Crime without punishment

DIRTY money makes the criminal underworld go round. Between $500 billion and $1.5 trillion (or 5% of gross world product) may be laundered every year, according to the IMF. Now it seems some of the IMF's own cash may be involved. Along with several leading banks, it is embroiled in what may prove the biggest-ever case of money-laundering. All protest innocence and even shock. But few are surprised that the money involved comes from Russia. For the scandal has confirmed Russia's status as the world's leading kleptocracy.

The story broke on August 19th, when the Bank of New York (BoNY), one of America's oldest, admitted to co-operating with an investigation into alleged money-laundering of as much as $10 billion. The paper-trail has touched several European banks too, all of which are said to have helped, over the past year, to move $4 billion from Russia to BoNY's London office. All the banks deny wrongdoing.

One focus of the investigation (who also denies wrongdoing) is Bruce Rappaport, a 76-year-old Swiss banker whom Antigua, a notorious Caribbean tax haven, recently appointed as its ambassador to Moscow. He is joint-owner, with BoNY, of Bank of New York-InterMaritime, a Swiss bank that does lots of Russian business. Another focus is Benex, a company run by Peter Berlin, husband of Lucy Edwards (born Lyudmila Pritzker), a BoNY executive. The bank has suspended her, along with a second Russian-born executive, Natasha Kagalovsky—who is married to Konstantin Kagalovsky, a rich Russian businessman, who in the early 1990s was Russia's IMF representative.

As much as $200m that passed through BoNY may have come from IMF loans to Russia. The IMF says allegations of money laundering are serious and it is looking into them. But it also says that its loans to Russia were deposited directly into the accounts of the Russian central bank and that it has neither the locus nor the ability to monitor what happens next.

Yet the IMF, which has lent over $20 billion to Russia since 1992, has had the sort of experience that would have persuaded any private lender to cut its credit lines. In July, a report by PricewaterhouseCoopers confirmed that, in 1996, Russia's central bank had moved $1 billion to Fimaco, a firm it controlled in the Channel Islands, without telling the IMF. Stanley Fischer, the IMF's deputy managing director, declared that the Russians had lied about the matter. Yet the IMF has just agreed to lend Russia a further $4.5 billion; though this time, the money is being used to pay off earlier loans, so the Russian government cannot touch it.

IMF officials concede privately that many problems have arisen because Russia has been treated as a special case. Lending to Russia has often been politically motivated, notably to help re-elect Boris Yeltsin in 1996. If lending criteria for Russia were unusually lax, that too is because of political considerations.

Western banks also argue that Russia is a special case. Many were encouraged to set up shop in Moscow after the collapse of communism. And much Russian business has indeed proved lucrative—although a lot of banks lost heavily a year ago after the Russian government defaulted on its debts. However, Russia is now a special case mainly because of its organised crime.

Banks have seldom asked much about where customers' money has come from. But in the past few years they have been tightening up. Most international banks have rules in place to detect and report money laundering. But in Russia, it is virtually impossible to tell whether money is earned legitimately.

That is because crime is not at the margin of society: it is at its very centre. Although all figures in this area are inherently unreliable, the Russian Interior Ministry has estimated that organised crime controls 40% of the economy; other estimates are even higher. Half of Russia's banks are thought to be controlled by crime syndicates.

A lawless history

Yet to understand the depth of Russia's crime problem, it is important to shed one big misapprehension: that it is a wholly new phenomenon. Russia has been, more or less, an orderly country for much of its history. But it has practically never been lawful. Property rights and an independent judiciary were only weakly rooted under Tsarist absolutism. They were further destabilised following the Bolshevik Revolution of 1917.

Crime is more visible than before, but that does not make it new. In the Soviet Union, there was also organised crime, but it was largely hidden. For decades, there was a tightly knit group of traditional gangsters, known as vory v zakone, an expression meaning “thieves governed by their own laws”, who ran rackets of the kind that flourish in any repressive society, from trading in building materials to illegal prostitution to gambling. Such clans were often at loggerheads with the authorities. Stories about these criminals rarely, if ever, surfaced in the state-controlled media.

