Corruption scandal hits Russia's 'young reformers'



Corruption scandal hits Russia's 'young reformers'

By Renfrey Clarke

MOSCOW — During a meeting with Boris Yeltsin on November 4, "young reformers" Anatoly Chubais and Boris Nemtsov reportedly urged the Russian president to sack business tycoon Boris Berezovsky as deputy head of the advisory Security Council. Through using this post to further his commercial interests — Chubais and Nemtsov are believed to have charged — Berezovsky (Russia's richest individual, with a reputed worth of US$3 billion) was giving Russian capitalism a bad name.

Berezovsky was fired. At about the same time Chubais, who as first deputy prime minister and finance minister is in overall charge of economic policy, gave an interview to USA Today.

The rule of law, Chubais insisted, had to be more than a slogan. Referring to the privatisation process, during which insider deals had allowed Berezovsky and other magnates to walk off with huge assets for a fraction of their value, Chubais stated that the "rules of the game" had to apply equally to all.

Little more than a week later, Chubais was on the political ropes. As a result of the most explosive corruption scandal in recent years, three of his "young reformers" had been sacked. "Anatoly Chubais has survived this time, but his team is falling apart in front of us", the commercial television channel NTV observed.

Berezovsky, many concluded, had hit back. In the style of the "sleaze wars" of Russia's new capitalist oligarchs, his weapon was kompromat — compromising material, gathered by his sleuths and kept for use when needed.

Royalty payments

In a period when the government was auctioning off assets worth billions of dollars, Russians learned, Chubais and a series of his close associates had received inexplicably large payments for books they were writing or co-authoring. Almost all the payments had been routed through commercial structures linked with the largest of Russia's new corporate empires, the Oneksimbank group.

Soon after these payments were made, Oneksimbank was the victor in several fierce privatisation battles, making off with crucial shareholdings in the telecommunications giant Svyazinvest and in Norilsk Nickel, the world's largest nickel producer.

A number of "young reformers" had been inspired to authorship even before Chubais. During the spring, Nemtsov, who shares with Chubais the rank of first deputy prime minister, received a fee of US$90,000 for his autobiography, Notes of a Provincial. The money was paid by Vagrius Publishing House, a Moscow company run by long-time Chubais associate Sergey Lisovsky.

Just 25,000 copies of the cheap 150-page book were produced, meaning that Lisovsky either wittingly took a huge loss, or was relaying money to Nemtsov from elsewhere. But Nemtsov, regarded as the capitalist camp's best hope in the next presidential elections, was not pressed by the media to explain the payment.

Nemtsov's literary success seems to have encouraged others. State Property Committee chief Alfred Kokh, in charge of the privatisation process, received US$100,000 from an obscure Swiss firm for a still-unwritten book on Russian privatisation.

During May, Chubais and six other present or former state officials, including Kokh, signed a contract to produce a History of Privatisation in Russia. The publisher was to be Segodnya-Press, a holding company controlled by Oneksimbank. In June, the writers received initial payments of US$50,000 each.

Next came the Svyazinvest and Norilsk Nickel privatisation auctions.

'Gentlemen' fall out

Until this point, the sell-off of major state assets had been run on the basis of "gentlemen's agreements" between the largest corporate groups, ensuring that the goods would be shared around and that the prices paid to the state would be minimal.

However, the supply of enticing properties was running out. As the largest and best financed of the business empires, the Oneksimbank group decided to break ranks and start a bidding war.

This shift coincided with the need of the government to increase its revenues. Chubais, who in earlier times had sought to get state assets into private hands quickly and at any price, now began talking of equal conditions for all bidders.

Oneksimbank's move to junk the old system outraged other business moguls, in particular Berezovsky. Throughout much of the summer, the country's rich and powerful used their media outlets to daub one another with kompromat.

Chubais and Kokh were widely accused of having favoured Oneksimbank, and when Kokh's royalty of $100,000 was revealed in an income statement, it aroused immediate suspicion. Even Nobel prize-winning economists, it was pointed out, rarely receive more than about US$10,000 for a technical work.

