[lbo-talk] US vs. Russian democracy

[Chris Doss]

>From: "Carl Remick" <carlremick at hotmail.com>

>
>It's interesting to see the outrage! outrage!! that Michail Khodorkovsky's 
>arrest has stirred in the West.  IMHO, being a billionaire anywhere is ipso 
>facto evidence of crimes against society, but the front page of Wall Street 
>Journal today sees Khodorkovsky's arrest as a sign Russia "is heading 
>toward authoritarianism."

It's old, but a propo.

from Johnson's Russia List]

the eXile
October 16, 1999
www.exile.ru
Privatized: Your Guide to Stipping Russia's Assets
By Matt Taibbi

In the early nineties a group of reputable American archeologists announced
their intention to travel to Mongolia to search for the tomb of Genghis 
Khan.
They were being funded by a stockbroker from Chicago who'd had a childhood
fascination with the Khan, and had even modeled his business philosophy, or
so he said, on the Mongol military style. It was his dream to decorate his
briefcase with some of the Khan's effects.

At the time I had some money saved up, and I decided to try to join the
expedition. Before I left, I interviewed an archeology professor at Harvard
University to get some background on the archeological side of the venture.
Unfortunately, there was no archeological side of the venture. As the 
Harvard
man told me, the whole expedition was a sort of joke in the academic
community.

"The only surviving evidence of the resting place of Genghis Khan indicates
that he was buried with his horse, 'under a great tree'," he told me.
"Mongolia is the size of Alaska. It's had a lot of trees over the years.
They'll never find that fucking thing, and they know it."

I was shocked. "Then how can they justify going to look for it?" I asked.

He laughed. "They're intellectuals," he said. "They can justify anything!"

LAST WEEK, a New Jersey-based law firm filed suit on behalf of a Russian
metals company called Avisma against a group of American investors, 
including
styrofoam magnate Kenneth Dart and former American aid honcho Jonathan Hay.
The suit charges that Hay, Dart and other co-defendants violated America's
RICO statutes-- our federal racketeering laws-- when they took over a
transfer-pricing scheme designed to plunder Avisma, a scheme originally
designed by the previous owner of Dart's stake, Bank Menatep.

Dart Management denies Avisma's allegations, but neither side disputes the
existence of the original Illegal Scheme, as it is called in the lawsuit.
Filed by the Russian-American law firm Egorov Puginsky Afanasiyev and Marks,
the suit provides a rare glimpse into the nuts-and-bolts reality of Russian
"capitalism" in the mid-to-late nineties. It is a snapshot of the true face
of privatization, which, as it turns out, was little more than a means of
opening a gate to let wolves in to feast on the carcass of Russian industry.

By extension, the Avisma case is also an illustration of one other thing. By
showing just exactly how far Russia's major economic players were from
practicing anything like genuine competitive capitalism, it gives us an idea
of what great lengths all the Westerners who did business with banks like
Menatep must have gone to, to turn a blind eye to what was really happening
in this country in the years before the crash.

At the time Menatep sold its stake in Avisma to Dart, the U.S. government 
was
issuing an editorial announcing that Russia was "on the right road", and 
that
its economic news was encouraging. The oligarchs were enjoying a honeymoon 
of
sorts with the Western media and business world; Vladimir Potanin was on his
way to being lauded in the Washington Post as a "baby billionaire", and 
Boris
Russian Privatization at a Glance

1. State, with urging and guidance of West, announces privatization of
company (Company A).

2.Scary mobsters bribe/threaten privatization official, take controlling
stake in Company A with mere promise to invest.

3. Scary mobsters make offer that directors of new holding can't refuse.

4. Scary mobsters induce another of its privatized properties-Company B-- to
sell raw materials below cost to offshore company X, controlled by scary
mobsters.