Then there was the communist-run state itself. For the ordinary citizen, it may have maintained a semblance of law and order. But it also confiscated anything it wanted, ranging from household savings (through currency reforms) to the lives of its citizens (via slave labour). Until the fall of communism, the extent of official lawlessness was not fully appreciated. Thanks both to Russia's freeish press and to greater integration into the outside world, lawlessness is now more visible than it was. Day to day, it is probably worse; but it is not completely new.

The unusual thing is not that crime has flourished since 1989. It is that there has been at least an attempt to run Russia as a law-governed state. And the worrying thing, for both Russians and the rest of the world, is that this attempt has largely failed. On a superficial level, certainly, the structures and values of legality are in place. Policemen and judges no longer take orders from party bosses; there is parliamentary oversight of the executive; on paper, nobody is above the law. Even the most corrupt politicians pay lip service to notions of legality.

But, once again, the reality is different from what is visible. At the top table, ex-communists used legal, semi-legal and illegal means to turn power into wealth, and then wealth into power. The presidential administration has become fantastically wealthy (its former chief housekeeper, Pavel Borodin, earlier this year valued its assets, shamelessly if fancifully, in the hundreds of billions of dollars). There are no meaningful public accounts; such details as do drip out—hundreds of millions of dollars spent renovating the Kremlin, for instance—suggest prodigious indulgence.

Other signs of lawlessness at the highest level include the privatising of Russia's main industrial and energy companies for token amounts in the shares-for-loans scandal; the extraordinary indulgence shown to banking magnates whose recklessness in any other country would have led to bankruptcy and prosecution; and the remarkable and unchecked opportunities for bribery created by a combination of high tariffs and a corrupt customs service.

Although state institutions are strong and greedy where their own interests are concerned, they are weak and apathetic in defending Russia's citizens. This has cleared the way for the growth of a new organised crime that preys on the country's private sector. When the state will not help you collect your debts, secure your business or provide public services, as a rational businessman you must look elsewhere.

The mundaneness of most protection rackets is no reason to be sanguine. “The mafia both exploits a vacuum, and maintains it,'' points out Mark Galeotti, an academic based at Keele University who specialises in Russian organised crime. Although business enjoys a quieter and more predictable life, the hefty fees for krishas have pernicious effects. One is to make sure that officials stay weak and bribable. Another is to finance the mafia's own business expansion plans in Russia and, increasingly, abroad.

Survival of the fittest

Fuelled by other people's money, high and low forms of criminality have over the past decade converged into one (see chart 1 above). Corrupt officialdom pervades the economy; organised crime pervades officialdom. Russia's financial collapse last year made things worse. The devaluation of the rouble has savagely reduced the value of public-sector salaries. This makes officials more vulnerable; it also makes hiring the public sector the most cost-efficient form of physical protection. The cost of hiring a squad of elite OMON anti-terrorist police, for example, has fallen to 1993 levels (see chart 2).

Where this now leads depends largely on the economy. When Russia is booming, it produces a distorted form of crony-capitalism, visible in Russia's biggest and most prosperous cities, in which local political barons are, in effect, a super-krisha for all business on their patch. Different clans divide up the economic cake by district or specialisation (all petrol stations in an area, for example, may be formally or informally franchised to the same group). A stable pecking order is often maintained by an external group, perhaps of Chechens, acting on behalf of the city bosses.

This is hardly attractive, and certainly not optimal. Illegal revenues are funnelled through businesses that are kept going only as money-laundering operations, or thanks to monopolies maintained by force. But it does at least offer a kind of stability. One recent opinion poll in Moscow showed that a majority of residents believed that the municipal administration was corrupt—but that a majority would still be ready to re-elect it.

Lawlessness can take far worse forms, leading to a vicious circle of increasing poverty and greed. This is visible in some of Russia's most far-flung and worst-governed regions, such as the far eastern provinces, where local officials use the crudest threats and intimidation to force businessmen to hand over cash, shares or physical property. Increasingly corrupt officials and ever more criminal businesses squabble over a shrinking cake. Russia's economic crisis has tilted the balance further towards this more poisonous variant. Contract killings, for example, which were declining until last year, are rising as turf wars intensify.

