Archive Press Releases

Testimony Before the Committee on Banking and Financial Services,
United States House of Representatives

By Dimitri K. Simes, President, The Nixon Center, and
Paul J. Saunders, Director, The Nixon Center¹

Tuesday, September 21, 1999

The outrage expressed by Russian officials over recent wide-ranging corruption allegations is obviously self-serving to no small extent. Nevertheless, the surprise expressed by current and former Russian officials at the Clinton Administration's "shocked, shocked" response to Russian corruption is understandable; indeed, while new cases have arisen, the administration has known the extent and magnitude of the problem for some time and has done very little.

Although corruption and organized crime had established roots in the Soviet Union and pre-revolutionary Russia, they received a major boost from the collapse of the Soviet Union and Russia’s early misguided efforts at reform. Facing not-so-gentle encouragement from the International Monetary Fund to liberalize its economy, Russia freed most prices from state control shortly after its independence in 1992. The resulting hyperinflation wiped out the savings of ordinary Russians well before the government was able to develop a privatization strategy. As a result, when privatization finally began, its benefits were limited to a very few.

Three key groups – so-called nomenklatura managers, commercial bankers, and organized crime lords – soon emerged as the principal beneficiaries of privatization. The managers used their administrative control over enterprises to win de facto and even de jure property rights. The bankers, who were not really bankers at all, used their initiative and government connections to win control of vast amounts of state funds, the interest from which was routinely skimmed into private accounts (as were portions of the principal, in many cases). Organized crime lords took a more direct approach, using Russia’s chaos to take control of enterprises through violence, to demand "protection" payments, and to corrupt law enforcement bodies.

While the fundamental decisions that led Russia down this path were taken in Russia by President Boris Yeltsin and others, many key choices were taken under heavy pressure from the Clinton Administration and the International Monetary Fund. President Yeltsin’s decision to give priority to macroeconomic policy at the expense of legislation to develop a healthy market in Russia – a move strongly encouraged by the administration – came at a particularly high cost as it discouraged investment, spurred capital flight, and facilitated widespread corruption.

In the seven years of Russian independence, corruption has penetrated virtually every sector of society. It is not limited geographically or functionally. Corruption knows no limits within the Russian government as well; it has grown rapidly not only in the executive branch but also in Russia’s legislature, where it is well known that votes are for sale.

At this very moment an effort is underway in Russia’s State Duma, the lower house of parliament, to overturn President Yeltsin’s veto of a recent protectionist and confiscatory insurance law. According to Russian accounts, a great deal of money has changed hands in a drive to submit a new law that would violate Moscow’s existing international obligations and virtually force foreign insurers from Russia. Moreover, the companies reportedly behind the new law – such as Spasskiye Vorota and Ingosstrakh – are allegedly involved in unsavory practices including so-called "wage schemes" that evade payroll and income taxes by substituting bogus insurance payments for wages. These and other schemes deprive ordinary Russians of reliable insurance, deprive the Russian government of much-needed tax revenue, and open up the insurance industry to money-laundering rackets. One source estimates that 80% of Russia’s life insurance policies are fraudulent.

Recent revelations from the U.S. Embassy in Moscow published in The Washington Post and The Wall Street Journal demonstrate conclusively that the administration has been aware of the scale and scope of Russia’s corruption problem for some time. Although there seems to have been some disagreement between the political and economic sections in the embassy in recent years, its staff produced many cables – including some signed personally by then-Ambassador Thomas Pickering – that unambiguously described the cancerous growth of official corruption and organized crime and the perversion of Russia's historic transformation. [Unfortunately, from all available accounts, this objective reporting apparently ended after Ambassador Pickering’s departure from Moscow.] Central Intelligence Agency analysts brought similar information to the attention of their superiors. And, of course, scholars and journalists have published extensively on Russian corruption. Dimitri Simes, among others, has personally discussed these issues with senior officials including Deputy Secretary of State Strobe Talbott.

Thus is not a lack of information that explains the Clinton Administration’s failure to act on Russian corruption but the administration’s determination to ignore the problem combined with its simplistic division of Russian political leaders into "good" and "bad." Although Secretary of State Madeleine Albright insisted only last week that the administration’s policy was intended to support "good people doing the right things" it seems increasingly evident that it has actually aided very imperfect people doing misguided things, at a minimum.

Some of the administration’s greatest favorites in Russia have been involved in dubious activities of which the administration has been aware, and which it has ignored, for years. For example, attempting to distance itself from the Russian government’s more obviously corrupt policies, the Clinton Administration is now trying to claim that it did not support the controversial "loans-for-shares" privatization program, through which leading Russian enterprises were auctioned off to well-connected banks at bargain prices. This argument is at best disingenuous taking into account the administration’s unstinting support of Anatoly Chubais, the architect of the loans-for-shares scheme, and of Russia’s privatization policies more broadly. In the words of Richard Morningstar, then the coordinator of U.S. aid to the former Soviet Union, "If we hadn’t been there to provide funding to Chubais, could we have won the battle to carry out privatization? Probably not. When you’re talking about a few hundred million dollars, you’re not going to change the country but you can provide targeted assistance to help Chubais." Then Deputy Secretary of the Treasury Lawrence Summers was still sufficiently enamored of Chubais and his circle to call them "an economic dream team" in 1997. If anything, the administration’s support for Chubais grew after the true nature of the loans-for-shares privatization became apparent.

