets a lot more time.
    I am not a Russian scholar. I am a law enforcement 
practitioner, retired. But I started dealing with the Russians 
in October 1990; and from day one I found out that corruption 
was one of the major problems that they were facing, corruption 
and organized crime.
    I will give you an example. During one of my trips, in the 
early morning hours--and it must have been 3 or 4 o'clock in 
the morning--a high ranking Russian official brought seven 
officers in to meet me, so we could talk a little bit, and he 
wanted me to meet people in Russia that were not corrupt.
    On another trip, I met a high-ranking officer and he 
estimated that 90 percent of his officers were corrupt, which 
is a monumental problem to address.
    But almost always when they talk about corruption over 
there, they say the court system is worse, and based upon----
    The Chairman. Pull the mike a little closer.
    Mr. Moody. OK. And based upon their system, it is very 
possible that the court system is worse, because their system 
is similar to Napoleonic code where you only have to bribe, 
threaten, or intimidate one individual and it will stop a case.
    When--whenever you start looking at this and start 
establishing a relationship with them, I think there is a 
number of steps that has been taken that have been very 
positive.
    One is the PDD42, addressing international organized crime. 
Another one is the FBI office in Moscow, which is the point for 
coordinating of investigations.
    A third one was the relationship that the G-8 countries 
have gotten together and started addressing law enforcement 
issues, the fact that law enforcement issues are now an agenda 
item on diplomatic meetings, the fact that the financial action 
task force is taking a lead on addressing money laundering 
internationally, and the money that has been allocated by 
Congress for training, including FBI training, other agencies' 
training in the former Soviet Union and the establishment of 
the International Law Enforcement Academy in Budapest.
    I also believe that the fact that Congress amended some of 
the legislation that--that allows the intelligence communities 
to produce assistance to United States law enforcement agencies 
is very important.
    Now, there were--when you start looking at the problem as 
you sit now, Senator Kerry aptly described what happened a few 
years ago, but I would say today that has been raised to a 
little bit higher plane, in that you have not just strictly the 
former black marketeers involved. You have high-level party and 
government officials that are literally plundering the country.
    So what is the long-term effect to us here in the United 
States? You--you--you always worry about Russia reverting back 
to what it was. I do not think that will ever occur.
    But what we will see in the United States--we will continue 
to see significant criminal activity carried out by 
individuals, both here in the United States and ordering 
illegal activity in the United States from without the United 
States.
    And these will all be addressed. Items like the Bank of New 
York is on--is--is in the press today. And probably what we 
will find out about that is the vast majority of that money 
will never be proven to be money laundering.
    That is a very visible thing that you can see that is a 
threat. But to me, that is not the biggest threat facing us 
today.
    The biggest threat facing us today in the United States is 
the literal billions of dollars that these people have 
generated that they are going to start investing.
    And the best place in the world to invest right now is the 
United States, so they are going to be purchasing companies. 
They are going to be establishing companies, or they are going 
to be investing in our stock market to have a tremendous 
economic effect upon us.
    Now, I am an experienced organized crime investigator, and 
I have never found anybody who was a criminal who gained his 
money as a criminal that did not run a business illegally once 
they get control of it.
    The long-term effect of what we are facing is monumental, 
and I do not know how bad it is going to be. Now, that to me 
is--is the biggest problem that we are facing.
    There is going to be a tremendous appearance of legitimacy 
and a tremendous amount of back-door illegal activity that is 
going to be very, very, very difficult to root out.
    I do believe, though, that we should continue to build the 
infrastructure with the Russian authorities. I think that is 
very, very important for us for the long-term future to address 
this problem.
    And I--again, I would like to thank you very much for 
inviting me.
    The Chairman. Well, we certainly thank you, sir. And you 
can expect some questions and discussion--but I agree with you.
    [The prepared statement of Mr. Moody follows:]

                   Prepared Statement of Jim E. Moody

    I would like to thank the Chairman and the United States Senate's 
Committee on Foreign Relations for inviting me to appear before you on 
the issue of ``Russian Corruption and Recent U.S. Policy.''
    As background, I am not a scholar on the Soviet Union, Communism or 
foreign intelligence operations. I am a law enforcement practitioner 
with extensive knowledge of organized criminal activities, methods, 
modus operandi, strengths, weaknesses and the development of criminal 
intelligence. With regard to the former Soviet Union, other than 
training to do battle with their military forces and preparing defense 
plans during the Vietnam era, my first association with the Russians 
occurred in October 1990.
                 first meeting with russian authorities
    As an explanation, I managed the FBI's Organized Crime Program from 
September 1988 until I retired in June 1996. The investigation of both 
local and worldwide organized crime groups, including those involved in 
drug trafficking, was my responsibility. In October 1990 I attended a 
United Nations sponsored conference in Russia hosted by the Ministry of 
the Interior or MVD. At this conference I met and discussed organized 
crime issues with law enforcement officers, practitioners and scholars 
from around the world. I also met with the Interior Ministers or their 
Deputies from all the Soviet Republics. In addition, I had sidebar 
meetings with Russia's Komitet Gosudarstvennoi Bezopasnosti (KGB) and 
others interested in organized crime.
    As a result of these meetings I brought back to the United States a 
belief that great changes were occurring in the Soviet Union. Also, I 
became aware of the fact that the Russian authorities had an organized 
crime problem that was a threat to their national security. They also 
had significant corruption problems along with inadequate laws, which 
were generally accepted and supported by civil society. Their lack of 
understanding and/or knowledge regarding how to address the organized 
crime problem was another great concern.
                    preparing to meet the challenge
    Based upon the worry that we were not adequately prepared and with 
the concurrence of the FBI Director, I ordered a survey of the 
approximately 63,000 ongoing FBI criminal investigations. The goal of 
the survey was to learn what criminal cases we had involving Russia or 
Russians. I believe we found 68 investigations at that time that met 
those criteria. However, what struck me about these cases was not only 
the fact that they crossed all the FBI's criminal program lines, but 
that they were complex investigations with significant violence and 
money involved.
    Based upon this survey, in June 1991 the FBI established Russian 
Organized Crime as a subprogram of our overall Organized Crime Program. 
Identifying Russian Organized Crime in this manner allowed FBI offices, 
for the first time, to investigate these criminal groups. Subsequently, 
in October 1991, based upon my presentation, the Attorney General and 
her Organized Crime Council established Russian Organized Crime as an 
investigative/prosecutive priority for Federal Law Enforcement.
    Due to manpower restrictions, the FBI prioritized the criminal 
groups and criminals on which we can focus our investigations based 
upon their threat to America or United States citizens. Our priorities 
after designating Russian Organized Crime a subprogram, not in priority 
order, were as follows:

   American La Cosa Nostra
   Italian Organized Crime--(Sicilian Mafia, Comorra, 
        N'drangheta, Sacred Crown)
   Colombian and South American Organizations
   Mexican Drug Trafficking Organizations
   Asian Criminal Enterprises--(Major groups include Japanese 
        Boryokudan, Chinese Triads and Chinese Drug Trafficking 
        Organizations, Korean, Vietnamese and Filipino Criminal 
        Enterprises)
   Criminal Syndicates--(Major criminal groups, primarily 
        involved in drug trafficking, such as the Jamaican Drug 
        Trafficking Organizations and the Nigerian Criminal 
        Enterprises)
   European/Eastern European Organized Crime--(Commonly called 
        Russian Organized Crime)
   Gangs--(Examples would be the Crips and Bloods Street Gangs, 
        Black Gangster Disciples, Outlaw Motorcycle Gangs, and others 
        who may be regionally or locally prominent or extremely 
        violent)

    It should be noted that six of the eight above listed groups are 
headquartered outside of the United States. These groups supply the two 
indigenous groups. It is because of these threats to the United States 
that the FBI is attempting to place itself in a better position to 
address the problem by expanding its offices in our Embassies overseas.
                    we have the tools and knowledge
    Being an Organized Crime specialist I fully support the FBI's 
definition of the organized crime phenomenon. The FBI defines Organized 
Crime as a ``continuing criminal conspiracy having an organizational 
structure, fed by fear and corruption, and motivated by greed.'' The 
purpose of Organized Crime is to generate profits. Profits provide 
power. Corruption is a vital tool of Organized Crime. I believe you 
cannot have Organized Crime without corruption. This corruption can 
take many forms and can range from a telephone repairman installing 
call forwarding services for a small apartment with ten telephone 
lines, knowing he is supporting an illegal gambling operation to 
Government officials using their positions to support illegal 
activities.
    Once you have organized criminal activity entrenched in a society, 
it is very difficult to eradicate. I do not believe it is possible to 
destroy organized crime using autocratic methods. Benito Mussolini 
tried to do that in Italy. He failed.
    I do believe that you can destroy organized crime structures using 
the ``rule of law'' and gaining the support of society. Fortunately, 
the United States has anti-organized crime legislation that will 
support this. However, technology is overtaking the basis of some of 
these laws, requiring some modifications.
    Even with the legislation, there are a number of problems and 
obstacles that must be overcome before addressing organized crime or 
major conspiracies. One of the major problems is identifying the 
problem. As explanation, a friend of mine liked to describe the problem 
of detecting who or what is Organized Crime by using the analogy he 
took from a Sherlock Holmes mystery. To paraphrase, Dr. Watson once 
asked Sherlock Holmes, ``Who is the most dangerous criminal in 
England?'' Holmes responded, ``Dr. Morarity.'' Dr. Watson's replied, 
``Dr. Morarity? I never heard of him.'' To which Holmes replied, 
``That's why he is the most dangerous.'' ``Who'' is very important for 
successful Organized Crime investigations.
    With regard to Russian Organized Crime and Russian crime in 
general, the ``Who'' continues to be a pressing problem for US law 
enforcement. I learned from my first interaction with Russian 
authorities that they had an endemic corruption problem. In fact, you 
could easily observe corruption, though on a small scale, when I was 
first there. I also met Russians that wanted to do something about the 
problems facing their society.
                 russia's law enforcement shortcomings
    However, events often overtook good intentions. As the former 
Soviet Union dissolved, Russia and the Newly Independent States did not 
have an infrastructure of regulatory agencies such as the United 
States' version of the Federal Deposit Insurance Corporation or the 
Securities and Exchange Commission to regulate newly emerging 
capitalistic industries. In addition, many internationally recognized 
criminal laws were nonexistent or sorely lacking. I would describe 
their criminal code shown to me as consisting of a 6" x 9" pamphlet 
approximately 1/8" thick.
    Then as now, the recognized law enforcement authorities were 
lacking in training and equipment. In addition, the police were 
underpaid, underprivileged, understaffed, overly bureaucratic and were 
not supported by government mechanisms for ensuring democratic law 
enforcement. Also, like most other governmental agencies in the former 
Soviet Union, the police had a significant corruption problem, as did 
the judicial system. One ranking officer confided to me that he 
believed that over 90% of his officers were corrupt.
    Because of the rapid collapse of the Soviet system, the lack of 
regulatory institutions, corruption of authorities and institutions, 
and virtually no criminal legislation, organized criminal groups 
suddenly became the only functional organizations providing goods and 
services. They controlled the black market. The black market became the 
Russian version of free enterprise and it fed and clothed Russia. This 
led to big problems. The black market was run by criminals who were 
positioned to gain vast amounts of wealth and influence, expand their 
operations, recruit new members--including government officials--
further corrupt the system and even challenge the emerging democratic 
institutions and governments as well as entrepreneurial capitalistic 
efforts. These groups became an even more important element of Russia 
and became entrenched in their society just as the Cosa Nostra did in 
the United States.
    In the last few years, organized criminal activities increasingly 
have had a debilitating effect on Russia's move towards a capitalist 
society. The lack of adequate criminal laws, a fair and impartial civil 
court and tax system and corruption have also harmed Russia's budding 
entrepreneurs. Most small to mid-sized Russian companies have been 
required to operate in a system unlike any other. Security is one of 
the biggest non-income producing items in many Russian company's 
budget. They often pay up to 30% of their budget for security, most 
often to an Organized Crime Group. Due to corruption, another equally 
high expense is lobbying. A peculiar feature of doing business in 
today's Russia is that the two expenses are almost always 
interconnected and interdependent. This is a lot of overhead to pay in 
order to be allowed to operate a company securely.
                 political corruption the major problem
    However, organized criminal groups preying on Russia and its 
businesses are but one problem facing the country. A larger problem is 
the government and former party officials that have also used the 
opportunities available to them to enrich themselves and their 
associates. Corruption has flourished; promises of a rapid transition 
to a democratic society based upon capitalism have been sidetracked. 
Full privatization of government-owned industries and land has not 
occurred. When industries were privatized, only insiders have 
benefited.
    Once again, the FBI's definition of Organized Crime is a 
``continuing criminal conspiracy having an organizational structure, 
fed by fear and corruption, and motivated by greed.''
                     effect upon the united states
    At the same time, the easing of travel restrictions has enabled 
many Russians to come to the United States. The number of United States 
visitors' visas issued for Russians had at one time increased by more 
than forty times. Successful criminals are greedy; they want to 
increase their profits, safely. Since the United States is the richest 
country in the world and their assets are safe here, we have hosted 
many organized crime members and corrupt officials. We have also 
received their money. We still do. However, we have to recognize that 
the money we receive, though probably generated using methods deemed 
illegal in the United States, is not necessarily illegally generated in 
Russia.
    Organized crime groups attempt to legitimize their affairs and 
profits by influencing or controlling businesses. Violence, 
intimidation and use of illegally generated money are their tools for 
taking over businesses. Once established in legitimate businesses, 
however, criminal organizations are not content to play by the rules as 
their legitimate business competitors do; they will illegally 
manipulate the affairs of the legitimate businesses they control in an 
attempt to monopolize the industry or business in question. Legitimate 
businesses are a prime target for exploitation or infiltration by 
organized crime. You can rest assured that US-based businesses are 
being established or being purchased using money from Russia. The long-
term effects of these investments remain to be seen.
    I do not believe that there is a society free of corruption. Law 
enforcement must work within the confines of the ``rule of law'' to 
address corruption, one of the foundations of organized crime. We must 
use the ``rule of law'' as a weapon. Fortunately, the FBI has been 
successful in doing this in the past. I believe they will continue to 
be successful in the future.
             previous fbi success using the ``rule of law''
    In the early 1980s we learned how successful international 
organized crime investigations could be using the ``rule of law'' while 
investigating Italian Criminal Enterprises.
    Sicilian Mafia members were operating in the United States and 
internationally but were headquartered in Sicily. At that time we knew 
that there was a significant amount of corruption in Italy.
    We were able to identify Italian law enforcement officers and 
prosecutors who we believed we could trust and cooperate with to 
jointly address the crime problem in our countries. At that time, 
however, Italy's laws were based upon the Napoleonic Code. These laws 
did not allow undercover operations, court-ordered electronic 
surveillances or adequate plea-bargaining. They had no Witness Security 
Program and criminal conspiracies could not be adequately surveilled to 
develop evidence against those directing others to commit crimes. These 
authorities are absolutely necessary to successfully address organized 
crime. Despite these obstacles, we were successful with developing 
sufficient evidence to support the Pizza Connection prosecution in the 
United States and the Maxi-trial in Italy.
    Based upon this success, we established the Italian-American 
Working Group. Although organized crime members have murdered some of 
the original Italian members of this Working Group, the Working Group 
continues to function today.
    Through our cooperation, Italian law enforcement officials were 
able to observe how the FBI conducted Criminal Enterprise 
Investigations, within the ``rule of law.'' Based upon these successes 
and lobbying by Italian law enforcement, Italy changed its laws to 
somewhat mirror United States' anti-organized crime legislation. 
Actually, their laws now give more legal authority to law enforcement 
agencies than ours do.
    The FBI uses lessons learned jointly with Italian authorities as 
the ``Italian Model'' to follow in their efforts internationally. This 
genuine give and take, finding ways to support each other and working 
within the applicable ``rule of law'' is the ``Italian Model'' being 
used as an outreach program to other law enforcement agencies 
internationally and with Russian authorities. Successes have been 
achieved. Much remains to be done.
                     fbi relationship with the mvd
    After overcoming some significant administrative and bureaucratic 
obstacles within the FBI, I was able to establish a working 
relationship with the Russian MVD beginning in February 1993. At that 
time, Mikhail Yegorov, Russia's First Deputy Minister of Interior newly 
designated to head their anti-organized crime effort, and I met for one 
week at FBI Headquarters.
    At the end of our meeting, the FBI and MVD agreed to cooperate on 
organized crime issues. From that moment, the MVD helped the FBI 
identify the ``who'' described above as being so important in organized 
crime cases. They saved us untold investigative man-hours. In addition, 
the MVD was instrumental in returning FBI fugitives to the United 
States for prosecution. They assisted us in this manner even though we 
had no Mutual Legal Assistance Treaty or Extradition Treaty.
    We established a Working Group consisting of the MVD, the German 
Bundeskriminalamt (BKA) and the FBI. The BKA's involvement was vital 
because Germany experiences organized criminal problems coming from 
Eastern Europe a short time before we do in the United States. In 
addition, the criminals often operate in all three countries. This 
Working Group continues to meet regularly to share criminal 
intelligence and coordinate investigations.
    Investigations coming from this Working Group have been successful. 
Some of the investigations have targeted high-level Russian government 
officials requiring the MVD officers to conduct their portion of the 
investigation while under death threats. Some of these officers have 
indeed been physically harmed. The group of officers we worked with in 
Russia has been described by one new magazine as the ``Untouchables.''
    Due to new Russian legislation and Presidential Decrees, the KGB 
was reorganized and split into different sections and given new 
responsibilities. At this time, the FBI is also working jointly with 
the Federal'naya Sluzhba Bezopasnosti or, translated, the Federal 
Security Service (FSB). This organization is the descendant of the 
former 2nd Directorate of the KGB and has been given law enforcement 
responsibilities.
    Also, after some effort, we were allowed to post an FBI Legal 
Attache's office in our Embassy in Moscow. This office allows our 
Agents to build relationships with Russian law enforcement and is the 
focal point for coordination of criminal investigations conducted 
jointly.
        us government response to international organized crime
    I believe that the United States Government has taken some 
significant steps to address international crime including organized 
crime. Because of these steps, the United States is in a much better 
position to address the criminal problems we see today. In addition, 
the future may bring even more success.
    I will name a few of these positive steps that I believe have been 
helpful and will be to future successes. In October 1995, President 
Clinton signed a Presidential Decision Directive (PDD) regarding 
international organized crime. He also made a speech before the United 
Nations identifying the problem and requesting that organization and 
its member states to address the problem. Additionally, the PDD caused 
a better coordination of efforts by all government agencies.
    Through the Great 8 conferences, international crime and 
specifically international organized crime has been an agenda item 
resulting in the Great 8 countries agreeing to encourage other 
countries to act forcefully to address the problem. They also agreed to 
enact legislation and set up procedures themselves that will have a 
significant, long-term, positive impact on the crime problem. Also, the 
Financial Action Task Force, which is composed of several countries, 
has supported initiatives that have been and will continue to be of 
assistance in the law enforcement effort. Our Treasury Department is 
the lead United State agency in this effort.
    Also, Congress has authorized funding for FBI training of Eastern 
European law enforcement as well as the establishment of the 
International Law Enforcement Academy in Budapest managed by the FBI 
jointly with Hungarian authorities. In this manner, the FBI has trained 
hundreds of Eastern European officers. Some of this training has been 
specialized. For instance, I know that the FBI held specialized 
corruption training for Russian investigators and prosecutors at their 
Academy in Quantico. It is my understanding that other Academies 
modeled after the FBI Academy are planned.
    In short, these initiatives are attempting to work with countries 
and law enforcement agencies throughout the world to enact laws and 
address international crime and organized crime in a coordinated 
manner. These efforts are the first steps in a long-term process. 
Corruption is but one of the targets of these efforts. However, it 
should be remembered that it is not illegal in many leading countries 
to pay foreign government officials. Also, some countries allow their 
businesses to deduct bribe payments as a business expense, just as 
other countries expect to pay bribes to conduct business.
                              russia today
    I believe that Russia must enact adequate criminal laws. Several 
times proposed legislation have been processed through the Russian Duma 
and Federation Council and forwarded for President Yeltsin's signature. 
Each time the legislation has been returned, unsigned.
    If President Yeltsin or his successor eventually approves the 
proposed legislation that I last reviewed as requested by the 
Federation Council, Russia will have one of the strongest anti-
organized crime legal authorities in the world. As I set forth above, I 
believe it is vital to have the necessary legal authority to address 
organized criminal activity within the ``rule of law.''
    Concurrently, the Russian Courts must be strengthened and corrupt 
officials removed. The same is true for the law enforcement agencies. 
If there is adequate legal authority and the courts and law enforcement 
authorities can get corruption within their ranks under control and 
they do not acquiesce to self-serving and possibly illegal political 
pressures, I believe that we will see a sea change in Russia. Russian 
citizens will be able to trust their government institutions, depend 
upon justice being applied equally and the forces of democracy and 
business will greatly improve their standard of living.
    There are Russian authorities that want to improve their system. 
They want to root out corruption and lawlessness. They want to develop 
a democratic society based upon capitalism with a Russian tilt. We 
should be prepared to support their efforts, while understanding that 
they will not totally follow the American example. However, we can 
provide them our expertise and experience while they make the 
transition through these difficult times.
    I would like to thank Chairman Helms and the Senate Committee on 
Foreign Relations for inviting me today. I would be pleased to provide 
any additional insight that I may have.

    The Chairman. Mr. Merry.