5. Scary mobsters induce Company A to buy those same raw materials above
cost.

6. Offshore company X returns profits from cost-fixing transaction to scary
mobsters.

7. Company A is induced by scary mobsters to sell product below cost to
Offshore company Y.

8. Offshore company Y sells stuff at market cost to "unsuspecting" Western
importers.

9. Offshore company Y returns profits from price-fixing transaction to scary
mobsters.

10. Scary mobsters funnel its gazillions in profits through Offshore company
Z to "unsuspecting" reputable Western bank.

11. Scary mobsters taught to walk upright and wear ties, invited to speak at
universities in same city as "unsuspecting" reputable Western bank; lauded 
as
market-friendly champions of "efficiency".

12. Reputable Western bank sends gazillions of profits to scary mobsters'
secret account in Switzerland.

13. Scary mobsters lease private jet, fly to the Hague to strike merger deal
with major Western energy conglomerate.

14. Investors hear of mergers, speculate heavily on Russian stock market;
expats in Moscow cash in.

15. Privatization hailed as a success.

Berezovsky was laying the foundation for a future invitation to speak at a
Harvard Symposium. Money was flooding into the Russian stock market. George
Soros had gone in with Potanin to buy a stake in Svyazinvest; Western
academics and economists were tripping over each other to commend the
successes of privatization.

Many of the things that were written at that time sounded much like this
passage from the Moscow Times, culled from its review of a book on the fifth
anniversary of the privatization effort:

"Yet mass privatization actually happened, and it has changed the landscape.
Since 1992 the government has managed to fulfill much of its privatization
promise. Eighteen-thousand large and medium-size businesses have been sold,
and 45 percent of the work force is now in the private sector. This is no
mean feat considering how little else was accomplished during those early
years of reform."

All it takes is one close look at the Avisma suit to realize how grotesquely
inappropriate all of this enthusiasm was. Like the Genghis Khan
archeologists, it turns out that Westerners who came to Russia to do 
business
could justify anything, so long as it was in the name of legitimizing a rich
partner. Here is what we were justifying-- one close-up look, by means of 
the
Avisma case, at the real mechanism of the privatization "miracle":

Step 1
Guys With Guns

All Russian money-making schemes during the privatization era started off
with one constant-- a group of scary guys with guns. They were the economic
dynamo that privatization's masterminds chose as replacements for the
"inefficiency" and "uncompetitiveness" that they claimed fueled state-run
industries.

It is important to remember that in the early days of privatization, before
the loans-for-shares auctions, stakes in public enterprises were often
auctioned away not for cash, but in exchange for promises to invest a 
certain
amount of money. The winners seldom hurried to fulfill their investment
obligations. The deciding factor in these early auctions was usually the
favor of the privatization officials running the process. They were usually
bribed, intimidated, or both.

Once the auction was over, the new bosses would arrive on-site at the 
company
drooling and snarling, call in the company directors (who at the time,
remember, were roundly vilified in Western privatization rhetoric as
recalcitrant "Red Directors"), and start laying down a series of offers they
couldn't refuse. Papers were produced that would shortly thereafter contain
either the directors' brains or their signatures. Invariably the directors
chose a bribe over the bullet and signed off on what was usually a master
plan to bleed their own companies to death.

In the Avisma suit, the guys with guns make their fist appearance in the
following manner:

"In the mid-1990's, Menatep Bank, a Russian bank, and/or its parent,
affiliates, subsidiaries and/or principals (collectively, "Menatep") 
obtained
a controlling interest in Avisma."

2. The Feeding Frenzy

Remember that part of the movie "Goodfellas", where the family boss Paul
Cicero becomes a partner in the Bamboo Lounge restaurant? The restaurant
owner had cut Paulie in when he needed protection against Joe Pesci, but 
once
he had Paulie as a partner, he was fucked: the family maxed out his credit
lines for profit, and once the joint was bankrupt, they burned it for
insurance money. They brought booze in the front door for credit at $200 a
case, and sold it right out the back door for cash at $100 a case. It didn't
matter, it was all profit.

