Money Laundering and the Looting of Russia: The Saga of the KGB Billions
This article covers how the KBG stole and laundered billions of dollars of Communist Party money out of the Soviet Union prior to its collapse. It is the third in the series “Vladimir Putin, Global Corruption, and the 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.
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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On Sunday, August 25th, 1991, Nikolai Kruchina’s world was collapsing around him. Six days earlier, the KGB had launched an attempted coup d’état in the hopes of saving the Soviet Empire. It lasted barely four days, after which the coup leader and KGB head Vladimir Kryuchkov and his top lieutenants were arrested.
On the 24th, Mikhail Gorbachev had stepped down as the general secretary of the Communist Party of the Soviet Union (CPSU) and signed a decree transferring over party property. The coup which was designed to preserve the USSR had succeeded in driving a stake through its heart.
As the chief-of-staff of the Central Committee, Kruchina’s primary concern was the transfer of property. Kruchina had for years been entrusted with overseeing the CPSU’s prodigious and secretive party finances, which included billions of dollars both within Russia and stashed offshore.
Any investigation into those finances, Kruchina well-knew, was bound to lead to trouble. On the 25th, the day after Gorbachev had issued his decree transferring party property to the new Russian government, the newly empowered Yeltsin issued one of his own ordering the same transfer.
Later that day, Kruchina was forced to meet with representatives of the infant government in Moscow to discuss the transfer. The meeting, which dragged on until 9pm, was contentious and did not go well for the shell-shocked party apparatchik.
That evening Kruchina returned to his elite 5th-floor apartment in a Moscow building reserved for the highest members of the Soviet nomenklatura, the class of influential Party and Government bureaucrats that had enjoyed all that was best in a “classless” society.
After bidding his wife goodnight he mentioned that he had work to do. Sometime after 5am on the 26th, Kruchina stepped onto his balcony and jumped to his death, taking the secrets of the CPSU’s finances with him.
In the saga of the KGB billions, however, this was only the beginning.
The KGB During the Final Days of the USSR
“Plans for the looting of the Soviet State were first discussed in 1984 by specific sectors of the Soviet Politburo, the top officials of the Soviet Government,” Richard L. Palmer, a veteran CIA Chief of Station in the Former Soviet Union, testified to the House Banking Committee.
“However, one must keep in mind that this massive effort included many of the highest officials of the Soviet government, several elements of the KGB (now FSB), old and new bankers, industrialists and, of course, traditional criminals, such as the Russian Mafiya — which already had experience and significant personnel stationed in the West. Their primary goal was to ensure their financial and political status in the future, by taking control of the vast funds and resources of the Party and converting them into personal assets that could not be tracked or confiscated by future governments.”
The movement of illicit funds was something the Soviet-era bankers had ample experience with. Both the USSR and Nazi Germany engaged in widespread money laundering through the Western financial system.
Unbeknownst to most Russians at the time, the Communist Soviet Union maintained an extensive network of strategically placed state-backed banks and multinational corporations around the world.
These secretive institutions not only funded espionage activities and managed foreign trade, they also laundered funds which were funnelled to communist parties and leftist organizations around the world.
The KGB was already attempting to infiltrate the Western financial system by the mid-1970s. Using KGB-assets as foreign intermediaries, the Singapore branch of Moscow Norodny Bank attempted to purchase four California banks including Peninsula National Bank in Burlingame, the First National Bank of Fresno, Tahoe National Bank and Camino California Bank in San Francisco.
While the scheme didn’t violate any US laws, it was shut down by the CIA nonetheless. By acquiring these banks, all of which were in close proximity to Silicon Valley, US officials worried that the Russians would gain access to advanced technology and insight into the confidential finances of American technology companies.
Throughout the 1970s and 80s a curious dynamic took place, at the same time the Soviet Union began its long-term lurch into terminal economic decline, its KGB-managed offshore accounts swelled with cash.