STATEMENT OF E. WAYNE MERRY, FORMER STATE DEPARTMENT OFFICIAL; 
  AND DIRECTOR, PROGRAM ON EUROPEAN SOCIETIES IN TRANSITION, 
             ATLANTIC COUNCIL OF THE UNITED STATES

    Mr. Merry. Thank you, sir.
    We have disposed of the ``Who lost Russia'' question here 
today as meaningless, which it is. But the ``Who robbed 
Russia'' question is very real, and it is going to stay with 
us.
    There is also the question what impact there has been on 
our own national interest from the failure of economic reform 
in Russia.
    The robbing of Russia has been pretty much a global 
activity, with lots of non-Russian hands. This is how Baltic 
states became exporters of commodities they did not produce; 
how Switzerland, Singapore and Caribbean countries became 
centers of Russian finance. It is how Russians have transformed 
the real estate market of Southern Europe. And it is why 
thousands of automatic teller machines in posh parts of 
Manhattan are all programmed in the Russian language.
    I suspect much of the money is already in non-Russian 
hands. Past lootings of other countries like Nigeria, Zaire, 
the Philippines, and so forth, all enriched the West. And I see 
no reason why Russia is going to be any different.
    We Americans have certainly played our part and quite 
knowingly provided a warm welcome for many tens of billions of 
dollars that were strip-mined from Russian public properties. 
And I think we should be very cynical when we hear bankers 
claim to be ``shocked, shocked'' that money laundering was 
going on.
    But we are also complicit through our Government's role in 
determining what economic path Russia was going to take. Russia 
is certainly responsible for itself for good or ill, and 
Russians pretty much are always their own worst enemies.
    But the Russia that emerged from the collapsing Soviet 
Union was very dependent on the United States, both financially 
and psychologically. It received a very great deal of money and 
advice from this country. And I think our authorities are 
responsible not just for the dollars, but for the policies as 
well.
    Our Government--and this applies to both the previous and 
the current administrations--made our assistance conditional on 
the adoption of what is sometimes called the ``Washington 
consensus'' of monetarist mechanisms known as shock therapy. In 
Russia, these policies were catastrophically wrong. Russia was 
very much like a very sick middle-aged man seeking medical 
advice after decades of chronic bad habits. Unfortunately, he 
consulted a team of surgeons at the U.S. Treasury and at the 
IMF, who prescribed radical surgery, because that is all they 
knew how to prescribe. Unfortunately, the Pennsylvania Avenue 
surgical team never bothered to take this patient's medical 
history nor to evaluate his capacity to survive surgery. When 
the Russian patient's vital signs began to fail on the 
operating table, the surgeons just resorted to more and deeper 
surgery, until his family members finally called a halt.
    The very worst feature of this monetarist-malpractice case 
is that alternative therapies were never even considered, nor 
were suggestions that this patient would be better served by 
less radical, less intrusive or longer-term care. The patient 
was less important than the doctrine. We forgot the maxim, 
``First do no harm.''
    Most Russians of the reformist stripe did not favor our 
economic prescription. They felt that shock therapy was just 
wrong for their country, that it was too much of a challenge 
and was insufficiently concerned with vulnerable members of the 
society. They were interested in other models and looking for a 
right mixture for their own needs, their own traditions, and 
their own national limitations.
    But the United States absolutely insisted on radical market 
reform and used our dominance of the international financial 
institutions to force-feed it on Russia. In the process we 
allied ourselves with some of the most ruthless, undemocratic 
and rapacious people in the country, people who are so 
shameless they actually refer to themselves as ``The 
Oligarchs.''
    Now, these robber-barons and their political allies care 
very little for the well-being of average Russian people. And 
their attitude toward electoral democracy is one of undisguised 
contempt. These people have made the name of free enterprise 
stink in Russia as decades of Soviet propaganda never could.
    However, I think the most egregious of American policy 
errors and one that is almost incomprehensible, given our own 
national history, is the confident assumption of the Washington 
consensus that a viable legal system would appear in Russia 
automatically and as a matter of course after the application 
of market shock therapy.
    This is certainly a case of putting the cart before the 
horse. Our policy quite literally gave precedence in our Russia 
policy to the concept that ``greed is good'' over the concept 
of ``due process of law.'' In the process, we created 
incentives for the very public theft and capital flight that we 
now deplore.
    Unfortunately, legal reform was the single field where we 
as a country could have made the best and most enduring 
contribution to the Russian transition. A few years ago, I can 
tell you, most Russians saw America as the best model for a 
successful constitutional system and law-based state. 
Unfortunately, our Government's priorities were elsewhere. A 
number of Americans, mostly in private institutions, have 
worked with Russian counterparts on legal reform and I salute 
them. But they never received much more than lip service from 
their own Government. You only have to look at the tangible 
record of the programs and at the low priority given to rule of 
law at summit meetings and other high-level meetings. It is 
very easy in Washington to identify who in our Government is 
responsible for cooperation with Russia in energy, space 
flight, privatization, Bosnia, and other things. But who in our 
Government has Russian rule of law as a top priority? I put it 
to you: No one.
    American businessmen in Russia are constantly pointing to 
the need for legal reform, because they know that law and not 
money is the true basis of market capitalism. Russia can choose 
any kind of different economic model, but any one is going to 
require a bedrock of law in order to succeed. I believe the old 
Soviet system ultimately failed because it was based on 
arbitrary and unaccountable power, rather than on law. And the 
crony capitalism which we helped to create and rationalize as a 
mere blemish on the road to the Promised Land, has failed 
because it is lawless. Now, the rule of law did not develop 
automatically or by accident in this country, and it is not 
going to in Russia.
    It has been asked recently ``What did our policymakers know 
about corruption in Russia, and when did they know it?'' I can 
only say that anyone involved with Russia, whether in the 
Government or on the street, knew about it all along. It was 
never any secret. Even if the U.S. Embassy and the CIA had 
never written a word on the subject, the Western press covered 
the story; and the Russian media has reported on corruption 
constantly. Indeed, an entire series of reporters have been 
killed for their efforts in this area. Anyone who wanted to 
know knew. The real questions are: What did our policymakers 
care about this issue, and what did they do about it? I put to 
you that the record of neglect on legal reform in our policy 
will give you the answer.
    Mr. Chairman, we have been told by our authorities that 
there was really no alternative to the shock therapy policy and 
to support for the crony capitalists, that these policies were 
vital to shore up pro-Western forces in Russia, to forestall a 
Communist return to power, to assure responsible behavior by a 
nuclear armed country and to protect American influence and 
interest.
    I ask you not to believe it. The Russian oligarchs are not 
pro-Western. They are pro-self. Most true Westernizers in 
Russia today are alienated from their own government and its 
policies; and they are alienated from the United States.
    Eight years ago, our reputation and prestige as a society 
in Russia were supreme. Today, even the young in Russia see 
America as unprincipled and cynical. Russian democrats 
condemned their government's war against the people of 
Chechnya. Our authorities condoned it.
    Russia's Communists are a fading political force, and the 
strength they retain comes from an understandable popular anger 
at the enrichment of an odious handful and the impoverishment 
of working people. If such policies were carried out in this 
country, you might see red banners on our streets.
    The Russian military maintains the stewardship of its 
nuclear arsenal for their country's benefit and not for any 
convenience of ours. Our cooperation in reducing nuclear 
arsenals, and not just theirs, but both of our nuclear arsenals 
in tandem, in parallel, is a mutual interest. And if anything, 
this process has been slowed down, delayed by shock therapy and 
the consequent collapse of the military industrial sector in 
Russia.
    And to imply, finally, that we must accommodate systemic 
corruption in order to maintain influence is the eternal 
rationale of short-term expediency. We were given the same 
rationale in other places, from Iran under the Shah, Zaire 
under Mobuto, to Indonesia under Suharto. And we have seen the 
price of such short-term expediency.
    Mr. Chairman, I certainly do not equate Russia and Boris 
Yeltsin with the cases I just cited. Unfortunately, I think 
that our Government, for practical policy purposes, does. And I 
think this is unworthy of both of our countries. Russia is 
certainly one of the great countries of the world and it will 
be important for our interests in the century ahead.
    Russia is also a very resilient society, but we should not 
expect its people to show endless patience with failed 
policies. They have a right to organize their national 
household as they see fit, even if it does not equate with 
current American fashion and doctrine.
    Disengagement from Russia is certainly not an option. I 
would hope that learning from our mistakes could be.
    Mr. Chairman, it is an honor to appear before your 
committee, sir.
    The Chairman. Thank you, sir.
    [The prepared statement of Mr. Merry follows:]

                  Prepared Statement of E. Wayne Merry

    Mr. Chairman, I appreciate the opportunity to appear before this 
famous Committee.
    The question ``Who Lost Russia?'' is meaningless and misleading. In 
contrast, the question ``Who Robbed Russia?'' is very pertinent. We 
should also inquire into the damage done to American national interests 
from the failure of economic reform in that country and our role in 
that failure.
    Robbing Russia is a global activity, with lots of foreign 
participants. How else could Baltic states become major exporters of 
commodities they do not produce; how else did Switzerland, Singapore 
and Caribbean islands become centers of Russian finance; how else could 
Russians transform the real estate market in southern Europe; and why 
else are automatic teller machines in posh sections of Manhattan 
programmed in Russian? I suspect much of the loot is already in non-
Russian hands. The looting of Nigeria, Zaire, Mexico, the Philippines, 
and Indonesia all enriched the West. Why should Russia be different? 
Americans have played their part and provided a warm welcome for many 
billions of dollars strip-mined from Russian public properties. We 
should be very cynical when bankers profess to be ``shocked, shocked'' 
to learn that money-laundering has been going on.
    We are also complicit through our government's role in determining 
Russia's economic path. Yes, Russia is ultimately what Russians 
themselves have made it, for good and ill, and Russia is always its own 
worst enemy. But the Russia emerging from the Soviet collapse was both 
financially and psychologically very dependent on the United States. It 
received a great deal of both money and policy guidance from 
Washington. I believe our authorities are accountable for the dollars 
and for the policies as well.
    Our government--both the current and previous Administrations--made 
assistance conditional on adoption of the so-called ``Washington 
consensus'' of monetarist mechanisms called ``shock therapy.'' In 
Russia, these policies were disastrously wrong. Russia was like a sick 
middle-aged man seeking medical advice after decades of chronic bad 
habits. Unfortunately, he consulted surgeons (at the U.S. Treasury and 
the IMF) who prescribed radical surgery as their standard response to 
any ailment. The Pennsylvania Avenue surgical team did not bother to 
take the patient's medical history nor to evaluate his ability to 
survive surgery. When the Russian patient's vital signs began to fail 
on the operating table, the surgeons resorted to more and deeper 
surgery, until his family finally called a halt. The very worst feature 
of this monetarist-malpractice case is that alternative therapies were 
never even considered, nor were suggestions the patient would be better 
served by less radical, less intrusive, and longer-term care. The 
patient was less important than the doctrine; we forgot the principle, 
``first do no harm.''
    Mr. Chairman, most Russians reformers did not favor our economic 
prescription; they felt shock therapy was wrong for their country, was 
too great a challenge, and insufficiently concerned with vulnerable 
elements of society. They discussed other models, ranging from 
Scandinavian and French to Korean and Chilean alternatives, looking for 
the right mix for their own needs, traditions, and limitations. The 
United States absolutely insisted on radical market reform and employed 
our dominance of international financial institutions to force-feed it 
on Russia. In the process we allied ourselves with some of the most 
ruthless, undemocratic, and rapacious people in the country, people so 
shameless they refer to themselves as ``The Oligarchs.'' These robber 
barons and their political allies care little for the well-being of the 
Russian people, while their attitude toward electoral democracy is 
undisguised contempt. These people have made the name of free 
enterprise stink in Russia, as decades of Soviet propaganda never 
could.
    However, the most egregious of American errors--and one made almost 
incomprehensible by our own history--is the confident assumption of the 
``Washington consensus'' that a viable legal system would appear in 
Russia automatically and as a matter of course after the application of 
market shock therapy. The mildest metaphor I can apply to this view is 
that it put the cart before the horse. Our policy gave precedence in 
the Russian transformation to the concept that ``greed is good'' over 
``due process of law.'' We thereby created incentives for the public 
theft and capital flight we now deplore.
    Ironically, legal reform was the field where we could have made the 
best and most enduring contribution to the Russian transition. A few 
years ago most Russians saw America was the best model of a successful 
constitutional system and law-based state. Sadly, our government's 
priorities lay elsewhere. I salute those American institutions and 
citizens, mostly private, who have worked with Russian counterparts on 
legal reform, but their efforts never received much official 
appreciation or support. Lip service, yes, but look at the tangible 
record: at the meager programs and funding and at the low status given 
to rule of law at summits and other high-level meetings. It is easy to 
identify the Washington officials responsible for cooperation in such 
fields as energy, space flight, Bosnia, or privatization. Who in our 
government has Russian rule of law as a top priority?
    American businessmen in Russia constantly point to this problem, 
because they know that law, not money, is the true foundation of market 
capitalism, but Washington still does not get it. Russia can choose a 
different economic model, but any approach requires legal bedrock to 
succeed. I believe the old Soviet system ultimately failed because it 
was based on arbitrary and unaccountable power rather than on law. The 
``crony capitalism'' we helped create (and then rationalized as a mere 
blemish on the road to the Promised Land) has failed because it is 
lawless. The rule of law did not develop automatically or by accident 
in America; it will not in Russia.
    It is now asked, ``What did our policymakers know about corruption 
in Russia and when did they know it?'' I can only say that anyone 
involved with Russia--in government or on the street--knew about it all 
along. There was no secret. Even if the Embassy and CIA had not written 
a word, the Western press covered the story fairly well, while the 
Russian media reported on corruption constantly; indeed, a series of 
reporters were killed for their efforts. Anyone who wanted to know, 
knew. The real questions are, ``Did our policymakers care and what did 
they do about it?'' The record of neglect on legal reform will give you 
the answer.
    Mr. Chairman, we have been told there was no real alternative to 
shock therapy and to support for the ``crony capitalists,'' that these 
policies were vital to shore up pro-Western forces in Russia, to 
forestall a Communist return to power, to ensure responsible behavior 
by a nuclear-armed country, and to protect American influence and 
interests. Please don't believe it.

   The Russian oligarchs are not pro-Western, they are pro-
        self. Most Westernizers in Russia today are alienated from 
        their own government, its policies, and from the United States. 
        Eight years ago our reputation and prestige in Russia were 
        supreme; now even the young see America as unprincipled and 
        cynical. Russian democrats condemned their government's war 
        against the people of Chechnya; our government condoned it.
   Russia's Communists are a fading political force, and the 
        strength they retain comes from understandable popular anger at 
        the enrichment of an odious handful and the impoverishment of 
        working people. If such policies were carried out in this 
        country, you might see red banners in the streets.
   The Russian military maintains stewardship of its nuclear 
        arsenal for their country's benefit, not for any convenience of 
        ours. Our cooperation in reducing nuclear arsenals is a mutual 
        interest and has, if anything, been delayed by shock therapy 
        and the collapse of the military-industrial sector.
   To imply we must accommodate systemic corruption in order to 
        maintain influence is the eternal rational of short-term 
        expediency. We were given the very same rationale about Haiti 
        under Duvalier, about Iran under the Shah, Zaire under Mobutu, 
        Indonesia under Suharto, and elsewhere. The long-term price of 
        such short-term expediency should be clear.

    Mr. Chairman, I absolutely do not equate Russia and Boris Yeltsin 
with the cases I just cited. Unfortunately, I think our government, for 
practical policy purposes, does. This is unworthy of both countries. 
Russia is one of the great nations of the world and will certainly be 
important for our interests in the century ahead. Russia is also a 
resilient society, but we should not expect its people to show endless 
patience with failed policies. They have the right to organize their 
national household as they see fit, even if it does not equate with 
current American fashion and doctrine. Disengagement from Russia is not 
an option, but learning from our mistakes should be.
    Mr. Chairman, it is an honor to appear before your Committee. Thank 
you.

    The Chairman. Mr. Legvold.

