Is Russia Really "Lost"?
The Reflections on Western Economic Assistance

by Elena Menchov
Investment Executive
Tucker Anthony

After seven years of economic "reform" financed by billions of dollars in US and other Western aid, subsidized loans and rescheduled debt, the majority of Russian people find themselves worse off economically. The country seems to have plunged into a monetary crisis; it is politically unstable; it gets involved in international bank scandals... What a mess!

The United States, along with other Western developed countries, acknowledge the difficulty Russia has found itself. Yes, the drastic political change that took place starting with Gorbachev's "perestroika" is recognized as the right direction to follow, but how can Russia be helped to achieve its goals and to be transformed into a truly democratic capitalist country? This task is demanding and thorny primarily because the West has no experience with it. What kind of assistance would really benefit Russia? How can the application of the standards of western life and economic rules help the country with its own unique development, well known as unpredictable and often chaotic?

The amazing transformation from a dictatorship to a democracy, from centralized state-owned economy to a free capitalist enterprise is a stormy road. Given the historical, political, and cultural circumstances, this transition is unique in the history of our planet. Therefore, this process is unpredictable and its results are as well hard to anticipate. However, the picture is not as dark as many politicians and economists have been trying to create. Many of Russia's rough turns can be monitored and helped - if the Western world takes a more optimist stance. Declaring Russia "lost," as it has been recently claimed by some US legislators in relation to the financial scandal at the Bank of New York, would hardly address its problems and improve the international situation. But let's reflect on the sources of Russian economic and financial behavior, which might open up a different option to Western attitudes.

Russia's countless mistakes during this transitional period may be caused by a variety of reasons: there is a definite lack of economic and political know-how, complemented by the frozen over the decades Russian mentality, whose secrets and depth lie in the mysterious "Russian soul." There are also the resisting to change political forces and the old bureaucratic system. All this creates a bundle of problems, and unraveling it would require time and effort. Meanwhile, this difficult political and economic transition makes poor people poorer and, moreover, suggests a populist feeling that the old regime was so much better since at least it provided for mere necessities. Who cares about lack of freedom if one is hungry?

Human history does not know any other country of a similar size, population, and ethnic diversity, which survived 70 years under communist rule - longest ever - with 40 million best people lost during Stalin's regime and 20 million lost in World War Two, that made an attempt of such a transition in such a short period of time. The consequences of such a historical mass experiment are still unknown...

It is a challenging task to structure and give international assistance in view of all these circumstances in the most effective way, therefore the Western governments often operate in the dark, having no experience to rely on. However, the mistakes already made appear to be the only light at the end of the tunnel. Evaluating them and learning from them, while adjusting its way rationally, seems to be the direction to take.

An example of the dynamic adjustments to international aid to Russia could be the following: Before providing monetary help, IMF should have a one hundred percent guarantee that those funds will be spent with the right purpose. Asking accountability of these funds after they have been received, serves no real purpose in the Russian context, where bureaucracy is very skillful in providing explanations and covering up lies and financial crimes, after 70 years of games with the Soviet regime.

However, Russia's mistakes and failures in the context of Western assistance have been severely condemned in the West. Russia's image, depicted by the media, has been declared "lost" and hopeless for the entire world, in the international community's minds, in the minds of simple Americans, who read about the ugly New York Bank scandal in the newspapers. Would they be willing to opt for more assistance to Russia, to vote for a senator, a congressman, a president who would?... How safe would be the international situation if they wouldn't? What are the real consequences of such a call for a lost cause?

Reflecting seriously, using those failures in the political campaigns and in the media to reach some short-time political goals appears a shortsighted approach, for it will hurt both nations (the US and Russia) in the long run.

On the origins of Bank of New York scandal

It goes without saying that all individuals and businesses always attempt to save/invest their moneys and other funds in the safest places available. It is a very normal fact of life and a very rational behavior. Nobody can argue with that.

This behavior does not depend or the country, race, or ethnic belonging. It is very human to safeguard one's money. Why is Russia supposed to be different?

