Quotation of the Month:  "Growing Crime and Corruption Threaten Not Only Russia, but the Entire World."
Arial Cohen of the Heritage Foundation takes the Russian Mafiya Head-On

A tidal wave of crime and cor- ruption is sweeping Eurasia, threatening to bury the nascent and fragile democratic institutions in Russia and other countries in the region. Russia alone is under attack from over 5,000 gangs, 3,000 hardened criminals, 300 mob bosses, and 150 legal organizations with international connections. Some 40,000 Russian business and industrial enterprises are controlled by organized crime. Their combined output is higher than the gross national product of many members of the United Nations. The Russian mafiya (a generic term for all organized crime in the former Soviet Union) is estimated to be worth $10 billion. More Russians died of criminal violence in 1993 than were killed during nine years of war in Afghanistan. In 1994 criminals took 118 people hostage in Moscow alone. The situation in other Newly Independent States (NIS) of the former Soviet Union is even worse, with criminal gangs even controlling the value of some national currencies.

Growing crime and corruption threaten not only Russia, but the entire world. Russian contract killers have murdered in, London, Los Angeles, and New York. Former KGB "specialists" in assassination are available to the highest bidder. Corrupt officials and criminal organizations are involved in a variety of black market activities that generate multi-million-dollar profits. The illegal export of oil, ferrous and nonferrous metals, timber, and diamonds is the most lucrative, followed closely by illegal drug production and distribution. The illicit sale of arms and nuclear materials and technologies represents the greatest threat to Russia's neighbors and to the West. Privatized property is bought up by foreign and domestic criminal organizations to launder and hide illegal profits.

The Russian Interior Ministry estimates that oil smuggling grew by 50 percent from 1992 to 1993. The ministry believes that around 20,000 metric tons of metals, over 100,000 metric tons of oil products, and more than 200,000 cubic yards of timber were smuggled abroad from Russia in 1993, with up to a trainload a day passing through Lithuania and into the Port of Kaliningrad.

Russian officials charge up to $80,000 to register a bank and up to 15 percent of an oil deal's value to issue a license to export. Managers of government-owned industrial enterprises often bill international customers only 10 percent of the price of exported commodities, with the difference between the contract price and the world market price deposited into their offshore bank accounts. Until early 1994, the Central Bank of Russia issued credits to commercial banks and state-owned enterprises at rates much lower than inflation. The banks and enterprises then lent the money at higher market rates. Central Bank officials reportedly received 13 percent of the loan as bribes.

Soviet military officers allegedly sold off the military's strategic supply of fuel to black marketeers in Western Europe from 1990 to 1994. There were several million tons of oil in the strategic reserves, enough to fuel planned Russian occupation forces in Western Europe until the year 2006. Russian generals used military aircraft to fly Volvos and other European cars home for sale. The top brass illegally traded in MIG fighters, armored vehicles, and stolen German cars. They even illegally manufactured and sold synthetic drugs using Russian military labs.

The Russian mafiya landed in the United States in the 1970s. Since then it has become involved in gasoline tax and medical insurance fraud in New York and California. It has cooperated with the Sicilian mob in transporting heroin and with Colombian cartels in shipping cocaine. One metric ton of cocaine was seized in St. Petersburg's Pulkovo airport en route to Antwerp in 1994. While not yet as powerful as the Colombians, the Chinese Triads, or La Cosa Nostra, the Russians are an up-and-coming force in the increasingly globalized world of crime. Russian mafiya operations in the United States are thought to be headed by Vyacheslav ("Yaponchik,""Little Japanese") Ivankov, known as "the father of Soviet extortion."

[Ivankov, the reputed top Russian mob boss, now 55, was arrested in the United States by FBI agents on June 8 for allegedly masterminding a $3.5 million extortion scheme. He spent a decade in a Siberian prison for crimes ranging from robbery to drug trafficking, and slipped into the United States on a doctored passport three years ago. The mobster came to Brooklyn's "Little Odessa" to oversee Russian organized crime activities in America, and became the target of an unprecedented joint effort by the FBI and Russian authorities. Eight others are charged with him in the extortion plot. FBI Assistant Director Jim Kallstrom called Ivankov's capture the most important arrest ever made in the war against Russian organized crime in the United States.]

The Russian mafiya is fast developing an international network. Mobsters launder their ill-gotten gains by investing in gambling, luxury car dealerships in European cities like Budapest, and banks, marinas, and resorts in the Caribbean Basin. They also work with top-flight international attorneys in Frankfurt and Zurich to learn money-laundering techniques perfected by Colombian drug lords and Sicilian mobsters. The main technique is to move money electronically among dozens of companies so that eventually it finds its way into respectable investment portfolios in the West.

