Eurasian Organized Crime and the Origins of the Post-Soviet Oligarchic System
This article covers the the role of Eurasian organized crime in the development of the corrupt oligarchic system in post-Soviet Russia. It is the third article in the series “Vladimir Putin, Russia, and the Long Road to the 2016 American Election.” While it is not necessary to read previous entries, it is recommended.
The first article provided a brief history of Russia’s intelligence services and a definition of “Disinformation” and “Active Measures.”
The second article described Vladimir Putin’s early life and his experiences as a KGB Officer in Russia and East Germany.
The third article describes how elements of the KGB laundered billions of dollars of Communist Party money into the West as the USSR collapsed.
This article is an excerpt from my book, While We Slept: Vladimir Putin, Donald Trump, and the Corruption of American Democracy, available here.
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In 1991, a decisive year in the history of Russia and the development of the contemporary world, the Soviet Empire vanished into the pages of history. The Soviet Union was a political entity distinct from the country now known as the Russian Federation. With a pseudo-federal political structure centered in Moscow, the USSR had ruled over the vast lands and many ethnicities that Russian Tsars had spent centuries conquering.
Following victory in the Second World War, Soviet influence extended into the heart of Central Europe. While Russia was the largest republic in the Union, there were 14 others ranging from Eastern Europe to Central Asia. In fact, Russians only made up only 51% of the Soviet population.
The long-term causes of the USSR’s demise include terminal economic decline, the expenditures of a lost arms race, the moral and political bankruptcy of the communist system, ethnic conflict, national independence movements, and re-energized democratic activism.
These factors notwithstanding, the collapse and dissolution of the Soviet Union, and the oligarchic, corrupt and authoritarian Russian state that would rise from its ashes, were not inevitable. The character and decisions of Russia’s leaders drove the outcome.
Boris Yeltsin and the Birth of Post-Soviet Russia
A Siberian politician named Boris Yeltsin emerged as the unlikely leader of Russia’s nascent democracy. Yeltsin was a complex man, capable of bouts of extraordinary energy, industriousness, and bravery. He also was a severe alcoholic prone to depression.
Yeltsin likely saved Russia’s early experiment in democracy by risking his life and dramatically standing up to a hardline, KGB-led, communist coup attempt. However, later in his career as the President of Russia, as his health and alcohol abuse deteriorated, Yeltsin slipped into insularity and corruption. Russia became overwhelmed by criminality and chaos.
The newly independent Russian Federation faced catastrophic economic problems and serious shortages of all consumer goods. Russia was at a moment of existential crisis. Yeltsin feared a communist resurgence. He was then being advised by a group of young St. Petersburg-based economists led by Yegor Gaidar and Anatoly Chubais. These economists were, ironically, of ex-Marxists who believed that immediate, radical solutions were the only way forward.
At their urging, Yeltsin pushed through a variety of economic reforms, “shock therapy”, as it was known, designed to transition the Soviet top-down, centrally planned economy into a private property based market economy. These reformers differed from those in the Russian intelligentsia who were interested in political reforms. They were focused on economic reforms to the exclusion of all else.
It is doubtful that Yeltsin fully understood the nature of market economics, but he possessed a bold and intuitive leadership style, and he favored the dramatic proposals of the young economists from St. Petersburg.
Yeltsin was concerned that, given the political and economic instability in Russia, its history of coups and intrigues, and their precarious hold on power, they had little time to enact their ambitious agenda. Driven by fears of Communist resurgence, they proceeded with blinding speed to drive a stake through the heart of Communism in Russia.
While they succeeded in dismembering Communism, they failed to create a replacement system founded upon the rule of law, widespread economic opportunity and a vibrant civil society.
American Involvement in Post-Soviet Russia
American political and academic elites participated in the conception and implementation of the shock therapy privatization program. The organization most heavily involved in American economic aid efforts in Russia was the Harvard Institute for International Development (HIID).
Lawrence Summers, appointed by Bill Clinton as Under Secretary of the Treasury and a former Harvard economics professor, was a major supporter of HIID in the administration.
Harvard economics professor Jeffrey Sachs, having advised previous countries such as Bolivia and Poland through economic transitions, travelled to Russia and met with and advised the young reformers. While Sachs has vigorously defended his actions in Russia as largely being misunderstood, his support for rapid change at the time was clear.