This price of oil skyrocketed following the Middle East oil crises of the 1970s. The resource rich but technologically inferior Soviet Union traded basic commodities like oil for Western technology, thus pioneering the simple means by which the later oligarchs would enrich themselves by buying Russian natural resources at artificially depressed prices and selling them at a mark-up on international markets.
By this method, a significant hard currency reserve was built up and maintained by the KGB overseas.
For years, the arrangement had been that the CPSU maintained ultimate decision making powers over the overseas financial network while the KGB was in charge of implementing those decisions.
By the time Gorbachev began implementing perestroika and glasnost, it appears that KGB began to take more control over the decision making process, not only keeping money stashed safely abroad but increasingly repatriating funds out of Russia using the same network.
KGB Chairman Vladimir Kryuchkov, who distrusted Gorbachev and later lead a coup against him, convinced the reformist Soviet leader to use KGB-trained economists to manage the opening of the Soviet economy.
According to Congressional testimony by Richard Palmer, in 1986 an informal, highly secretive CPSU planning committee headed by Nikolai Kruchina was provided the services of two KGB First Chief Directorate Officers with experience moving funds overseas both for Party purposes and to fund clandestine operations.
The only written records of these meetings were provided to the KGB officials Kryuchkov and Viktor Chebrikov.
The First Chief Directorate, the wing of the KGB traditionally dedicated to domestic political surveillance and repression, was then under the leadership of General Philipp Bobkov.
Bobkov was also the head Sixth Chief Directorate, which previously had been tasked with investigating economic crimes but following Gorbachev’s reforms it aggressively infiltrated Russia’s new cooperatives and banks, thus increasingly coming into contact with organized crime and indelibly shaping post-Communist Russia.
The exfiltration of party funds out of Russia started simply. Between 1986–1989, small foreign front companies and bank accounts were opened using suitcases full of cash and money appropriated to Soviet diplomatic residencies.
After these KGB front companies and accounts were established, official CPSU organizations and party-controlled state enterprises sent their money abroad and stashed it in banks and companies with no obvious connection to the CPSU.
As all this was happening, the KGB established shadowy “intermediary firms” that purchased Soviet resources at reduced prices, sold them abroad at a mark-up, depositing them into the already established network of shell companies. As time went on, the scheme became more advanced and increasingly dependent upon elements of organized crime.
On August 23rd, 1990, the deputy general secretary of the CPSU Vladimir Ivashko issued an memo entitled “Urgent measures on the organization of commercial and foreign economic activities of the party,” in which he called “for the development of an autonomous channel for the obtaining of currency into the party’s cash box.”
The memo further called for the “strict observance of discreet confidentiality,” and “the use of anonymous facades to disguise the direct issue of money.” By October, the KGB had sent several members of its foreign intelligence unit, the First Directorate to coordinate the CPSU’s economic activities. This was done on the basis of an agreement between a small group at the highest levels of the KGB and CPSU.
Colonel Leonid Veselovsky of the KGB’s First Chief Directorate was one of the men transferred to the CPSU’s Central Committee Administrative Department. Veselovsky had served as a Field Officer in Portugal in the late 70s and early 80s, which provided him experience with the KGB’s clandestine funding operations.
Vesolovsky outlined his plan in a memo, stating: “The earnings which are accumulated in the Party treasury and are not reflected in the financial reports can be used to purchase the shares of various companies, enterprises and banks.”
The memo continues, “On the one hand, this will create a stable source of revenue, irrespective of what happens to the party. On the other hand, these shares can be sold on the security exchanges at any time and the capital transferred to other spheres, allowing the Party to keep its participation anonymous and still retain control…”
“In order to avoid mistakes in the course of this operation during the ‘period of emergency,’ it is essential to organize, both in the U.S.S.R. and abroad, special rapid response groups, staffed by specially trained instructors from the active reserve of the KGB of the U.S.S.R., as well as by trusted individuals volunteering their cooperation and by individuals who, for one reason or another, have lost their job in the field units or administrative departments of the KGB.”
