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John Thornhill and Charles Clover   Financial Times   21-Aug-1999   Why are the Slavs poor?
While Mr Lazarenko was prime minister in 1996, at least $72m in profits from Ukrainian state factories went to a Cyprus-registered company, Somolli Enterprises.  The profits were then deposited in Mr Lazarenko's bank accounts in two Swiss banks before being transferred to accounts in the Caribbean.
The $72m stolen by Pavlo Lazarenko is his to keep.  Ukraine will never try to get it back.  It will never put Pavlo Lazarenko on trial.  It will never extradite him.  Why?  Because Pavlo Lazarenko stole the money as President Leonid Kuchma's Prime Minister, with full knowledge of Leonid Kuchma, with Leonid Kuchma's blessing, even while Leonid Kuchma himself was stealing from Ukraine along with Pavlo Lazarenko and now for one thief to put the other on trial would be to expose them both.

And that $72m was just the amount stolen by one Ukrainian parliamentarian within one year.  A number of other parliamentarians have their hand in the till, and not just for a single year, and the plunder is by no means limited to parliamentarians.  The world gazes upon the two economic basket cases of Ukraine and Russia, and tries to fathom the mystery of their economic underperformance.

Ukrainian gaining of independence in 1991 was a sham.  Ukrainians continue languishing in the same state of serfdom that oppressed them prior to independence, and under the same ruling lords.  The affluent West does not merely support the plunder of the Slavic peoples, it participates in it.  The West deliberately imposes dictatorship upon Ukraine and Russia so as to promote the subjugation of the Slavic world.

The hypocricy of Switzerland sitting on $40bn (all that it can bring itself to admit to at the moment) in stolen cash in its vaults while knitting its brow in disapproval of the plunder of the Slavic peoples tries one's patience.


Financial Times
21 August 1999

RUSSIA: The robbery of nations

Billions of dollars are flowing out of the former Soviet Union, say John Thornhill and Charles Clover

In the dying days of the Soviet Union, as ethnic tensions flared and the economy crumbled, the Communist party began secreting part of its vast assets abroad.  Fearful of losing power, the party nomenklatura instructed the KGB to set up a web of foreign banks and companies to channel their wealth overseas.  Soviet embassies, trade delegations and central bank subsidiaries all became part of this sophisticated state-sanctioned machine.

Nobody knows how much money leaked out of the Soviet Union in the late 1980s and early 1990s, but it is thought to have run into billions of dollars.  Russia's first post-Soviet government hired Kroll Associates, the private detective agency, to try to track down where the Communist party money had disappeared.  The agency's inquiries were quickly squashed by powerful interests in Moscow.

Some of the money later returned to Russia and other former Soviet states, enabling the nomenklatura to buy privatised companies and reassert its political influence.  To this day, the 12 countries of the Commonwealth of Independent States remain in the grip of former Communist party officials.  But much of the cash has probably remained abroad, invested in everything from houses in London to night clubs in Budapest and US Treasury bonds.  It finances extravagant lifestyles for many Russian jetsetters.

Nor did the flow of money out of Russia cease with the fall of Communism.  Indeed, the move to a market economy may simply have accelerated the process.  A money laundering scandal in New York this week is only the latest example of capital flight to emerge.  Citing US law enforcement officials, the New York Times newspaper reported that the Bank of New York may have been used to handle up to $10bn from suspect Russian sources since early last year.

If the individuals exporting Russian money have changed, the network remains largely the same.  Many of the experts who worked for the Communists found lucrative employment as the former Soviet Union lurched towards a market economy in the early 1990s.  Oleg Babinov, director of the Moscow office of Risk Advisory Group, a business intelligence consultancy, says criminal gangs, commercial banks and industrial companies were all keen to take advantage of their expertise.

"By the time all the CPSU [Communist Party of the Soviet Union] money had been laundered and legitimised, the mechanisms that had been set up started accepting other clients," he says.  "It was a business arrangement available to a fairly large group of people with the right connections."

The New York Times report suggested that the Bank of New York accounts were linked to Semyon Mogilevich, a 53-year-old businessman originally from Ukraine, who it said was being investigated by international law authorities.  He was said to be suspected of involvement in drugs running, arms trafficking and prostitution rings.

But bankers in Moscow and New York find it inconceivable that Mr Mogilevich alone could have been handling such colossal sums of money.  The $10bn that is believed to have passed through the New York accounts is equivalent to about 40 per cent of the Russian government's budget or 6 per cent of the country's post-devaluation gross domestic product.  They suspect some big Russian corporations or banks must have been involved.