Home matches, away victories

The future depends partly on the mafia's own business planning, which is becoming increasingly sophisticated. A striking consequence of Russia's economic crisis was to speed up consolidation. Low-level gangsters, whose talents extended to little more than terrorising a bunch of kiosk owners or a car park, found revenues drying up along with consumer spending. They have lost market share to more sophisticated competitors who offer better service at a lower price. “Many thugs are putting on uniforms and working as security guards for the better krishas,” says Dr Galeotti.

But the biggest worry for the rest of the world is not so much the prospect of a dismal, lawless future for Russia as of contagion outside its borders. If Russia's economy continues to stagnate, the prospects for an ambitious, criminally minded Russian are limited. Local business looks increasingly unrewarding compared with the pickings elsewhere.

There are three troubling possibilities. One is of Russian organised crime abroad. Russian racketeers in businesses such as prostitution and smuggling are already a well-established feature of the criminal landscape in countries with a big Russian immigrant presence, including Germany and America. Money-laundering into respectable businesses, or simply assets such as London property or American shares, is also substantial, as the BoNY case may yet confirm.

More worrying is co-operation with foreign criminals in areas where Russian gangsters have a competitive advantage, in either skills or ruthlessness. Dr Galeotti's research, for example, suggests that Japanese gangs have used Russian hackers to attack law-enforcement agencies' databases. Russian professional assassins are also in big demand.

But the worst threat comes from the fusion of a corrupt state with powerful gangsters. It has never been explained, for example, how the menacing Aum Shinrikyo cult was able to continue operating in Russia, even after its nerve-gas attack on the Tokyo subway. International branded-goods companies look with near-despair at the counterfeiting business in Russia, which seems to enjoy protection from the highest levels of government. Russia is a major staging-post for smuggling weapons and drugs, something that would be impossible without the close co-operation of state bodies. “Organised crime interests are global, not isolationist,” says one western security specialist. “They would love it if Russia was in the European Union.'

Dr Galeotti speaks of a “symbiotic relationship” between organised crime and Russian intelligence. In parts of the world where Russia's intelligence agency, the SVR, has been cut back (such as Latin America), organised crime syndicates will do important legwork for Russia's spymasters, he says. In a country like Israel, “which has excellent counter-intelligence but is hopeless at dealing with organised crime”, the same arrangement applies. In return, he says, the SVR performs services for Russian criminals—for example, spiriting key members across borders. There is, says Dr Galeotti, “no known case of Russian state interests prevailing over those of Russian criminals abroad.”

This presents a huge difficulty for western law enforcement agencies—and for the IMF and other creditors. If the Russian state is fundamentally corrupt, working with it against crime is worse than useless. Any sources that Interpol share with Russian colleagues risk being fed straight back to the criminals. And any money that reaches Russia from abroad risks being siphoned off by organised crime, in cahoots with the state.

Glass roof at tunnel's end

Yet the picture is not totally hopeless. Other post-communist countries have managed to tackle both the mafia and corruption. Estonia, which was under Soviet rule until 1991, has made substantial progress, sometimes by threatening to deport Russian suspects. Latvia and Lithuania have jailed heads of mafia clans who seemed untouchable only a few years ago. Public disgust with crime and corruption, coupled with pressure from friendly neighbouring countries, were key factors. So was an increasing desire among leading crooks to go respectable.

The shift is not complete: one Estonian law enforcement official laments that some well-known and well-connected local businessmen still dip into illegal business if they can. But it marks a huge step towards manageability. That most post-communist countries have reduced lawlessness below some western levels is cause for congratulation, though perhaps not complacency.

There is no reason why this should not also apply, eventually, in Russia. Although Russians tolerate a remarkable degree of lawlessness in their country, there is no evidence that they actually like it. This may seem a slender reed to rely on, but it is not a negligible one—particularly as and when the costs of corruption become more apparent. Russian voters, like voters elsewhere, will not put up indefinitely with corrupt rulers who keep them poor. The sad thing is that they have little experience of anything else.