In the course of the economic transition from the Soviet regime, the Russian government has failed several times to protect ordinary people's finances - which can be considered a legacy of its previous authoritarian government as well as the result of a chaotic banking and legal system.

Lying to its people, promising golden mountains and not delivering on any of their promises, is a historical tradition in the country, where, for example, government bonds had been forcefully used to replace wages starting from 1946 and for many years ahead. People had to wait 20 years till the government's promise to pay them would go into effect. During the Soviet years, most of those bonds became valueless when the government declared them null and void. Finally after about 30 years or so they repaid some of them, but it happened after a lot of people lost all their life savings and were thrown into total poverty.

That was just for starters. Many times after that the Soviet and then Russian government abused powerless ordinary people by using their savings in their political games to pay for their own extra expenses, ignoring ordinary people's needs. After a few hard lessons, Russian people learned not to trust its government, and, unfortunately, Yeltzin's government did not change their mind about that trust. New commercial banks were failing almost every day, because of lack of support and lack of legal framework, which was supposed to protect the customers. Inflation and criminal activities also helped.

Not seeing any trustworthy places to keep their money in inside the country, individuals and companies started moving their funds abroad to protect them.

In response to this situation, the Russian government and foreign consultants should have addressed the issue of safety for saving and investing money inside Russia, like, for example, of how to create and enforce laws that would support a better banking system. Instead, artificial rules restricting money transfers abroad have been created.

Somehow Western consultants kept quiet about this issue of primary importance to Russia, and their opinions have not been heard nor publicly known. One cannot say the same about the "money-laundering" scandal at the Bank of New York.

It seems absolutely amazing that the investigation of the criminal case is blown into a top world news category, and this scandal has been on the front pages of many leading newspapers and magazines for two months already. Yes, the moneys involved in the scandal are huge, fluctuating between 4 and 10 billion dollars, according to different sources. But there has not been a word told yet on how much money had been transferred legally and how much was crime-related. And what happened to the famous American presumption of innocence?

Even before some answers to all the questions have been given, American media feels free to speculate and to expand on the sources and effects of this transaction. Individuals, organizations, and the whole country have been left to the unspeakable accusations, without the investigation being completed and without any publicly released proofs of guilt. The criminals must be published, but nobody has been convicted yet. Nobody has been taken into custody. The former Vice-President of the Bank of New York, Lucy Edwards, her husband, Peter Berlin, and an associate, Aleksey Volkov, have been charged for conspiring to take illegal deposits and for transferring funds without proper licenses. The charges have not included money laundering. As Mark D. Seltzer, an attorney with Goulston & Storrs in Boston, and a former Federal prosecutor said, "You have to prove that the source of the money that created this activity in your accounts was ill-gotten gains from specific criminal activities."

There is no doubt that if there is a proof of criminal activity in this case all involved should be prosecuted and sentenced and should serve their terms. But we are not there yet. It would be wiser to wait and see, until competent organizations are able to come to some final conclusions, so that we can hear the names of the people indicted with the list of crimes they have committed. The huge amounts of money involved in the transaction do not necessarily make this activity criminal. Evidence is needed, and until it is found, it is precocious to pronounce Russia "lost."

But what is the definition of a "lost" country? Lost forever? Lost for hope? Who is interested to declare a country "lost"?

Nobody called Korea "lost" because of the 1997 financial scandal. It has been almost forgotten as a low-profile case - just the opposite of Bank of New York scandal involving Russia. The same thing seemed to be happening - large moneys, probable government involvement - but nobody paid attention.

The scandal in South Korea, surrounding the collapse of a steel company, snowballed, straining overseas operations of South Korean banks, and bankers were questioned in a bribes-for-loans investigation.

The heads of two commercial banks - Shin Kwang-shik of Korea First Bank and Woo Chan-mok of Chohung Bank - were questioned by prosecutors seeking to determine whether they received payments in exchange for loans to the bankrupt Hanbo Steel Industry Co. Lee Hyung-koo, former chief of the state-run Korea Development Bank, also was questioned. At $1.3 billion, Korea First Bank was the biggest lender to the debt-ridden Hanbo group, the nation's 14th largest conglomerate, which owns the bankrupt steel firm.

