The Rape of Russia

by Anne Williamson

The following is Anne Williamson's testimony before the Committee on Banking and Financial Services of the U.S. House of Representatives, presented Sept. 21, 1999.

It shows how the historic opportunity given the U.S. to help transform Russia into a free, peaceful, pro-Western country was squandered in the form of a bruising economic rape carried out by corrupt Russian politicians and businessmen, assisted by Bush and (especially) Clinton administrations engaged in political payoffs to Wall Street bankers and others, and by ineptitude and greed on the part of the U.S. Treasury and the Harvard Institute for International Development, assisted by fellow travelers and manipulators at Nordex, the IMF, the World Bank, and the Federal Reserve.

The losers were the Russian people and (mainly) U.S. tax-payers.

And the winners? Ms. Williamson names names, and that's why the elite media has shut out her book. She indicates their heroes are thieves, and they are afraid she may be right.

In the matter before us – the question of the many billions in capital that fled Russia to Western shores via the Bank of New York and other Western banks – we have had a window thrown open on what the financial affairs of a country without property rights, without banks, without the certainty of contract, without an accountable government or a leadership decent enough to be concerned with the national interest or its own citizens’ well-being looks like. It’s not a pretty picture, is it? But let there be no mistake, in Russia the West has truly been the author of its own misery. And there is no mistake as to who the victims are, i.e. Western, principally U.S., taxpayers and Russian citizens whose national legacy was stolen only to be squandered and/or invested in Western real estate and equities markets.

The failure to understand where Communism ended and Russia began insured that the Clinton Administration’s policy towards Russia would be riddled with error and ultimately ineffective. Two mistakes are key to understanding what went wrong and why.

The first mistake was the West’s perception of the elected Russian president, Boris Yeltsin; where American triumphalists saw a great democrat determined to destroy the Communist system for freedom’s sake, Soviet history will record a usurper. A usurper’s first task is to transform a thin layer of the self-interested rabble into a constituency. Western assistance, IMF lending and the targeted division of national assets are what provided Boris Yeltsin the initial wherewithal to purchase his constituency of ex-Komsomol [Communist Youth League] bank chiefs, who were given the freedom and the mechanisms to plunder their own country in tandem with a resurgent and more economically competent criminal class. The new elite learned everything about the confiscation of wealth, but nothing about its creation. Worse yet, this new elite thrives in the conditions of chaos and eschews the very stability for which the United States so fervently hopes knowing full well, as they do, that stability will severely hamper their ability to obtain outrageous profits. Consequently, Yeltsin’s "reform" government was and is doomed to sustain this parasitic political base composed of the banking oligarchy.

Russian property rights are tricky; property has never been distributed, but only confiscated and awarded on a cyclical basis. For the big players property exists, as it always has, only where there is power. For the common man, the property right hasn’t advanced much beyond custom which prevents the taking of any man’s shelter, clothes or tools so long as continuous usage is demonstrable. An additional, purely Slavic feature of the Russians’ concept of property is the shared belief that each has a claim upon some part of the whole.

In ancient ‘Rus, property existed for the individual as a claim - or an entitlement if you will - to a shared asset, a votchina or "estate", held by all the members of a particular clan. This understanding of property still informs the culture; though Westerners bemoan Moscow mayor Yury Lyuzhkov’s retention of the system of the residential permit ("propiska") as an impediment to a flexible labor force, the policy is one of Lyuzhkov’s most popular. Muscovites are well-satisfied with a mayor who polices outsiders as they believe any proprietor of such a great estate as Moscow should.

The Russians’ failure to accept the Roman concept of private property has compelled them to suffer the coercive powers of the state so that at the very least a civil order, if not a civil society, might be established and sustained. The hackneyed idea that Russians have some special longing for tyranny is a pernicious myth. Rather, they share the common human need for predictable event undergirded by civil and state institutions and their difficult history is the result of their struggle to achieve both in the absence of private property.

Since only the Tsar or the Party had property, no individual Russian could be sure of long-term usage of anything upon which to create wealth. And it is the poor to whom the property right matters most of all because property is the poor man’s ticket into the game of wealth creation. The rich, after all, have their money and their friends to protect their holdings, while the poor must rely upon the law alone.

Ironically, the nontransferability of the votchina system’s entitlement was the very flaw a shareholding culture and an equities market could have addressed successfully had Lenin’s revolutionary dictum of "Property to the people! Factories to the workers!" been realized. And such a program existed. It was designed by Larisa Piasheva, a free market Russian economist who was appointed by Moscow mayor Gavriil Popov to design and execute a program for the privatization of Moscow’s assets. Ms. Piasheva’s program was a fearless and rapid plunge into the market which would have distributed property widely into Russia’s many eager hands. Further, the program – inspired as it was by the policies of Ludwig Erhard and his adviser, the renowned Austrian economist Wilhelm Roepke - did not rely upon Western lending but instead tailored itself to maximize direct Western investment.

