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Corruption dominates the economy of Russia

By Lem Harris, People's Weekly World, 7 June 1997

It is common knowledge that the Russian economy is close to bankruptcy, sustained only by massive loans and promises of loans by the American controlled World Bank. It is also well known that the widespread and massive corruption that flourishes under President Yeltsin's rule, guarantees the luxurious living for the wealthy few and distress for the bulk of the population.

Less well known is that even the largest newly privatized joint stock companies are gaily playing the same crude role as the "robber barons" of the 19th Century American capitalism.

Here are three citations of massive corruption as great fortunes are amassed at the expense of the State and the real producers of wealth. Each of these has been published in the Russian press, but the government does not interfere.

1. The Moscow daily Izvestia reports the recent maneuverings of the Vologda Ball Bearings Plant (VBP) which employs 10,000 workers.

Something strange happened to the VBP company in 1995. It had been paying taxes of 120 rubles, but in 1995 VBP found itself in arrears and declared a loss of 21 billion rubles. No taxes were paid, and management claimed this to be "the inevitable difficulties of economic reform." But how inevitable is it?

The Izvestia correspondent found that VBP had set up a number of "middlemen" to whom it sold its bearings for cost or even below cost. The "middlemen" promptly resold the bearings to the usual customers (in this case the Volga Automobile Plant) for 300 to 400 percent higher than they had paid. These middlemen were located in another province, Ingushetia, out of the reach of the Vologda Province tax inspectors.

One of these middlemen which handled 20 percent of VBP's output called itself VBP Limited partnership. It was registered at 3 Factory St., Nazran, Ingushetia. But this limited partnership existed on paper only, a tax ruse. The mother plant "shipped" its bearings to 13 Ring Highway, Vologda, the address of the plant itself!

This "middleman " firm had a staff of just seven people, made a profit of 21,402,000,000 rubles, a return on capital of 10,000 percent.

Another such Ingushetia middleman firm founded in 1996 was set up in part by a firm known as Mona. A major owner of the Mona firm is Nadezhda Katz, the sister of Aleksandr Elperin, General Director of the Vologda Bearings plant.

The greed of Elperin and his cronies did not stop there. The "middlemen" have made large loans to Elperin, 501 million rubles, and to his six deputies, 105 million rubles each. The loan includes a provision that repayment may be made by offering shares of the plant at 45,000 rubles a share. Now Elperin is busily buying up the shares issued to the workers at 3,000 rubles per share. So much for workers' participation in the new democratic reformed economy.

Izvestia has also reported the strange doings of Novolipetsk Metallurgical Combine (NMC), the largest steel producer in Russia. Its annual production of high quality metal is $2 billion.

But in spite of its high production, it is having financial problems. NMC claims that the State budget owes the combine "an enormous sum of money." The sttate accuses the combine of concealing profits because the combine is not allowing an independent audit which 40 percent of the stockholders are demanding.

NMC claims that 60 percent of its production is exported which if true would mean that the state owes NMC a refund for the value-added tax it paid for its raw materials. It is significant that the company will only sell to domestic users of steel if they pay in full in advance. Of course, the original purpose of this combine under Soviet conditions was to meet the nation's needs for steel without regard to a possible export market.

So at present there is a standoff: the company hides its books and it is a matter of doubt "to what extent the law and the authorities can [want to?] protect the rights of owners and ultimately the rights of the authorities themselves."

The newspaper Nezavisimaya Gazeta (Independent Journal) picks up the shareholders side of NMC's twisted tale. These shareholders representing 40 percent of the outstanding stock include the American investment funds; Cambridge Capital Management, Sputnik, and Russia's International Finance Corporation Bank.

Prominent people are involved on both sides of this controversy. The stockholders' side includes the senior officer of the International Finance Corporation Bank who is now the First Deputy Prime Minister to Yeltsin. Sputnik is controlled by George Soros, "who is known in Russia as a philanthropist, and just as well known in the West as a stock market speculator."

The most prominent American involved with the stockholders' protest is Boris Jordan from the First Boston Bank. He is called the godfather of Russian privatization, since he "has been credited with half of all the American foreign investments in Russia." Yet for several months last year he had been denied a visa. He received one after Yeltsin's former close advisors, Alexandr Korzhakov, Michael Barsukov and Oleg Soskovets were removed from office. Jordan, has finally been able to launch a court case against the combine.

Russia's aluminum industry is a third major area in which privatization has led to horrific results. The Kommersant Daily (Commercial Daily) quotes Anatoly Kulikov, another Deputy Prime Minister and Minister of Internal Affairs: "The aluminum sector is totally criminalized." Like steel, of the 3 million metric tons of aluminum produced in Russia, (second place in the world), only about 600,000 tons goes for domestic production. The rest is exported. Kulikov added: "Russia's raw material resources, including nonferrous and rare-earth metals are the primary interests of thieving criminal clans ... Crime kingpins ... are usurping the functions of the state." And Kommersant adds, "As if that were not common knowledge."

Kommersant suggests that Minister Kulikov chose the aluminum industry for attack for political reasons. The paper points out that the former Deputy Prime Minister Oleg Soskovets, whom Yeltsin removed form office, had been closely involved in the aluminum industry and was one of Alexander Lebed's chief sponsors. General Lebed, it will be remembered, cherishes hopes to oust and replace Yeltsin as President.

The grab for easy wealth taking place in these three major industries is no exception. It is typical of the bulk of the Russian economy. How else to explain that the Yeltsin regime takes no action even though billions of taxes are avoided and the Government finds itself unable to meet payrolls?

Part of the answer is that President Yeltsin is reported to have an ongoing and substantial racket of his own. The Komsomolskaya Pravda (Young Communist Pravda) published the following: By decree, signed by Yeltsin, the business manager of the Kremlin household was given the privilege of importing anything from abroad free from customs charges or taxes. The paper described the Kremlin household as the most prestigious and most corrupt commercial firm in the country."

Nor is the Clinton administration unaware of this well publicized record of corruption. Yet it allowed the World Bank to supply candidate Yeltsin with ample funds to bribe voters before last year's presidential elections.

This is not something new. The United States has a record of supporting despots - Somoza of Nicaragua, Pinochet of Chile, Mobutu of Zaire. All these won favor and military support because they claimed their opponents were Communists. Turncoat Yeltsin, a life-long Communist until recent years, feels sure of the American Government's protection because of his virile anti-communist policy.

-Lem Harris is a former writer for the People's Weekly World.

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