Russia's largest exporters have certainly grown adept at channelling much of their money offshore.  In spite of stiffer central bank regulations introduced earlier this year, Russian oil and gas companies have seemingly been under-reporting how much profit they make abroad through convoluted transfer pricing mechanisms.  In spite of running a big trade surplus so far this year, the central bank's reserves have been under pressure, suggesting there is still an alarming level of capital flight.

Earlier this week, Fitch IBCA, the international credit rating agency, estimated that $136bn of capital had poured out of Russia between 1993 and 1998, far exceeding the capital inflows from foreign investors and international financial organisations.

Western banks face enormous difficulties in trying to decide on the legitimacy of much of the money emanating from the former Soviet Union.  Some of Russia's biggest banks and companies are suspected of having close links with criminal organisations even if they are not controlled by them.  Even the endorsement of a Russian state organisation means little, given the prevalence of corruption in the bureaucracy.

"There is such a mix of legitimate and illegitimate businesses in Russia that it is extremely difficult to distinguish between the two," says Mr Babinov.  "Criminals have turned into legitimate businessmen.  They may run soft drinks companies or steel plants but they still use the same practices and methods as they did when they were drug dealers."

Western law enforcement agencies have been stepping up their surveillance of capital flows from the former Soviet Union.  In particular, the Swiss authorities stung by controversy over how their banks handled money stolen from Holocaust victims have been pursuing investigations into "dirty money" from the former Soviet Union now sitting in local bank vaults.  The Swiss authorities estimate the figure may be as high as $40bn.

At the request of the Russian prosecutor general, the Swiss authorities have recently been investigating the foreign finances of Pavel Borodin, a top Kremlin official, who has placed orders worth hundreds of millions of dollars to remodel the Kremlin and other government offices.  A team of investigators is looking into allegations that Mr Borodin took bribes from Mabetex, a Swiss contractor involved in the renovation work.  The investigators raided Mabetex's offices in Lugano in January.  Both Mabetex and Mr Borodin fiercely deny the charges.

Earlier this week, the Swiss authorities also froze a series of bank accounts containing about $65m.  The Swiss media have reported the move was linked to an investigation into Andava, a Swiss-based company, which handled the foreign finances of Aeroflot, Russia's main international airline.  Earlier this year, Russian law officials issued an arrest warrant against Boris Berezovsky, the influential financier and powerbroker, in connection with money laundering allegations involving Andava.  Mr Berezovsky subsequently persuaded the prosecutor general to drop the charges against him.

One of the most striking cases to come to light of the connections among former Soviet officials, large companies and money laundering is in Ukraine.  Last year, the Swiss authorities arrested Pavlo Lazarenko, the former Ukrainian prime minister who was travelling on a Panamanian passport, and charged him with money laundering.  Yevhym Zviagelsky, one of Mr Lazarenko's predecessors as prime minister, fled to Israel in 1994 to evade investigators.

The allegations against Mr Lazarenko centred on the looting of many of Ukraine's most profitable export factories using a variety of barter schemes.  Mr Lazarenko allegedly benefited from a scheme under which a gas trading company received exclusive rights to sell natural gas to some state enterprises.  Essentially, it was a way to buy valuable export goods at cost, without paying taxes.  The goods could then be exported at below-market prices to offshore trading companies linked to Mr Lazarenko.

While Mr Lazarenko was prime minister in 1996, at least $72m in profits from Ukrainian state factories went to a Cyprus-registered company, Somolli Enterprises.  The profits were then deposited in Mr Lazarenko's bank accounts in two Swiss banks before being transferred to accounts in the Caribbean.

One of the most alarming features of the case at least from the Swiss point of view was how compliant some Swiss banks appear to have been in dealing with suspect transactions.  The Swiss authorities have launched an investigation into whether either of the two banks violated local laws.  Banque Populaire, which handled $43m of the money, was an affiliate of Credit Suisse, one of Switzerland's biggest banks, at the time.

Public outcry in the west about "mafia money" from the former Soviet Union has until now been chiefly directed at the supposed criminality of much of the post-Soviet elite.  The role of western banks has attracted less attention.  Yet the awkward fact is that many banks inadvertently or otherwise have provided services to Russia's shadier and richer capitalists.  This week's events in New York may give them some pause.


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