Russian and other Eurasian criminals also are becoming more involved in the international drug trade. The opium poppy and cannabis (marijuana and hashish) have grown naturally in Eurasia for millennia, from the Ukrainian steppes to the plateaus of Kyrgyzstan. With the collapse of strict police controls, drug cultivation in Eurasia has reached an all-time high. Three million acres of opium poppies are controlled by organized crime in Central Asia, primarily in Kyrgyzstan, Tajikistan, and Uzbekistan. There is no fuel or spare parts for the aircraft that were once used to police these areas. Besides, in many instances the police are "on the take" from drug dealers, and the porous borders in Eurasia allow illegal drugs to pass from Central Asia into Western Europe.

Central and Eastern Europe, Russia, and Eurasia are becoming major transit points for drugs manufactured in Afghanistan, Iran, and Pakistan. Uzbek and Tajik tribes inhabit Afghanistan and have close connections in Central Asian governments; the Central Asians in turn are plugged into the Moscow power structure. Azeris, Armenians, Russians, Georgians, and Central Asian Turks play an important role in maintaining the bridge between the drug manufacturers in Asia and markets in Western Europe.

Russia is also becoming a transit point for heroin coming from the Golden Triangle of the Far East (the Burma-Thailand-China border region). The Russian mafiya has established a foothold in Bangkok, Hong Kong, and Singapore, where it cooperates with the Chinese Triads. Moreover, Russian gangs in New York, working with the Mafia's Gambino family, are shipping heroin into the United States.

The problem of crime in Russia and the NIS has many roots. The criminal code of Russia and other former socialist states cannot always deal with the freedom unleashed by the collapse of communism. During Soviet times, such innocent practices as buying and selling for profit or dealing in securities or foreign currency were criminalized. Meanwhile, such simple judicial tools as laws against a conspiracy to commit crime were lacking. Soviet law was ideological and arbitrary, allowing Communist Party apparatchiks to decide the legality of economic transactions.

Legally, there was no private property, so the legal system did not contain provisions for conflict of interest. This legacy has been carried over into the new Russian Federation. Even today, there is no adequate definition of corruption in the Russian criminal code. Nor are there adequate civil service ethics regulations. It is no wonder that Russia and other Newly Independent States have some of the most corrupt bureaucracies in the world. Their legal systems are incapable of preventing corruption.

Soviet-trained judges have a poor understanding of private property. They have not been trained in the Western legal practices of settling property and transactional disputes between private individuals. Before 1992, there was only one state-run arbitration system in the U.S.S.R. There were no forums for corporate dispute resolution. Since everything belonged to the state, nobody really cared whether contracts were honored. Parties to conflicts and their counsel had no personal or business interest in the outcome of the proceedings.

The implications of such widespread corruption are potentially devastating:

• Corruption discredits free markets. Lacking a legal system capable of buttressing the market economy, Russia and other NIS societies have lost hundreds of millions of dollars to fraud. Legal authorities do not protect investors or consumers from thievery, extortion, or fraud. For example, in 1993 a company called Independent Oil Concern stole millions of dollars from investors and transferred the money abroad. The Russian prosecutor's office did not even investigate the matter.

Another example was the 1993-94 MMM (named for the initials of the partners) stock market disaster caused by Moscow entrepreneur Sergei Mavrodi. This was a massively advertised pyramid scheme in which the value of the shares was driven sky-high by the influx of millions of new buyers. In the end, the bubble burst and multi-billion-ruble losses ensued.

The negative impact of all this criminal activity on the image of business and markets is tremendous. The crime and corruption of today are reviving prejudices left over from the days of Soviet communism, giving the old charge that business is "dirty" a new meaning. Widespread crime and corruption are deterring honest, industrious people from joining the ranks of entrepreneurs and are engendering a hostile political climate toward free market reforms.

• Corruption weakens the rule of law. Democracy and free markets cannot survive without the rule of law. However, precious little has been achieved in establishing a firm legal basis for a civil society based on democratic principles. There is hardly any state-run or private enforcement service—with the exception of organized crime. In 1994 dozens of senior police officers were fired for cooperating with the mafiya, while others were killed by criminals for refusing to cooperate.