Whereas the First Chief Directorate had once been responsible for directing flows of laundered money to places like Latin American, now it was directing money out of Russia. With the failure of the coup and the banning of the CPSU by Yeltsin, the vast looting of party funds hastened.
Shortly after the coup failed, a Veselovsky-established front company called Galaktika was “loaned” $168 million in CPSU funds that was never paid back as the party ceased to exist shortly thereafter.
According to Richard Palmer, Galaktika and others received $560 million in the days following the coup. This was just a drop in the bucket compared to the total amount of wealth the KGB whisked offshore, which includes upwards of $50 billion in CPSU hidden assets and a large portion of the Soviet Union’s gold reserves.
With the dissolution of the CPSU, the party’s assets were now firmly under the control of the KGB. The KGB, on the other hand, was no longer under the control of the now defunct CPSU.
Iron Triangles: The KGB, CPSU Party Officials, and Eurasian Organized Crime
Just because the Party no longer existed, didn’t mean that its components disappeared entirely. Many former communist officials and government bureaucrats became inextricably linked to Eurasian organized crime.
As Richard Palmer explains, “Organized Crime in Russia is an ‘oligarchy’ formed by the former officials of the Soviet state and the Russian Mafiya. What makes this group unique is not only the extent of their power, influence and wealth in Russia, its republics and increasingly internationally, but also that these are two distinctly different groups, operating sometimes independently, sometimes in common.”
“The best estimate is that the criminal Russian Mafiya makes up 10 to 15 percent of Russian Organized Crime, while the remaining 85 to 90 percent are current or former officials of the Soviet party-state.”
“Wide scale infiltration of the Western financial system by Russian organized crime started right on the eve of the collapse of the Soviet Union,” Yuri Shvets, a major in the KGB from 1980–90 who defected in 1994, testified before congress.
“The main players were high ranking officials of the Soviet Communist Party, top KGB leadership and top bosses of the criminal world. They joined forces by the end of the 1980s on the initiative of the Communist Party, and this unique formation is called today by the Russian people the Russian mafia. The primary objective of this brotherhood was to accumulate maximum personal wealth and build safe havens abroad before Russia plummeted into financial chaos. There was little doubt among them that the collapse was more likely than not in the near future.”
Following the failure of the coup, Leonid Veselovsky fled Russia for Canada where he linked up with a Russian emigre named Boris Birshtein.
Born in Soviet-occupied Lithuania, Birshtein had emigrated from the USSR to Israel before settling in Canada in 1982.
By the mid-80s, Birshtein and his company Seabeco were involved in a Soviet program to establish international business ventures headed by Georgi Arbatov, a KGB asset codenamed Vasili.
Seabeco was later involved in the exfiltration of billions of dollars of Communist Party funds out of Russia after the party was outlawed following a KGB-led coup attempt that Boris Yeltsin accused Birshtein of financing.
Following the collapse of the USSR, Birshtein wielded influence in numerous post-Soviet states including Ukraine, Moldova and Kyrgyzstan.
In 1995 Birshtein hosted a high level mafia meeting in Tel Aviv to discuss the divvying up of power and influence in Ukraine. One attendee of that meeting, head of the Solntsevskaya criminal syndicate Sergei Mikhailov, confirmed to The Financial Times that he had a business relationship with Birshtein, who he described as wielding immense influence in Ukraine.
Veselovsky claimed to have first met Birshtein in early 1991 while negotiating for the latter to rent a luxurious Villa in Moscow that was controlled by the Central Committee’s administrative department. Afterwards, Birshtein offered Veselovsky work as a “consultant.”
Documents suggest that shortly thereafter Veselovsky started to direct business towards Birshtein’s Zurich-based company Seabeco AG. Birshtein eventually offered Veselovsky a one-year contract with Seabeco, relocated him to a lakeside villa in Zurich and provided him with a company owned Mercedes.
Shortly after his association with Veselovsky, Seabeco’s fortunes dramatically improved with the signing of half-a-dozen profitable contracts with Russian companies. Seabeco went from struggling with its creditors in 1989 to an annual turnaround of over $500 million by 1993.
