      http://www.wsws.org/articles/1999/aug1999/russ-a27.shtml

      Copyright 1998-2001
      World Socialist Web Site
      All rights reserved

      Bank of New York probe exposes ties between Western financiers and Russian Mafia

      By James Brookfield 27 August 1999

         When the history of the first ten years of capitalist restoration in 
      Russia is written, it will have to include two fundamental points. First, 
      that never before was so much money stolen by so few people in so short a 
      span of time. Second, that the thieves included not only elements of the 
      old Stalinist "nomenklatura" and a new generation of Russian 
      gangster-businessmen, but also a good number of Western bankers and 
      government officials.
         An important chapter in this history is now unfolding in the United 
      States. Federal officials, working with their counterparts in Britain and 
      Switzerland, are engaged in an investigation of what may be the largest 
      money-laundering scheme in US history. They allege that billions of 
      dollars from Russia, some of it from Mafia elements, were channeled 
      through accounts at the Bank of New York. Two BNY vice-presidents have 
      already been suspended as a result of the probe.
         Investigators are also looking into the possibility that Russian Mafia 
      elements took $200 million from IMF loans that were made to the Russian 
      government.
         A series of articles by "New York Times" writer Timothy L. O'Brien 
      has brought the salient facts to light. Sometime during the summer of 1998 
      British officials investigating Russian mob activities alerted US 
      authorities to a link between YBM Magnex, a front company for suspected 
      Russian gangster Semyon Yukovich Mogilevich, and Benex, a firm owned by 
      Peter Berlin, the husband of one of the now-suspended BNY vice-presidents. 
      From October 1998 to March 1999, $4.2 billion in suspect money passed 
      through the BNY accounts of Benex and other firms. Investigators allowed 
      the account to remain open after March as they continued their probe, and 
      the total amount laundered may prove to be as much as $10 billion.
         The traces of criminal wrongdoing extend beyond suspected organized 
      crime figures like Mogilevich and point to high-level officials in the US 
      and Russia. Investigators are looking into whether funds from the now 
      insolvent Russian bank, Menatep, were also involved in money laundering at 
      BNY. Menatep is owned by Russian oligarch Mikhail Khodorkovsky and 
      recently employed, as a senior executive, Konstantin Kagalovsky.
         Kagalovsky's alleged role in the money-laundering operation highlights 
      the criminal character of the nouveau riche in Russia, for the most part 
      born of the old Stalinist bureaucracy, as well as the complicity of 
      Western financial institutions, governments, and academic advisors. 
      Kagalovsky was involved at the highest level of the Russian government, 
      serving as an advisor and as its representative to the IMF before moving 
      on to Menatep in 1994. Prominently displayed in his office at Menatep were 
      photographs of his meetings with George Bush, John Major and other Western 
      leaders.
         He left Menatep to become the vice-chairman of the Lukos oil 
      conglomerate. This company had been acquired by Menatep on the cheap in a 
      "loans-for-shares" scheme in which the bank extended credit to the Russian 
      government in exchange for shares in the company's ownership. When the 
      bank went under, Lukos picked up many of its assets, including its Moscow 
      headquarters and a number of offshore holding companies, according to a 
      report in Thursday's "Wall Street Journal".
         These holding companies are alleged to have been used to plunder a 
      number of other Russian companies, also owned by Menatep. In a procedure 
      known as tolling, the assets or products of manufacturing firms were sold 
      to the holding companies at below-market prices. The offshore holding 
      companies then sold the goods at normal prices, keeping the profits 
      outside Russia. The <I>Journal</I> article cited one example of tolling in 
      which $20 million was removed from a Russian titanium plant in just one 
      year.
         Such dealings are alleged to have quickly made Mr. Kagalovsky a very 
      rich man. So suggests the following description, provided by John Lloyd, a 
      writer who recently traveled to Moscow and prepared an article for the 
      "New York Times Magazine" ("Who Lost Russia?" the Russian Devolution," 
      15 August 1999):
         "[Kagalovsky] was the first reformer I had got to know when I went to 
      live in Russia early in 1991. Back then, he lived in a two-room, 
      comfortless flat in one of the massive projects that ring Moscow. Thin and 
      intense, he had sat me down at the kitchen table and, battling with his 
      halting English and my halting Russian, talked of Adam Smith and Milton 
      Friedman and Jeffrey Sachs.... He told me of the futility of Gorbachev's 
      reforms, the need for policies of the strictest monetarist provenance and 
      of the pure evil of Communism.
         "The man who [now] came out of his office to meet me&#8212;after I had gone 
      through two careful security checks and several soft-carpeted corridors in 
      an expensively renovated 19th-century Moscow mansion&#8212;had put on some 
      weight and wore a well-cut suit and rich tie....
         "In 1991 and into 1992,' he said, "we were still in our romantic 
      period. Our views and feelings were based on our readings, discussions, 
      ideas -- some of them childish, it seems now. After that' -- he smiled a 
      little -- life changed all of us....