“If you look at how reform has occurred, it has been through the rapid adoption of foreign models,” Sachs told The New York Times in 1993, “not a slow evolution of modern institutions.”
The Corrupt Privatization of Russia
The first of several death blows to the Communist economic legacy in Russia was dealt in January of 1992, a month after the dissolution of the USSR. Spearheaded by the thirty-five-year old reformer Yegor Gaidar, former economics editor of Communist Party publications Kommunist and Pravda, prices in Russia were freed from state control.
While this was an effective and perhaps necessary step to end the Soviet practice of central economic planning, its immediate effect was hyperinflation. Almost overnight, many Russian pensioners were turned into paupers as their savings were rendered worthless. The transition to capitalism was to have many casualties, inevitably among the most vulnerable of Russian society.
Gaidar’s price liberalization policy contained a fatal flaw, which was exploited by organized crime syndicates and a small group of enterprising individuals who came to be known as the oligarchs.
While prices for consumer goods were liberalized and thus prone to the violent fluctuations, prices for Russia’s primary natural resources were kept artificially low and under state control. At the same time the reformers ended state control over prices, they also eliminated the state monopoly on imports and exports.
As a result, well-connected insiders and powerful criminal groups could buy oil, diamonds, timber and other natural resources at artificially low prices within Russia and then turn around and sell them on the international market for an immense profit.
Thus began the full-scale robbery of Russia’s natural resource wealth.
After ending central planning of the economy, the radical reformers next moved to eliminate the state monopoly on property. Anatoly Chubais implemented privatization with ruthless efficiency and appeared largely unconcerned with who would end up owning Russia’s immense state assets, believing that market mechanisms would eventually sort matters out equitably.
This proved a colossal miscalculation, as the oligarchs gained ownership over vast sectors of Russia’s strategic resources and economy.
Straddling eleven time zones across both the European and Asian continents, the countries of the former Soviet Union covered one-sixth of the Earth’s landmass. Russia, by far the world’s largest country, enjoys immense natural resource wealth, particularly in oil, natural gas, coal, precious metals and timber. It was at that time, and remains today, a natural resource, commodities-based national economy.
With a hasty and chaotic process of privatization underway, the race was on by the bold and the unscrupulous to gain control over the largest transfer of state wealth into private hands in the history of the world.
What motivated the speed with which the reformers moved was an out-of-control process that Chubais referred to as “spontaneous privatization.” Members of the former Soviet elite, known as the Red Directors, were seizing natural resource wealth from now defunct state bodies and squirreling away illicitly acquired fortunes in off-shore havens.
This was an early example of capital flight that would soon unleash a tidal wave of Russian cash across the Western world.
Chubais implemented a controversial voucher privatization program in which the Russian government distributed 148 million vouchers to every Russian citizen born after September 2nd, 1992. Each voucher was worth 10,000 rubles (roughly $25) and could theoretically be traded at auctions for shares in new, private companies formed from the old Soviet bureaucracy.
The process disintegrated into chaos. Scams and insider dealings between the old Communist elite, an unscrupulous new cast of bankers and businessmen, and an exploding underworld of Russian organized crime groups quickly overcame the country. Ordinary Russians, having no experience with markets or private property and suffering from hyperinflation, could be seen trading their vouchers for bottles of Vodka.
Western governments, aid agencies and financial institutions were intimately involved in the early stages of voucher privatization in Russia. To assist former Soviet countries in their transformation to capitalism, Western governments established the European Bank for Reconstruction and Development (EBRD).
Chubais approached the EBRD to assist in the first privatization auction to take place in Russia. The EBRD arranged for the auction to be overseen under the advisement of the Swiss-American bank Credit Suisse First Boston (CSFB).
The first Moscow factory to be privatized was the Bolshevik Biscuit Company. The CSFB consultants were stunned by the results of the auction. The Bolshevik Biscuit Company was sold into private hands for $654,000 dollars. A nearly identical cookie company in Eastern Europe had sold a year earlier for $80,000,000.
The lesson behind the sale of the Bolshevik Biscuit Company was clear, there was a firesale about to take place in Russia and everything was up for grabs for those with the means and ruthlessness to take advantage of the opportunity. Credit Suisse First Boston would go on to oversee one out of every ten vouchers issued in Russia.
Many in the up-and-coming clique of oligarchs were well poised to purchase these newly privatized industries because they were flush from having established banks in the twilight years of the USSR.