    STATEMENT OF DR. ROBERT LEGVOLD, PROFESSOR OF POLITICAL 
                  SCIENCE, COLUMBIA UNIVERSITY

    Dr. Legvold. Mr. Chairman and other committee members, for 
me, too, it is very much an honor to be before you today.
    My concern is rather different from the colleagues who have 
appeared before you today, including that of Strobe Talbott at 
the outset.
    I am fearful that in this sudden renewed focus on Russia, 
we are framing ways--we are framing issues in ways that are 
likely, in the long run, to jeopardize our national interest.
    There is much in U.S. policy toward Russia since the fall 
of communism that has been wrong, or at least arguably so, and 
Mr. Merry has just very vigorously argued so.
    There, however, is also much that is wrong in our current 
national discourse about Russia. And I have been taught since I 
was a small boy that two wrongs do not make a right.
    As long as I am tossing around this word ``wrong,'' let me 
add two other relevant wrongs. In Russia, since independence, 
things have gone wrong, in some respects very wrong, but that 
is only half the story, for as others have said, there is some 
important things that have gone right considering the 
circumstances.
    In U.S./Russian relations, things are going wrong now. In 
some important respects, very wrong. But, again, that is only 
half the story. There are other extraordinarily important 
things to preserve and to pursue within that relationship.
    None of this is to say that the topic of your hearing--of 
these--of this session today and subsequent one, and the issue 
that now seems to have re-centered Russia in our mind's eye is 
illegitimate. Far from it. This question of corruption and 
money laundering and collateral issues are very important for 
several reasons.
    And it is important that we unravel the issue, and that we 
address it effectively, first, in order to protect the 
integrity of our banking system; second, in order to protect 
the integrity of our foreign aid programs; third, in order to 
protect this country from the international effects of 
organized crime; and finally, in order to appreciate an 
important dimension of what indeed is going wrong in Russia.
    That is the way in which the conversation has been focused 
up to this point and very much in the panel this afternoon.
    And in the process, in terms of what has gone wrong, 
something that is threatening a key interest of ours, a 
national interest of ours, which is namely Russia's successful 
passage to an open, vibrant market-oriented society.
    In reviewing the last 9 years of U.S. policy toward Russia, 
one could argue that the Bush administration failed to push 
hard enough for critical elements of economic reform essential 
at the very outset of the process, and that the international 
financial institutions failed to provide their fair--their fair 
share of the wherewithal in order to make it occur.
    One could argue that the Clinton administration was 
mistaken in the degree of unconditional support given to 
Yeltsin, particularly in the first 2 years of the 
administration--and Fritz Ermarth has made that argument--that 
it did not raise a sufficient ruckus soon enough over not 
merely the rise of corruption within Russia, but what I would 
call the criminalized state, which is a very different problem.
    And it is the one that Jim Moody began to focus on, which 
is the heart of the matter, not just corruption or organized 
crime, or syndicates or many of the elements that were in 
Senator Kerry's paragraph from the book, but a criminalized 
state. And that is not what we have been talking about up to 
this point, how you address it.
    One could argue that the administration can be criticized 
because it did not stop, that it merely dissented from a 
malignant step like the 1995 loans-for-share deal, which 
contributed so much to the growth of this fundamental problem; 
or one could even argue in a different vein that the 
administration should have, but failed to encourage devaluation 
of the ruble in the fall of 1997 and, therefore, contributed to 
the August crisis of 1998 and everything that has followed from 
it.
    I would be inclined to make most of these arguments. But I 
also believe that honest people could disagree over each of--
each of these points.
    But more important are two other considerations. First of 
all, even if these charges have merit, I have no way of 
assuring you that had we followed another course implied by 
this, that the outcome would have been materially different on 
any large scale. And that is worth thinking about.
    And second, and more important from my point of view, they 
are not the central point. The core problem today is not that 
we have misengaged Russia, though that is very important and 
for the reasons that you have already been given on this panel 
and that you already know based on the comments that you have 
made.
    It is that we are disengaging from Russia. I have heard 
everyone around this panel and this table say that we do not 
disagree over remaining engaged. The truth of the matter is 
that this country is in the process of disengaging from the 
Russian challenge.
    Let me be more concrete. I will finish that first thought. 
When I say, ``We are disengaging from Russia,'' the 
administration is a part of the ``we.'' But it is by no means 
the worst part of the ``we'' in this instance.
    Let me be more concrete. A month ago, the last week in 
August at the Ashuluk test range in the Astrakhan region of 
Russia, Russia, Belarus, Armenia, and Kazakhstan ran their 
Commonwealth 1999 military exercises.
    The scenario was to thwart and to destroy imitative massive 
attacks by aviation and cruise missiles, with no attempt to 
disguise the fact that this was inspired by what Serbia had 
encountered several months before.
    This, in turn, is against a background in which opinion 
among a majority of the foreign policy elite, I say a majority 
of the foreign policy elite in Moscow, including some of the 
most pro-reform liberal elements, believe that NATO would 
permit itself unilaterally to do in or around Russia exactly 
the same thing. And they do not see that as a element of 
protection. They see that as a threat.
    It is accompanied by a tendency these days in Russia to 
consider solving the problem of Russia's immense weakness in 
conventional arms by introducing low yield tactical nuclear 
weapons in order to strengthen conventional defense.
    And in terms of addressing the issue of deterrents with 
NATO expansion, continental deterrents with NATO expansion, 
there are those voices now who say the answer should be 
intermediate nuclear forces, INF, and if to--if to do so, you 
have to scrap the INF agreement of 1987, so be it.
    This in turn is part of a broader context in which Russian 
policymakers and politicians stress increasingly an emerging 
strategic rivalry with the United States and the West within 
the post-Soviet space.
    And everything from the way we exercise partnership for 
peace to our support for multiple oil pipelines to the 
bilateral relations that we build in Central Asia and the 
Caucuses, together with the actions of NATO, are put together 
in order to demonstrate what I think is a very distorted notion 
of what is happening, but one to which they are responding.
    And this is only a capsule version, this list that I have 
given you, of what is a much more complex and large dynamic in 
the relations between the United States and Russia at this 
point.
    This awkward chain of suspicions on the part of the 
Russians, from my point of view, is distorted and wrong. But it 
is also the malign product of enormous Russian weakness.
    Who in this town--who in this town is arguing that this 
represents a crucial danger over the long run to our national 
interest, and a problem with which we should be profoundly 
seized and engaged rather than disengaged?
    Who in this town recognizes that this is one road to a 
genuinely lost Russia, a Russia that is alienated from the West 
and combative; a Russia that is set against the United States, 
either alone or in league with, should it arise, an alienated 
and combative China?
    Nearly all--second point, nearly all of the major 
candidates for the Presidency the next time around on both 
sides of the aisle, Republican and Democrat, recognize that it 
is crucial to our national interest over the long run that the 
Russians succeed with the transformation that they undertook in 
the late Gorbachev years and under independence, to a 
modernized political and economic system.
    But who in this town is ready to grapple with the ways we 
and our allies might engage the Russians--that is, with 
material support and appropriate conditionality--after we have 
satisfied ourselves on the issues that are before you now in 
this hearing, that would induce the political leadership, both 
parliamentarians and the executive to attack the underlying 
structural obstacles to reform, including the criminalized 
state, which all of us agree is one of the major structural 
obstacles to reform?
    Rather than wrestle with these profound and difficult 
versions of the Russian challenge, we have retreated to a few 
marginally useful programs, not to be dismissed as they are 
described, but being cut back increasingly under the pressure 
of legislative decision in this country, and to relief in 
facing the debt overhang, which is what the IMF business is all 
about.
    But when the IMF repays the IMF on behalf of the Russians, 
which is a useful thing to do because we prevent the Russians 
from going over the cliff, we are not doing anything to lead 
the Russians or encourage the Russians to address the 
underlying structural obstacles to reform that are leading to 
contraction of the economy and all the rest of it.
    That is, we are not doing nothing to attack, to briefly 
conclude now, the criminalized state, ineffective commercial 
banking, the liquidation of value destroying industry, and the 
creation and protection of real property within that--within 
that system.
    If the economic failure continues--of the last 8 years, 
continues and deepens within Russia, that leads to the 
possibility of another kind of lost Russia.
    That other lost Russia--and I do not say the possibility--I 
do not say the inevitability. I say the possibility of another 
lost Russia, is a failed state, Russia in ruins, Russia as a 
vortex of instability, of violence and of deadly contaminants 
beyond our wildest imagination.
    I think we got to this point--I say all of us, this body, 
my kind of people in the outside world as analysts, the media, 
our leadership within this country--through inattention, except 
for moments of spasms of interest as we are going through right 
now.
    And I think that this spasm of interest has been caused and 
sustained by what would appear to be a widespread sense that 
the stakes for us are not all that high, where we can afford to 
disengage from the Russian challenge.
    The words of our public figures say otherwise, but the 
actions, including much of the way in which we are shaping this 
current debate, I think, move in the other direction.
    They suggest that in the Congress you have a bipartisan, 
veto-proof majority in favor of walking away from the Russian 
problem in its hard form.
    Thank you.
    The Chairman. Thank you.
    And my question is to Mr. Ermarth. Do you have any 
explanation satisfactory to yourself, sir, about the President 
and the Vice President having met with figures associated with 
corruption and organized crime in the former Soviet Union? I am 
talking about Vadim Rabinovich, or figures like that.
    The President and Vice President met him in 1995 at a 
fundraiser in Miami, and there is a photograph somewhere of 
that. It was a 1995 fundraiser in Miami and that photograph 
just being posted right now, was taken at that fundraiser.
    Do you have any opinion about that?
    Mr. Ermarth. Well, I have an opinion. I think it is rather 
careless. I am sure that had the--the true business profiles of 
these gentlemen been known to the planners of those occasions, 
things would have been done differently.
    I think the point that--to be taken from these episodes is 
the one I was making very briefly in my remarks, namely that 
these guys by influence, you know, insinuating their money and 
their--and their influence into our political processes comes 
naturally to them.
    We should not make it natural to receive it. As to the 
particular instances you are querying me about, Mr. Chairman, 
I--I cannot illuminate it further. I do know about what Mr. 
Loutchansky was up to.
    The Chairman. Very well. I have a followup question. Do you 
believe that IMF money was diverted improperly into private 
foreign bank accounts?
    Mr. Ermarth. The diversion of IMF money?
    The Chairman. Yes, sir.
    Mr. Ermarth. I believe Mr. Skuratov is telling the truth 
and providing additional detail about something that was widely 
known in Russia in August--August, September 1998 and even got 
some coverage in the Western press.
    The IMF lent Russia about--about $4.5 billion in a tranche 
of a larger package of $20 billion to support the currency and 
stabilize the financial markets during the crisis of summer 
1998.
    It bought--it used those--the--the Russian central bank 
used those dollars to buy rubles. That is what you do when you 
stabilize a currency, but rather than going through the Central 
Interbank Currency Exchange with about $3 billion of those 
dollars, it bought them directly from--it bought the rubles 
directly from the commercial banks and the commercial banks 
ended up with the dollars. The dollars ended up in New York, 
just like that.
    Now, maybe the IMF is telling us that unless they ended up 
in the private pockets of certain individuals, it is not 
diversion. But the banks are in the private pockets of certain 
individuals. I defy you to sell the IMF version of this to any 
of your constituents.
    The Chairman. I think you are right.
    Mr. Merry.
    Mr. Merry. Yes, sir.
    The Chairman. You were stationed at the American Embassy at 
Moscow, is that right?
    Mr. Merry. Yes, sir.
    The Chairman. Could you elaborate on the suppression of 
information, given that experience? Was information about the 
corruption of senior Russian Government officials suppressed 
and--let me ask the whole question; then you can answer it in 
one lump--was such information about a Viktor Chernomyrdin, was 
that suppressed, and was such information available to anybody 
in the administration, e.g., the Vice President?
    Mr. Merry. The questions of corruption almost all took 
place after my years in Moscow. I left in the summer of 1994. 
The case you referred to took place after that time. I have no 
information about that.
    What I would say is that what took place was not 
suppression of information, so much as there were, I think, 
very sharply conflicting views within the embassy about the 
appropriateness of the market reform policies that we were 
forcing on the Russians, and the degree of success they were 
experiencing.
    And I think there was certainly a considerable problem, in 
my view, that people who were institutionally responsible to 
the Gore-Chernomyrdin commission mechanism were also 
responsible for overseeing the evaluation of the success of the 
policies, and this constituted a conflict of interest.
    I can only say that in my own section of the embassy, what 
was called the Internal Political Section that dealt with 
internal Russian affairs, I received nothing but the fullest 
support from both of my Ambassadors and their deputies in 
sending out messages which frequently made our readership in 
Washington extremely unhappy, telling Washington things it did 
not want to hear.
    I have to tell you that I think that in other parts of the 
embassy, there were a lot of very energetic, mostly junior 
reporting officers who were trying to get out the message, as 
they saw it, the information that they gained from their 
travels around the country. And their message traffic never 
went out.
    The Chairman. Thank you very much. My time is up.
    Senator Biden.
    Senator Biden. Thank you very much. Mr. Chairman, with 
regard to that picture, it reminds me--I remember in, I think 
it was, 1976--I am not positive; I think it was 1976--seeing a 
picture using the campaign of Jimmy Carter with John Wayne 
Gacy, you know, the guy who chopped up and ate those folks, you 
know, buried them under his--I am serious. You all--are you 
reporters old enough to remember that?
    And I remember the same implication being drawn from that, 
that Jimmy Carter really wanted to have the support of a guy 
who molested, killed and ate children, just as Vice President 
Gore wanted to have the oligarchs support him.
    I mean, that is the thing that every living politician, 
because of the corrupt political system we have here and not 
having public financing of elections--every one of us lives in 
fear of.
    We live in fear. Seriously, we live in fear, and we do not 
have the FBI sitting next to us and tell us everybody who comes 
in. I would like you to vouch for every contributor you have. I 
sure in hell am not going to vouch every one that I have.
    But at any rate, it is--it is kind of amusing, but--to me, 
anyway.
    Mr. Merry, the irony I find--and I do not disagree with 
much of what you said. The irony I find in what you said is I 
remember Jeffrey Sachs, who--who shocked Poland through its 
renewal. There was a great debate. Conservatives in this town 
and on this committee were saying Russia should go the Sachs 
route, Russia should go the Sachs route, shock treatment.
    The irony is: you are being critical of this administration 
for its shock treatment, when they were getting beat up now--
the very people who are beating them up now are the very people 
that said the reason they are in trouble is they did not have 
the shock treatment.
    You do remember that debate, do you not?
    Mr. Merry. Yes, sir.
    Senator Biden. Yes. So I--I find this incredibly ironic, 
the very people who are talking about the failure here of the 
way we--we engaged Russia economically are saying we failed for 
the very reason that--totally different reason than you are 
saying we failed.
    I happen to agree with you, because I was on the side 
saying, ``Hey, you cannot expect these folks--they do not have 
anything remotely approaching Poland's circumstance, and it 
will not work. It will not work in Russia.''
    And I--the irony is that the bulk of the criticism that you 
are getting--that we are getting from--not from within the 
Congress, but outside the Congress and from your colleagues, 
Mr. Legvold, who are being critical, is that, you know, they 
were the very guys back then who were saying, ``Shock, shock, 
shock. Sit--sit him in that chair and turn up the pressure, 
because that is the only way it is going to happen.''
    I just put--I will put that down as a historical footnote 
here, because I was here for that debate.
    Mr. Legvold, one of the things that I find absolutely 
compelling about what you said is: I just got back from a trip 
to Kosovo and the region, and I recently have been in other 
parts of Europe and the Middle East.
    And I was astounded, as you seem not to be, by the reaction 
of our allies as well as our adversaries, if we can call it 
that, by what went on in Kosovo.
    Our allies walked away thinking, Oh, my God. What an 
incredible display of power by the United States, military 
power. And guess what? We're not even close technologically to 
the capacity they displayed.
    It has caused political eruptions in France. It is causing 
difficulty within NATO. The NATO alliance is in a position now 
where after having observed what we have been telling them all 
along, that you should be spending more money to increase your 
technological capability to keep up with us, now are having 
this--mark my words. I am not an expert like you, but I have 
been doing this for 27 years.
    Mark my words. You are going to see an increased move 
within western Europe to disengage with NATO, because there has 
got to be a different way to do it because the only way to stay 
in it without us totally dominating it is to spend money they 
are not willing to spend and take the years it takes to catch 
up.
    So the irony, I found, was here you have our very allies 
going, Oh, my God. Look what those Americans can do, even 
though they allegedly knew it.
    Every other part of the region I went to whether it was the 
Middle East or Russia, it was, My God. If they can do that here 
for a violation of human rights, they can do it anywhere.
    And we actually had people in China, in Russia, in Beijing, 
in Syria, in small and large countries being chastened in a way 
that leads them, I think, to the proliferation of cheaper means 
by which to be able to deal with what they believe to be an 
inclination of ours and a capacity we demonstrated to do them 
great harm.
    Chemical weapons, biological weapons, theater nuclear 
weapons, intermediate range nuclear weapons, in the case of--
of--of the Russians.
    What is your suggestion? Step out of what you academics 
love to do. Give us a concrete suggestion as to what we should 
be doing now.
    The Chairman. In 30 seconds.
    Dr. Legvold. Mr. Chairman----
    Senator Biden. Submit it in writing, because I am really 
interested in what you have to say.
    Dr. Legvold. OK. I will submit it in writing, because I 
cannot do justice to the question in 30 seconds----
    Senator Biden. I understand.
    Dr. Legvold [continuing]. And it is fundamental to the 
overall structure of the problem that I was laying out.
    Senator Biden. That will be my question for you to respond.
    The Chairman. All right.
    The Chairman. Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you.
    Gentlemen, thank you, each of you. We are grateful for your 
insight and your time.
    As a matter of fact, I--I do want to really attach myself 
to what Senator Biden was asking.
    But I would like to ask each of you the general question--
we heard some very insightful thoughts from each of you, coming 
from different perspectives, different experience basis.
    And my question following along Senator Biden's question 
really is from each of you: What do we do now? Where do we go 
from here? What is the policy we should--we should follow with 
this administration just a year out?
    You heard me ask the question of the Secretary of ``What 
changes do you plan or intend to make based on a year, only 1 
year before a new administration takes over?''
    So I would like to hear from each of you. Thank you.
    Mr. Ermarth.
    Mr. Ermarth. Well, sir, I believe we have to start in going 
from here with a thorough audit of our policy of a sort that a 
few hearings cannot accomplish.
    I mean, we have got a--we have got to tally what happened 
to the nuclear weapons on the front end of those missiles that 
were dismantled, and what happened to the dollars that were 
expended in achieving that. How much went to U.S. contractors? 
How much went actually into Russia? A thorough audit of our 
policy on practical matters, to preserve and identify the good 
as well as things that we did not want to see.
    Then I believe we can craft a more constructive policy for 
dealing with the next Russian administration, and what will 
probably be the next American administration as well.
    And it is going to have to be more therapy than shock. It 
is going to have to be a--a policy that puts much more emphasis 
on the legal, institutional, even cultural foundations of 
capitalism.
    The principles expressed in what this--the chief economist 
of the World Bank said, ``Capitalism will not work, if 
everything is for sale, including the state.''
    Now, some of that is going to involve some policies that 
are not very popular, particularly on the Republican side, 
state controls of various things, controls on the movement of 
capital in some respects, a kind of industrial policy.
    But remember, we are dealing with a very disheveled, in 
some ways very primitive economic scene there, and different 
policies than are orthodox here are required there.
    Now, we cannot impose them, but we need them as a checklist 
for ``What are you doing right in our eyes? What can we support 
with our taxpayer money, and with our applause,'' so that we do 
not repeat the mistakes we have committed in the past.
    Senator Hagel. Thank you.
    Mr. Moody.
    Mr. Moody. If I may, I am a businessman by background. And 
I believe that you have to set up a plan, and the whole time I 
was in government I never knew or never saw a U.S. Government-
Russia policy.
    And I believe that you have to establish a plan. You have 
to identify the issues as Fritz just set out. Then you are 
going to have to articulate the policy on each--each issue; for 
instance, supporting the proposed legislation they have today.
    Then you need to make sure that everybody in government 
understands what the policy is within the entire organization 
so everybody is marching along the same way. And I think that 
way we can be successful.
    Senator Hagel. Thank you.
    Mr. Merry.
    Mr. Merry. In my view, the most important U.S. national 
interest with Russia during the remainder of the current 
American administration is that the upcoming Russian 
Parliamentary and Presidential elections actually take place, 
that they are legitimate and that the results of the elections 
are respected, and that we have a constitutional transfer of 
both legislative and executive power in that country.
    I can think of nothing that would better set the stage for 
whoever is in power in the United States after our next 
election than to have a government in Russia which enjoys 
electoral legitimacy.
    And I think this time, our administration should really 
communicate in ways that are available to it that we expect no 
less. We went along with unconstitutional actions in 1993. That 
may have been necessary. That is a long debate. We went along 
with the war in Chechnya. I happen to think that was totally 
unjustifiable.
    In 1996, Boris Yeltsin through his own immense energy 
actually did win the election, but it is pretty clear our 
administration would have settled for an outcome which was not 
constitutionally legitimate.
    I think this time we have to put constitutional legitimacy 
and the rule of law at the absolute top of our platform. 
Whatever government emerges will obviously want to demonstrate 
its nationalist credentials. It will want to demonstrate a 
break with the past. It will want to demonstrate that it is not 
the vassal of the United States. That is going to lead to some 
fairly difficult rhetoric, perhaps on both sides. And I think 
it is going to lead to the Russians being more inclined to rely 
on their own internal resources and their own capabilities 
rather than assistance from the West. And I think that is going 
to be a good thing.
    Senator Hagel. Thank you.
    The Chairman. Mr. Legvold, please proceed for 2 or 3 
minutes.
    Senator Hagel. Thank you, Mr. Chairman.
    Dr. Legvold. Thank you.
    Well, first of all, I want to begin by--by re-emphasizing 
what Mr. Merry started with. I think it is absolutely crucial 
that not merely the U.S. administration executive branch, but 
that you in your dealings with the parliamentarians, stress the 
importance of going ahead with no confusion, obsfucation or 
circumvention of the elections, both sets of elections in 
December and in--in--in July, the Presidential elections.
    Second, I agree with what Fritz had said about doing the 
audit.
    Third, I think clarifying all of the issues that are before 
you around the current matter of corruption, malfeasance, money 
laundering, so on, is very important for the reasons that you 
mentioned, Senator Hagel.
    I think we cannot mobilize political support for engaging 
the Russians materially, unless we can demonstrate that it is 
not simply down a black hole or that we are being taken for a 
ride on it.
    But then I come back to the agenda that I laid out, that we 
are missing, that we are failing to engage. The sad part about 
this story--implications of Senator Biden's point about Kosovo 
and the way others other than our allies are responding, the 
Russian reaction that I began to describe in only bits and 
pieces, is how warped and distorted and inappropriate it is for 
the Russians in terms of their security agenda.
    The same week that they did that Commonwealth 1999 exercise 
that I referred to, a month ago in August, Shamil Basiath was 
bringing 2000 or more Chechens across the border into Dagestan, 
seizing villages and the Russians were then tasked with this 
military contest, a series of terrorist bombings that many 
people associated with that.
    The Russians have a very different security agenda from 
addressing a kind of threat, so-called Serbian threat, within 
their own territory.
    And yet by not wrestling with these problems together and 
the way we are seeing one another's behavior, whether it is in 
how we go about building ballistic missile defense in the 
context of preserving the ABM agreement, the degree to which we 
do that by imposing it unilaterally or the extent to which we 
are or are not engaged in a serious discussion with the 
Russians about our respective positions in Central Asia--we are 
not doing that now--or in the Caucuses, or the extent to which 
we are utterly insensitive to the way our politically motivated 
approach to multiple pipelines in the Caucuses comes across, we 
simply--we simply reinforce this warping of the way in which 
they do their security agenda.
    And we create this prospect of the lost Russia I was 
referring to in the long run, a genuinely alienated Russia, 
because for all their frustration and anger, if you look at 
their behavior in the last several years, the Russians in the 
end have remained constrained.
    And in the end they have not turned over the furniture. In 
the end, they have not turned out to be spoilers for all 
international enterprises among the great powers in the United 
Nations.
    And then we get to the fundamental question of the degree 
to which we are prepared to engage them on that most crucial 
issue that the administration is right to focus on from the 
beginning, and that is a successful domestic transformation to 
democracy and economic reform, and a series of things that we 
need to think about, not merely as the U.S., because we cannot 
do it as the U.S. effectively unless we are leaders of the G-7, 
the industrialized democracy. But that would take more time 
than I should.
    The Chairman. Thank you, sir.
    Senator Hagel. Thank you.
    The Chairman. Senator Kerry.
    Senator Kerry. Mr. Chairman, thank you.
    I think there has been a great deal of wisdom from this 
panel. And I want to thank all of you for your comments here 
today. I think there has been more wisdom from you as a panel 
than there has been from the Congress in its recent 
politicization of some aspects of this issue.
    Now, gentlemen, you, Mr. Ermarth, Mr. Moody, and Mr. Merry 
have focused more on the criminal transition that has taken 
place.
    And I think you have appropriately placed some blame on a 
combination of naivete and what Professor Legvold has called 
inattention which, candidly, has combined to minimize the kind 
of impact that we might have had that might have implemented 
some of what the professor just talked about.
    And you are correct, I think, in the picture you draw. I 
certainly agree with you.
    I--just to amplify, Mr. Moody--also did write about the KGB 
plundering that began with the vision of the demise that was 
coming, and the great plundering that has taken place since, 
which is why a place like Estonia can boast about being the 
greatest metal producer in the world, yet there is not a metal 
factory in the country. It has all come from Russia. It is all 
smuggled. And it has all gone elsewhere. There has been a 
plundering of Russian assets.
    And indeed the Apparatchki were able to transition 
themselves from Communist Apparatchki into the oligarchy and 
into the criminal authorized group that you talk about.
    But--and here is the ``but''--there are good things that 
have happened. And the professor has referred to them. There 
have been acts of responsibility. Yeltsin himself has tried to 
walk a line in a dangerous atmosphere.
    And so the question is really not ``How can we in the 
Congress find ways to make this a political football,'' and 
chew each other up over who did or did not do something.
    I would agree with the criticisms that someone must have 
known there was a level of criminality that was such that these 
transfers of money and other things we were trying to achieve 
were threatened without other safeguard in place.
    The issue for all of us now is: What should those 
safeguards be? How do we proceed? How do we undo this 
combination of criminality and all of the other forces that are 
loose in this country? The perception of America and American 
capitalism is considerably less than we would like it to be 
today because of what has happened.
    So a lot hangs in the balance. And I think that--I thought 
the professor's summary of it was really superb, when he talked 
about the combination of these challenges, the criminality, the 
lack of structure, the laws and the inattention that may have 
led us here and the spasms of focus that we have on this.
    I think it is essential that we not let this become 
political because our national interest is so entwined in it, 
and that may be a useless plea in a city that is increasingly 
more partisan and politicized.
    But, professor, maybe you want to lead off, and each of you 
might share with us. You say do not disengage. Clearly, some 
moneys have been essential to the de minimis stability levels 
that we want to continue to maintain, and even to some of the 
connections and good faith exchanges that people rely on that 
do not empower the more radical nationalistic forces that would 
clearly take us down a very different and more dangerous road.
    So how do we manage that now in your judgment? I mean, what 
is the order of priority as to how we can establish the law and 
order, the legal structure, the system that inspires the 
confidence that helps build the other things we want to do, 
without giving in to the lowest common denominator here that 
threatens everybody?
    Do you want to begin that, professor?
    Dr. Legvold. Well, I--I--again, in a brief compass, I 
cannot--or in a short time, I cannot do justice to the 
question, Senator Kerry, but I would say the following, and 
maybe especially since I am the one that has strayed farthest 
from your--the--the core issue of these hearings, that on the 
issue of corruption and malfeasance, the way I would bring it 
together is the following:
    First to underscore a point, Mr. Chairman, in particular, 
given your interest and concern about this point I have made of 
the criminalized state: It is implicit in the way Fritz Ermarth 
phrase the issue and it was explicit in what Jim Moody had 
said. There is a fundamental difference between countries that 
have corruption and even at times corruption in government.
    This country has corruption, organized crime. It has even 
had corruption at local and state and Federal levels.
    Italy has corruption and often corruption that penetrates 
in the government.
    That is very different from a criminalized state. That 
means that when you sit down with Chernomyrdin or when you sit 
down with Putin these days, or when you sit down with 
parliamentarians and you talk to them about fighting corruption 
and you are willing to join forces with them and you beg the 
question that they are themselves the problem, who really are 
missing the boat.
    That means that the issue of--of fighting corruption in 
this case, the criminalized state, is very tough. It is very 
difficult.
    And I think it is probably wrong to assume that it is 
emerged largely because of our neglect or the things that we 
did or what international financial institutions did.
    I would, however--to come back to your question, Senator 
Kerry--say that in the future if we were really going to try to 
influence the structural obstacles to reform--and we agree that 
one of the major ones is the criminalized state, not just 
corruption, but the criminalized state--then the degree to 
which we enter into the bargain with material commitments and 
the conditionality will be the degree to which national leaders 
and parliamentarians attack the criminalized state, not just 
corruption.
    And if we have to give a percentage point or two on 
stabilization packages in order to maintain budgets in the way 
in which we give money, I would argue that we should, in order 
to get at that underlying structural problem.
    I do not know whether it will work. I do have the 
impression, perhaps mistaken, that when--when Primakov was 
prime minister, that he was somebody who might have been 
willing to attack the problem of state corruption or the 
criminalized state.
    The Chairman. Thank you so much.
    Senator Kerry. Can the others comment, Mr. Chairman?
    The Chairman. Well, I tried to warn against asking a 
question that ended on the caution light, but, yes, we will 
hear from the others.
    Senator Kerry. Thank you, Mr. Chairman.
    Mr. Merry. In my own view, as we look ahead we should 
really be concentrating on things where we do not judge the 
value of our programs by the number of dollars we spend.
    I think the greatest positive accomplishments in Russia in 
my lifetime have been in the area of civil liberties. I lived 
in Russia under Brezhnev. And I think the state of civil 
liberties in Russia today exceed anything I ever would have 
dreamed I could live to see.
    I think encouraging things like that do not necessarily 
cost a lot of money. Some of the kinds of exchange programs the 
Librarian of Congress James Billington has put forward, are not 
going to cost a vast amount of taxpayer money. And we are going 
to get immense returns for them.
    I think also we should greatly increase our support for 
some of the private American programs in rule of law and legal 
reform, particularly in commercial law.
    I think, beyond that, we should get out of the habit of 
regarding Russia as a welfare case. It is still eminently a 
very rich country. It has lots of resources. And the best way 
for it to learn to use its own resources is by not providing 
opportunities for those resources to be strip-mined by a bunch 
of robber-barons. And there is nothing that encourages people 
to look to their own resources than knowing they are not going 
to get bailed out from abroad.
    I do think, however, that in the next few years, the West--
and I do not mean just the United States, because other 
countries actually have more interest in this than we do--the 
Soviet era debt is almost certainly going to have to be 
disposed of. I just cannot imagine that money is ever going to 
really be repaid.
    Beyond that, I think it is very important and I would 
commend this administration for its efforts in this regard, to 
keep Russia engaged in many areas of the world, even when they 
do not have much of a contribution to make, even when they are 
sort of a pain in the neck to have around, but just to give 
them the sense that we treat them as a great power.
    Now, this is an empire that has failed. It is not the only 
empire that has failed in our lifetime. I know a lot of French 
people who still have not gotten over the loss of Algeria. I 
know English people who still get very upset when people talk 
about Gibraltar reverting to Spain. The Russians----
    Senator Kerry. I thought you were going to say Delaware, 
North Carolina and Massachusetts.
    Mr. Merry. That, I would not touch, sir.
    The Russians are going through what is a deep psychological 
problem. Keeping them engaged in many areas even when their 
objective strength does not justify it is its own reward.
    The Chairman. Very well.
    Mr. Moody.
    Mr. Moody. I--I think that the first issue I would address 
right at the moment is the fact that the oligarchs are 
purchasing the news media. They are purchasing the televisions. 
They are purchasing the magazines. They are purchasing the 
newspapers to have effect on the next election. Now, we ought 
to at least speak up about that.
    The second thing I would do is--it does not work with my 
children, so I do not believe it should work in other ways. I 
do not believe in giving money away. It is never appreciated. 
And it is never spent like you want.
    But anyway, especially when the Russian Government auditors 
at the same time, even prior to this, were saying, ``Do not 
give us anymore money. It is just going to be stolen anyway.''
    The third thing I would say is the United States has an 
enormous wealth of expertise and information out there that is 
not being used today, and by that a lot of retirees.
    And I think it would be very good for, maybe a kind of a 
Peace Corps type operation to go on in the former Soviet Union 
using a lot of these retirees to go over, show them how to set 
up businesses on a real grass root level, work with them on--on 
legislation and things like this.
    American retirees should love to do that, because it is a 
great country to go see. It is--you know, it is magnificent to 
be there and to understand the--the people over there. And I 
think in the long-term it is a nice cheap way to build things 
from the grass roots up.
    The Chairman. Mr. Ermarth.
    Mr. Ermarth. Senator Kerry, let me answer your question by 
sketching very briefly a rosy scenario. It may be smelly, but 
at least rosy. And we ought to support it.
    They get through the elections. Whoever wins--and we should 
not be calling favorites on this. Whoever wins is going to--I 
mean, is going to have some prospect, some stability, some 
creditability.
    And then I suspect there will be an opportunity for that 
winner, in alliance with possibly the leftovers of the Yeltsin 
official family and the power ministries, to turn to the 
oligarchs, to the opposition, to the regions and say, ``OK, 
guys. Let us have a deal here. Let us start out by fixing the 
Constitution so the President is accountable, the--the Duma is 
responsible and the government is responsible to the Duma. Then 
let us start the long agenda of tamping some law and order into 
place.''
    Big complicated problem, but it means like going back and 
passing that money laundering bill that Yeltsin vetoed and 
getting it passed.
    Then comes the hard part, the money, working out how much 
you give back and how much you got to--you get to keep. It is 
not going to be clean and neat. But it is the least worst 
scenario.
    I posed this scenario to General Kulakoff, the former chief 
of the--of their national police force. He says, ``Yes. That is 
it. That has got to be something like that.''
    Now, if they go on that course, we have to be in a position 
to know what is real, what is phony, what we can support and 
what we--what we cannot.
    The Chairman. Gentlemen, I thank you very much. We have 
kept you here longer than I had anticipated, but you have made 
such a difference in this hearing and I appreciate it 
personally, and I know my colleagues do.
    Now, if I may ask you to submit to written questions from 
members of the committee who were here and committee members 
who were not here, because they will have an interest in it 
too.
    And I thank you again.
    Senator Biden. Mr. Chairman.
    The Chairman. Yes.
    Senator Biden. Before you close, 30 seconds. I want to tell 
Mr. Moody, you and I and others of this committee have 
supported a thing called the International Executive Service 
Corps of Retired Executives.
    Thousands of them have participated. They are ready to do 
it. They are not--they come away disillusioned sometimes, but 
also come away with some contributions.
    So that--that is well under way. I do not know how to make 
it better. If you have any ideas, we would like to hear them.
    Thank you.
    The Chairman. Thank you. If there be no further business to 
come before the committee, we stand in recess. Thank you again.
    [Whereupon, at 5:47 p.m., the committee adjourned, to 
reconvene at 10:30 a.m., September 30, 1999.]