“I have been particularly concerned for sometime, Mr. Chairman,” James Woolsey, former Director of the CIA, explained to the House Committee on Banking and Financial Services, “at the inter-penetration of Russian organized crime, Russian intelligence and law enforcement, and Russian business.”
“I sometimes illustrate this point with the following hypothetical,” Woolsey continued. “If you should chance to strike up a conversation with an articulate English-speaker Russian in, say, the restaurant of one of the luxury hotels along Lake Geneva, and he is wearing a $3,000 suit and Gucci loafers and he tells you he is an executive of a Russian trading company and he wants to talk to you about a joint venture, he may be what he says he is. He may be a Russian intelligence officer under commercial cover. He may be part of a Russian organized crime group. But the really interesting possibility is that he may be all three, and that none of those three institutions have any problem with that arrangement.”
While that description would seem a perfect fit for Boris Birshstein, the man Woolsey went on to mention Grigori Luchansky, telling the committee that “during the time that we [the CIA] were working on this issue of organized crime in Russia, Mr Luchansky and his company Nordex, were a focus of our attention.”
The felon Luchansky, a Georgian-born Russian, was released from Latvian prison with the help of the KGB. His multinational trading firm Nordex was set up with former Commnunist funds and quickly became a multibillion dollar operation.
By 1993, Nordex was given a monopoly over oil imports in Ukraine. Luchansky had relationships with high level Russian politicians including deputy prime minister Vladimir Shcherbakov and Prime Minister Viktor Chernomyrdin, as well as the heads of state of Ukraine, Latvia and Kazakhstan, the sons of the British media tycoon Robert Maxwell and important political figures in Israel.
Both Birshtein’s Seabeco and Luchansky’s Nordex funded the criminal presidency of Leonid Kuchma in Ukraine, and both were present along with Semyon Mogilevich at the Tel Aviv retreat that included Sergei Mikhailov, the head of the Solntsevskaya Bratva criminal syndicate.
A Swiss police report published by the Transborder Corruption Archive lists Nordex and Seabeco as two of the central firms established by the KGB and linked to organized crime to launder CPSU funds out of Russia.
The report further states that Luchansky was a KGB asset and that Birshtein is an ex-KGB officer who maintains contacts with the Russian and Israeli security services.
US Intelligence, KGB Money Laundering, and the Strange Tale of Alexander Konanykhine
As both Woosley and Palmer indicate, the CIA was aware of many of these activities as they were taking place.
In the mid-spring of 1992, the CIA’s Chief Russian Analyst Fritz W. Ermarth was approached by a retired colleague working for an international detective firm which had been hired by the Yeltsin government to search for the vanished party funds. Ermarth was asked whether the CIA might be in a position to help the new Russian government repatriate their funds.
“Could U.S. intelligence help find the money?” Ermarth later wrote of the episode. “Specialists in collection disciplines informed me that we could indeed help, although at some risk to our sources, should, for example, court cases expose them. It would be rather similar to tracking money in pursuit of drug traffickers.”
Ed Hewitt, the man in charge of running Soviet affairs on the National Security Council, brought together representatives from the State, Defense, Treasury Departments and the intelligence community to discuss the matter. Ultimately, it was decided that the US Government would not help, the rationale being that the US could no more help Russia with its capital flight than it could help Brazil or Argentina. The US Government wasn’t the only party uninterested in tracing the funds.
“About a year later, my retired colleague updated me on subsequent developments,” Ermarth wrote. “On its own, his company had located substantial funds expatriated by the KGB. It informed its client and suggested approaches for recovering the funds.”
“By that time, however,” Ermath continued, “the Russian government no longer seemed interested. Obviously, top officials and organizations had found ways to access the funds that did not require, indeed would be disrupted by, official efforts to repatriate them.”
The “international detective firm” Ermath referred to was Kroll Associates. Founded by Jules Kroll, the firm was an early pioneer of the private intelligence industry and was the home of numerous former CIA Officers.