•Corruption impedes Western investment. Western businessmen increasingly are harassed by Russian mobsters. American managers in Moscow told the author that they have received anonymous phone calls more than once a day inquiring about their sales volume. Such routine intelligence gathering helps criminals to determine which foreign firms can be targeted for extortion. To cope with the danger, foreign businesses must bear the steep costs of additional security for themselves, their families, and their property. Faced with these costs, which can absorb as much as 30 percent of foreign profits, many firms refuse to invest in Russia and the NIS.

• Corruption spreads the dangers of nuclear proliferation and terrorism. The deterioration of central controls since the collapse of the Soviet Union in 1991 has led to the hair-raising possibility of unauthorized sales of nuclear components and material to terrorists and other criminals. By 1993 Germany had arrested more than 100 people involved in smuggling nuclear components from the former Soviet Union. Ukraine, with its diverse nuclear establishment, was a major source of nuclear-related dual-use materials, including heavy water, zirconium, and hafnium, from its Dneprodzerzhinsk production complex. These materials are all on the Nuclear Suppliers Group restricted list (the NSG is an international regime aimed at stopping the proliferation of dual-use nuclear weapon components).

Nuclear facilities are located in such potentially unsafe and unstable areas as Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Tajikistan is in the midst of a civil war, while nuclear security in the other republics can be very lax. There are unguarded nuclear components in research facilities such as Dneprodzerzhinsk in Ukraine and nuclear laboratories in Georgia and Armenia. Ex-Soviet nuclear scientists are working on secret and illegal nuclear weapons programs in Algeria, China, India, Iran, Iraq, Libya, and North Korea, in violation of the Nuclear Non-Proliferation Treaty.

Radioactive components for nuclear weapons can be bought in Russia and other parts of the NIS. Since 1990 there has been clear evidence that uranium and plutonium are being smuggled out of the former Soviet Union. Several smugglers died or became severely ill from mishandling the materials, which have been left in railway stations and airports in Austria, Germany, and Lithuania. More than 100 people have been arrested by German, Czech, and other Central European security services since 1991. Russian KGB and military officers have been caught supplying nuclear machinery and weapons systems to Italian mafiosi, who were reselling them to Libyans. Transshipment of nuclear materials were made to Austria, Italy, Sweden, and Switzerland, but the direct route is even easier.

Coordinated action is required by the entire international community. If the wave of crime and corruption in Eurasia is to be halted, Russia, other NIS countries, and the Central and East European states should:

•Create new, clearly independent criminal investigation agencies.

•Amend criminal codes to better define organized crime. In particular, a conflict-of-interest doctrine must be incorporated into post-Soviet legal systems.

•Establish a witness relocation program. Protecting witnesses in organized crime trials is crucial to successful prosecution.

•Recruit and train a new judiciary. With weak courts and incompetent judges, the legal systems of these countries cannot function.

•Upgrade the civil courts to handle private sector disputes. Right now many private disagreements are settled at gunpoint by the mafiya.

•Improve security, inventory management, and accountability at nuclear production and storage facilities.

•Ease bureaucratic regulation of the economy. Bureaucrats who work together with mobsters are the major source of corruption in the post-Soviet states.

•Reduce the tax burden. High tax rates and corrupt internal revenue services are endemic in Central Europe and the NIS. Low taxes applied uniformly would not only increase the tax base and bolster government revenues; it would reduce the rampant tax evasion that fuels crime and corruption.

Since crime and corruption in Eurasia are spilling over into other countries, some degree of cooperation with the West will be required to solve the problem. Thus, Western countries should:

•Share computerized databases on criminal activity.

•Identify trustworthy and reliable law enforcement personnel in the East. Western law enforcement services need all the support they can get from local police establishments.

•Use legal expertise to help Central and East European and Eurasian countries draft laws and train legal personnel.

•Expand the International Criminal Investigative Training Assistance Program and other FBI-sponsored programs to all countries of the former Soviet Union and Central and Eastern Europe.

There are at least two actions the United States and its allies can take on their own to curb crime and corruption in Eurasia:

•Track and penetrate Russian and NIS criminal rings dealing in nuclear materials and narcotics.

•Monitor East-West financial transactions better. A significant percentage of the money coming out of Russia represents the proceeds of such criminal activity as extortion and drug trafficking. To battle Russian and Eurasian crime successfully, NIS deposits in Western banks should be screened and tracked more carefully.

Based on the Heritage Foundation background paper, "Crime and Corruption in Eurasia: A Threat to Democracy and international Security," by Ariel Cohen, Salvatori Fellow in Russian and Eurasian Studies. To order: The Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 200042-4999, USA, tel. (202) 546-4400.