              CORRUPTION IN RUSSIA AND FUTURE U.S. POLICY

                              ----------                              


                      THURSDAY, SEPTEMBER 30, 1999

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met at 10:42 a.m., in room SD-419, Dirksen 
Senate Office Building, Hon. Gordon H. Smith presiding.
    Present: Senators Smith and Biden.
    Senator Smith. Good morning, ladies and gentlemen. We will 
convene this hearing of the Foreign Relations Committee. 
Senator Biden will join us shortly, but he is literally 
speaking on the floor right now, and so his staff has suggested 
we go ahead in the interest of time and out of respect for our 
witnesses today on this very important topic.
    This is the second of two hearings this committee has held 
devoted to the subject of corruption in Russia. These hearings 
could not be more timely, given that 80 percent of an IMF 
bailout in 1998 did not even reach Russia, that enormous sums 
of money have been laundered through the Bank of New York, and 
that President Yeltsin may--and I emphasize ``may''--have 
received kickbacks from a Swiss construction company.
    In our first hearing on the subject a week ago, this 
committee learned first about a pattern of organized crime and 
officially-sponsored crime in Russia and, second, about 
administration policy in light of that pervasive pattern.
    Unfortunately, at that hearing the administration was not 
able to give us details regarding what the administration knew 
about specific corrupt figures in the Russian elite. We were 
able to have somewhat of a dialog about the need for engagement 
as a policy with the Russian Federation. It's a policy I agree 
with. We must engage Russia.
    But it's impossible to perceive United States policy as 
containing only two paths to our relationship with Russia: 
isolationism on the one hand or blind engagement on the other. 
I reject the isolationist tendency too prevalent in politics 
today and firmly believe that we need to help consolidate 
market economies and democratic governance in today's Russia. 
We do this by sharing American values, by democracy building, 
by teaching how a court system works, and by the rule of law.
    In turning to the question of future U.S. policy regarding 
corruption in Russia, we have in today's hearing an opportunity 
to explore precisely in what fashion the United States should 
further pursue engagement.
    As I pointed out in our hearing a week ago, I'm a strong 
supporter of funding for international affairs. We do some good 
things in Russia, in particular, work in the area of the Nunn-
Lugar program assisting Russia with the safe and secure 
transportation, storage, and elimination of nuclear weapons. I 
am, however, concerned that American taxpayers underwriting 
other, perhaps not as well-known, assistance to Russia have a 
right to ask how those other funds are being used.
    For example, they need to know whether the Russian 
officials with whom we are dealing are trustworthy. They have a 
right to know that the administration will insist on the 
accountability and commitment to the rule of law of those 
officials when we offer our assistance to Russia, consisting to 
date of over $5 billion obligated in grants and almost $13 
billion in loans from the United States.
    In today's hearing on corruption, we will examine, one, the 
prospect for change and reform in Russia; two, the relative 
impact U.S. policy is likely to have on Russian reform; and 
three, what policies the United States should pursue given the 
experience of what has worked and what has not during the 
Clinton administration.
    I hope, in particular, that we will focus on what needs to 
be done on the ground in Russia and what the United States can 
do to facilitate it.
    Among our witnesses today, we have Peter Reddaway, 
professor of political science and international affairs at 
George Washington University. He is the co-author with Dimitri 
Glinski of a book to be published in January entitled ``The 
Tragedy of Russia's Reforms: Market Bolshevism Against 
Democracy.'' The very title of the book shows how appropriate a 
witness Dr. Reddaway is for today's hearing. And we welcome 
you, sir.
    Dr. Reddaway. Thank you.
    Senator Smith. We also have as a witness Thomas Graham, 
senior associate at the Carnegie Endowment for International 
Peace. As a Foreign Service officer, Dr. Graham served in 
several capacities at our embassy in Moscow, including 
political counselor and head of the Political/Internal Section 
of the embassy staff. And we welcome you, Dr. Graham.
    Dr. Graham. Thank you.
    Senator Smith. Our third witness is Dr. James Finckenauer, 
a professor of criminal justice on leave from Rutgers 
University. He has a special expertise in the area of organized 
crime and that includes organized crime in Russia. Our welcome 
to you, sir, and to all of you.

             Prepared Statement of Senator Gordon H. Smith

    This is the second of two hearings this committee has held devoted 
to the subject of corruption in Russia. They could not be more timely, 
given allegations that 80 percent of an IMF bailout in 1998 did not 
even reach Russia, that enormous sums of money have been laundered 
through the Bank of New York, and that President Yeltsin may have 
received kickbacks from a Swiss construction company.
    In our first hearing on the subject a week ago, this committee 
learned, first, about the pattern of organized crime and officially-
sponsored crime in Russia and, second, about the Clinton-Gore 
Administration policy in light of that persuasive pattern.
    Unfortunately, at that hearing the Administration was not able to 
give us details regarding what the Administration knew about specific 
corrupt figures in the Russian elite. We were only somewhat able to 
have a dialogue about the need for engagement as a policy with the 
Russian Federation.
    But it's impossible to perceive United States policy as containing 
only two paths to our relationship with Russia--isolationism or blind 
engagement. I reject the isolationist tendency too prevalent in some 
politics today and firmly believe that we need to help consolidate 
market economies and democratic governance in today's Russia. We do 
this by sharing American values, by democracy building, by teaching how 
a court system works and by rule of law.
    In turning to the question of future U.S. policy regarding 
corruption in Russia, we have in today's hearing an opportunity to 
explore precisely in what fashion the United States should further 
pursue engagement.
    As I pointed out in our hearing a week ago, I am a strong supporter 
of funding for international affairs.
    We do some good things in Russia, in particular, work in the area 
of the Nunn-Lugar program assisting Russia with the safe and secure 
transportation, storage, and elimination of nuclear weapons. This is 
largely Defense Department funding. I am, however, concerned that 
American taxpayers underwriting of other, perhaps not as well-known, 
assistance to Russia have a right to ask how those funds are being 
used.
    For example, they need to know whether the Russian officials with 
whom we are dealing are trustworthy. And they need to know that the 
Administration will insist on the accountability and commitment to rule 
of law of those officials when we offer our assistance to Russia--
consisting to date of over $5 billion obligated in grants and almost 
$13 billion in loans from the United States.
    In today's hearing on corruption, we will examine (1) the prospects 
for change and reform in Russia, (2) the relative impact U.S. policy is 
likely to have on Russian reform, and (3) what policies the United 
States should pursue given the experience of what has worked and what 
has not during the Clinton Administration.
    I hope, in particular, that we will focus on what needs to be done 
on the ground in Russia and what the United States can do to facilitate 
it.
    Among our witnesses today, we have Peter Reddaway, professor of 
political science and international affairs at George Washington 
University. He is the co-author with Dimitri Glinski of a book to be 
published in January entitled ``The Tragedy of Russia's Reforms: Market 
Bolshevism Against Democracy.'' The very title of that book shows how 
appropriate a witness Dr. Reddaway is for today's hearing.
    We also have as a witness Thomas Graham, senior associate at the 
Carnegie Endowment for International Peace. As a Foreign Service 
officer, Dr. Graham served in several capacities at our embassy in 
Moscow, including political counselor and head of the Political/
Internal section of the embassy staff.
    Our third witness is James Finckenauer, a professor of criminal 
justice on leave from Rutgers University. He has special expertise in 
the area of organized crime, including Russia.

    Senator Smith. We will hear from Senator Biden when he 
arrives from the floor. Without further delay, we will turn to 
Dr. Reddaway and invite your testimony.

STATEMENT OF DR. PETER REDDAWAY, PROFESSOR OF POLITICAL SCIENCE 
   AND INTERNATIONAL AFFAIRS, GEORGE WASHINGTON UNIVERSITY, 
                         WASHINGTON, DC

    Dr. Reddaway. Thank you very much, Mr. Chairman.
    With your permission, I would like to offer my statement 
for inclusion in the record.
    Senator Smith. We will receive that and do so without 
objection.
    Dr. Reddaway. Thank you, and I will present a brief summary 
of that statement with a little bit of elaboration in one or 
two places.
    I would like to start with a list, that I hope is in a 
logical sequence, of points which I think the U.S. Congress, 
the executive branch, and also the American people need to 
recognize even though most of these facts are uncomfortable and 
not very welcome. I would like to start with four that relate 
principally to the past and the present and then go on to 
another four that relate to the future.
    The first one--and I cannot state this strongly enough--is 
we have to recognize that the whole Russian system, political 
and economic, is in a very profound crisis of legitimacy. I 
think the word ``legitimacy'' sums it up best. And it is 
uncertain whether the Russians are going to come through and 
develop better legitimacy in the future.
    The second point is that the Russian Government is the 
major player that bears responsibility for this most 
unfortunate development through its ineptness, its corruption, 
Mr. Yeltsin's obsession with holding onto power at any cost to 
his own country. But we in the West also bear a considerable 
responsibility for what has gone wrong in Russia, in my 
opinion, especially since 1991 when we became particularly 
closely engaged.
    My third point is that--and this is particularly 
uncomfortable--the United States is today viewed by most 
Russians with at best indifference, more often by suspicion, 
resentment, or even with outright hostility. And the hostility 
side applies particularly to the political, economic, and 
social elite in Russia which is on the whole more alienated 
from us than the mass of ordinary Russians.
    My fourth point, which is also very uncomfortable, is that 
those Russian politicians with whom we are particularly closely 
associated and have been over the last 7 or 8 years, President 
Yeltsin, Mr. Chubais, Mr. Gaidar, Mr. Nemtsov, these are the 
politicians who are at the moment most distrusted and often 
hated out of all the politicians in Russia.
    Looking to the future, my four points are as follows, and 
they derive from what I have just said about the past. We 
should, in my opinion, as a country and a Government, stop 
doing what we have been doing for the last 14 years and 
especially since 1991, which is advising Russia in a rather 
insistent way on how to run their internal affairs. Most of our 
advice over these last 14 years, and especially the last 8 
years, turns out to have been inappropriate or even downright 
wrong. Most of the outcomes in my opinion have been unfortunate 
or even tragic. At first, of course, in the early 1990's, the 
Russian Government very much sought our advice, wanted our 
advice. That situation has changed in the last 2 or 3 years. 
They show less and less interest in our advice and increasing 
interest in opposing us in various regards.
    My second main point about the future is that, rather than 
go on giving advice and lectures to them, which has been the 
hallmark of our policy over the last 8 years, we should, rather 
than doing that, open our minds and listen. The key word is 
``listen'' carefully to the internal debates that the Russians 
are now deeply into and will be into for the foreseeable future 
over why their system has entered into this acute crisis of 
legitimacy and how they, the Russians themselves, think that 
they may be able to come through and get out of that crisis.
    My third point is that, after doing a lot of listening, we 
ourselves listening to the Russians should extend our current 
and long-delayed debate about what has been wrong with our 
Russian policy and turn it into a debate about how, in light of 
the Russian debate and of our own national interests, of 
course, we should radically reshape our policy toward Russia. 
The final stage of that debate should involve frequent 
consultations with the Russians.
    At the present stage, I might mention in passing that the 
Carnegie Corporation of New York is just launching a major 
Russia initiative which should come to fruition about a year 
from now, and we will be sharing the results of that project 
with the Congress through a variety of channels. Mr. Graham and 
myself are some of the leaders of that Russia initiative.
    My fourth point is that for a limited time, perhaps a year 
or so, we need, in fact, to a certain extent to disengage from 
Russia. At the same time, we need to explain carefully to the 
Russians why we are partially disengaging and make it clear 
that we plan to reengage on a more full scale as soon as we 
have listened to their debate and carried out our own debate 
and entered into consultations with them as to what the future 
pattern of our relations can most fruitfully be.
    Those are my broad points. Let me say why I think this is 
an especially critical turning point in U.S.-Russian relations. 
Some of the reasons should be clear from what I have said, but 
let me add an extra dimension.
    The danger does exist, in my opinion, that if we are not 
extremely careful, Russia could conceivably at some point in 
the next few years again turn into a rogue state. Russia was a 
rogue state for 70 years under communism. We did not use the 
term at that time, but that is in fact what it was.
    Now, in my view history is not very often a linear process, 
and especially that is true when it comes to Russia. In the 
period from 1860 until 1917, Russia was steadily integrating 
itself into the Western world, economically, politically, 
socially, culturally, and so on. Then when we thought that 
Russia was more or less part of the Western world, suddenly in 
1917, what did it do? It pivoted through 180 degrees and shot 
off in a totally unexpected direction, which was the exact 
opposite. Instead of embracing democracy, it embraced 
totalitarian dictatorship. Instead of becoming part of the 
world capitalist system, it became a closed state socialist 
system.
    Well, by the late 1980's, the Russians had tired of 
totalitarianism and state socialism, and they were interested 
again in democracy and free markets. In 1991, they threw off 
communism and they embraced what is often called shock therapy 
as a strategy for economic reform, or the Washington consensus. 
Again, the goal to integrate themselves into the world 
community, into the world economy, the world political system, 
international organizations, and so on.
    However, that strategy of shock therapy and the Washington 
consensus has turned out to be--and some of us warned that this 
would happen from the start--not suitable for Russia and it 
explains why Russia has landed in the present unfortunate 
situation with perverted and criminalized forms of economy and 
political system.
    As a result, most Russians are alienated today from the 
Russian state and to a considerable extent from capitalism and 
even to some extent from democracy because of the perverted 
forms that those important institutions have taken in Russia. 
Today Russia is divided socially into a very small layer of 
political and economic haves who lead lives of conspicuous 
consumption, a small layer of middle class, and the great 
majority of the population who are have-nots economically, 40 
percent live in poverty, even by the Russians' low standards of 
what poverty is, and they have no effective political or labor 
union representation.
    In these circumstances, it is not impossible that Russia 
might make another 180 degree pivot as it did in 1917, and 
instead of continuing to engage itself and integrate itself in 
the world community, it might shoot off in some other 
direction. That is the ultimate danger that our Russia policy 
is called upon to face.
    When we rethink our Russia policy, we need to face 
unpleasant facts, as I mentioned before. Anti-Americanism is 
now a big feature of the Russian scene. The politicians we are 
closely associated with--Mr. Gaidar in the latest poll has the 
trust of 2 percent of Russians and the distrust of 81 percent 
of Russians. Mr. Chubais has the trust of 3 percent of Russians 
and the distrust of 85 percent of Russians. Mr. Yeltsin has the 
trust of 2 percent of Russians and the distrust of 90 percent 
of Russians. These are the politicians that we are associated 
with in the minds of ordinary Russians.
    Well, I do not think, as I hope I made clear earlier that 
it is appropriate for us at this stage to put out even a 
tentative blueprint of what our new Russia policy should be. 
Let me conclude with a few very broad principles that should 
guide us, in my opinion, for the interim period.
    We should not continue to meddle in Russia's internal 
political processes and their top personnel choices as we have 
done on over the last 8 years.
    We should not lecture the Russians.
    We should not allow the IMF to send large quantities of 
cash to Russia because it is too uncertain what would happen 
with that cash.
    We should not collaborate extensively with their law 
enforcement agencies because those agencies are, unfortunately, 
too corrupt and unreliable.
    We should, on the other hand, maintain low key but large 
scale cultural and educational programs with Russians, 
especially young Russians.
    We should continue the Nunn-Lugar program as long as it is 
politically feasible to do so.
    We should prepare to help the Russians in the various 
humanitarian and Chernobyl-type crises that are likely to arise 
in the coming years.
    I hope that the Congress will develop close relations with 
the new Duma which is set to be elected in December of this 
year.
    We should try to develop trade as far as possible, 
providing it is on a transparent basis.
    And, of course, we should not lose sight of our national 
interests which means openly--more openly than over the last 7 
or 8 years--telling the Russians when their behavior is 
something that we are not prepared to tolerate. Mr. Weldon in 
the House has taken a strong lead on this. I very much support 
him and indeed all his policy suggestions vis-a-vis Russia. I 
think he has a very well thought out program, and it involves 
being open and frank and direct with them when they do things 
that we are not prepared to tolerate.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Reddaway follows:]

              Prepared Statement of Dr. Peter Reddaway \1\
---------------------------------------------------------------------------

    \1\ Professor of Political Science and member of the Institute for 
European, Russian, and Eurasian Studies, George Washington University; 
formerly Director of the Kennan Institute for Advanced Russian Studies.
---------------------------------------------------------------------------
    My statement aims to advance several main ideas:
    1. We must recognize that the Russian political and economic system 
is in a profound crisis of legitimacy.
    2. We need to acknowledge that while the Government of Russia bears 
the major responsibility for this crisis, the West bears a considerable 
responsibility too.
    3. We must face the fact that the U.S. is now viewed by most 
Russians with indifference, suspicion, resentment, or even outright 
hostility.
    4. We need to ponder the fact that those Russian politicians with 
whom we are most closely and intimately identified--Yeltsin, Chubais, 
Gaidar, Nemtsov--are the politicians who are more deeply distrusted and 
hated by Russians than any others.
    5. We should therefore stop what we have been doing for the last 
fourteen years, that is, advising the Russians how to run their own 
affairs. Most of our advice has been inappropriate or wrong, and has 
turned out badly.
    6. We should, rather, listen carefully to the debates the Russians 
are now conducting among themselves about why they are facing a major 
crisis of their system, and what they should do about it.
    7. When we have opened our minds and done a lot of listening, then 
we should extend our current U.S. debate about what went wrong with our 
Russia policy into a debate about how--in light of the Russian debate 
and of our national interests--to radically reshape that policy. The 
final stage of the debate should be conducted in frequent consultation 
with the Russians.
    8. For a limited time, then--perhaps a year or so--we should to 
some extent disengage ourselves from Russia, explaining carefully to 
the Russians why we are doing so, and making clear that we plan to re-
engage in accordance with goals that have been, as far as possible, 
painstakingly and mutually agreed with them.
    While the above prescriptions are more precisely defined than such 
processes can be in real life, I attach great importance to their 
essence. U.S.-Russian and U.S.-Western relations are, in my view, at a 
critical turning-point, and if we are not careful, it is possible that 
Russia could, at some point in the next 5-10 years, become again a 
rogue state--as it was for seventy years under communism. History, 
often, does not proceed in linear ways, and least of all in Russia, 
which has twice in this century been the victim of false ideologies of 
economic determinism.
    During the last fifty years of the tsarist period Russia integrated 
itself steadily into the world community--economically, politically, 
and culturally. Yet suddenly, in 1917, with virtually no warning, it 
pivoted through 180 degrees and sped away in exactly the opposite 
direction. It embraced Marxism, which held that if the state suppressed 
the ruling class and ruthlessly seized all economic assets for itself, 
a Marxist utopia could be built. Thus, instead of continuing to develop 
free markets and democracy, Russia's Bolsheviks built a totalitarian 
dictatorship and an economy completely owned and operated by the state.
    In the late 1980s Russia tired of Marxism and began to aspire again 
to democracy and free markets. In 1991, at our urging, it embraced an 
ideology known as ``shock therapy'' or ``the Washington consensus.'' 
This ideology held--as applied to Russia by the Kremlin and the IMF--
that if market mechanisms were imposed on the Russian economy with an 
iron political will, and the state's assets were quickly privatized, 
this economic revolution would cause new democratic institutions and 
the rule of law to arise almost spontaneously. Russia would steadily be 
integrated into the world community.
    After 1917 and after 1991, the ``economic base'' would determine 
everything. After 1917 it would produce a socialist utopia. After 1991 
it would produce free markets and democracy.
    Today, the mounting disillusion of most Russians with the perverted 
market and democratic system they see around them could conceivably--at 
some point in the coming years--lead them to pivot again through 180 
degrees and speed off in some new direction as a reborn rogue state.
    This is the biggest danger that our radical re-thinking of our 
Russia policy is called on to avoid.
                    what has gone wrong since 1991?
    The first and indispensable step towards fashioning a new policy is 
to examine carefully and honestly what was wrong about the old one. In 
highly condensed form, this, in my view, is what happened. The U.S., 
the G-7, and the IMF pushed Russia in 1991 into accepting an economic 
reform strategy that was not suitable for it. Its cultural traditions 
after centuries of tsarism and communism were not appropriate for shock 
therapy. It did not yet have the necessary political, economic, legal, 
and financial institutions. President Yeltsin's imposition of shock 
therapy in unsuitable conditions soon produced widespread political 
opposition, which, with U.S. agreement, was eventually, in October 
1993, suppressed through the armed, violent dissolution of the 
Parliament.
    To compensate for his loss of popular support, Yeltsin bought the 
support of the beneficiaries of the privatization of the state's 
assets--the so-called oligarchs--by granting them financial and 
political favors. Although rhetorically opposing the new ``crony 
capitalism'' and the widespread corruption of government officials, in 
practise he allowed corruption and organized crime to flourish 
virtually unchecked. The outflow of capital out of Russia exceeded the 
inflow of capital from trade, foreign aid, and investment by roughly 
two to one. The oligarchs, the officials, and the politicians, 
including the Yeltsin family, systematically plundered the Russian 
state. Democracy was subverted, because the Parliament had few powers 
and the extremely powerful presidency was, in practise, subject to few 
serious or consistent checks. The judiciary was neglected, and became, 
in almost all critical cases, a tool of the executive or of organized 
crime.
    Because the West and the U.S. were so closely linked to Yeltsin and 
the oligarchs, they became objects of suspicion to most ordinary 
Russians, 40% of whom, even by the low Russian definition of the 
subsistence level, now live in poverty. The West's expansion of NATO to 
the east, and its military campaign against Yugoslavia over Kosovo, 
both in the face of strenuous Russian objections, deepened Russians' 
alienation from the West.
    Today the U.S. is sufficiently unpopular that, for example, 
according to a poll of 17-21 September 1999 by VTsIOM, only 27% of 
Russians think that Russia should cooperate with the U.S. in the fight 
against international terrorism, while 61% are opposed to such 
collaboration. According to another poll by the Public Opinion 
Foundation, which does some of the Kremlin's polling, the politicians 
most closely linked to the U.S. have these ratings: Boris Nemtsov is 
trusted by 8% of Russians and distrusted by 66%, Yegor Gaidar is 
trusted by 2% and distrusted by 81%, Anatoly Chubais is trusted by 3% 
and distrusted by 85%, and Boris Yeltsin is trusted by 2% and 
distrusted by no less than 90%.
                    what does russia's future hold?
    At present Russian society is divided between a small layer of 
economic and political haves, a small and--since the rouble devaluation 
and government bond default of August 1998--diminished middle class, 
and a big majority of economic have-nots who are, in reality, without 
representation by either politicians or labor leaders. The big question 
is whether the alienation of the latter can be reduced without, 
eventually, major revolts or even revolution. Almost all the contenders 
for high office in the Duma and presidential elections are beholden to 
strong private interests, and will not therefore be in a position to 
put the national interest above these personal and group interests. The 
tendency of the ruling class is to try to divert attention from its own 
failings by blaming foreigners, whether international terrorists, as in 
the current highly dangerous developments in Chechnya and Dagestan, or 
the U.S. and the West. The main hope is that present and future crises 
might bring the ruling class to allow the sort of frank national debate 
which could end in a new emphasis on the national interest. It is the 
popular longing for this to happen that accounts for the popularity of 
Yevgeny Primakov, who is seen as non-corrupt and as a defender of the 
national interest.
    In a sentence, can the Russian system regain a measure of 
legitimacy?
                         rethinking u.s. policy
    As suggested above, I believe it is inappropriate for the U.S. to 
build a new Russia policy until much rethinking has been done in both 
Russia and the U.S. But there are some things we should NOT do, and 
others that we can and should do in a low-key sort of way.
    We should NOT:

   interfere in Russian internal political and economic debates 
        over policy;
   in general, lecture the Russians about political and 
        economic reform;
   allow the IMF or other bodies to send the Kremlin large 
        amounts of cash;
   collaborate extensively with Russian law enforcement bodies, 
        because they are mostly too touched by corruption.

    We SHOULD, on the other hand:

   continue low-key, but large-scale cultural and educational 
        programs, especially for young people;
   prepare to help when humanitarian or Chernobyl-type crises 
        arise;
   continue Nunn-Lugar assistance as long as it is politically 
        feasible;
   develop Congressional relations with the new parliament to 
        be elected in December;
   trade with Russia wherever this can be done on a transparent 
        basis, realizing that foreign markets are of the greatest 
        importance to the Russian economy.
   counter openly actions of the Russian government that affect 
        our national interests: the Russians interpret anything else as 
        either weakness or evidence of some cunning plot.
                               conclusion
    The American key-notes should, in my view, be patience, humility, 
readiness to admit past mistakes, and understanding that the Russians 
have entered a major systemic crisis: We need to listen, make clear we 
do not intend to isolate Russia, while, of course, being alert to 
possible mischief.

    Senator Smith. Dr. Reddaway, I think you have been very 
helpful. I think you have just stated, as one of your 
principles, that we should draw back and we should listen to 
the Russian people generally and their political debate, to 
their solution, how they get out of it.
    What do we do with IMF money in the meantime? I think you 
said do not be just handing over cash.
    Dr. Reddaway. Right. At the moment the IMF does not intend 
to actually hand over any cash, but it does intend to go 
forward with the present loan. They just transfer the money 
from one account into the account through which the Russians 
are paying back previous loans. That policy itself is open to 
question in my view, but at the very least, in my opinion, the 
U.S. Government should put pressure on the IMF not to hand over 
actual new sums of cash. As I say, this is not on the agenda at 
the moment, but just to keep that in mind.
    Senator Smith. When Russia shot off in an unexpected 
direction in 1917, it did so under the guise of a new ideology, 
obviously, communism. Should they do that again, what do you 
think that guise will be under? What will the political 
drapings be? Will it just be a fascist situation?
    Dr. Reddaway. I do not think it would be any sort of return 
to communism. I think I would rule that out. I do not think it 
would be fascism. There has been a lot of very good, thoughtful 
work done by Russian and Western scholars examining the reasons 
why fascism as such is not actually very suitable for the 
Russian political culture. It is to do with the fact that the 
Russians have always really been a multinational people, a 
multi-ethnic people, and fascism does not go very well with 
that.
    Senator Smith. Are the Russian people capable of really 
turning to the West? Is Russia part of the West? Can it ever be 
part of the West, or is it a nation caught between two 
continents?
    Dr. Reddaway. It has had an ambivalent attitude toward the 
West for the last 3 centuries, and the debate about Russian 
national identity has been going on all of those 3 centuries. 
The tragedy and one of the reasons why my co-author and I have 
named our book ``The Tragedy of Russia's Reforms'' is that in 
1991 it appeared that there was a very good chance that Russia 
would at last adopt a decisively Western identity. They were 
extremely open to us. They were wanting to join our world 
economy. They were wanting to become democratic in the way that 
the West was democratic. There was a unique opportunity, if we 
had pursued more wise policies, to actually make a breakthrough 
in this 3-century ambivalence that the Russians have had about 
the West, and unfortunately, I think for the time being we have 
blown that opportunity.
    Senator Smith. Are we to be excused at least by the fact 
that we were dealing with people who at least called themselves 
reformers, even though apparently they really were not 
reformers, they were perhaps looters?
    Dr. Reddaway. I think the root of the problem was that we 
decided to go along with the ideology that is called shock 
therapy, or the Washington consensus. I think that that 
ideology may be applicable to some countries at certain stages 
in their development, but it was most emphatically not suitable 
for Russia in 1991. I myself argued that actually 2 or 3 months 
before Mr. Yeltsin adopted it. He adopted it very much at the 
urging of the G-7 and the IMF and certain individuals, Jeffrey 
Sachs and Anders Aslund, in particular. I think it was a 
profoundly flawed strategy, and the trouble was that it 
determined the shape of a lot of other policies outside the 
economic sphere. So, I am afraid we cannot excuse ourselves 
because we were very much involved in pressing that strategy on 
the Russians.
    Senator Smith. I guess in our hearing last week, as we went 
back and forth with Secretary Talbott in the debate about ``Who 
lost Russia,'' the contention from the administration is that 
we are not capable of losing Russia. It is not ours. Their 
defense was we were dealing with people that were 
democratically elected. We had to deal with them. We were doing 
as best we could. But I think you might be saying----
    Dr. Reddaway. I am saying something different.
    Senator Smith. You are saying something very different, 
that there is a case to be made that Russia was lost.
    Dr. Reddaway. Yes. Of course, I am against the formula that 
we lost Russia because the ultimate responsibility did, indeed, 
lie with the Russians. They decided to adopt shock therapy. Mr. 
Yeltsin decided to adopt this strategy which was profoundly 
anti-democratic in its essence. He turned against the 
democratic support movement that had brought him to power and 
he emasculated that democratic mass support, and it all came to 
a head in October 1993 when he dispersed the Parliament by 
force. I think those were developments that flowed, to a very 
considerable extent, from the adoption of the shock therapy 
strategy. I think we made a great mistake by allowing Mr. 
Yeltsin--it was not for us to allow him, but by giving him 
advice which led to him subverting and betraying democracy in 
the interests of a, to my mind, false ideological economic 
strategy.
    Senator Smith. There is one final question I have. You 
talked about our need to stay out of Russia's internal affairs, 
and yet I wonder, on the question of anti-semitism and 
religious persecution, if we can afford to be quiet in any 
country.
    Dr. Reddaway. I was wanting to put special emphasis on 
staying out of their, if you like, macroeconomic and political 
policymaking.
    Senator Smith. So, your comments do not extend to our 
efforts to try to urge and incentivize religious toleration of 
Jews and other faiths.
    Dr. Reddaway. They would not extend to that. I think we 
should speak up on those issues, again not with an overly 
domineering and morally superior tone, although that cannot be 
avoided altogether certainly.
    We have this record of involving ourselves not just in 
economic policymaking in Russia, but also in personnel. It was 
actually an unwritten condition of the IMF loan in 1995 of $6.8 
billion that Mr. Chubais would be the person in charge of 
running economic policy. It was not written into any agreement, 
but it was an unspoken agreement, unrecorded agreement, but it 
was let out of the bag by certain people. That is the sort of 
meddling, the sort of attempt to direct Russian policy at the 
macro level, and supporting Mr. Yeltsin prior to his decision 
to destroy the Russian Parliament in 1993, we gave our 
permission to do that. We allowed democracy to be subverted in 
that way. Those are the sorts of meddling and involvement that 
I think have been very much against our national interest.
    Senator Smith. Any predictions on what direction these 
elections will cause Russia to go?
    Dr. Reddaway. I think the new elections to Parliament in 
December, 3 months from now, are likely to produce a Duma that 
is even more hostile to Mr. Yeltsin than the present one. It is 
hard to know how much the support will be for the alliance of 
Mr. Luzhkov and Mr. Primakov. It is possible they might get 20 
percent of the vote, possibly even a little more. It will be a 
hostile Parliament to Mr. Yeltsin. It is possible that they 
might renew their attempts to impeach him, assuming he has not 
resigned by the time the new Duma assembles next January.
    As regards the Presidential elections, I do not know if you 
were asking about those as well.
    Senator Smith. Those as well.
    Dr. Reddaway. Those as well in June. Those are in some ways 
more important than the parliamentary elections. That at the 
moment I would regard as an extremely open race. The only thing 
I would say is that if Mr. Primakov runs and if he does not 
make major mistakes between now and then, as things look at the 
moment, he would have the best chance of winning, and I do not 
think that would be bad for Russia.
    The reason I say that is that he is almost the only 
prominent politician in Russia who is believed by most Russians 
to put the national interest above personal and private 
interests. Almost all the other politicians, with the exception 
of Mr. Yavlinsky and one or two others, are regarded as 
representing private and personal interests, group interests. 
And frankly, those interests have been concerned and still are 
to plunder the Russian state for their own personal and group 
interests. It is very sad to have to say that, but that is my 
considered judgment.
    Senator Smith. The evidence is there.
    Thank you, Dr. Reddaway. Very helpful.
    Dr. Graham.

   STATEMENT OF DR. THOMAS E. GRAHAM, JR., SENIOR ASSOCIATE, 
   CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, WASHINGTON, DC

    Dr. Graham. Thank you, Mr. Chairman. I want to take a few 
minutes simply to summarize the statement that I have submitted 
for the record.
    This committee has already spent a day focused on the 
nature of corruption and organized crime in Russia, and I would 
like to start with just two points on that issue before turning 
to the broader issue of U.S. policy.
    First, corruption has deep roots in the historical 
conflation of the public and the private in Russian history. 
For most of Russian history, the state was either the private 
property of the csar or what I would call the collective 
property of the Communist Party of the Soviet Union.
    What we have witnessed since the breakup of the Soviet 
Union and the demise of the Communist Party is the 
fragmentation of the state. The central bureaucracy is much 
less coherent and disciplined than it used to be, but the one 
thing that remains the same is that key parts of the state 
structure remain in the hands of private individuals. They are 
privatized parts of the state, and they are used largely for 
private gain and not for advancing the public good.
    It is this fragmentation of a privatized state that has 
exacerbated the problems of corruption that grew out of the 
Soviet period. Corruption is pervasive now. It is more chaotic. 
The holders of state power are greedier. The Russians 
themselves have a word for it. It is ``bespredel.'' It is a 
world without limits, without constraints, without rules. This 
corrupt state has sent much of the wealth of the country abroad 
and it has watched the GDP decline by nearly 50 percent over 
the past 8 years, and it has watched the standard of living for 
the vast majority of the Russians deteriorate quite sharply. 
Not surprisingly, according to recent polls, most Russians view 
the Brezhnev period, what we used to call the period of 
stagnation, as a time when life was better.
    The second point I would like to make is that there are no 
easy solutions to this problem of corruption, and some of the 
remedies can be worse than the disease. While we understandably 
want the Russian Government to move quite aggressively against 
corruption, we need to appreciate the dangers of doing that in 
an environment where the rule of law has not been 
institutionalized in an independent, reliable, and non-
politicized court system, nor has it been internalized by the 
citizens as a code of conduct. Under such circumstances, the 
term ``Mafioso'' or ``corrupt official'' could easily become 
the functional equivalent of ``enemy of the people'' of 
Stalinist notoriety, and if this happens, an aggressive anti-
corruption campaign could become a witch hunt, and that over 
time will serve only to destabilize Russian society, erode 
support for democratic principles, and deepen the lawlessness 
that we see in Russia today.
    Combating corruption is going to take political will, 
imagination, patience, and money over many years, and even then 
corruption is only going to be tamed. It is not going to be 
eradicated. This campaign against corruption has to proceed 
simultaneously with efforts to rebuild the capacity of the 
state to govern effectively, to separate the private from the 
public sphere, to make the state an autonomous entity that 
works for the public good, not for private gain, and at the 
same time we have to instill within the citizenry as a whole 
respect for the rule of law. This is going to take a great deal 
of time.
    Now, this is not counsel for moving slowly against 
corruption, nor is it counsel for being lenient toward the 
Russian Government. It is counsel to proceed with full 
awareness of the difficulties involved, of what is 
realistically possible. We need to pay attention to the down 
sides of an anti-corruption campaign so we can minimize them. 
At the very least, we can and we should insist that the Russian 
Government cooperate in the current investigations. But as 
Peter has already pointed out, need to proceed with caution. As 
any Russian will tell you, the law enforcement agencies in 
their country are deeply politicized and corrupt themselves. 
And as a result, even as we cooperate, we will need to verify 
repeatedly the information we receive from the Russian side, 
and we are going to need to reassess the motives of our Russian 
interlocutors.
    So, Mr. Chairman, how do we deal with Russia? What 
principles should guide U.S. policy? Like you, Mr. Chairman, I 
would add my voice to those who have warned against 
disengaging. That is not an option given the importance of 
Russia, what happens in and around Russia to our own security 
and well-being and to the security and well-being of our allies 
and partners around the world.
    That said, we also need to appreciate the difficulties of 
engagement. To put it simply, it takes two to engage, and the 
Russian Government has increasingly lesser capacity to engage 
productively because it is fragmented and privatized. So, 
rather than broad engagement, which we have been practicing 
over the past several years, I would urge pragmatic engagement, 
that is, engagement on those issues that are priorities to the 
two sides. Strategic nuclear stability, for example, is a 
shared top priority, even if we differ on the solutions. On 
this matter, engagement is both necessary and natural.
    Nonproliferation of weapons of mass destruction is, 
however, another issue. There is a shared interest but the 
priorities that we attach to this are quite different. For us 
it is a top priority, one of the few real threats to our 
security over the next decade and beyond. For the Russians, 
however, the immediate security threat arises from socio-
economic decline in their own country, not from proliferation. 
For this reason, Russians tend to be lax on technology export 
controls because the sale of technology provides desperately 
needed money for dealing with domestic ills.
    So, the challenge to the United States is to develop ways 
in which we can provide incentives to Moscow to raise the 
priority of nonproliferation for them, and I think that is 
going to mean that we are going to have to engage them on 
issues of high value to them that might be of lesser 
significance to us, say, something like debt relief. Now, I am 
not saying that this is the appropriate linkage or the only 
linkage. All I am saying is that we are going to have to make 
some serious and tough tradeoffs if we are going to engage 
Russia to our benefit.
    Now, on the more specific issue of dealing with Russia, 
knowing what we do know now about corruption, I want to make 
five recommendations.
    First, we need to ensure the integrity of our own 
institutions. I think the steps that the Congress is taking to 
ensure better oversight of our banking and financial system are 
steps in the right direction. We need to make them less 
vulnerable to money laundering operations.
    Second, we need to continue our efforts to integrate Russia 
into the global economy. To succeed globally, Russian 
businessmen will have to adapt to the values and principles of 
the world economy where corruption is, or at least can be, 
punished more harshly than it is within Russia today. 
Integrating Russia will entail that we continue to provide 
properly safeguarded IMF funding to the Russian Government, at 
least to cover debts, and moving it from account to account, 
not simply handing it over to the Russian Government. I think 
it is also going to require that we consider some form of debt 
relief, but then again, only in exchange for a Russian 
commitment to move forward on micro-economic restructuring.
    Third, we need to refocus some of our technical assistance. 
To date, we have spent relatively little on rule of law 
programs, preferring to spend the money on economic reforms and 
business practices. I think we need to remember, as we do this, 
that our influence, as Peter has already pointed out, is going 
to be on the margins. The demand for a rule of law society has 
to originate within Russia itself. The demand has to come from 
Russians themselves. At best, we can help nurture and channel 
these desires.
    Fourth, we need to do a much better job of selling America 
and our values in Russia. As Peter has pointed out, over the 
past 8 years, we have squandered a vast reservoir of goodwill 
toward the United States by our close identification with an 
increasingly enfeebled Yeltsin, by our support for the 
increasingly unpopular so-called radical reformers, and by our 
unwavering support for shock therapy, or the Washington 
consensus, for an economic policy that the vast majority of 
Russians believe led their country to ruin.
    There are two ways at least in which we can improve the 
image of the United States while imparting values to Russians 
in a non-patronizing fashion and laying the foundation for the 
development of rule of law over the longer term.
    First are exchange programs. We have already done a 
considerable amount in this area, and many observers have 
pointed out that these programs are the best payoff in 
imparting values and winning friends for the United States. As 
we look toward the future, I would suggest that we focus less 
on passing technical information and skills through these 
exchange programs, even in the areas of democracy-building. 
Rather, what we need to do is give a greater number of Russians 
the opportunity to enjoy a liberal education in the United 
States. Longer-term exchanges will allow them to experience 
firsthand how our society functions. They will become 
acquainted with the values that are essential to building an 
effectively functioning rule of law society. This approach has 
the advantage of allowing Russians to adapt our experience to 
their society, to Russian conditions, rather than our telling 
them how they have to be adapted.
    Second are our information centers. Now, Peter has said 
that there is growing anti-Americanism in Russia, and he is 
certainly right on that score. But I would also point out that 
there is an abiding curiosity about the United States as a 
successful and powerful country, and we need to play to this 
curiosity. One of the unsung successes of the past several 
years have been information centers that we have set up in 
major cities across Russia. These centers provide printed 
material and access to the Internet. As such, they have become 
valuable sources of information about the United States, both 
our political system and our legal system.
    Senator Smith. Are they highly utilized?
    Dr. Graham. That is the next point I was going to make. 
They are highly utilized, and more important, what we have 
noticed over time is increasing numbers of Duma deputies and 
other officials at both the national and regional level are 
turning to these centers for information about the United 
States, particularly about legislation that is under 
consideration in the Duma. They want to know how we do it, how 
it is done in a normal and successful country, and then they 
try to adapt those principles to their own legislation. This, I 
think, is a way in which legislation within Russia has improved 
over time. So, I think as we move forward, one of the things we 
might consider is expanding the collections of these centers 
and also expanding the network across Russia.
    Now, the last point I would like to make is that as we 
proceed, our senior officials of this administration and any 
future administration should seek to establish what I would 
call a respectful distance from their Russian counterparts. The 
problem was not that this administration over-personalized the 
relationship with Yeltsin, although that in fact did happen, 
but rather that a relatively small circle of senior 
administration officials entered into what I would call a 
partnership with a similarly small circle of senior Russian 
Government officials for the purpose of transforming Russian 
society. Like all partnerships, this one required a high level 
of interaction and a high degree of trust among the individuals 
involved. The result was that senior administration officials 
were tempted to turn more to their Russian partners than to the 
intelligence community and the Foreign Service for insights as 
to what was happening in Russia and how to proceed. Moreover, 
the success of their partners became critical to the success of 
the enterprise itself, and slowly the political survival of 
specific individuals, Mr. Chubais in particular, became a 
symbol of the success of overall reform effort. This close 
association with Russian senior officials led to a great 
misreading of the political situation which led to the 
administration's being caught off guard by the financial 
collapse of August 1998.
    Now, this example that senior administration officials set 
I think had a pernicious influence down the line. Lesser 
government officials began to see their Russian counterparts in 
a similar fashion, as partners and not, first of all, as 
representatives of a foreign government with its own motives 
and its own agenda. As a result, over time we as a Government 
tended to see Russia through the eyes of our official Russian 
partners who had a vested interest in persuading us that they 
alone knew what was happening and what needed to be done.
    To guard against this tunnel vision, I think we as a 
Government need to engage a broader range of Russian contacts 
in serious discussion. There are, of course, limited 
possibilities for senior officials. There is the press of time, 
time constraints. But what we need to do is utilize to the 
maximum the opportunities afforded to embassy and consulate 
officials and official Washington visitors to engage Russians, 
not only to argue our point of view to represent our interests, 
but as Peter has said, to listen attentively to what they are 
saying about their own country, about where it is headed, and 
what needs to be done. This is a task that we have not taken 
seriously enough to date, but it is critical to the success of 
our policy and I think we need to begin to do a much better job 
in this regard.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Graham follows:]

            Prepared Statement of Dr. Thomas E. Graham, Jr.