Kroll was stymied by the very officials who hired them and ultimately was unable to identify the whereabout of the looted billions.
Just because the US Government wasn’t interested in helping the Russian government crack the KGB’s money laundering schemes, didn’t mean the CIA didn’t attempt to infiltrate these operations.
In testimony before congress, a consultant named Karon von Gerhke-Thompson claimed under oath that she and her company First Columbia Company, Inc. had been recruited by the CIA to infiltrate a suspected KGB money laundering network being operated by a wealthy, young Russian named Alexander Konanykhine.
Still in his twenties, agents at the CIA referred to Konanykhine as “The Kid,” and US intelligence officials believed he was a member of former Communist youth (Komsomol) activists they called the “Miracle Boys.”
These were a group of young men formerly affiliated with Komsomol who were believed to have been selected by the KGB to help move billions of dollars out of Russia.
Konanykhine has vigorously denied that he ever worked for the KGB. In his telling, laid out in a self-published memoir, after being kicked out of his university he started his own construction company, he established a commodity exchange that made him one of the richest men in Russia by the age of 25.
Konanykhine used his fortune to bankroll Boris Yeltsin’s early political career.
Konanykhine maintains that he hired former KGB officers for security purposes and they eventually betrayed him and attempted to strong arm him out of his own company.
After a kidnapping attempt in Hungary in which elements of the KGB threatened to kill him if he didn’t sign over ownership of the exchange, Konanykhine and his wife fled to the United States where they filed for political refugee status.
In direct contradiction of all of this, former-KGB Major Yuri Shvets testified before Congress that Konanykhin was selected by the KGB at the age of 24 because his energetic and publicity hungry personality fit the profile of a good KGB frontman.
According to Shvets, Konanykhine and a KGB active duty officer Major Chukhlantsev jointly established a private company called Rosinformbank in September, 1990.
Using this front organization to establish several other shells that would be used to cover their tracks, Konanykhine and his KGB handlers established the All-Russia Exchange Center (AREC). Chukhlantsev was appointed as the technical director of the exchange while other members of the KGB were appointed to the board.
AREC was used to establish multiple other KGB shadow organizations, culminating in the All-Russia Exchange Bank that again listed Konanykhine as its president.
The Russian Central Bank awarded the All-Russia Exchange Bank the first license to engage in hard currency transactions with foreign institutions. This brief monopoly occured at a time of extreme devaluation of the ruble and led to Konanykhine making a fortune in currency speculation.
According to Shvets, this privileged position could only have been created with the complicity of high level officials at the Kremlin. Russian prosecutors alleged that the bank illegally funnelled at least $300,000,000 out of Russia and possibly up to $1 billion.
While Shvets doubted that Konanykhine had masterminded the scam, he strongly suspected he was an accomplice. Shvets also cast doubt on the validity of Konanykhine’s claim that a kidnapping attempt had been made against him, suggesting it was a means to dupe American authorities into letting him stay in the United States.
While in the United States, the strange and mysterious tale of Alexandre Konanykhine continued.
In testimony before Congress, Karon von Gerhke-Thompson explained her interactions with Konanykhine as an unpaid volunteer intelligence asset for the CIA.
According to Thompson, Konanykhine accompanied Boris Yeltsin on his first trip to meet President George Bush in June of 1992. Konanykhin represented himself as a Kremlin insider and reformer and he further claimed to have provided 50% of the financing for Yeltsin’s presidential campaign.
Two months later, Konanykhine returned and described himself as the US Vice President of Menatep Bank, which was owned by the wealthy oligarch Mikhail Khodorkovsky.
Thompson claims she was connected to Konanykhine through colleagues with national security backgrounds whom she had previously worked with “on a classified law enforcement operation.”
Thomspon met with Konanykhine in her capacity as a consultant. During the meeting, Konanykhine explained to her “that Menatep Bank controlled $1.7 billion in assets and investment portfolios of Russia’s most prominent political and social elite; that one hundred of his clients had individual assets and investment portfolios in excess of $100 million.”