As part of perestroika, in 1988 Gorbachev passed the Law on Cooperatives, which was meant to spur semi-private economic activity (“worker” owned cooperatives as opposed to state owned) within the Soviet Union. However, a few savvy operators noticed that the law contained a line allowing for establishment of financial or credit lines of business, in other words, banks. Many of these banks would start out making fortunes through currency speculation during the period of price liberalization.
Many in the new class of oligarchs were well poised to purchase these newly privatized industries because they were flush from having established banks in the twilight years of the USSR.
Russian organized crime moved into this proto-banking sector early and on a massive scale, using them to launder vast amounts of illicit money and placing the bankers themselves under protection rackets.
The legacy of the radical reformers, embodied by Yegor Gaidar and Anatoly Chubais, has been fiercely debated. While they are credited with annihilating the Communist economic system in Russia, they did so with a curiously Marxist mindset that elevated economics above all other societal considerations.
Economists like Gaidar and Chubais believed that if they simply changed the economic system the culture and society would follow. They implemented economic policies, which had been devised in secret during the Soviet era and were left largely unexplained to the Russian people, into the social, legal and moral vacuum left by the death not only of the Soviet Empire but of the socialist value system that undergirded it.
While the control of the Communist Party over the levers of power had led to a certain form of stability, in truth the Soviet Union had never known the rule of law.
Konstantin Simis, an esteemed Soviet lawyer who defected to the United States in 1977, wrote, “[A]t the root of the general corruption of the Soviet Union lies the totalitarian rule of the Communist party, single-handedly ruling the country. This power is checked neither by law nor by a free press. And the nature of any unrestricted power is such that it inevitably corrupts those who wield it and constantly generates the phenomenon of corruption. So it is that corruption has become the organic and unchangeable essence of the Soviet regime and can be eliminated only by a root-and-branch change in the means of government.”
Gorbachev thought he could reform the Soviet Union without destroying it, but failed. Boris Yeltsin effectively banished the Communist Party from government in 1991 and his radical lieutenants did away with the lingering Bolshevik economic legacy in the following months.
In the sweep of history, these events of monumental importance unfolded practically overnight. Simis may have been right that a “root-and-branch change in the means of government” may have been a necessary starting point to begin to address corruption in Russia, but the Russian experience of the early 1990s vividly demonstrates that simply ending one form of government and social structure is insufficient, that something positive must be put in its place.
What was lacking in Soviet as well as post-Soviet Russia was the rule of law. Capitalism requires well established and equally applied rules in order to engender a sense of trust among its participants that allows it to properly function. These rules must be codified in the law, but it is not enough that these laws be written down, there must also be a reliable system of courts and legal processes to protect private property, enforce contracts and adjudicate disputes.
“The core of the existing principle is, I suggest,” says Tom Bingham, the former Lord Chief Justice of the United Kingdom, “that all persons and authorities within the state, whether public or private, should be bound by and entitled to the benefit of laws publicly made, taking effect (generally) in the future and publicly administered in the courts.”
According to S. Jayakumar, former Deputy Prime Minister, Coordinating Minister of National Security and Minister for Law of Singapore, “In modern society, the value of the Rule of Law is that it is essential for good governance. Governments must govern in accordance with established laws and conventions and not in an arbitrary manner. The law must set out legitimate expectations about what is acceptable behavior and conduct of both the governed and the government. This is important: the law must apply equally to the government and individual citizens.”
Fundamentally weakened following the collapse of the Soviet Union, the Russian state under Boris Yeltsin was incapacitated at every level and entirely unable to manage the emergence of capitalism. The Russian court system and organs of law enforcement were not only in a state of chaos, but after decades of Communism had no practical or intellectual experience in these matters.
Despite this dysfunction, the shock therapy of the early Yeltsin era led to a flurry of unprecedented economic activity over a significant portion of the Earth’s natural resource wealth. This inevitably led to rivalries and disputes that, one way or another, needed to be resolved.
This vacuum was filled by organized crime.
Eurasian Organized Crime in Russia and Newly Independent Former Soviet States
“Russia is the biggest mafia state in the world,” Yeltsin admitted in 1994, “the superpower of crime that is devouring the state from top to bottom.”