Lee Chul-soo, former head of Korea First Bank, was arrested on charges of taking bribes from Hanbo, which collapsed on Jan. 23 under $6 billion in debt, mostly in bank loans.

The scandal raised worries about the creditworthiness of South Korean banks and businesses. At the government's suggestion, three banks provided $500 million to branches in Japan to help alleviate a cash crunch, bank officials said.

The Korean government was forced to publicly guarantee the completion of $587 million worth of construction projects undertaken by the Hanbo group in Jordan, Indonesia, Pakistan, the Philippines and Russia.

And how about the Mexican 1997 financial scandal, involving Mexican ex-President's brother, Raul Salina? Nobody called Mexico "lost"...

Citibank bypassed its own safeguards against fraud and helped Raul Salinas de Gortari move as much as $100 million from Mexico to Switzerland and London through shell companies and multiple accounts, according to a General Accounting Office report.

Citibank's New York private-banking section, which handled the account of the brother of former Mexican president Carlos Salinas de Gortari, failed internal audits in 1996 and 1997 because bank officials didn't comply with the required policies. However, the Citibank case never produced that much publicity and never attracted that much attention.

Nobody called the United Kingdom "lost" because of the collapse of Barings Bank (the oldest English bank) in 1995, the most publicly discussed financial scandal of recent years.

The 233-year-old British investment bank, that helped finance the Napoleonic wars and the Louisiana purchase, was broke after one of its Singapore traders lost more than $1 billion. The bankruptcy, one of the largest in British history, battered the pound sterling and pushed stocks in more than a dozen countries into a tailspin as investors scrambled to recover assets.

As a result, Japan's Nikkei 225 index fell 3.8%, one of the largest one-day collapses. In the Philippines the composite index lost 4%, and Taiwan's stock market lost 3.15%.

European stocks fell and the British pound plunged to a record low against the deutsche mark after the Bank of England failed to bail out Barings Plc. from Asian losses that have mounted to more than $1 billion.

The declines came as international accounting firm Ernst & Young took Barings into receivership and began laying plans to sell the assets of the UK's oldest investment bank.

Leading European stock indexes were down about 1%. The British pound fell almost 1% against the deutsche mark to a historic low of 2.2954 marks. Bank of England Gov. Eddie George said back then that the Tokyo stock market's fall pushed Barings' loss to more than $1 billion.

So, who makes the decision about condemning the country as "lost" and why are these decisions made about some countries and not about the others?

The sad reality of the Bank of New York case is that, according to the Chairman of the Bank of New York, who testified before the House Banking Committee (September 23, 1999), the bank was reviewing whether to continue its business with Russian banks. That means that along with the intelligent decisions to investigate the transaction from Russia, the bank is anticipating cutting service to all Russian banks. Somehow, after Raul Salinas's scandal, American banks did not stop accepting deposits from Mexican citizens and companies...

Although the investigation has focused on finding evidence of money laundering through the Benex and Becs accounts, the charges make no mention of money laundering. Rather they included one count of conspiracy to illegally transmit funds and receive deposits, and two counts on the operation of an illegal money-transmittal business.

No matter what outcome of this case will be, it is very wrong to put an equation between Russia, its newly developed businesses and businessmen, and other parties indicted in this case. Declaring Russia, as a whole country, "lost" because of its economic difficulties and lack of social integrity, does not help to fight its crime nor its chaotic economic situation. Helping Russia does not mean closing the American or international banking system to it. Helping Russia does not mean labeling it as "criminal" or "lost." Helping Russia means to reevaluate the previously given assistance, aiming at restructuring it, with specifically and uniquely Russian economic, political, and cultural context in mind. Helping Russia also means adequate information disseminated by the media in the West, avoiding labels, stereotypes, and non-existent evidence. It is easy to "lose." It is hard to gain.