Konanykhine wanted to set up a bank in a Latin American or Caribbean country “that offered unrestricted repatriation of capital and stringent bank secrecy laws.”
Furthermore, Konanykhine wanted the country in which the bank was established to be willing to issue passports to his clients which would allow them to travel more freely around the world.
Thompson agreed to assist Konanykhine, but was privately suspicious that he was talking about repatriating $1.7 billion out of Russia at the same the US Senate was about to appropriate $4 billion in foreign aid to the country.
She called the CIA, who informed her that the agency was “extremely interested in obtaining intelligence” on Konanykine’s and by extension Khodorkovsky’s activities.
She was further told that “the CIA believed they were engaged in an elaborate money-laundering scheme to launder billions of dollars stolen by the KGB and high-level government officials.”
Between April and September of 1993, Thompson offered the use of her and her company on a voluntary basis for what was described as “among the Agency’s highest ranking operations.”
Thompson and her CIA handlers came to believe that Konanykhine was answering to a female associate named Elena Cidorchuk-Heinz-Volevok, who herself took orders from a senior KGB official in Moscow.
After Konanykhine and Cidorchuk increased the pressure on her to find a locality that would provide their clients with passports, Thompson began to negotiate with the Embassy of Uruguay.
In September of 1993, Konanykhine and Cidorchuk abruptly cut off all contact with Thompson. She was later informed that the operation had been blown by Aldrich Ames, the notorious CIA counterintelligence officer and KGB double agent.
Thompson noted in later testimony that the failed intelligence operation was never reported to the appropriate congressional oversight committees as was mandated by law. She further claimed that every operation that Ames had compromised had been reported in this manner with the exception of the one involving Konanykhine.
“It [signaled] to me that it was a ‘policy’ verses ‘intelligence’ failure,” Thompson explained. “Konanykhine’s money laundering trail led directly to Boris Yeltsin. It was politically unpalatable for the Clinton administration, the Yeltsin administration and the CIA…”
In September 1995, Konanykhine and Khodorkovsky opened the European Union Bank (EUB) in the small Caribbean island secrecy jurisdiction of Antigua. Antigua at the time was a hotspot for Russian organized crime.
US officials believed that Russian mobsters and former KGB agents were meeting with representatives of the Columbian cartels and Italian mafia to establish inroads into the South American narcotics market.
The Russians were also interested in establishing a financial center to launder illicit proceeds. Rumors flew about the island regarding a Russian submarine that was docked in St. John’s harbor for over a year.
EUB was owned by a Bahamian shell company called Swiss Investment Association and claimed to be the world’s first online bank.
“Since there are no government withholding or reporting requirements on accounts, the burdensome and expensive accounting requirements are reduced for you and the bank,” EUB’s website read. “EUB maintains the strictest standards of banking privacy and in offshore business and financial transactions. Indeed, Antigua has stiff penalties for officers or staff that violate banking secrecy laws.”
EUB aroused the suspicions of investigators when it was first chartered in July 1994 as a subsidiary of Menatep Bank with Konanykhine as its sole shareholder.
Menatep claimed to have withdrawn its backing of the bank within weeks of it being chartered, but according to a restricted memo the Board of Governors of the US Federal Reserve System had been informed by the Bank of England that in January 1995 Konanykhine visited Antigua “where he called on government officials to request their cooperation in keeping Menatep’s ownership of European Union Bank confidential.”
While EUB may have been chartered in Antigua, its computer server was run out of Konanykhine’s Washington, DC apartment. Within nine months, the bank claimed to have 144 accounts in 43 countries.
The bank was initially chaired by Lord Mancroft, an Old Etonian and former heroin addict with a peerage in the British House of Lords.
In addition to establishing an online bank, Konanykhine also set up an online gambling outfit out of Antigua also using his DC-based server. The total amount of funds that went through EUB will never be known as in mid-1997 in the face of mounting investigations its server’s plug was pulled.