This is all Russian industry has been in the last five or six years or so. 
In
the Avisma case, it was the Paulie Cicero scheme exactly: they brought in 
raw
materials through the front door at $200 a case, and sold finished titanium
sponge out the back door at $100 a case. It didn't matter, it was all
profit-- for Menatep. Here's the way it was described in the suit:

"Under the Illegal Scheme, Menatep induced Avisma to sell titanium and other
products at below-market prices to TMC, which then resold them on the
international market at substantial profit; prior to the Illegal Scheme,
Avisma had sold its products directly to Western customers.

"As a further part of the Illegal Scheme, Menatep arranged for TMC to sell
raw materials, such as ilmenite (which is used to produce titanium sponge) 
to
Avisma at above-market prices; before the Illegal Scheme, Avisma had
purchased ilmenite directly from producers, mainly from the Ukraine."

To keep the companies functional and still ensure their kickbacks, bosses
like Menatep had to cut corners. Normally this came in the areas of worker
compensation and taxes.

A recent article by Yuliya Latyina in Sovershenno Sekretno describes the
Menatep method in detail. Having taken over Yuganskneftegaz, Samaraneftegaz,
and Tomskneft, Menatep found itself ruling three companies with a combined
workforce of 76,000. Its latest plan for staff reductions, Latyina reports,
would leave only 25,000 workers in the three companies. The remaining 
workers
were to be transferred to independent state-run service companies, which
would die shortly thereafter. Furthermore, the social guarantees for all of
the workers were to be transferred to the local government in Yugansk, in
exchange, the paper reported, for making the Yugansk mayor's repair company
the primary contractor for the Menatep companies.

The new bosses' zeal for laying off workers was widely applauded in the
Western media as evidence that the new Russian capitalists were better
managers than their predecessors, who kept bloated workforces that weighed
down company margins. In fact, however, privatization-era layoffs were
normally intended not to increase competitiveness-- since there was no
competition-- but to guarantee the mobster/boss's returns.

Not long ago I interviewed Pulitzer Prize-winning reporter Steve Liesman of
the Wall Street Journal. We had an argument over whether or not 
privatization
had been a good thing. I mentioned that there was an enormous number of
workers who were not getting paid their wages where they once had been, and
that this was obviously a negative.

"Yeah," he snapped, "but not getting paid for what kind of work?"

"Well, for instance," I said. "Mining coal."

"Mining coal that was needed?" he sneered.

The answer to that question is yes, it was needed-- not for any compelling
economic reason, but because the directors of the coal companies, and their
bosses, needed it in order to get rich selling it at below-market prices. If
the coal really wasn't "needed", no one would have been mining it. In the
same way, Menatep "needed" Avisma's titanium sponge.

In retrospect, it was only due to Western free-market enthusiasts' inherent
hostility towards working people, and their impatience to praise the firing
instinct, that the New Russians were (and still are) able for so long to
masquerade abroad as right-thinking capitalists.

Non-payment and layoffs were never about competitiveness in this country.
They were about slavery -- about protecting things like the size of the
kickbacks TMC was able to pay to Menatep. The size of that kickback was only
peripherally affected by the market. Mainly it was about how much milk they
could get out of the cow without feeding it.

3. Go West

Once the guys with guns had the director on board with the
front-door/back-door transfer pricing scheme, all that remained was to pay a
bunch of Westerners to handle their money.

In the Avisma case, the allegation goes as follows:

'Upon information and belief Peter Bond, the principal of TMC, managed and
coordinated TMC's fraudulent sales of ilmenite to and purchases of product
from Avisma, set up and oversaw the offshore accounts through which proceeds
of the Illegal Scheme were funneled, and arranged for the kickback payments
to Menatep.'

It was at this stage of the process that the West really lost its mind.
People who were close enough to privatization to see what was really going
must have been flabbergasted by the amounts of money companies like Menatep
were making. It was easier than drug money-- the cold-blooded, risk-free
extraction of profits from Russian enterprises held hostage.