Then the news emerged that the head of the Swiss "shell company" that had made the payment to Kokh was also employed by an Oneksimbank daughter firm. Under heavy pressure, Yeltsin sacked Kokh in August. Kokh was put under investigation.

Meanwhile, the position of Chubais and of the other state officials who had accepted payments from Segodnya-Press became intensely uncomfortable.

Covering tracks

In an effort to obscure the financial trail, it was decided that Segodnya-Press would cede the rights to the History of Privatisation to a registered charity run by one of the authors, former Chubais aide Arkady Yevstafyev. The writers would transfer 95% of their royalties to a charity fund nominally headed by one-time "reform" chief Yegor Gaidar.

It is doubtful that the writers were really smitten with generosity. The financial maze into which their royalties were tipped was largely set up by Chubais himself during a period out of government service last year. The nature of Yevstafyev's "charity" is suggested by its name: the Fund for the Defence of Private Property.

Chubais seems to have felt himself sufficiently well covered to go on the attack against Berezovsky. But all the key details of the royalties scheme were in the hands of opponents of Chubais, and with the sacking of Berezovsky from the Security Council, the last reason for keeping these facts in reserve evidently ceased to apply.

The information was passed to one of Russia's best-known investigative journalists, Aleksandr Minkin, who on November 12 put it to air in an interview with the radio station Ekho Moskvy.

Each contributor to the privatisation book, Minkin revealed, was to receive a total of US$90,000; the overall royalties would amount to more than half a million dollars. "A fee of half a million dollars for a book on a technical subject ... is unimaginable", Minkin declared. "It is a veiled bribe."

"Naturally, while working in the State Property Committee, the officials had opportunities to get much more, not hundreds of thousands but tens of millions of dollars", the journalist continued.

"But it is very difficult to legalise these sums, so they decided to write some books, and the publishers would pay large fees for them. But one cannot get paid a million dollars for a book, so they decided that a hundred thousand would be somehow acceptable."


Next day the lower house of the parliament voted 302 to 0 to ask the prosecutor-general to investigate the royalty payments. On November 14, one of the contributors to the History of Privatisation, deputy head of the presidential administration Aleksandr Kazakov, was sacked.

The main blow fell on November 15, when Yeltsin fired two more authors: Maksim Boyko, Kokh's successor as privatisation chief, and federal bankruptcy administration head Petr Mostovoy.

Chubais was harshly criticised by the president for "unacceptable activities" in his personal financial dealings.

However, Yeltsin turned down Chubais's offer to resign, saying this could "destabilise the situation". Suggested a Reuters report: "Yeltsin clearly decided he needed Chubais to persuade the International Monetary Fund to resume payments of a frozen $10 billion loan to Russia".

In domestic politics, the scandal is unlikely to have any dramatic impact. The fact that Chubais has been left in office will add to the cynicism with which the population greets promises of a crackdown on corruption.

The more serious repercussions will be international. Chubais has enjoyed the solid trust of western financiers and political leaders, who view his bureaucratic skills and ruthlessness as indispensable if capitalism is to be consolidated in Russia.

The strong prima facie corruption case against Chubais will not change this situation fundamentally. But Chubais' misadventures nonetheless pose a serious problem for his friends in the west. They may regard corruption as forgivable when prime interests are at stake, but this is not something they like to admit to voters. They will still deal happily with Chubais, but from behind closed doors.

Most importantly, the book royalties scandal seems certain to destroy the myths that have been used to rationalise recent western dealings with Russia. These myths have rested heavily on Chubais and his "young reformers".

Characterised as brave, clean-living and western oriented, the "young reformers" are supposed to be fighting for civilised free-market values against communist conservatives, criminals and, in the more sophisticated of the myths, the new capitalist oligarchs. The "young reformers" are presented as proof that capitalism represents the way forward for Russia.

But what if the relationship between this group and the most powerful of the oligarchic blocs is shown to be more than cosy and quite probably indictable? It will be much more difficult to present the capitalist project in Russia as anything but a crime-ridden fiasco.

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