         "We now see such simple truths: that a country that is based on 
      stealing and corruption is much less efficient than a normal society. And 
      that the end doesn't justify the means. After 1996, corruption became a 
      systematic element of the state. It went to the core of the new Russian 
      state ...'
         Of which, he does not add, he came to be an instrumental part.
         Kagalovsky is a fitting representative of those who actively worked for 
      and profited from the dismemberment of the USSR. From whatever exposure to 
      Marxism they received in the waning days of the Soviet Union, the "New 
      Russians" like Kagalovsky retained one concept: the venality of capitalist 
      society. This they considered not a socially detrimental aspect of the 
      profit system, however, but a positive basis for personal enrichment.
         Kagalovsky is married to Natasha Gurfinkel Kagalovsky, who is the 
      second suspended BNY vice-president. She oversaw the vast majority of the 
      bank's Russian accounts. Like her husband, Natasha Kagalovsky proved to be 
      a rapid social climber. Born in 1954 in the Soviet Union, she emigrated to 
      the US in 1979, got her degree from Princeton, and in 1996 joined Irving 
      Bank, which was bought by BNY two years later. She took over the bank's 
      East European division in 1992 and became very wealthy, reportedly paying 
      cash for a $796,000 Manhattan condominium in 1997.
         The plundering exemplified in the BNY case is of an immense magnitude, 
      particularly in its relation to the size of the Russian economy. One 
      analyst estimated that the $10 billion allegedly laundered over the past 
      year constitutes fully 6 percent of the Russian gross domestic product, 
      and 40 percent of the Russian federal government's budget. And this is 
      only the sum that may have passed through one channel over one year. An 
      article in Saturday's "Financial Times" of London cited a report 
      prepared by Fitch IBCA, an international credit rating agency, that 
      estimated a total of $136 billion was taken out of all of Russia between 
      1993 and 1998. Another estimate, provided in Lloyd's article for the 
      "Times", puts the total in the neighborhood of $200-500 billion.
         Though the exact figure has not been determined, this vast sum not only 
      lined the pockets of the new Russian kleptocracy, but also flowed into the 
      coffers of US and European financial institutions. (The BNY case may well 
      involve a number of major European banks. On Tuesday, the "Wall Street 
      Journal", citing sources familiar with the investigation, said that 
      Credit Suisse, Union Bank of Switzerland, Dresdner Bank, Westdeutsche 
      Landesbank and Banque Internacionale of Luxembourg are being scrutinized 
      for their role in the matter.)
         Claims that US and European banks were merely taken for a ride by 
      Russian corporations and Mafia elements are belied by the vast profits 
      garnered from Russian accounts. As Natasha Kagalovsky pointed out in a 
      1995 memo to Thomas Renyi, then BNY president and now its CEO, "Inkombank 
      [another bank that, like Menatep, is now insolvent] is "our largest 
      generator of fee income" and they are now the largest clearing bank in 
      Russia for domestic transactions" (emphasis added).
         The new Russian oligarchs, who felt their hold on their newfound wealth 
      to be very fragile as long as it remained in the country, needed Western 
      banks to get the money out. They had little difficulty finding major banks 
      willing to overlook evident wrong-doing in order to open up fat and 
      profitable accounts for their Russian clients.
         Since the BNY scandal broke last week, articles critical of the Clinton 
      administration, the Yeltsin government and Western banks have appeared in 
      the US press. But not one will so much as broach the possibility that the 
      plundering of Russia is organically linked to the restoration of 
      capitalism in the Soviet Union, or that the West bears any responsibility 
      for the economic, social and moral disaster that has engulfed Russia over 
      the past decade.
         Nevertheless, the record speaks for itself. At the end of the last 
      decade, capitalist policy makers in the US and Europe, backed up by the 
      IMF, demanded the rapid privatization of the Russian economy, the 
      liberalization of prices, the elimination of social benefits, and the 
      removal of other barriers to profit-making in the former USSR. These 
      policies, which put in private hands what had been, at least legally, 
      public property, thereby creating a new possessing class, required 
      criminality. Who but the most avaricious, ruthless, and reckless would 
      implement such policies? Western officials and banks worked with (and 
      continue to work with) the new Russian oligarchs and their political 
      allies.
         Ten years ago, pro-capitalist politicians were able to take advantage 
      of the disaffection of the Soviet masses with the Stalinist regime to 
      reintroduce capitalist market relations. At the time, their promise that 
      freedom and prosperity would follow was taken more or less as good coin. 
      As this decade closes, the human toll of capitalist plunder in Russia -- mass 
      unemployment, rapid decline in life expectancy, the reduction of as much 
      as one-fifth of the population to a level of poverty almost unknown 
      outside the Third World&#8212;already constitutes a devastating historical 
      indictment of capitalist restoration, and more generally, the prospects 
      which the profit system offers to the vast majority of the world's 
      population.

      See Also: http://www.wsws.org/sections/category/news/eu-russ.shtml Russia [WSWS Full Coverage]