    Mr. Chairman, I deeply appreciate the opportunity to speak before 
this committee on the issue of corruption in Russia and U.S. policy 
responses.
    This committee has already spent a day focused on the nature of 
corruption and organized crime in Russia. I only want to stress two 
points on this matter, before turning to the question of U.S. policy.
    First, corruption has deep roots in the historical conflation of 
the private and the public in Russia. For most of Russian history, the 
state was for all practical purposes the property of the Tsar. There 
was no formal distinction between sovereignty and ownership, between 
the public sphere and the private sphere. Almost by definition, public 
positions were exploited for private gain. This situation was beginning 
to change in the nineteenth century, but the Bolshevik coup d'etat put 
an end to this positive evolution in 1917. The Communists reverted to 
the old tsarist tradition, with one distinction: The state became the 
collective property of the rigidly hierarchical Communist Party of the 
Soviet Union, not the sole property of a single ruler.
    What we have witnessed since the breakup of the Soviet Union and 
the demise of the Communist Party of the Soviet Union is the 
fragmentation of the state. Much power has flowed out of Moscow into 
the regions. The central governmental bureaucracy has become less 
coherent and disciplined. But the important point is that various key 
pieces of the state remain the private preserves of specific 
individuals, managed primarily for private gain rather than for the 
public good. Moreover, unlike the Soviet period, when ``property 
owners'' derived profit from the state's strength and control of 
society, today's proprietors find it more advantageous for the state to 
be weak and incapable of mobilizing resources for its own projects at 
home or abroad. They enrich themselves by preying on the weakness of 
the state, by stripping assets from property that once belonged to the 
state as a whole.
    This fragmentation of the state has exacerbated the problems of 
corruption that grew out of the Soviet period. Corruption has become 
pervasive, more chaotic; the holders of state power greedier. The 
Russians have a word to describe the situation: bespredel, or a world 
without limits, constraints, or rules. The corrupt Soviet state was in 
some ways better for the population as a whole. It may have squandered 
resources on excessive military production, but it did keep wealth 
within the country and slowly raised living standards. The new Russian, 
fragmented state has overseen the collapse of production--GDP has 
plummeted by nearly a half since 1991--and sent much of the country's 
wealth abroad, while the standard of living of most Russians has 
sharply deteriorated. Over 37 percent of the population now lives below 
the official poverty line; five years ago, the corresponding figure was 
just over 20 percent. Should it be surprising that, according to recent 
polls, Russians look back to the Brezhnev period, once known as the 
``time of stagnation,'' as a time when life was better?
    Second, there are no easy solutions to the problem of corruption in 
Russia, and some remedies can be worse than the disease. While we 
understandably would like the Russian government to move aggressively 
against corruption, we need to appreciate the dangers of doing so in a 
country where the rule of law has not been institutionalized in a 
reliable, independent, and non-politicized court system or internalized 
by most citizens as a code of conduct. Under such circumstances, 
``Mafioso'' or ``corrupt official'' could easily become the functional 
equivalent of ``enemy of the people'' of Stalinist notoriety. The only 
difference would be that whereas most of the charges against ``enemies 
of the people'' were absurd, those against ``mafiosi'' or ``corrupt 
officials'' would have a certain ring of credibility. An aggressive 
anti-corruption campaign could easily turn into a witch-hunt, which in 
the long run would only serve to destabilize Russian society, erode 
support for democratic principles, and deepen lawlessness.
    Combating corruption will demand political will, imagination, 
judiciousness, patience, and money applied over many years, and even 
then corruption will not be eradicated but only reduced to manageable 
proportions. The campaign against corruption has to proceed 
simultaneously with efforts to rebuild the capacity of the state to 
govern effectively; to separate the public from the private sphere and 
make the state an autonomous entity for the promotion of the public 
good; to construct an independent and reliable court system; and to 
instill respect for law within the political class and more generally 
across society. Both Russian and Western leaders must pay close 
attention to ensure that there are no excesses, no dangerous 
encroachments on human rights.
    This is not counsel for slow movement on corruption or leniency 
toward the Russian government. It is counsel to proceed with full 
awareness of what is realistically possible and the potential 
downsides, so that we can take steps to minimize them. At the very 
least, we can--and should--insist that the Russian law enforcement 
agencies cooperate with us in the investigation of cases such as that 
involving the Bank of New York. But even here, we must proceed with 
caution. Any Russian can tell you that his country's law enforcement 
agencies are themselves corrupt and highly politicized. Much of the 
mud-slinging, or kompromat wars, now escalating as Russia enters an 
electoral cycle, has at its origins information obtained from these 
agencies. As a result, even as we cooperate, we will need to verify 
repeatedly the information we receive and reassess the motives of our 
Russian interlocutors.
    So, Mr. Chairman, how do we deal with Russia? What principles 
should guide U.S. foreign policy? I would add my voice to those who 
have warned against disengaging. That is not an option, given the 
importance of what happens in and around Russia for the security and 
well-being of the United States, as well as of our allies and partners 
the world over. Moreover, we cannot reliably isolate or contain the 
problems arising from the breakdown of governance and the rise of 
corruption in Russia. We need to deal with the problems at their 
origins.
    That said, we also need to appreciate the difficulties of 
engagement. It takes two to engage. And Russia in its current state has 
an increasingly lesser capacity to engage productively. We need to take 
care not to overburden the circuits or impose engagement on the 
Russians where they are not ready for it. Rather than broad engagement, 
we need pragmatic, engagement on those issues that are priorities to 
the two sides. Strategic nuclear stability, for example, is a shared 
top priority issue for both sides, even if we differ on the solutions. 
On this matter, engagement is both necessary and natural.
    Non-proliferation of weapons of mass destruction is another matter, 
however. There is a shared interest, but the priority each side 
attaches to it is different. It is a top priority for us, one of the 
few real threats to our security. For the Russians, the immediate 
security threats arise more from socio-economic decline than 
proliferation. Russians are more lax in their technology export 
controls in part because the sale of technology brings into the country 
desperately needed resources for dealing with urgent domestic problems. 
The challenge for the United States is to create incentives for Moscow 
to give non-proliferation greater attention, and that will only occur 
if we begin to address issues of great value to them that might be of 
lesser priority to us, say, debt relief, restrictions on imports of 
Russian steel, or repeal of the Jackson-Vanik amendment. This is not to 
say these are the right or only possible linkages, but rather that we 
will have to be prepared to make tough trade-offs if we are to engage 
Russia to our benefit.
    On the more specific issue of engaging Russia, knowing what we now 
do about corruption, I would offer the following five recommendations.
    First, we need to ensure the integrity of our own institutions. The 
Congress is to be commended for introducing legislation that will 
tighten the supervision of our own banking and financial system to make 
it less vulnerable to money laundering operations. At the same time, we 
need to press ahead with the investigation of the current charges, 
taking care to distinguish criminal actions from capital flight, not 
accepting allegations against specific individuals as fact, and 
refraining from generalizing from this case to all Russian businessmen 
and officials. There are thousands of honest and decent Russians 
engaged in business or trying to make government work for the welfare 
of the people.
    Second, we need to continue our efforts to integrate Russia--and 
Russian business--into the global economy. To succeed globally, Russian 
businessmen will have to adapt to the values and principles of the 
world economy, where corruption is--or at least can be--punished more 
harshly than it is within Russia. Integrating Russia entails that we 
continue to provide properly safeguarded IMF funding to the Russian 
government (at least to cover past debt to the IMF) and that we 
consider debt relief, but only in exchange for Russian movement on a 
genuine program of micro-economic restructuring. Finally, this means we 
have to take a tough look at our own practices to determine whether we 
can open our own markets up further to competitive Russian products.
    Third, we need to refocus some of our technical assistance. As 
others have noted, the United States has spent relatively little on 
programs designed to advance the rule of law and other democratic 
practices, choosing to concentrate instead on economic reforms and 
business practices. These programs can range from developing programs 
to train judges to assisting in the development of civic education 
courses for schools and universities. Our goal should not be to impose 
our system on Russian society, but to help Russia develop one that fits 
its own conditions, while meeting international standards.
    At the same time, we need to remember that, like the rest of our 
assistance programs, our influence will be only at the margins. The 
demand for a rule of law society must emerge from within Russian 
society. At best, we can help nurture and channel it. This is true of 
democracy-building more generally. In the ongoing debate on where 
Russia is headed, the Administration and others have pointed to regular 
elections, a vigorous media, and respect for basic democratic freedoms 
as signs of progress and the success of Administration policy. It is 
important to remember, however, that the origins of the great 
democratic opening of Russian society occurred under Soviet leader 
Gorbachev when there were few credible promises of Western assistance. 
It happened because the Russian elites and society more broadly saw 
these developments as critical to restoring the country's vitality and 
turning it into a ``normal country.''
    Fourth, we need to do a better job of selling America and our 
values in Russia. Over the past eight years, we have squandered the 
vast reservoir of goodwill Russians had for the United States through 
our close identification with an increasingly enfeebled Yeltsin, strong 
backing of profoundly unpopular ``radical reformers,'' and unwavering 
support for economic policies, which Russians believe led their country 
to ruin. Preaching to the Russians about the evils of corruption now 
will do nothing to restore that reservoir. There are two ways, however, 
in which we can restore some of this goodwill, while imparting values 
to Russians in a non-patronizing fashion and laying the foundation for 
the development of rule of law over the longer term.

   Exchange programs. We have already done a considerable 
        amount in this area, and many observers have pointed to these 
        programs as the best payoff in imparting values and winning 
        friends for the United States. As we look toward the future, 
        there is less of a need to impart specific technical skills in 
        democracy-building, NGO-building, and so on. Rather, we need to 
        give a greater number of Russians the opportunity to enjoy a 
        liberal education in the United States. Longer-term exchanges 
        will allow them to experience first-hand how our society 
        functions, as well as to become acquainted with values that are 
        essential to the building of a rule of law society. This 
        approach has the added advantage of letting the Russians 
        themselves adapt our experience to Russian realities.
   Dissemination of information and information centers. There 
        remains a critical need for information about the United States 
        and the West in general in Russia. One of the unsung successes 
        of the past several years has been the information centers we 
        have set up in several cities across Russia (Moscow, 
        Vladivostok, St. Petersburg, Rostovon-Don, Tomsk, Nizhniy 
        Novgorod, and Yekaterinburg). These centers play to the natural 
        curiosity Russians still have about the United States as a 
        prosperous and successful power. They provide not only books 
        and other printed material but also access to the Internet. As 
        such, they are a source of valuable information on the United 
        States, including our political and legal systems. Over the 
        years, Duma deputies and local officials from across the 
        political spectrum have routinely requested information on U.S. 
        legislation from these centers on a range of issues that were 
        under consideration in the Duma and other legislative bodies. 
        This information has improved the overall quality of Russian 
        legislation. For these reasons, we should consider building up 
        the collections of these centers and expanding them into other 
        cities.

    Last, senior officials of this and future Administrations need to 
establish and maintain a respectful distance from their Russian 
counterparts. The problem was not that this Administration 
overpersonalized the relationship with Yeltsin--although that did 
happen--but rather that a relatively small group of senior 
Administration officials entered into a ``partnership'' with a 
similarly small group of senior Russian officials to push forward an 
agenda focused primarily on the domestic transformation of Russia. Like 
all partnerships, this one required constant interaction and a high 
level of trust to function effectively. The result was that senior 
Administration officials were tempted to turn more to their Russian 
partners than to the Intelligence Community and the Foreign Service for 
insights as to what was happening in Russia and how to proceed. 
Moreover, the success of their partners became critical to the success 
of the enterprise as a whole, and slowly the political survival of 
someone like privatization czar Chubais became a symbol of the success 
of reform as a whole. This ultimately led to a grave misreading of the 
political situation, which resulted in the Administration's being 
caught off guard by the financial collapse of August 1998.
    The example senior Administration officials set had a pernicious 
influence down the line, as lesser officials began to see their 
counterparts in the Russian governments in a similar fashion, as 
partners, rather than as first of all representatives of a foreign 
government with its own agenda. The goal was to push forward the 
domestic transformation of Russia, not to provide critical assessments 
of the policies themselves. These official contacts became the primary 
sources of information about what was happening in Russian society, in 
part because dealing with policy issues left little time for nurturing 
contacts elsewhere in Russian society. As a result, we developed as a 
government a tendency to see Russia through the prism of our Russian 
partners, who had a vested interest in persuading us that they alone 
knew what was really happening and what needed to be done.
    To guard against such tunnel vision, we need as a government to 
engage a broader range of Russian contacts in serious discussion. There 
are, of course, limited possibilities for doing this at the highest 
levels; the time constraints and press of other business leave little 
time for serious grooming of contacts. But we need to utilize to the 
maximum the opportunities afforded to Embassy and Consulate officials 
and official Washington visitors to engage Russians, not only to argue 
our policies and represent our interests, but to listen attentively to 
what they are saying about their own country. This task we have not 
taken seriously enough to date.
    Thank you, Mr. Chairman.

    Senator Smith. Thank you. You have been very helpful.
    I wonder if you can speak to some specifics. You had some 
great suggestions, but in our hearing last week, we were trying 
to draw out what has gone on really in all of this. The former 
Deputy Assistant Director of the FBI in charge of criminal 
investigations, Jim Moody, testified before this committee that 
a Russian law enforcement official he spoke to estimated that 
90 percent of his officers were corrupt. How can the United 
States collaborate with Russian law enforcement and security 
services if large numbers of them are just simply corrupt?
    I love your idea about more and more engagement, but it 
seems to me the Clinton administration has tried to engage. And 
I am saying this as a Republican, trying to be fair. They have 
tried to engage but they have met with folks whose motives are 
not to the benefit of the Russian nation.
    Dr. Graham. Yes. The point that I would make on that is 
that if 80 percent are corrupt, then there is a 20 percent that 
is not corrupt. The real challenge for us, as we try to engage 
Russia, is to find those 20 percent--I would suggest that it is 
somewhat more--who do have an interest in dealing with 
corruption in an equitable fashion in Russia today.
    Senator Smith. We would have to be careful because it seems 
to me that it may allow sensitive information to get to 
criminal hands.
    Dr. Graham. Obviously. So, this is why I urged that we have 
to treat these relationships with extreme caution. We have to 
know whom we are dealing with. But simply not to engage because 
of the possibility of the leakage of information I think is the 
wrong approach. What we need to do is to check as carefully as 
we can who we are dealing with, proceed cautiously as we 
develop the level of trust that we need in order to engage 
productively across a range of issues, particularly in criminal 
investigations.
    Senator Smith. I think that is right.
    It is alleged that the intelligence community and our 
diplomats in Russia were discouraged from fully airing 
information about systematic corruption in Russia. You spent 
some time there. You can tell us whether that is the case or 
not. They were discouraged from giving information about the 
lack of transparency in the Gore-Chernomyrdin Commission. Is 
that fair? Is that accurate?
    Dr. Graham. I would argue that that is not an accurate 
picture of what the embassy did at least. I cannot speak to the 
intelligence community, but you have had people who could 
address that issue.
    My experience in over 3 years of supervising all reporting 
on domestic political matters in Russia is that there was no 
systematic attempt to prevent us from sending back what we 
thought needed to be sent back no matter what official it 
concerned, no matter what the charges were, whether it be 
corruption or something else.
    That said, you have to remember that as Government 
officials and embassy officers, we had a responsibility I think 
to be quite careful and cautious in the way we treated specific 
allegations against specific individuals. We, as Foreign 
Service officers, did not have the ability, I would say, to 
investigate these charges fully. They were rumors. What we 
tended to do was to present these as rumors back to Washington 
in the hopes that there was someone else in our Government, 
whether it be in the intelligence community, the FBI, or 
elsewhere, who would find this a useful piece in a puzzle that 
they were trying to put together. But we were always very 
careful to give some assessment of the source and what we 
thought might be the possible validity of the information.
    The second point I would like to make is that for most of 
the time that I was in Moscow, I had the authority to sign 
cables out of the embassy. I did not have to give them to the 
Ambassador for prior review. I can tell you that we sent out 
what we thought needed to be sent out, and at no point did the 
Ambassador come back and say, stop sending that information 
back to Washington, they do not want to hear it. We were 
encouraged to do that.
    The point I would like to make on the Gore-Chernomyrdin 
Commission is that I think this falls into a somewhat different 
category. The problem with the commission was not so much its 
original design. I think it served a useful purpose in bringing 
together government officials on both sides to discuss a range 
of issues that were of interest to both governments. There were 
some, I think, productive and useful exercises, particularly in 
working on some business exchanges within that commission.
    The commission, however, came to meet too frequently, and 
anybody who has served at an embassy knows that when you are 
bringing over hundreds of senior U.S. officials, eight or nine 
cabinet officers, all demanding the attention of a senior 
administration official, this is a tremendous burden on an 
embassy. We would have to close the embassy down for other 
business, by and large, 3 to 4 weeks before these delegations 
arrived. Obviously, that puts a limit on what we can do in our 
real job, which is interacting with Russian society. It puts a 
limit on what we can do in reporting on Russian society. So, I 
think the frequency and also the nature of high level meetings 
like this, that is, to look for success stories, ultimately had 
a pernicious influence on the reporting out of the embassy. 
That is not to say we should not have done it. I think we 
should have done it, but we should have stretched out the time 
between sessions and had them not so much on a regular basis 
but ad hoc when there was real business to be discussed and 
business to be concluded.
    Senator Smith. Can you speak to the IMF managing director 
who told the Washington Post in February 1996 that in a real 
sense the IMF was financing Russia's military efforts in 
Chechnya? Do you think that is accurate?
    Dr. Graham. I think you have already had a discussion over 
whether money is fungible or not, and I think that is the point 
that I would make. Obviously, the Russian Government chose what 
to do with the money. You will never be able to demonstrate 
that there were bills that were printed and received from the 
IMF that were spent on the Chechnya effort.
    Clearly I think we should have been much harsher in our 
judgments against the Russian Government at that time. It was a 
time when it was probably wise for, again, political reasons to 
withhold the tranche of an IMF agreement precisely because we 
knew that money was fungible and that any money that we would 
put in at that time would allow the Russians to use other 
sources to conduct the war against Chechnya.
    Senator Smith. What should our policy be with respect to 
Russia and Chechnya, and Russia and Kosovo, in providing 
financial resources?
    Dr. Graham. The Russians have a tremendous problem in the 
north Caucasus now. It is not only Chechnya, but it is 
Dagestan, it is elsewhere. I think, unfortunately, they are 
going down the wrong track in seeking a military solution to 
what is largely a socio-economic problem. Of course, the 
problem is that Russians do not have the resources in order to 
engage in a broad political and socio-economic program aimed at 
pacifying the region by giving the people of that region a 
reason to stay within the Russian Federation.
    I also think that you have to see this crisis within the 
context of the broader Caucasus. It is not only instability in 
Russian regions, but there is instability in Georgia, Armenia, 
and Azerbaijan. I would submit that there is no solution to 
Chechnya outside of a broader solution to the whole Caucasus 
situation.
    What is probably called for at this point is something 
along the lines of an international conference on the Caucasus 
where we bring together the leaders and the political actors, 
both Russian from the Trans-Caucasian region, Chechen leaders, 
Dagestani leaders, and so forth, and look to see whether it is 
possible to make broad tradeoffs that will satisfy both sides.
    Clearly for this to succeed, it is going to require 
financial resources, and that is where the West comes in. We 
are the only people who have the resources that could be used 
for a solution of this kind. Now, I do not know what the 
details are of it, but as I said, I would submit that solving 
this problem simply between Russia and Chechnya is impossible 
at this point. Our national security does, I think, call for 
stabilizing the region, and I think it is at least worthwhile 
pursuing this option at this point to see what can be done.
    Senator Smith. Thank you very much, Doctor. I appreciate so 
much your testimony.
    Dr. Finckenauer, we appreciate your being here and look 
forward to hearing your views on how we deal with corruption.

 STATEMENT OF DR. JAMES O. FINCKENAUER, PROFESSOR OF CRIMINAL 
 JUSTICE, RUTGERS UNIVERSITY (CURRENTLY ON LEAVE), WASHINGTON, 
                               DC