Konanykhine’s bizarre and mysterious story continued on through a variety of lawsuits related to his visa which he eventually won after it was determined that the FBI was pressuring INS to deport him back to Russia because they were hoping to influence Russian officials into allowing them to open up an office in Moscow.
It was also later learned that Bank Menatep’s decision to open a subsidiary in Antigua had been done on the advice of the American consulting firm Ernst & Young.
FIMACO: Corruption, Offshore Accounts, and the Russian Central Bank
While the KGB may have inaugurated the era of mass capital flight and money laundering, authorities at the highest levels of the new Russian Federation wasted no time in continuing and expanding upon the practice.
In mid-1993, the Russian Central Bank (RCB) under the leadership of the Soviet-era central banker Viktor Gerashchenko began to use an offshore vehicle named FIMACO, registered in the Royal Court of Jersey in the Channel Islands, to hide and launder immense sums of cash primarily provided by the International Monetary Fund (IMF).
FIMACO was incorporated on November 17th, 1990 at the behest of the Banque Commerciale de l’Europe du Nord (Eurobank) based in Paris. Eurobank was a subsidiary of the Russian Central Bank, an arrangement that dated back to Soviet times. The establishment of offshore vehicles was in keeping with the practice of many French banks at the time as French law restricted certain activities of banks headquartered in France.
In November/December of 1992, the IMF loaned roughly $1 billion to the RCB. The IMF funds were sent from the RCB to its subsidiary Eurobank in Paris. As the Russian economic situation was highly volatile and chaotic at that time, Eurobank transferred the IMF funds that had been intended to stabilize the Russian economy into their offshore FIMACO account.
In doing so the RCB succeeded in weakening the ruble rather than strengthening it, which was the purpose of the loan in the first place, and hid the actual size of its reserves from potential creditors and lenders like the IMF.
Despite the fact that the IMF loans were supposed to be held in safe investments, the RCB turned around and through FIMACO invested in highly speculative short-term Russian government bonds known as GKO’s. Thus, the RCB made it appear as though there was a higher demand for the risky debt instruments than actually existed.
Gerashchenko was replaced as the head of the RCB by Sergei Dubinin in 1994, but the use of FIMACO to stash away funds as the economic situation in Russia deteriorated only accelerated under the RCB’s new leadership.
In 1996, the RCB sent another $1.2 billion in IMF loans into FIMACO. This time the RCB double-counted the loan to give the impression that it enjoyed greater liquidity than it did, representing to the IMF that the cash was in the RCB’s coffers when in fact it was hidden away offshore.
The RCB then continued the deceptive practice of using FIMACO to purchase its own holdings of GKO’s, thus fundamentally distorting both its own balance sheets and the value of the short-term bonds. By 1996, foreign investment into the artificially juiced GKO market was booming.
Bill Clinton was a loud proponent of the IMF providing the 1996 loan to Russia, despite mounting evidence of corruption.
The IMF subsequently admitted that it was aware at the time that much of the money it was providing to Russia ostensibly to stabilize its economy and currency was being skimmed away by Russian officials for other purposes.
There have been credible accusations that the RCB used FIMACO to benefit Boris Yeltsin’s 1996 presidential campaign. FIMACO plowed $1.17 billion into the speculative GKO debt market one week prior to election day, which it later sold back to itself after the election ended.
It has been alleged the $38 million profit from the sale was used to fund the final stage of Yeltsin’s campaign.
When FIMACO’s existence finally became public in early 1999, then Russian Procurator General Yuri Skuratov accused the RCB of having sent some $50 billion dollars into the offshore account. However, that didn’t occur until after a financial crisis wiped out the Russian economy in 1998 and the Russian government defaulted on a $40 billion dollar, over inflated GKO market.
Corruption and Money Laundering By US Economic Advisors in Russia
It wasn’t just Russians who engaged in financial crime and corruption in the 1990s, Americans got in on the action too. And not just any Americans, but some of the very people who had been sent over from the country’s most prestigious university to teach the recovering Marxists the ways of capitalism and the free market.