Instead, after robbing the Russian people of the only capital they had to participate in the new market – the nation’s household savings  – by freeing prices in what was a monopolistic economy and which delivered a 2500 percent inflation in 1992, America’s "brave, young Russian reformers" ginned-up a development theory of "Big Capitalism" based on Karl Marx’s mistaken edict that capitalism requires the "primitive accumulation of capital". Big capitalists would appear instantly, they said, and a broadly-based market economy shortly thereafter if only the pockets of pre-selected members of their own ex-Komsomol circle were properly stuffed. Those who hankered for a public reputation were to secure the government perches from which they would pass state assets to their brethren in the nascent business community, happy in the knowledge that they too would be kicked back a significant cut of the swag. The US-led West accommodated the reformers’ cockeyed theory by designing a rapid and easily manipulated voucher privatization program that was really only a transfer of title and which was funded with $325 million US taxpayers’ dollars.

Co-temporaneously with voucher privatization, an early and precipitous Bush Administration initiative was coming to fruition. In early 1992, the "Bankers Forum" project was wheeled into place by a former New York Fed chief, Gerald Corrigan, who at George Bush’s direction sent in a group of experts from the Fed, commercial banks and the Volunteer Corps on an off-the-books mission to teach the Russians at the Central Bank the bond game. Moscow-based Dialog Bank’s Peter Derby, who explained the project’s background remarked, "Basically, when Corrigan asks, I guess no one turns him down, because people reacted instantaneously. It was done by private investors, who were asked by a person you can’t say no to" (my emphases).

So lush were the bond market’s rewards that dubious market participants included the Russian Central Bank itself through an off-shore firm known as Fimaco. The involvement of the Harvard Institute of International Development’s [HIID] honchos in the same conflict-of-interest activities has already been admitted publicly and remains the object of a Boston Grand Jury’s scrutiny. The Harvard Management Corporation[HMC], which invests the university’s endowment, was also an avid purchaser of Russian bonds, a dubious and unsettling history since there is no legal separation of HMC and the university itself. According to the Russian Interior Ministry’s Department of Organized Crime, Western employees of Russian banks, Western bankers and consultants, Russian bankers and anecdotal evidence, other likely participants include certain employees of the U.S. Treasury, of the multilateral agencies (most especially the World Bank’s Moscow offices), of bilateral aid agencies, and policy and program consultants acting through accounts established in their wives’ maiden names with non-U.S. reporting brokerages in Moscow. Even the Ford Foundation’s Moscow office sponsored its own internal Russian bond shop for which the unthinking Russian managers once asked this reporter to drum up U.S. investors.

The aid program delivered best it could what was in reality a flimsy contrivance, which - in turn - was really only an exotic venue through which to pass public funds to selected Russians of the Clintons’ and HIID’s choosing and to Wall Street investment banks the Clintons hoped to entice permanently into their orbit of supporters and contributors. In short, the Russian bond market was the Arkansas Development Finance Authority gone international.

In an interview published in a 1993 issue of VIP, the vanity organ of the commercialized nomenklatura, Shcherbakov reported excellent relations with the new regime of "eager young reformers" – Gaidar, Chubais et al – and their leader, Boris Yeltsin. All hail-fellows-well-met. So too did FPI enjoy similarly sympathetic connections to the EBRD, the IMF and the UN Industrial Development Organization. Shcherbakov even boasted about FPI’s "new approach to the problem of the property of the Western Army Groups in Eastern Germany that comes down to its joint exploitation by Russian and German businesses", an eyepopping admission since a year after the interview was published, the Russian scandal was Bonn’s claim that Soviet weaponry sales to rogue regimes originating in the Western Army Group had amounted to a $4 billion criminal take.

The CIA has determined that through Nordex, FPI seized the export earnings from Russia’s natural resource companies – oil, gas, platinum, gold, diamonds – and from industrial firms exporting items such as steel and aluminum and then stashed the hefty profits in Western bank accounts. And only now, eight years almost to the day later, do US taxpayers learn that the "eager, young reformers" to whom their resources were sent for the purpose of building a new Russia were in league from day one with the exhausted Soviet nomenklatura in a scheme to loot Russia’s wealth and park it in the West.