    Dr. Finckenauer. Thank you very much, Mr. Chairman, and 
thank you for giving me the opportunity to speak with you 
today. I certainly agree with your comment at the outset, that 
this is a very important and timely topic.
    I would like to divide my presentation roughly into three 
areas, and some of what I will say will echo what my two 
colleagues have already spoken about. I think it is important 
to have a little bit of a historical overview to give us some 
context for understanding what is going on today. I will talk a 
little bit about the current state of affairs and then also 
offer just a few recommendations for some future strategies and 
policies.
    With regard to this history, I think it is important to 
understand that what we see called today crony capitalism and 
patrimonialism not only in Russia, but also in other of the 
former Soviet Republics, are not new phenomena. I think it 
would be wrong and remiss to assume that this sort of symbiotic 
relationship among crime and the government and the economy all 
began after the collapse of the Soviet Union in 1991. As I 
think Professor Reddaway alluded to, corruption and corrupt 
bureaucrats in Russia go back to the time of the csars. What is 
particularly important to understand about the historical 
period is that so too does a very blase attitude about the 
legality of stealing from the state as being accepted as normal 
behavior. I think it is important to understand that that very 
much shapes the kind of mentality that exists in Russia today, 
given the economic situation and the corruption situation.
    Senator Smith. Doctor, Secretary Talbott was here and he 
said last week--and I quote--``Russia's current problems with 
crime and corruption are different from the corruption so 
entrenched in Soviet communism. Indeed, today's problems are a 
result of an incomplete transition to democracy and market 
reform.'' I think you are saying that is not the case.
    Dr. Finckenauer. I think they are different in the sense of 
the differences in the economy that exist today and the 
opportunities for corruption that exist today. I do not think 
they are different in the sense of a mentality about taking 
advantage of opportunities and, in a sense, having a sort of 
historical perspective to this.
    I think other elements of the history are the role of 
organized crime that began very early in the Soviet Union, the 
linkages, the growth out of the Gulag system of organized 
crime. We had the Communist Party that took on the trappings 
and characteristics of a sophisticated criminal organization, 
and then we had, as was also mentioned, the Brezhnev period in 
particular in the Soviet Union that was a period in which 
corruption sort of rose to its zenith. So, we see certain 
historical legs that provide the foundation for what has 
happened in Russia since 1991.
    I think a critical characteristic of that Soviet period is 
what the Russians call ``blat.'' It means use of informal 
personal networks to obtain goods and services that are in 
short supply. As we will remember, lots of things were in short 
supply in the Soviet Union. If we draw a contrast with the 
United States--and my area of specialty in criminal justice is 
organized crime, and I have spent a lot of time studying 
organized crime in the United States--we see that organized 
crime arises principally to provide goods and services that are 
in demand, but that are either illegal or in short supply 
because they are being regulated. What we saw in the Soviet 
Union was that the response to the shortage of goods and 
services was a black market, a shadow economy, and this system 
of blat, the system of informal social networks and 
connections.
    Senator Smith. How do you spell that word?
    Dr. Finckenauer. B-l-a-t.
    Senator Smith. Blat.
    Dr. Finckenauer. Blat.
    I think that is the foundation which has evolved into what 
we see as today's more formal or more, say, sophisticated, 
higher level kind of corruption. Things like insider trading, 
preferential licenses, rigged auctions, illegal banking of 
state funds are all new examples of the same phenomenon, this 
phenomenon of blat.
    I just recently read a book called ``Collision and 
Collusion'' by Janine Wedel in which she talks about how the 
informal networks in Russia and Ukraine and also in Eastern 
Europe diverted and subverted massive amounts of the Western 
aid that has come into Russia and Ukraine in the 1990's. 
Subverted because it got linked into this personal network 
system that people were accustomed to. This is the way they did 
business. This is the way things operated in the Soviet Union.
    In the work I am now doing in Ukraine, I see some of the 
same practice, but I think it is what we would call cronyism. 
The people that I deal with in Ukraine see nothing wrong with 
this. They do not understand that we are looking to develop, 
for example, a merit-based system to award grants to 
researchers or to award Internet contracts. They want to deal 
with the people they know because they trust them because they 
have some track record with them. It is not hard to see how 
this can get elevated to a much larger scale and bring in many, 
many more people who do not essentially see this as wrong. This 
is the way we do business, and this is the way a sort of 
interpersonal trust operates in this area.
    I think that, as other people have said better than I, we 
need to understand this history. We need to look at the impact 
of that history on what we have done and also need to draw 
lessons for what we do in the future and learn from that 
experience.
    As my colleagues have also said today, in Russia we see a 
very feeble commitment to the rule of law. And maybe feeble is 
overstating the commitment. In part it flows from the kind of 
background that I have just sketched out. Whereas, in most of 
the countries of the world, crime is something that is outside 
the state and the society and sort of in opposition to them, in 
Russia crime is inside the state and the society. It is 
insidious. It is pervasive, but it is also mainstream in a way 
that we in the West do not quite understand. The kind of 
centrality, if you will, of official crime and its relationship 
to what is taken to be normal political activity is a carryover 
of this blat system that I described.
    As a result of this, we see in Russia state institutions 
that are very protective of their own vested interests, but are 
very negligent and deficient when it comes to defending the 
interests of ordinary Russian citizens. One of the results of 
this is to breed disrespect and distrust of legal and political 
institutions among the Russian people, and it also opens the 
door to opportunities for Russian organized crime because what 
happens is when the state falls down on its job of providing 
protection and employment and social services, other mechanisms 
begin to move in to fill that gap. Russian organized crime is 
one of those mechanisms.
    To give you another Russian word, there is a word 
``krysha'' which in Russian means roof. Practically every 
business operating in Russia today has to have a krysha, or 
roof. This is a form of protection, a form of insurance, if you 
will, to protect businesses from extortion. Now, why is there 
this role for the krysha? It is because the state and state 
institutions do not have either the will or the capacity to 
protect businesses. So, for example, if somebody wrongs you in 
a business deal, who do you go to in order to get redress of 
your grievance? There is no mechanism to go to. There is no 
mechanism that is trusted by Russian people and by Russian 
businesses, so they turn to organized crime to resolve that. 
What that does is simply continue to promulgate and strengthen 
the role of organized crime in Russia.
    Senator Smith. Doctor, can that explain perhaps why an 
American businessman named Paul Tatum was slain over a dispute 
over a hotel? We may never find out who did that. Is that what 
you are telling me?
    Dr. Finckenauer. That is correct. Let me put on my social 
scientist hat and say I think that is a plausible hypothesis. 
Given that we know that these kinds of activities go on and 
given that we know organized crime is in fact being paid to 
protect the interests of businesses, it is not hard to make the 
next step and say, well, that killing was a step in protecting 
somebody's business interest. Certainly, as I say, a plausible 
hypothesis.
    One other thing about these so-called kryshas, often they 
are made up of police types who may be active duty police 
officers who are working in protection rackets--and I will call 
them rackets--on the side as a way of making extra income. They 
may be ex-KGB agents who have skills in the areas, or they 
simply may be traditional organized crime types. But it is a 
pervasive operation that permits business and facilitates 
business practices to continue.
    Senator Smith. But you are not describing a system that is 
going to attract a lot of U.S. or European capital.
    Dr. Finckenauer. No, I do not think so. I think that early 
on there was a naivete and an ignorance about the way business 
was done in Moscow and elsewhere in Russia, and I think 
American businesses, as they are oft to do, looking for 
opportunities--they are entrepreneurs. They were looking for 
opportunities. But I think there have been some hard-learned 
lessons out of the last 10 years of trying to bring business 
practices into the Soviet Union.
    Senator Smith. But if it is as pervasive as you suggest, 
maybe I should be more pessimistic about it. I have tried to 
remain optimistic. I am not sure I should be if there is the 
system of blat and what was the other word?
    Dr. Finckenauer. Krysha.
    Senator Smith. Krysha. If that is the way it is done, there 
are other places to invest.
    Dr. Finckenauer. But if I jump ahead to propose an 
alternative, I think that the krysha system, the roof system, 
the protection racket system is related to the weak role of the 
state. So, therefore, one needs to think about how do you begin 
to build--and my colleagues have already mentioned it--a rule 
of law? How do you build a viable judicial system and legal 
system that would provide the avenues for businesses to turn to 
if they have grievances or they have other problems that they 
want to be worked out? That is obviously the way we do it in 
the United States. We do not turn to organized crime--or at 
least most of the time we do not--to resolve those kinds of 
disputes. So, one is related to the other.
    I think that the development of the legal system and the 
judicial system is very much intertwined with the attempt to 
develop a viable economic system, and among the aspects of that 
development is trying to do away with this krysha system, do 
away with the need for that kind of a system.
    Senator Smith. Is it fair to say, though, that this existed 
even with a dominant, heavy state under the Soviet Union with 
central planning? This existed anyway because that state--even 
though to the outside world it was a powerful, centrally 
planned super power--was really a very weak state when it came 
to protecting its citizens. Therefore, this kind of thing 
predated the collapse of Soviet communism.
    Dr. Finckenauer. But I do not think you had this kind of 
krysha system in the economic role. You had a black market and 
you had a shadow economy, but by and large, those were 
permitted by the state because the state well knew that the 
state economy was unable to meet the needs of the Russian 
people.
    Senator Smith. And it has just grown.
    Dr. Finckenauer. So, they sort of allowed, if you will--not 
only allowed, but in part benefited from allowing--the black 
markets to exist.
    But now we see this explosion of other kinds of economic 
enterprises that did not exist before. You have pizza joints, 
for example. I have a colleague. We were standing on a corner 
in Moscow and just looking around, and she said to me every one 
of these businesses, including this local little pizza place, 
is paying a krysha in order for them to operate.
    I had another colleague describe to me how an individual 
that he knew set up a small kiosk, literally on a sidewalk, in 
Moscow selling rugs that he was bringing in from Central Asia. 
He very quickly was approached by some individuals who said to 
him, this is our territory. We will, in effect, allow you to 
operate on this corner or in this area in return for 10 percent 
of your profits. When this same friend of mine talked again to 
his colleague who is still in the rug selling business, this 
percentage had grown to 80 percent. So, the challenge to the 
business person is how much is that 20 percent worth to me? Is 
this still a viable business that I will pay the other 80 
percent simply to be allowed to operate?
    But the point is that the individual has nobody to go to. 
There is no recourse. Who does he go to to complain about this, 
who is actually going to come in and take some action? No one.
    So, we see, I think, a system that has bred distrust and 
disrespect of legal and political institutions in Russia.
    We do, by the way, have an analogous situation that I think 
we could learn lessons from, and that is in Sicily where the 
Sicilian Mafia, also in the instance of there being a weak 
state, came in and essentially ran an extortion racket and a 
protection racket. But we now see strong measures being taken 
to combat the Sicilian Mafia, often driven by grassroots 
efforts to support that. And I think that perhaps we could look 
to that as a model or as an example of where we could apply 
some of those lessons in the Russian situation.
    The nature of organized crime in Russia is quite different 
than it is in the United States. It is much more, I would say, 
professional, much more adept at what we call white collar 
crimes as opposed to the traditional crimes of prostitution and 
gambling and drugs and so on, not that they are not engaged in 
those, but they are also involved at much higher level, more 
sophisticated kinds of crimes, electronic crimes, defrauding 
banks and other financial institutions, money laundering.
    They are also engaged in supporting political candidates. 
There were questions about what is going to happen with the 
elections. I would be interested in where the money is coming 
from to support candidates in the elections and how much of 
that is dirty money perhaps coming out of organized crime.
    They are buying mass media. They make charitable donations 
to very considerable degrees.
    They are also a global phenomenon, and I think it is very 
important that since we are sitting here in Washington, DC, we 
not lose sight of the fact that we have other reasons to try to 
engage in what is going on in Russia and to help bring about 
reform that go beyond the altruistic and philosophical reasons 
of, for example, supporting democratic governance. Beyond Bank 
of New York type problems, we see threats of trafficking of 
arms, drugs, women and children, cybercrime, counterfeiting, 
economic espionage, et cetera, all of which are threatening to 
the United States, in the United States. It is not just what 
are the United States' interests in Russia per se. My point is 
we have other reasons to want to be engaged and stay on top of 
this in an attempt to encourage and bring about reform.
    Let me quickly turn to the future and premise this by 
saying, given this sort of dark and gloomy scenario, what can 
be done about any of this? Again, I think first of all, we have 
to recognize what our limitations are. There is only so much 
the United States is going to be able to do. The major 
solutions--I agree with my colleagues--rest with the Russians 
themselves.
    But I would take a little bit different tack on that, and I 
would say the Russian people have got to become disgusted--
disgusted--with the system that they see. Unless and until that 
occurs, those who are benefiting from this will continue to 
operate business as usual.
    Senator Smith. But I think we have heard it is not 
disgusting yet. It is normal.
    Dr. Finckenauer. That is correct. Lest we think that this 
notion is naive, I would again offer the example of Sicily and 
Palermo and particularly Mayor Orlando Leoluca in Palermo who 
started out as sort of a one-man band in taking on the Sicilian 
Mafia, not a small task in Sicily. But what we now see is 
grassroots efforts of teachers and mothers in a variety of 
strategies to begin to combat the Sicilian Mafia and 
essentially shame the government and shame the political system 
into moving against that Mafia.
    I think the thing is how could something like that begin to 
be done in Russia. We know that the Russian people do not like 
this. I talk to lots of Russians. They do not like it, but they 
see themselves as being sort of powerless in making any efforts 
in this regard. And I think there are things that we can do to 
encourage them to show that they are not powerless, to provide 
them with examples. I would echo the notion of exchanges. I 
would echo the notion of how do we get more supportive 
information out to the Russian people.
    In particular, I would mention a small, tiny, little 
program called Developing a Culture of Lawfulness. This 
includes a curriculum that has been developed, and presently 
being pilot tested in southern California and in Mexico. The 
goal of this curriculum is to create a hostile environment for 
bribery and corruption among school children. The idea is if we 
could begin to turn around these young people's minds that they 
would see the harm, they would see the pervasiveness and the 
insidiousness of corruption and crime and they would become our 
allies, they would become our ambassadors, first of all, within 
their own families, within their own classrooms, with their own 
teachers, and out of this little, tiny pebble in a puddle, if 
you will, that could radiate out, we could begin to see the 
foundation of support for the notion of building a rule of law 
society. They are doing this in Sicily. They have done it in 
Hong Kong. If this notion can work in southern California where 
they have got all kinds of kids being drawn into street gangs, 
et cetera who then get into drugs and then link up with adult 
criminal activities, this is not unlike what we see going on in 
Moscow and St. Petersburg and other places. This is an idea I 
think that is like an egg. We should warm it. We should protect 
it. We should let it hatch. We should watch it grow and see how 
it develops. And if it works, we should move that egg to Moscow 
and to other places and see if we cannot do it there.
    I would also say that we need to think about providing 
additional equipment and training and technical assistance for 
law enforcement. I was taken with your point about Jim Moody's 
comment on the degree of corruption among Russian law 
enforcement, an enormous problem. But I would draw a contrast, 
and I hope you will not view this as splitting hairs, but I 
would like to differentiate among different types of 
corruption. There is a kind of venal corruption and then there 
is something called situational corruption.
    We have Russian police officers who are making money that 
puts them below the poverty line, lots of them. They are in 
this situation at the same time where they have the authority 
and the power of being a police officer. Do those police 
officers all like the fact that they have viewed themselves as 
having to take money or take bribes, be involved in corruption? 
I suspect they do not, but what is their alternative? How could 
we, for example, sort of weed out the venally corrupt ones, who 
we could write off and forget about? If we could provide the 
right opportunities, increase their salaries, increase their 
professionalism, increase their training, give them equipment 
to do the kind of jobs they want to do, would they still be 
corrupt? I suspect a lot of them would not.
    So, I think we need to think about those kinds of 
strategies, not simply say, well, we cannot deal with them 
because they are all corrupt. We should not be naive. And we 
should understand that if we share information, we had better 
be very careful with the kind of law enforcement information we 
are sharing because we do not know what might be done with it. 
But I think there are avenues there that we could pursue.
    Finally, I would say that for the whole system of 
administration of justice, we have got to look to build an 
independent and incorruptible legal and judicial system because 
that is now the weakest link in the Russian governmental 
system. It is being overpowered by the legislature and 
particularly by the executive. There is no avenue, as I have 
mentioned, for citizens to turn to for redress of grievances. A 
prominent judiciary would undercut the role of organized crime 
in these krysha respects that I have talked about.
    I think projects like the ABA/CEELI program need our 
encouragement, they need our support. We need more of that to 
be done.
    Finally, I think all of this presents enormous challenges, 
but also opportunities for the United States, but what we must 
understand is that this is not a sprint. This is a marathon, 
and we are only going to be ultimately successful if we are 
willing to stay the course. I think that is probably the most 
important lesson that we can learn out of all of this.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Finckenauer follows:]

             Prepared Statement of Dr. James O. Finckenauer

    Thank you very much for giving me this opportunity to speak with 
you today. The topic of our discussion is not only important but also 
timely. I would like to make clear at the outset that I am speaking 
here, not as a representative of the Department of Justice nor of the 
National Institute of Justice, but rather as a Professor of Criminal 
Justice at the Rutgers University School of Criminal Justice in New 
Jersey. It is in that role that my research, which provides the basis 
for my statement, was conducted.
    I will divide my presentation into three parts: (1) a brief 
historical survey to provide a context for current events; (2) a 
description of the current state of affairs; and (3) some 
recommendations for future assistance and strategies. I would be happy 
to try to expand upon any of these should you so desire.
                                the past
    The so-called crony-capitalism and patrimonialism that we see in 
Russia and other former Soviet Republics today are not new phenomena. 
We would be both wrong and remiss to assume that the kind of symbiotic 
relationship among crime, government, and the economy we are now 
hearing about all began after the collapse of the USSR in 1991. 
Corruption and corrupt bureaucrats in Russia date back to the time of 
the czars; and so too does the blase attitude toward legality that 
accepted stealing from the state (in that case the czar) as normal 
behavior.
    Crime, and more particularly organized crime, became closely linked 
with the Soviet government after the October revolution--especially so 
under Stalin. The 75 years of Communist rule created the prism through 
which we should view today's developments if we want to understand why 
things are the way they are today. The foundation for the current 
problems rests upon several historical legs. Stalin's Gulag prison 
system spawned a professional criminal class known as the vory v zakone 
or thieves in law; the all-powerful Communist Party took on the 
trappings and character of a criminal organization; and, the Brezhnev 
period (1964-1982) that immediately preceded a series of reform efforts 
was a time when corruption, stagnation, and disillusionment reached 
their zeniths.
    A critical characteristic of this Soviet period was the important 
role of blat--informal personal networks that were used to obtain goods 
and services that were in short supply. And many things were in short 
supply. In the United States, organized crime responds to the demands 
for goods and services that are either illegal or in short supply 
because of regulation. In the Soviet Union, in contrast, it was the 
black market, the shadow economy, and blat that fulfilled this 
function. It is this blat--this social network system--that has evolved 
into the more sophisticated forms of corruption we see now. Insider 
trading, preferential licenses, rigged auctions, and illegal banking of 
state funds are all examples of the new forms of blat. In her new book 
``Collision and Collusion,'' Janine Wedel describes how these informal 
networks diverted and subverted massive amounts of Western aid coming 
to Russia and Ukraine in the l990s. In my own work in Ukraine, I see 
examples of this unusual reliance upon personnal relationships--what we 
in the United States would call cronyism--to award grants and other 
aid. My point is that this is normal and accepted behavior founded upon 
a peculiar cultural history. We perhaps had little reason to know this 
before, but we should know it now, and we should understand what its 
implications are for our future policies and assistance.
                              the present
    What we see in Russia today is a very feeble commitment to the rule 
of law. This flows in part from the background I have just sketched 
out. Whereas in most countries of the world crime is something that is 
outside the state and the society, and in direct opposition to them, in 
Russia crime is very much inside. It is insidious, not only pervasive 
but mainstream. There is a centrality of official crime and other 
illegality to what is taken to be ``normal'' political activity, a 
carry over of the blat system.
    Because of this centrality, this linkage, we see State institutions 
that are very protective of their own vested interests, but very 
negligent or deficient when it comes to defending the interests of 
ordinary Russian citizens. This breeds distrust and disrespect of legal 
and political institutions among the people. It also opens the door for 
Russian organized crime, in all its varieties, to assume what would 
otherwise be State roles--for protection, for employment, for social 
services. This State weakness is one of the reasons behind the growth 
of the krysha system. Krysha in Russian means roof. Nearly every 
Russian business has to have a krysha or roof. This is a form of 
protection or insurance policy against extortion. Because businesses 
cannot turn to and depend upon the State to protect their interests, 
they must turn to this alternative form. Roofs are provided by private 
security firms that may actually employ the police, by former KGB 
types, or by more traditional organized crime. The result is a 
pervasive protection racket. This kind of lawless and stateless 
environment is similar to that of Sicily some years ago; an environment 
that lead to the growth of the Sicilian Mafia.
    Russian organized crime has penetrated business and state 
enterprises to a degree that is unfathomable to most Westerners. It has 
also shifted more and more away from such traditional forms as the voiy 
v zakone mentioned earlier, to become more professional and adept at 
white-collar types of crimes. These include the kind of electronic 
crimes, the defrauding of banks and other financial institutions, and 
the money laundering that have recently risen to the fore. In addition 
to its already intertwined relationship with business and government, 
organized crime continues to extend its reach by supporting political 
candidates, by buying mass media, and by making charitable donations.
    The transnationai crime emanating from the former Soviet Union has 
also become a global phenomenon. This means that in addition to any 
altruistic or philosophical reasons (for example, supporting democratic 
governance) the U.S. may have for helping Russia engage its problems, 
there are also pragmatic and self-interested reasons for doing so. 
Besides the Bank of New York type problems, which are actually quite 
benign in many respects, there are threats from trafficking in arms, 
drugs, women and children, from cybercrime, from counterfeiting, and 
from economic espionage.
                               the future
    Given this dark and gloomy scenario, what might be done about any 
of this? First, we should recognize that there are limitations, perhaps 
severe limitations, on how much the United States can do about it. The 
major solutions rest with the Russians themselves. The Russian people 
must become so disgusted with what they now see that they begin, from 
the grassroots level, to change it. Lest one think this is extremely 
naive, we can look at the example of Sicily and the city of Palermo in 
particular. There Mayor Orlando Leoluca has lead a counteraction 
against the Mafia. Mothers and teachers and children have taken up the 
cause to achieve real successes.
    Russia, and other ex-Soviet republics such as Ukraine, lacks an 
aware and active civil society. There are not traditions of democratic 
governance, of peaceful resolution of disputes in accordance with 
accepted rules, and of a rule of law. This is why the U.S. could 
survive the impeachment of the President by the Congress, and continue 
to function. In Moscow, a dispute between the president and the 
parliament ended in armed conflict and the shelling of the Parliament 
building. Stephen Handeiman, in his book ``Comrade Criminal,'' argues 
that it was a fundamental mistake to attempt to develop free markets in 
Russia without first having a strong civil society in place. It was 
that ordering that led to the continued ascendancy of blat.
    One small approach to building this necessary civil society would 
be to adopt what has been called the ``culture of lawfulness'' 
curriculum for school children. The intent is to create a hostile 
environment for bribery and corruption. This idea is currently being 
pilot tested in schools in Mexico and southern California, and builds 
on practices in Sicily and in Hong Kong. If this approach bears fruit, 
it could be adapted and extended to Russia.
    Also needed are equipment, training, and technical assistance for 
law enforcement. Each of these is already being provided. We need now 
to assess the effectiveness of our current efforts in these areas and 
build upon the successes. Training, for example, might be more 
efficient and better targeted though the use of distance learning and 
web-based techniques.
    Finally, and perhaps foremost among the areas where we can help is 
in respect to the administration of justice. Russia sorely needs an 
independent and incorruptible legal and judicial system. This is now 
the weakest link in the system of governance. There is no brake on the 
excesses of the executive and legislative branches. There is also no 
avenue to which ordinary citizens and businesses can turn for redress 
of grievances and for dispute resolution. A strong judiciary would 
undercut the predominant role now being played in this area by 
organized crime. Projects such as those of ABA/CEELI are critical in 
helping achieve this goal.
    All of this presents enormous challenges as well as opportunities 
for the United States. We must, however, understand that this will not 
be a sprint, but a marathon. Ultimate success will be achieved only if 
we stay the course. I thank you for your attention and for this 
opportunity to engage the debate. I would be happy to answer any 
questions you may have.