The collapse of Communism led to the largest expansion of global organized crime in decades, particularly in the former Soviet Union. On the streets of Russia, this was most vividly embodied by a bloody gang war in the 90s between Slavic gangs on one side, and primarily Chechen gangs, among other groups from the Caucuses, on the other.
Throughout the 1990s the Eurasian Mafia was involved in more than just violent underworld disputes. Rather, organized crime integrated with political and economic elites, and absorbed newly unemployed members of the security services. This led to the criminalization of large segments of Russian government, law enforcement, finance, business and society.
This criminal underworld has traditionally been known in Russia as the vor v zakone, meaning “thieves-in-law,” referring to a code of values historically embraced by the Russian criminal class.
While elements of Vor culture can be traced back to Tsarist times, it was fundamentally shaped by the experience of mass imprisonment in the Stalinist gulags. This prison culture developed its own slang and an elaborate series of tattoos that provided information about the experiences and position of the inmates they adorned.
After Communism fell and as the Russian mafia expanded its influence abroad into ever more sophisticated areas of the global economy and financial system, the old tattooed inmates were replaced by men in suits with high up business and political connections.
During the late Gorbachev period, Russian organized crime exerted its influence over Russia’s budding capitalism by establishing protection rackets.
The Russian term krysha, literally translated as “roof,” is the practice of a gang establishing such a racket over a business or group of businesses.
During the early phases of privatization, the protection rackets settled disputes among the oligarchs. The symbiosis of crime, business and politics reached the highest levels of Russia’s power structure.
The establishment of early banking institutions by the oligarchs was facilitated in part by laundered money provided by organized crime. This capital was used by the oligarchs to purchase large sectors of Russian industry in corrupt insider deals at bargain basement prices. By the mid-90s, the black market was estimated by the government to comprise 40–50% of the Russian economy.
On of the most powerful Slavic gangs to emerge from this time was the Solntsevskaya Bratva, or Solntsevo Brotherhood. Established in Solntsevo, a district southwest of Moscow, the gang was founded by a former waiter and wrestler named Sergei “Mikhas” Mikhailov, who had joined forces with an ex-convict named Viktor “Avera” Averin.
The Solntsevskaya exploded in wealth and influence during the early years of Russia’s corrupt capitalism, and is now transnational with operations across the world. It is estimated to have between 5,000–9,000 members organized into twelve semi-autonomous brigades. A leadership council of 12-individuals meets regularly in various locations across the world.
The group first made its money through prostitution, before moving into arms dealing and drugs. Money from its illegal activities was reinvested into the legal economy, and the group seized control of several banks and over 100 companies. These banks held the gang’s common fund, or obshchak, which was used for investments or to assist gang members and their families.
Another powerful criminal organization that emerged roughly contemporaneously was the Izmailovskaya Bratva, headed for a time by a Soviet army veteran named Anton Malevsky, which was involved in the violent privatization of the Russian aluminum industry.
Read my description of the Izmailovskaya’s take over of the Russian aluminum industry and its relationship with the Russian oligarch Oleg Deripaska here.
Boris Yeltsin and the Semibankirschina
During Yeltsin’s first term, seven men rose to become the richest and most powerful oligarchs in Russia. They included: Boris Berezovsky, Mikhail Khodorkovsky, Mikhail Fridman, Petr Aven, Vladimir Gusinsky, Vladimir Potanin and Alexander Smolensky. They came to be known as the Semibankirschina, or Seven Bankers, and amassed unparalleled political and economic power over the Russian state.
Many were suspected of having been propped up by elements within the Russian security services, and had links to the powerful organized crime syndicates proliferating in Russia at the time. However, they soon faced a significant threat. By 1996, Boris Yeltsin was up for reelection and was desperately unpopular in Russia and it seemed as if the Communists had a good chance of being voted back into power.
Read my description of the American political operative and later member of the 2016 Trump campaign Michael Caputo’s work for Yeltsin during the 1996 Russian election here.
To the oligarchs, Communist retrenchment was a mortal threat. Rising antisemitism, long a feature of Russian life, was a particular worry for the Semibankirschina as five of the seven were of Jewish background.
“Our people are not blind,” said Communist Party leader Gennady Zyuganov. “They cannot turn a blind eye to the aggressive, destructive role of Zionist capital in ruining Russia’s economy and plundering her property owned by all. There is a growing understanding among the people that the origin of all the current troubles is the criminal course of an antipeople, supranational oligarchy that seized power.”