Moreover, the Clinton Administration supported Chubais, other so-called "radical reformers," and their patron President Yeltsin with much more than rhetoric and a few hundred million dollars. In fact, it pushed for a $10.1 billion International Monetary Fund credit to Russia in early 1996 – after IMF officials criticized Russia for failing to implement reform and at a time when it was well known that substantial Russian government funds were "managed" by leading banks that were siphoning away public money. Furthermore, because the loans were given as general budget support and commingled with other Russian government monies, it is virtually impossible to determine the origin of any particular dollar or ruble in a given account – a fact that makes statements that there is "no evidence" of the misuse of IMF credits meaningless. And the IMF was no rogue elephant in its lending to Russia; senior administration officials have themselves referred to the Fund as a proxy for American policy.

It is not surprising in this climate that those Russian leaders supported by Washington, who were simultaneously making concessions to the U.S. on foreign policy matters, developed a certain sense of impunity. They may have heard the administration’s half-hearted statements of concern over Russian corruption but did not take them seriously. And why should they, when as recently as May of this year National Security Advisor Sandy Berger, Treasury Secretary Robert Rubin, Secretary Albright, Mr. Summers, and Mr. Talbott received Anatoly Chubais – no longer a government official – during a visit to Washington. Enjoying such access to the administration, Chubais and others had every reason to believe that its protests were little more than a public relations measure.

The lack of seriousness behind the administration’s pronouncements about Russian corruption is further demonstrated by the fact that the Clinton Administration did make clear to Moscow that there was a price to pay for disregarding American warnings in other areas. American pressure significantly influenced Russia’s behavior in the Bosnia and Kosovo crises, its dealings with Iran, and many aspects of its macroeconomic policy. Corruption was never given this level of priority. As a result, even today the administration’s warnings on the issue are dismissed in Russia. For example, the Russian newspaper Izvestiya – which is generally favorable in its coverage of the Yeltsin inner circle – mocked Secretary Albright’s statement last week that the administration would be "outraged" if it is proven that U.S. assistance to Russia has been stolen. "That is all," the paper wrote, suggesting that an American response limited to "outrage" was not of particular concern.

Meanwhile, in Russia, there have been very few real investigations of corruption. Attempts at investigation are routinely blocked and investigators are fired, transferred, blackmailed, or themselves accused of impropriety, as has occurred in the case of former Russian Procurator General Yuri Skuratov. Since so few officials are entirely clean, counter-charges alone are often quite effective in killing inquiries. As a result, few are punished other than those out of favor or "small fish" selected to teach someone a lesson. The well connected, particularly those close to President Yeltsin, have little to fear.

All of this comes at a cost. Years of American support for the corrupt and ineffective Yeltsin regime have discredited the United States among ordinary Russians and led many to suspect that the U.S. seeks not to help but to weaken Russia. Ironically, now even the administration’s "friends" in Russia are confused about American policy and are irritated by the sudden escalation of anti-corruption rhetoric from senior U.S. officials.

Corruption has seriously damaged the way the Russian people view democracy and a market-based economy, discouraged significant domestic and foreign investment, and contributed to Russia’s addiction to foreign credits (which, in the view of many Russian and Western observers, do not help the country’s economy but rather end up being abused or exported). Because of the high-profile involvement of the Clinton Administration and international financial institutions influenced by the U.S. in Russia’s transition, these developments cannot but contribute to the growth of anti-American sentiment in Russian society. While some may argue that anti-U.S. sentiment has limited significance in a weak, fragmented Russia, it could have very serious implications for U.S. foreign policy and American interests more broadly in a recovering Russia. Moreover, just as too few analysts understood how weak the U.S.S.R. was and predicted how quickly it would collapse, today only a small minority realizes how quickly Russia could be on the road to recovery under strong leadership. If combined with a sense that the United States is a hostile power, a modest recovery, or even the perception of recovery, could drive Russia to seek arrangements with China or so-called "rogue states" such as Iraq and North Korea that would be detrimental to American interests and values around the globe.

Should the United States face a hostile, recovering Russia in the future, we may well find that the Clinton Administration's tactical gains from Russian cooperation (or, more accurately, acquiescence) in the international arena will be more than offset by the longer-term costs of failing to develop genuine partnership with Moscow. Russia still has thousands of nuclear weapons and a dangerous capability for the proliferation of sensitive technologies. And while it can never again be a global rival to the United States, Russia could be a major player in any of a number of potentially threatening anti-American alliances. This cannot but have a negative impact on American global leadership in the 21st century.

In its policy toward Russia, the Clinton Administration has clearly been on the wrong side of history. It has supported not democratization and economic reform but the polarization and corruption of Russian society. The administration cannot be said to have lost Russia, because Russia is not yet lost and was never ours to lose anyway. But to the extent it has had an impact on Russia’s historic transition, that impact has been negative – and America’s interest in a stable, democratic Russia has suffered profoundly.

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1.  The views expressed in this testimony are solely those of the authors and do not represent an institutional position on the part of The Nixon Center.