Suddenly the tables were turned. Even the most rapacious of Western
marketeers suddenly found themselves feeling like the the father who teaches
his teenage son the facts of life, only to discover six months later that 
his
boy is using the house every afternoon to hold orgies and pubic-hair-shaving
parties with his high school's cheerleading squad. Suddenly Dad looks at his
heavy-legged middle-aged wife, considers the cheerleaders, and decides he
wants in with junior. But how? He's too old and too square to join the main
party. No, what he has to do is wait for his son's leftovers-- and that's
precisely what happened with Avisma.

According to Latyina's article, Menatep and its chief, Mikhail Khodorkovsky,
completely lost interest in companies like Avisma once loans-for-shares came
around. Who needs titanium sponge when you can have petroleum? So he comes 
up
with a plan: liquidate all the previous "holdings", i.e. the half-milked
carcass companies won in earlier privatization processes, and funnel all the
cash from their sales into a bid for a spot in the petroleum aristocracy.

The only question was, to whom could they sell the old holdings? Menatep
didn't pay cash for its stakes in them, and no other Russian would, either.
Answer: Westerners. They've got money, and if you sweeten the sale enough 
for
them, they just might go for it.

In the Avisma case, the method by which Menatep sweetened the deal for the
consortium of Dart Management and the New York-based Andersen group was only
revealed through an accident. Much later on, after Dart already had bought
into Avisma, he and the offshore company TMC fell into a dispute over the
distribution of profits-- that is to say, kickbacks. In a moment of what
appears to be extraordinary hubris, the Dart consortium actually went to
court, in the Isle of Man, to attempt to retrieve what it considered to be
its rightful share from TMC.

They were emboldened in this move by the knowledge that court proceedings in
the United Kingdom are not public record: only the interested parties have
access to the documentation. Unfortunately for Dart and his partners, they
made the mistake of bringing in Avisma as a co-plaintiff in the suit, as a
means of strengthening its case. Avisma therefore gained access to the Isle
of Man court proceedings which it ultimately used to file its own suit
against Dart.

The following sequence of the suit cites the Isle of Man transcripts to
describe the process by which Menatep seduced its Western buyers.
Incidentally, according to an eXile source, the "Bank" named in this 
sequence
is the Austrian Creditanstalt. Bank spokesman Sergei Zenkin declined to
comment for the this article:

'The pleadings in the Lawsuit, from which the quotations below are taken,
recount that in 1997, the Defendants were approached by a Western investment
bank (the "Bank"), which is based in Austria and maintains an office in the
United States.

'Representatives of the Bank, including an American citizen, informed the
Defendants that Menatep had decided to sell most of its shares in Avisma and
solicited the Defendants to purchase Menatep's shares, with the intent that
the shares would later be sold or tendered to VSMPO, a large Russian company
that used titanium sponge in the manufacturing of titanium ingots, bar, 
rods,
and other products, in order to create a vertically-integrated titanium
company.

'Before purchasing shares in Avisma, the Defendants learned of the Illegal
Scheme by which a "significant proportion of the profits derived from the
sale of Avisma's products was taken off-shore" as a result of Avisma selling
its titanium at an "undervalue" to TMC "for the benefit of, and distributed
to or to the order of Menatep."

'The Bank explained to the Defendants that if they purchased the shares of
Avisma from Menatep, they "would not only acquire [Menatep's] majority
shareholding in Avisma, but also the right to the profits which [Menatep] 
was
accruing through TMC."'

In essence, Menatep told Dart that it would retain the machinery of the
extortion racket-- including, one must assume, the favor of whatever bribed
officials were doing Menatep's bidding at Avisma-- if it paid cash for the
stake. Much as Dad would have to get into to junior's cheerleader party, 
Dart
jumped at the chance, and overpaid. According to the affidavit, the Western
consortium paid $86 million for the stake. Khodorkovsky later that year made
his bid for the VNK oil company.