    Senator Smith. Thank you very much, Dr. Finckenauer. Very, 
very helpful. Very insightful.
    To any of you, in the current environment, do each of you 
think it is appropriate for the Ex-Im Bank to issue its largest 
loan guarantees ever to Russia? Is it appropriate, Dr. 
Reddaway?
    Dr. Reddaway. To what entities?
    Senator Smith. The Russian Government.
    Dr. Reddaway. To Russian Government.
    Senator Smith. Yes.
    Dr. Reddaway. I think that is not appropriate. I think that 
although different parts of the Russian Government are corrupt 
in different degrees, the great majority of Russian Government 
is, to one degree or another, corrupt and making large loans in 
cash to entities of the Russian Government is a very, very 
dubious proposition, indeed. I would want the particular cases 
to be looked at very, very closely indeed.
    Senator Smith. Let me clarify. It is to a U.S. company 
investing in a Russian enterprise.
    Dr. Reddaway. That is different. Again, I would say that 
the exact circumstances and the exact people involved need to 
be looked at very, very closely. I agree with what both my 
colleagues have stressed. It is certainly wrong to think that 
all Russians are corrupt, and I very much agree with Dr. 
Finckenauer that there are these different types of corruption: 
outright venal corruption and situational corruption. If the 
company that the Americans wanted to invest in was a relatively 
non-corrupt company----
    Senator Smith. It is a highly questionable enterprise.
    Dr. Reddaway. Oh, if it is highly questionable, then----
    Senator Smith. Dr. Graham, do you know what I am talking 
about?
    Dr. Graham. I do not know about the specific case, but I 
would argue along the lines that Dr. Reddaway has. You have to 
take a very close look at the specific enterprise, the 
activity. What we need to do is due diligence. We need to know 
whom we are dealing with, what type of activities they have 
conducted in the past before we issue loan guarantees of this 
sort.
    Senator Smith. You would argue high caution right now.
    Dr. Graham. High caution, particularly at this point.
    Dr. Reddaway. If I could add, it is also important to look 
very carefully at the local political leaders, the mayor of the 
city, the Governor of the region, and see what his record has 
been over how that individual has handled major investments by 
U.S. and Western companies in his city or region because some 
mayors and Governors encourage investment and then when the 
investment starts to produce some profits, they introduce new 
taxes, new regulations that make it possible to skim off a lot 
of the profits for the benefit of the local administration. 
That is something that is impossible to foresee. The only guard 
against it is what the track record of that local political 
leader has been up to now.
    Dr. Graham. If I remember correctly, this concerns an oil 
company----
    Senator Smith. It does.
    Dr. Graham [continuing]. That is engaged in trying to 
purchase an asset from another oil company that is in 
bankruptcy. There have been accusations that the oil company 
that is the subject of the deal is in fact engaged in illegal, 
or at least unethical, practices in its effort to purchase this 
other oil producing facility.
    The problem here is that we have got two American companies 
involved now. I forget the name of the one who got the loan 
guarantees, but BP-Amoco is also involved in this as well. It 
seems to me that it is inappropriate at this time for the Ex-Im 
Bank to be guaranteeing a loan so that an American can enter 
into a partnership with a Russian oil firm to take over an oil 
production facility that is in dispute and when one of the 
litigants is another American oil company.
    Senator Smith. A final, sort of general, question. If we 
desire to help and we want to leverage the rule of law to 
encourage its creation, is that leverage best applied with the 
incentive of loans and cash and these kinds of things that the 
Ex-Im Bank is on the verge of doing?
    Dr. Graham. If I could take a first shot at that. No, I do 
not think so. I think money sent to Russia now, particularly 
without proper safeguards, is money that will wind up in the 
West sooner as opposed to later.
    The way you help encourage, I think, a rule of law society 
is, as I said, by trying to encourage activities that integrate 
Russia into the outside world, but I think also by simply 
providing an environment in which Russians can learn about how 
our society functions. I do not think that you can stress too 
much the extent to which they are curious and envious of how 
successful our country is, and what they are looking for is 
ways to repeat that success in their own society.
    Senator Smith. Cash in almost any form, however you dress 
it up, maybe just reinforces the worst kind of lessons, the 
wrong kind.
    Dr. Reddaway. As a general proposition, I think that is 
true. I do, however, think that we have accumulated some 
experience in the West about small grassroots organizations 
which are not corrupt. Small amounts of money sent to small 
grassroots groups which have a track record to my mind is still 
feasible and desirable. But large sums of money are another 
matter, and I think one has to be very careful.
    Can I take a couple of minutes to make a few more remarks?
    Senator Smith. Sure.
    Dr. Reddaway. I think that one of the things that we should 
be uncompromising about is saying quietly but insistently and 
repeatedly to the Russians, you want us to come and invest. We 
would like to come and invest. You are an attractive country 
ultimately for us to invest in, but we cannot. We simply cannot 
invest on any scale today because of the political and legal 
conditions in your country. We should not pull any punches 
about that. As I say, we should not do it in a lecturing tone 
in big public forums, but we should insistently give that 
message through every possible channel we can because that is 
an argument that every Russian will understand.
    The second point is that I very much endorse Dr. 
Finckenauer's eloquent description of how in the long run the 
way to develop a rule of law society is from the grassroots up, 
and if we can persuade members of the young generation partly 
by bringing them over here, as Dr. Graham said, for prolonged 
visits so that they can absorb our values and understand them, 
then we have some hope.
    We should not, however, be blind to the difficulties 
involved. Ultimately, this sort of approach logically leads to 
promoting revolution in Russia against a corrupt regime. Now, 
that may be desirable. It may be the only way that you are 
going to get an improvement in the Russian situation. But 
obviously it involves very tricky political and diplomatic 
problems, and we need to look those problems squarely in the 
face and not flinch from them. Again, there are not easy 
answers.
    And a final point. Tom Graham said we should cooperate with 
the honest legal enforcement people. In principle, I agree with 
his argument, but in practice it is very difficult to do. I 
think Dr. Finckenauer was suggesting the same thing.
    Let me give just two interesting examples.
    There is an honest--or there was an honest--policeman in 
Moscow who testified in a court case against an oligarch. 
Almost immediately after he testified, he got threats against 
his life, and he and his family are now living in Switzerland 
and will probably stay there for a long time.
    A second example is a U.S. reporter who went to Russia and 
did extensive research about one of the most prominent Russian 
oligarchs, Mr. Berezovsky, wrote a big article in the U.S. 
press, and was very quickly threatened with his life, although 
he was living in the United States. On the advice of the FBI, 
he went to live in Europe incognito for about 6 months until 
the fear that he might be assassinated had diminished. He had 
got his information from honest police officials in Moscow, and 
those honest police officials--of course, he kept them 
anonymous in his story for the U.S. press, but quite possibly 
those officials are also in a position of great danger.
    So, the principle is right. We need to identify and work 
with the honest minority, even if it is a small minority, but 
we have to realize there are huge risks involved for those 
honest Russians. In addition, there are risks involved even for 
the Americans involved.
    Senator Smith. Gentlemen, you have been terrific and very 
enlightening. Joe, as I mentioned, has been on the floor doing 
battle, and we welcome him here. Unfortunately, I have to go 
and so I am going to leave this committee in his care.
    Senator Biden [presiding]. Thank you. I will be brief, Mr. 
Chairman. Thank you very much.
    Gentlemen, I apologize. We have been having an ongoing 
debate about whether or not we should bring up the ABM Treaty. 
Excuse me. We have been debating that as well, but debating the 
Comprehensive Test Ban Treaty. There was an offer made by the 
Republican leader to be able to bring that up on very short 
notice, which is fine by me, without any hearings. A minor 
issue. So, we were discussing that on the floor, and that is 
the only reason I was not here because the three of you are 
very knowledgeable, and I am told by staff, as well as the 
chairman, this has been an excellent exchange you have had so 
far.
    I very much wanted to be here because all three of you know 
better than I do that we had better get this relationship right 
somewhere along the way here. To state the obvious, not 
referring to the three of you, but at least on this side of the 
bench, there can be an awful lot of politics engaged in this 
issue over this Presidential campaign, and I hope we can sort 
of get through the din and the fog here of the political 
rhetoric on both sides we are going to hear to try to come up 
with a rational policy and understanding of how to get there.
    As I understand it--well, let me not characterize what you 
have said so far. Let me ask my question. If it has been asked 
already, please just indicate it and I will read it in the 
record. OK?
    Unlike the IMF assistance, U.S. assistance has not passed 
out big chunks of money. We do not decide to send $5 billion to 
a central bank in Moscow. Our programs are basically thus far 
exchange programs, technical assistance programs, technical 
expertise, equipment of various kinds, with the exception of 
the programs we have had to dismantle nuclear arsenals, which 
has, I think, been remarkably successful and money very well 
spent.
    But notwithstanding this, the way in which we have gone 
about it since the Bush administration through the present 
administration, how sure do you think the U.S. Government can 
be about where and how its assistance is being used?
    I am used to dealing with the criminal justice system here 
in the United States and used to be chairman of the Judiciary 
Committee. We had oversight hearings. We could track, not 
always well as we should have, how the money being sent out for 
programs is working and make a judgment about whether or not it 
made sense to continue it or not.
    How do we, in light of the way in which our aid has been 
forthcoming, to the extent it has, gain any confidence or 
certainty about what is working and what is not working and 
what makes sense and what does not make sense? We will start, 
Doctor, with you, however you would like to proceed.
    Dr. Finckenauer. Well, if I could respond from my 
experience with Ukraine. The assistance is very similar. The 
problems are very similar. We are presently engaged in an 
assessment process to look at the effectiveness of the delivery 
of law enforcement training by the United States in Ukraine. 
Obviously, there have been considerable resources devoted to 
this over the last 10 years, and there is little knowledge at 
this point about how well all that is working. Who is being 
trained? Are the right people being trained? Is it having any 
effect in terms of what they are doing?
    So, what we are in the process of doing is developing what 
we call a template by which we could look at how training needs 
are being assessed and whether the subjects that are being 
taught in these training programs are, in fact, the appropriate 
ones. Are they the ones that are really needed given what the 
concerns are?
    Not surprisingly, there has been a very haphazard process 
by which these training needs have, in the past, been assessed 
and been matched up with what we offer. It is very much off-
the-shelf items. We have people who can teach about this topic. 
They must need to know this. So, we go there. We teach on that 
topic.
    I think people more and more have become aware that that is 
not the way to do this. Let us look at what we are doing and 
see if we cannot do a better job. I would simply suggest that 
that same model could be employed in Russia or in any other 
place where the United States is doing law enforcement 
training.
    Senator Biden. Dr. Graham.
    Dr. Graham. Look, this is a very difficult question and 
very difficult to assess.
    Senator Biden. That is why I asked you. If I knew the 
answer, we would not call you guys experts. We would not pay 
any attention to you at all.
    Dr. Graham. That is right.
    Senator Biden. Except how you voted.
    Dr. Graham. Right, exactly.
    Part of the problem, of course, is that we give assistance 
to vast numbers of individual Russian entities, and it is 
physically impossible for us as a Government to evaluate all of 
them. Some of this we take on faith that the programs are going 
in the right direction.
    The second point I would make is that I think there is a 
danger in trying to determine whether something has been 
successful in the short run or not. In many of our programs, 
what we are looking for is a payoff that is going to come 5 to 
10 years down the road in the change in attitudes. So, 
something that focuses on whether the money spent has given us 
a return already or not many times is going to miss what is 
most important for us to do in Russia. I think part of the 
problem we have as a Government is that we tend to focus on the 
short term. In order to get additional money for programs, we 
have to demonstrate short-term success. That is very difficult. 
I think that is the wrong way to approach it.
    The third point I would make is what we really need to do 
on some of these programs that are aimed at developing rule of 
law democracy is devising some way of conducting a sociological 
research that would demonstrate or at least help us determine 
whether we are seeing changes in political attitudes and social 
attitudes among the people who participate in our programs. 
Setting up an efficient program to evaluate that is a major 
project in itself and will cost some money, but I think that is 
something that we ought to consider.
    Senator Biden. Thank you.
    Dr. Reddaway.
    Dr. Reddaway. If I could add. We have had some discussion--
and I think the three of us are agreed--that the elite in 
Russia today has become so corrupt that real change in Russia 
is probably only going to come from the grassroots of Russian 
society over a long period of time. That has some direct 
relevance to your question.
    On the one hand, in my opinion we should be extremely 
cautious and in general not give sums of money to government 
entities, whether at the Federal or the regional level. We 
should not give money to big Russian companies.
    On the other hand, we can, with much better chance that the 
money will not be abused, give it to grassroots groups, small 
sums of money to large numbers of grassroots groups, across 
Russia and the former Soviet Union. If particular groups abuse 
the money, then OK, it is lost, but it is just a small sum of 
money. Other groups will not abuse it and will put it to good 
use, and you will eventually get a culture of rejection of 
corruption that Dr. Finckenauer was talking about earlier, a 
culture of believing that Russia must renew itself from the 
grassroots upwards, which is I think the only real hope for the 
long-term future of Russia.
    Senator Biden. Can I ask any of you to cite for me, if you 
have any in mind, examples of where we have given large sums of 
money to individuals, companies, and/or a government that you 
believe has resulted in inappropriate confiscation of that 
money or aided and abetted the corruption, et cetera? Are there 
any? If you had to list just the number of direct grants of 
dollars that you consider large to the Government of Russia or 
any entities, because we keep hearing people talk about this. 
We should not give these large amounts of money, like you said, 
to the government. What large amounts of money have we given to 
the government for the record? Can you think of any?
    Dr. Reddaway. I can give one example, which is not exactly 
in response to your question, but it is I think relevant. The 
World Bank has given large sums in order to try to help the 
Russians restructure their coal industry. I think there have 
been at least two major grants or loans over the last 3 or 4 
years.
    Senator Biden. That is true.
    Dr. Reddaway. There has been extensive and growing evidence 
that a lot of this money has been diverted into private pockets 
in Russia. I read an article last week by John Helmer in the 
Journal of Commerce in which he detailed how this money had 
been embezzled in St. Petersburg. That is one example.
    Senator Biden. Well, let me be more precise. I think if you 
go home this evening and ask your next door neighbor, assuming 
they are not engaged in the same academic pursuits that you 
are--they are automobile salesmen or own a local company or 
work for a large outfit or work for the Federal Government--and 
you ask them what they think all this thing about the waste--
the ``Who lost Russia'' and all the money we are wasting in 
Russia, they think that, when you use phrases like we should 
not give large amounts of money, you mean taxpayers' dollars 
directly. Now, can you think of any bilateral program where we 
have given large amounts of money that has been wasted? 
Anybody.
    Dr. Graham. Look, I think the answer to that question is 
no.
    Senator Biden. Good.
    Dr. Graham. I cannot think of any.
    Senator Biden. Bingo.
    Dr. Graham. The issue has been more the money that has been 
provided through the IMF.
    Senator Biden. Good. Now, why do we not say that? I do not 
mean you, but why do we not all say that? Why do we not stop 
this malarkey about these large Government programs that we are 
funding? We are not alone funding any that I am aware of.
    And you understand--I need not educate you I am sure, 
Doctor--how the World Bank works and how the IMF works and how 
our money is put at risk and how we have not lost any money. 
Would you not be prepared to acknowledge that?
    Dr. Graham. That is a much more difficult question to 
answer----
    Senator Biden. Give it a shot. I have patience.
    Dr. Graham [continuing]. Because the question is not 
whether IMF money has been returned or not or not lost at this 
moment. The question is the impact of that lending on 
government practices.
    Senator Biden. That is your question. That is not my 
question.
    Dr. Graham. No.
    Senator Biden. And I get to ask the questions. OK? You have 
got to run for office to get to ask the questions.
    Dr. Graham. I understand that and perhaps I should.
    Senator Biden. I think that would be a good idea. It is 
always a salutary experience.
    Dr. Graham. But the point is when you have to make the 
payment and what form. You may get your taxpayers' money back 
on the IMF. We have not lost any money in that regard. No IMF 
money has been lost. But if what the IMF money has done is 
facilitate corrupt practices among high ranking government 
officials and then we have to spend more money, taxpayers' 
money, in investigating that and in setting up defenses against 
that, then I would submit that this is perhaps not----
    Senator Biden. Good. Now, we are getting somewhere.
    Dr. Graham. So, we need to focus on what the real tradeoffs 
are----
    Senator Biden. See, all I am trying to do is I think there 
has been--I think this is a corrupt society in Russia. It has 
been from my first meeting after Gorbachev's fall. I went over 
and met with all the major political party leaders, literally 
every one of them, ranging the whole spectrum. All of those who 
you would call democrats with a small D said do not give them 
any money. So, we started defining it. That is why when the 
seed program was written, that became the FREEDOM, whatever the 
heck we call it, Act, that is why we did not do it that way 
with direct, big, bilateral----
    Now, what has happened, though, is--we have to cut through, 
as I said, the fog here a little bit. We have a little bit of 
honesty in academia, honesty in advertising here. Everything 
you read, you read the headlines that say--not that any of you 
have written, but you read the headlines that say, billions in 
American tax dollars lost. That is what one of the articles 
said that everybody quotes around here. Billions in taxpayer 
dollars lost.
    Now, people at home are pretty smart. They divide it into 
two ways. They say, look, if you are pouring my money down a 
rat hole, like you would if the local corrupt mayor is taking 
the money and keeping his mistress and four other people, and 
they are raising my property taxes to do it, then that is one 
thing.
    If you are saying that, although I am not losing any money, 
I may be, as a consequence of decisions made by my Government 
participating in them, causing a circumstance where we ``may 
lose Russia,'' where we end up generating and perpetuating or 
invigorating a culture of corruption, where we enable it to 
happen because of what we are doing, then that is an equally 
serious problem in my view.
    But I think one of the obligations that I have at least as 
a United States Senator is to articulate as clearly as I can 
with as much precision as I can what is at stake, what the 
issue is. I just want somebody, for a change, to say sitting 
there, experts, what is at stake is a policy we have engaged in 
in two administrations through the so-called IFF'ies--I love 
the way the foreign policy guys use that phrase--the 
international financial institutions that we are talking about, 
the World Bank and the IMF and others, whether or not our 
policies relative to those institutions and how we vote in 
those institutions has created a circumstance that is 
detrimental and not positive or has not been used with as much 
efficacy as it should or could have been. That is a legitimate 
debate I want to engage in, and I want to solve, I want to be 
part of.
    But as long as it is confused with the debate and the 
assertions that are not true and a perpetuation of the notion 
that we are taking large, direct grants in foreign aid of U.S. 
taxpayers' dollars and pouring them down a rat hole so that 
Yeltsin's daughter can shop at Paris fashion shows, then you 
know what we do when you guys are not honest enough to put it 
in the way we should phrase the debate? Then we lose support 
for all foreign aid. Then we find ourselves in the position 
like we have in this foreign aid bill. And I will end my little 
diatribe here.
    We are cutting by $3 billion--hang on, Doc. You will get a 
chance. We are cutting by billions of dollars not only aid to 
Russia, we are not funding the Wye Agreement--we--we, the 
United States of America--because there is an attitude over in 
the House that I am not going to vote for foreign aid in this 
atmosphere, man. I am not going home and explaining to anybody. 
I am not going to vote for that. That is a killer for me 
politically.
    So, I think if we are going to be responsible adults and 
inform foreign policy experts, of which I consider myself one, 
we should be accurate and precise in the way in which we 
discuss the issue. That is the only point I am trying to make, 
and that is why I asked the question.
    Now, I will conclude my thing and hear what you have to 
say, Doctor, and not trespass on your time anymore, any of you. 
I think there is a big problem here, a gigantic problem. I 
think the culture of corruption in the Soviet Union and Ukraine 
I might add--forget Belarus. I mean, that is a different deal--
is extreme, is something that has existed from csar through 
commissar, back to what do they call themselves now? The elite. 
The oligarchs. From csar to commissar to oligarchs, not much 
has changed except we have a clearer view now--a clearer view. 
So, we have got to do something about it, and that is what I am 
here about, trying to figure out what we do.
    Doctor, the floor is yours.
    Dr. Reddaway. I have had time to think up a good response 
to your question. The U.S. food program----
    Senator Biden. Food, f-o-o-d?
    Dr. Reddaway. F-o-o-d program for Russia is in my opinion a 
major scandal--and I hope that you will find ways to 
investigate it--partly because it, I think, has directly fed 
Russian corruption and----
    Senator Biden. In what way, Doctor? I am not doubting you.
    Dr. Reddaway. I will explain in a moment. And second, 
because it seems that it is entirely possible that we will go 
through a new round of this unneeded, corruption-feeding food 
aid program in the next year, sometime in the next year. There 
are people pushing for it on both sides, both in the United 
States and in Russia.
    The program that was launched about a year ago, if I 
remember rightly, had a price tag of about $1.3 billion--
billion dollars. That food aid went ahead. The program was 
launched last fall, early winter against the objections of 
almost all the independent food experts in Russia, against the 
wishes of important people within the Russian Government. It 
was pushed by our Government because we wanted to help U.S. 
farmers and it was pushed by corrupt elements in the Russian 
Government who wanted to benefit directly from it themselves.
    The food was eventually sent late, too late to be of any 
use, not that there was in fact a shortage of food in Russia. 
So, the whole thing in that sense was corrupt from the start.
    Senator Biden. There was no shortage.
    Dr. Reddaway. There was no serious shortage of food. It was 
not actually needed. They got through the winter. The first 
food arrived in the spring.
    The terms of the deal were that the Russian Government was 
supposed to sell this food to the Russian people at, roughly 
speaking, market cost, and the money was supposed to go into 
the Russian pension fund, which is dramatically underfunded. 
Virtually nothing has gone into the Russian pension fund. The 
money has disappeared into the hands of corrupt Russian 
officials, in particular, the former Deputy Prime Minister, Mr. 
Kulik, in charge of food in Russia, no longer I believe now. It 
has already been documented in the Russian press the corrupt 
ways that he benefited from this food aid.
    And now we are apparently considering another food program 
despite the fact that it is not needed in Russia and despite 
the fact that the last time we fed Russian corruption with it.
    Senator Biden. A very good point.
    Dr. Reddaway. Now, this is with direct American taxpayers' 
money.
    Senator Biden. If you can, in addition to your cogent 
explanation of the waste of that money and how it impacted on 
corruption, supply additional detail, it would be very useful 
because I think you are absolutely right. We should be looking 
at that. That is a concrete example and it is something that 
obviously, as you point out, will be back on the agenda again. 
If you are correct, we should not be going forward with such a 
program.
    Dr. Reddaway. I will be happy to supply documentation.
    Senator Biden. I appreciate it very much.
    Well, gentlemen, as I have said, I have gone beyond the 
time that you expected to have to stay here. I would like to 
ask your permission to be able to submit two questions to each 
of you in writing. Again, no urgency in responding. If after 
the fact you think of anything that you wish you had said or 
issue that was not brought up or you want to in any way expand 
on any explanation you have given, with the permission of the 
chairman, who is not here--but I am sure he would not object--I 
would invite you to do that for the record. It would be very 
useful.
    I for one believe that this is an area where we should let 
the chips fall where they may because I believe if we do not do 
it, if we do not address this problem straight up, honestly, 
and thoroughly, we are going to not only undermine our 
engagement with Russia in any prospect for a positive 
engagement, that is, that has a positive impact, we are going 
to undermine our engagement with other nations as well. In a 
political context, this is a very porous issue. People do not 
make distinctions very clearly between one type of foreign aid 
and foreign aid and international institutions where there is, 
in effect, in the minds of people, foreign aid, but it is a 
policy decision we make to help or not help. And they do not 
make a distinction in what parts of the world it occurs.
    So, I think your testimony--I am told from my staff, as I 
walked in, the first thing that they said to me was this is the 
best hearing we have had so far. These guys really know what 
they are talking about. That was the comment made. I hope you 
do not view that as being solicitous. It was seriously stated 
and I look forward to reading the record. I also look forward 
to your expanding on anything you have said, as I said before.
    And, Doctor, if you could specifically on the food program 
because I think that is a very good example because I would 
note for the record as well that this time last year I was 
given assessments about the state of the agricultural 
commodities and availability and food that would not be on the 
shelves in Russia that were fairly bleak. As a consequence of 
that, I was one of those people who sat down with--if they give 
me any more notes, I am going to shoot them. I was one of those 
people who sat with some of the agriculture community and said, 
now, are you willing to participate in getting food there? How 
do we get it there and so on and so forth? And the issue we 
were talking about then was the physical capacity to lift the 
food there. So, to that extent, I was involved in that because 
I must tell you I had been convinced that not that there was 
not the capability of producing all the food they needed, but 
because of the lack of any infrastructure that they have within 
the country. More food gets wasted and lost in the fields in 
Russia than ever gets into the towns and cities, to overstate 
it slightly. But I had become convinced that this was a serious 
potential humanitarian problem. I quite frankly thought it 
would be better to run the risk on losing our food than direct 
dollars to the Russians. So, it would be very helpful because 
the point you make is a very, very valid one.
    Again, I thank you very much.
    I would like to keep the record open until the close of 
business tomorrow to allow Senators to offer additional 
questions for the record, if they have them, and again invite 
you to submit anything you would like, and particularly you, 
Dr. Reddaway, on this issue of food. Unless anyone has any 
comment they would like to make, I will adjourn the committee.
    Committee adjourned.
    [Whereupon, at 12:37 p.m., the committee was adjourned.]

                                  
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