The period following the collapse of the USSR was cataclysmic for the Russian population. The economy lost 50% of its value. Russia experienced demographic collapse, with average lifespans declining precipitously, particularly among Russian men. Alcoholism was rampant. The murder rate skyrocketed as much of the country was convulsed by violent gang wars. Countless women were sold into human trafficking networks and sexual slavery.
Yelstin’s battles with the legislative Duma eventually culminated in 1993 with the Russian President ordering the shelling of the parliamentary building using tanks and pushing through the rest of his shock therapy program by Presidential decree.
In 1994, Yeltsin had also initiated a bloody war in Chechnya against a radical Islamic independence movement that ended in failure.
As the 1996 election approached, the men of the Semibankirschina, who had spent the past several years ruthlessly competing with one another, realized they had to band together to support the flagging Yeltsin presidency or the Communists would regain power through popular election.
The oligarchs Boris Berezovsky and Vladimir Gusinsky controlled powerful independent television stations and immediately had them churn out programming in support of Yeltsin and attacking the Communists. However, support from the oligarchs would come at a price.
The final phase of the seizure of Russian state assets occurred at this time. The oligarch Vladimir Potanin, who grew up a scion of a well-connected Communist family and was now one of the richest men in Russia, approached an American named Boris Jordan, one of the Credit Suisse First Boston consultants who had overseen the first auction during the voucher privatization period and had recently established his own firm, Renaissance Capital.
Potanin described to Jordan an idea that would come to be known as “loans for shares.”
The basic concept was that powerful oligarchs would provide loans to the Russian government, which would temporarily benefit the Yeltsin regime, and as collateral the government would offer ownership shares of Russia’s most valuable state enterprises. This was the holy grail of privatization, Russia’s key strategic natural resources: oil, natural gas and precious metals.
Boris Johnson and his partner Peter Jennings wrote a white paper finalizing the concept for Potanin.
The process that followed was corrupt from the outset. Shares of Russia’s most lucrative natural resource wealth were offered as collateral for next to nothing to a select few insiders in a rigged process. It was well known and expected that the government would never be able to repay the loans. The oligarchs then sold the shares the government “owed” them back to themselves for next to nothing.
The Yeltsin government received a brief shot-in-the-arm in the lead up to the elections, all at the price of placing huge swaths of Russia’s geostrategic resources into the hands of a few men. The Russian oligarchic system had reached its apotheosis; these few tycoons now not only owned the most valuable assets in the country but achieved unparalleled influence at the heart of government.
American Support of Boris Yeltsin in the 1996 Russian Election
Yeltsin had another powerful ally supporting him during the 1996 election — the American government.
Bill Clinton liked Yeltsin personally and the American National Security establishment wished to avoid a Communist return to power at all costs. A number of American political operatives, some of whom who had previously worked on Clinton’s campaign, traveled to Moscow and provided campaign advice to Yeltsin’s daughter and closest advisor, Tatyana Dyachenko, who passed it on to her father.
The Clinton Administration also pressured the International Monetary Fund to provide a $10 billion loan to Russia in the lead up to the election. This support was offered despite the American governments awareness of corruption in the Yeltsin administration and fraudulent activities around the election.
“They figured out that it was possible to manipulate the process,” Thomas Graham, the Chief Political Analyst at the US Embassy in Moscow from 1994–1997, said in an interview with PBS Frontline. “They figured out that you could build a fairly formidable electoral machine if you took the control that you had collectively had — particularly over mass media — your support in executive structures, not only in Moscow, but more broadly outside the country, if you took into account the financial strength you had from these various industries… They figured out that, by using those wisely, you could lead to the result pretty much that you wanted.”
As Yeltsin was sworn into his second term as President in 1996, Russia found itself in a perilous historical moment. The oligarchs, particularly the Seven Bankers, had seized control of Russia’s natural resource wealth using a plan sketched out by Western financial analysts, and enjoyed unparalleled influence in the inner circle of the Yeltsin government.
Yeltsin was increasingly in poor health and intoxicated. The symbiosis of corrupt government officials, business tycoons, organized crime and disparate elements of the intelligence and security apparatus was well under way. The future of Russia was anything but clear.
The next installment in this series will cover Vladimir Putin’s tenure as Deputy Mayor of St. Petersburg, and his relationship with Eurasian organized crime.