The Dart group, much like, we now learn, the Bank of New York did its own
Russian dealings, managed to keep a steady flow of Russian money coming in
once they got involved with Avisma. But they weren't the only Westerners to
get into the act. When the Americans fell into their dispute with TMC, they
needed counsel. According to the suit, counsel told them they couldn't win 
it
alone:

'Upon information and belief, the Defendants were advised by their counsel
that Avisma, and only Avisma, had such standing, and, thus, Avisma must be a
party to the Litigation; the Defendants therefore recommended that Avisma
engage counsel to participate in the Litigation.

'The Defendants took care to ensure that Avisma would be represented by
counsel who would help them in their efforts to secure the kickbacks for
themselves, and would not inform Avisma of its rights against the Defendants
or encourage Avisma to pursue claims against the Defendants themselves for
their part in the Illegal Scheme.'

A source has told the eXile that the Law Firm in question here is
Chicago-based McDermott, Will, and Emery. The suit alleges that the firm
signed on as Avisma's counsel at the same time that it was on a retainer to
one of the other-co-plaintiffs, the Anderson group:

"The Law Firm, which had an undisclosed conflict of interest in representing
Avisma and Andersen at the same time, never advised Avisma as to its rights
against the Defendants -- even though the Law Firm had offices in the United
States, England, and Russia and should have been well-qualified to advise
Avisma about the violations of American and Russian law by the Defendants
described in this Complaint."

Spokeswoman Amy Negrelli of the firm's headquarters in Chicago has so far
declined comment on the story.

With a major Western investment bank, a major investor, and a major law firm
involved, all that remained was for a big shot from the aid community to get
in. When the Russian metals magnate VSMPO bought an interest in Avisma and
attempted-- whether out of desire to clean things up, or a desire to gain 
the
money for itself-- to put an end to payouts to the Dart group from TMC, the
Dart group mobilized. A share swap had given the defendants a stake in 
VSMPO,
and when the latter made their move to oust them from Avisma, the former
responded by moving to take over VSMPO. According to Bruce Marks, the
attorney for Avisma on this suit, the defendants used their votes as
shareholders to get three Americans elected as directors. One of those, he
said, was the former head of the Moscow office of the Harvard Institute for
International Development, Jonathan Hay.

"I was there, in Berezniki, when Hay was elected," Marks said. Hay has so 
far
declined comment on this story, but the mere presence in this story of the
former chief arbiter of the American aid effort here in Moscow should be
shocking enough to anyone who ever had any illusions about the privatization
effort.

Granted, Hay has been out of the game for a while -- kicked out of HIID for
investing in Russia through his girlfriend, and now, reportedly, under grand
jury investigation by the U.S. Attorney's office for suspected conversion of
government funds. In his place, disgraced and staring down the barrel of a
federal indictment, I'd probably go for the first get-rich quick scheme I
could find, too. On the other hand, staring down the barrel of a federal
indictment, I might also want to avoid working my way into lawsuit 
affidavits
that have me teaming up to violate RICO laws with styrofoam magnates with
Belize citizenship.

But that's the whole thing about temptation. It makes you do dumb things. 
And
as the Avisma story and the Bank of New York story show, there was plenty of
temptation fueling the ill-considered enthusiasm for the privatization 
effort.

At first, at the outset of the privatization effort, it didn't seem like
temptation-- just wishful thinking. Many Westerners in the middle of the
decade looked at the Potanins and the Berezovskys and the Khodorkovskys of
the Russian business world, saw how much money they were making, and they
wanted to believe... well, they wanted, on some vicarious level, to believe
these guys would get away with it.

"Yeah, I suppose it was a kind of wishful thinking," said Stanford professor
Bernie Black, an early proponent of privatization. "You'd see a guy who got
his start in somewhat dubious ways, and you sort of hoped he'd turn it into 
a
legitimate operation." Referring to Potanin, he said, "In that case, you had
a guy who at least was smart enough to say the right things. You had to feel
positive about that."

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