In 1992, USAID awarded the Harvard Institute for International Development (HIID) a multimillion dollar contract to assist Russia in its transition to a market economy. Harvard economics Professor Andrei Schleifer headed what became known as the Russia Project at HIID and worked closely with Anatoly Chubais during the chaotic period of privatization in Russia.
Day-to-day operations of HIID’s Russia Project were handled by a Rhodes Scholar and recent graduate of Harvard Law named Jonathan Hay.
Schleifer and Hay worked extremely closely with Russians at the highest level as the largest privatization project in human history unfolded. In this position, they were privy to an enormous amount of highly sensitive and potentially lucrative insider information.
The contract between Harvard and USAID prohibited anyone working on the project, including anyone acting on their behalf, the invest personal funds into Russia. However, the temptation appeared to be too much for some of Harvard’s finest to resist.
In July of 1994, Dr. Schleifer and his wife Nancy Zimmerman, a hedge-fund manager based out of Cambridge, began investing in Russia in direct violation of his contract. They invested $200,000 dollars in Renova-Invest, an investment vehicle operated by a New York-based Russian emigrant named Leonard Blavatnik.
The group invested in companies that were being privatized by the very people Shleifer consulted, including Gazprom, telephone operator Rostelecom and in vast aluminum smelters in Irkutsk, Bratsk and Sayansk (the latter having just recently hired a 26-year old new director named Oleg Deripaska). Len Blavatknik, now a multi-billionaire, donated $200 million to Harvard Medical School as recently as 2018.
Later that year, Schleifer and his wife also partnered with an investment group called Farallon Capital Management headed by Tom Steyer, who would run in the 2020 Democratic presidential primary decades later, to invest in Russian oil stocks.
Schleifer wired $165,000 to a bank account in the Channel Islands, the same secrecy jurisdiction where FIMACO was registered, and purchased 30,000 shares of the oil company Purneftegas. Schleifer and Zimmerman concealed their investment by registering their shares under the name of her father Howard Zimmerman.
Upon Schleifer’s advice, his HIID colleague Jonathan Hay invested $66,000 into the fund. A year later, Hay wrote in a memo to the Russian government that the oil companies they had invested in should be included in the loans-for-shares program.
In early 1996, Zimmerman set up a Russian company called Novyi Mir with a $5 million “loan” from Central Illinois Bank (CIB). Her father, Howard Zimmerman, was a director and shareholder of the bank. The $5 million was invested in the GKO market.
Not wanting to be left out of the GKO action, Jonathan Hay invested $150,000 into the fund under his father’s name. Profits from their investments in these Russian government’s debt instruments would then be sent back to CIB as “loan repayments,” allowing them to avoid paying Russian taxes. The cash was then promptly transferred from CIB to Nancy Zimmerman’s company in Cambridge.
In August 1995, the Russian Securities and Exchange Commission awarded a licence to Pallada Asset Management to become the first mutual fund to open its doors to the public in Russian history. The fund was operated by an enterprising young 33-year old named Elizabeth Herbert… who also happened to be Jonathan Hay’s girlfriend.
Herbert was not only dating Hay, but operated the fund out of HIID’s office in Moscow. Schleifer wired $200,000 to Pallada, which both parties labelled as a “loan.”
When these sordid side investments eventually came to light, Schleifer and Hay were fired from HIID. Schleifer, however, was allowed to remain a tenured economics professor at Harvard.
After the scandal broke, Len Blavatkin created a backdated document shifting ownership of Schleifer’s shares to his wife Zimmerman. By that time Gazprom had gone up five times in value.
On September 26th, 2000, Harvard University, Schleifer, Zimmerman, Hay and Hebert were charged by the US government with fraud, breach of contract and making false claims to the federal government. While the case ultimately settled, a judge found that Schleifer had engaged in self-dealing and that Hay was guilty in laundering over $400,000 through his father and girlfriend.
The next article in the series will cover the rise of the post-Soviet oligarchic system and the role of Eurasian organized crime in facilitating it.