No one had stopped producing, but shops were suddenly nearly empty. Producers had begun hoarding, as had fearful consumers, but why? It wasn’t that Yeltsin announced in November 1991 that the government intended to free prices, it’s that he also announced the exact date on which prices would be freed. Predictably, producers withheld their product from market and rubbed their hands together like flies awaiting the coming feast which Yeltsin’s newly announced policy guaranteed. Within a week of the ill-considered speech, Muscovites’ needs were being rationed.

In 1991, there was no hope whatsoever that wheezebag Soviet industries could compete with Western products. For decades, prices were set by Gosplan (State Ministry of Central Planning), any enterprise profits were claimed as Soviet tax revenues, all customer bases were guaranteed and therefore no enterprise had a financial incentive to compete. Without competition, there was never any need to improve quality.

Certainly eager Western banks should have been given admission to Russia. By working initially with more developed and well-capitalized Western banks and later by competing with them, Russian banks could have developed quickly and today be mediating capital responsibly and profitably. No good economic purpose was achieved by foisting subsidized billion dollar loans onto Russia for the purchase of Western consumer goods.

Unsurprisingly, the entire jury-rigged effort has collapsed in flames. The bond market has gone bust, Russia is crushed by her IMF loan payments, and OPIC’s nearly $2 billion in U.S. taxpayer-provided guarantees are yet to be resolved. The West’s best course under whatever new government the Russian people elect is to take its own advice, stop meddling, cease all subsidies and allow what few market mechanisms that do exist in Russia to work. The sooner the banking industry’s pylesos ("vacuum cleaners") are allowed to fail, then the sooner the national property can return to market where more able and productive hands might yet grasp it.

The years-long sugarcoating of what the Clinton administration’s policies have wrought in Russia is just one more lie bequeathed Americans. More Western money will only work to insure the continued degradation of Russia, bequeathing her people a future that can be discerned in that most familiar object of Russian folk culture - the Matryoshka nesting doll - a perfect, visual metaphor of Russia’s Brechtian universe: Each figure is captive, one inside the other, and in the end the biggest doll consumes the lot.

Any pyramid scheme remains viable only so long as its base continues to expand and it is that fact which has driven US foreign policy for much of the past century. Since politicians and investment bankers both have an interest in promoting deficits and in forcing taxpayers to redeem government debt, they were quick to come to terms on the advantages of underwriting foreign debt along with new markets and natural resources from abroad. Taxpayer-subsidized globalism then is not a new phenomenon, but it has reached an apogee of sorts under the guiding hand of the opportunistic Clinton Administration.

The 1930s were the last era in which the international political and financial elite sought advantage through control of the global economy. What economists call "hot money" raced from one nation to the next throughout that era, leaving a trail of competitive currency devaluations in its wake. Six decades ago, as nation after nation was humbled by and strangled with the manipulations of the financial world’s insiders, history saw fit to serve up Adolph Hitler.

During the Cold War, the International Monetary Fund got itself repeatedly into all sorts of financial and ethical mishaps in the West’s effort to contain the Soviet empire. But the IMF’s excesses were of little concern so long as its financial firepower could be directed at whatever nation appeared on the verge of toppling into the Soviet camp.

The ascendancy of Treasury in foreign policy at the State Department’s expense is the result of a neo-mercantilist foreign policy in which enterprise is to be subject to direction from the presidential administration it is to serve. By expanding the mandates and accelerating the use of a host of international agencies in which the US is dominant - the IMF, the World Bank, the EBRD, the regional development banks, the IFC - and combining their efforts with those of the Commerce Department, the Export-Import Bank, OPIC and USAID-financed Enterprise Funds, the Clintons succeeded in constructing an international patronage machine in which the American executive stands supreme.

Taking the IMF’s behavior in Russia as a guide, the answer is that we can expect a rapid escalation of taxpayers’ liabilities in the service of failed policies. After the chaos unleashed by the Fund’s initial advocacy of a single ruble zone for the Commonwealth of Independent States, which handed management of the ruble to 12 central banks, the Fund’s monetary sages settled down to their more usual business of lending large sums in return for secret, IMF-designed recovery programs always said to be strictly enforced. In Russia’s case, only the rhetoric of strict conditions was enforced.

Once the first tranche’s payout of a billion plus dollars arrived the following May, Yeltsin pulled out all the stops; back wages for state employees and pensions were paid, and after the IMF’s billion was consumed, the capricious Siberian ordered his initially mulish Central Bank to hand over a billion more. The IMF said nothing despite claiming the Fund’s main achievement during the previous 6 months was legislation establishing the Russian Central Bank as an independent institution. Therefore, the Fund’s current denial of any knowledge of the Russian Central Bank’s offshore operations through Fimaco is dubious at best.

Clearly, building an empire of finance capitalism is an expensive business. But who pays? U.S. taxpayers, who paid directly through contributions to both multilateral and bilateral assistance efforts, and Russian workers, who paid indirectly by having their wages go unpaid and their national estate continually degraded. Secondly, the Russian people paid by being denied a means of exchange since the banking and trade sectors of the economy were quick to socialize amongst themselves what few rubles the IMF’s tight money policies allowed the Russian Central Bank to print.

Sell assistance programs on an alleged "free market" and "humanitarian" basis by awarding government grants to those academics who can be relied upon to supply the intellectual camouflage politicians and journalists then repeat ad nauseum to a distracted public, move the IMF and the World Bank to target, induce target to raise taxes, fine tune target’s central banking operations, encourage borrowing and debt creation through the target’s government and its national banks, allowing IMF lending to pay yields if necessary; induce target to privatize national property while building a flimsy, artificial "infrastructure" for an equities market good enough to attract high risk foreign investors. Once the target nation’s government flounders, step back and watch speculators assert discipline through a run on the target’s currency. The subsequent devaluation delivers, in turn, a flood of cheap imports to American manufacturers and producers.

What U.S. policy has wrought across much of the post-cold war landscape is a moral, political and financial abomination based on fraud, theft and deceit. In Russia the results of the Clinton Administration’s policies are the perpetuation of the longest depression of the 20th century in what is increasingly an unpoliced deadly weapons dump, the biggest swindle of national property since Vladimir Lenin muscled the country early in the century and the discrediting of the ideas of free markets and democracy.

When exchange rates fluctuate against one another as they do now, some countries will inflate more quickly than other countries. The G-7 are the only nations that try to co-ordinate their monetary policies and the effort usually ends up a failure over time. When one country inflates too quickly, the value of its currency will decline.

But when exchange rates depreciate rapidly the specter of capital flowing out of a country appears. Foreigners and residents put their savings elsewhere. The currency goes into free fall, its value plummets, more investors flee and at the end of the cycle, interest rates skyrocket. This is exactly what happened in Asia in 1997, in Russia in 1998 and in Brazil in 1999.

In time, U.S. corporate profits will decline as a consequence of the IMF-induced deflation and share prices of all but premiere multinational corporations will follow suit. Alas, those Americans up to their necks in credit card debt may well be the next class of debtors to be rolled, and American farmers are already suffering serious losses from the collapse of farm commodities prices. In time, credit will dry up, government receipts will dwindle, the national debt will skyrocket and unemployment will increase. Eventually the government will inflate its way out of its accumulated debt.

In other words, long before bailouts of entire countries became routine Camdessus wanted a new loan program to feed the last disciplinarians in the world’s financial system - currency speculators - so that national governments might become even more unaccountable to their citizens. At the time, The Economist slammed the proposal, saying it was "absurd and almost certainly unworkable," since Camdessus "bizarrely" was assuming the IMF would know more about economic fundamentals than the markets. And that assumption, The Economist noted, was the very assumption which had been the undoing of the USSR’s centrally planned empire. But Camdessus’ 1994 plan is the very one the Clinton Administration implemented and seeks to institutionalize.

It doesn’t take a conspiracy theory to observe that the downward arc of citizens’ liberties, independence and civic competence and of American culture generally parallels the declining value of the U.S. dollar, which has lost 99 percent of its value since the founding of the Fed, and 75 percent of that debasement has occurred since the last link with gold established by Bretton Woods collapsed in 1971. From that perspective, it’s really not very surprising that at the end of the century, not quite a century after America instituted the Federal Reserve and thereby began the process that would deliver the power of creating unlimited debt to the political class, the White House is occupied by a couple who share not so much a marriage as they do a collection of felonies.

But what if - instead of Beatrice - what waits over our collective shoulder down Purgatory way is a repeat of the European currency instabilities of the 1930s, which culminated in the most vicious and widely-fought war in world history?

Russia is a fabled land, home to a unique and provocative thousand year-old culture, and a country rich in the resources the world needs whose people had the courage and resilience to defeat this century’s greatest war machine, Hitler’s invading Wehrmacht. Yet, thanks to Boris Yeltsin’s thirst for power and megalomaniacal inadequacy, Russia has become the latest victim of American expediency and of a culturally hollow and economically predatory globalism. Consequently, Americans, who thought their money was helping a stricken land, have been dishonored; and the Russian people who trusted us are now in debt twice what they were in 1991 and rightly feel themselves betrayed.

But where, in a land in which today more of the people die each year than are born, lies the gain? History’s yardstick will measure out the answer, and I suspect it will not suit us.

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