Australian Journal of Politics and History: Volume 49, Number 3, 2003, pp. 446-453.

© 2003 Department of History, School of Political Science and International Studies, The University of Queensland and Blackwell Publishing Asia Pty Ltd.

Crime That Pays: The Global Spread of the Russian Mafia

JOHANNA GRANVILLE Hoover Institution Fellow, Stanford University

Red Mafia: How the Russian Mob Has Invaded America. By Robert I. Friedman (Boston: Little, Brown, and Co.), 2000; 296 pp.; ISBN 0-316-29474-8 (cloth); US$25.95.

Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia. By Paul Klebnikov (New York: Harcourt), 2000; 400 pp.; ISBN 0-15-100621-0 (cloth); US$28.00.

Russian Mafia in America: Immigration, Culture, and Crime. By James O. Finckenauer and Elin J. Waring (Boston: Northeastern University Press), 1998; 320 pp.; ISBN 1-55553-508-9 (pbk); US$18.95.

Sale of the Century: Russia’s Wild Ride from Communism to Capitalism. By Chrystia Freeland (New York: Crown Publishers), 2000; 389 pp.; ISBN 0-8129-3215-3 (cloth); US$27.50.

The Merger: The Conglomeration of International Organized Crime. By Jeffrey Robinson (Woodstock, N.Y.: Overlook Press), 2000; 383 pp; ISBN 1-58567-030-8 (cloth); US$27.95.

As the British prime minister Benjamin Disraeli once sourly remarked, “What we anticipate seldom occurs, and what we least expect generally happens.” Russia watchers in the West expected the Russian economy to prosper like the Chinese economy once Boris Yeltsin, the first freely elected Russian president, cast off the communist mantle in 1991. Instead, he fostered the growth of crony capitalism, deliberately enriching a handful of men in return for their political support. Since Yeltsin’s resignation in 1999, journalists and scholars have begun to analyze his regime more frankly. This article will assess five books in particular.

To the extent that Russia now has free speech and democratic accountability, these principles were established by Gorbachev; Yeltsin failed to expand the aims of glasnost’ and perestroika. The “democrats” led by Yegor Gaidar and Anatoly Chubais freed prices in 1992 and unleashed hyperinflation before they privatised Russia’s assets. Most Russian citizens lost their savings in just a few weeks. While the few billionaire “oligarchs” liken themselves to the American “robber barons” of the nineteenth century, no real comparison can be drawn. These well-connected young men made fortunes not by creating new enterprises that increased their country’s wealth, as did Carnegie (steel), Rockefeller (oil), Ford (automobiles), and Morgan (finance). Instead, they played the role of old state trading monopolies, arbitraging the huge difference between old domestic prices for Russian commodities and the prices prevailing on the world market. Instead of investing in the Russian economy, they stashed billions of dollars in Swiss bank accounts. Experts estimate that as much as $15

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billion leaves Russia each year as either “capital flight” or laundered money from illegal transactions.1

According to Swiss Attorney-General, Carla del Ponte, by 1999 Russian organized crime gangs had “infiltrated some 300 Swiss companies” and are “using Switzerland as a piggy bank”.2 Failing to create a broad class of shareholders, Chubais’ voucher privatisation in 1993-1994 merely ceded Russia’s industrial assets to corrupt enterprise managers or to the new Moscow banks. Chubais and his allies subsidized these new banks by granting them Central Bank loans at negative real interest rates, giving them the accounts of government institutions, and manipulating the government securities market in their favour. In the rigged loans-for-shares auctions of 1995-1997, Chubais sold off the remaining gems of Russian industry to a few insiders. By 1999 the Russian economy was half the size it was a decade before; the top 10 per cent of the population owned half of the nation’s wealth.3

Without much exaggeration, one may call the legacy of Boris Yeltsin one of almost unmitigated failure — the biggest disaster (economically, socially, and demographically) since the Nazi invasion of 1941. For ordinary Russians, a “democrat” is construed to be a crook, and “democracy” a curse word. On the streets of Moscow they call the latter “shitocracy” (dermokratizatsiya) and privatisation “grab-it-ization” (prikhvatizatsiya).4

The Russian State has metamorphosed into a full-fledged “kleptocracy” — dedicated to enriching those in power and their associates, usually organized criminal groups. As US Congressman, Benjamin Gilman, observed as early as April 1996: “It is truly impossible in many instances to differentiate between Russian organized crime and the Russian State.”5 (The Russian Ministry of Internal Affairs calculated that at least 25 per cent of Russia’s gross national income each year stems from organized criminal activities.6 However, a clear history of criminal activity during the Yeltsin era is difficult to establish. Almost none of the most famous murders (Kholodov, Listyev, et al.) have been solved. Even past convictions have been difficult to identify, since well-connected ex-convicts can often remove their files, thus erasing any trace of past crimes.7 Moreover, given the corrupt system of law enforcement, when one is in debt, it is often cheaper to pay a hit man to kill the creditor and bribe police officers to look the other way than it is to pay off one’s debts to the creditor.

Although organized crime had prevailed in the communist nomenklatura when the USSR still existed, US authorities are focusing more heavily on it now, since Russian white-collar crime has branched out all over the world. The scope of power and control of organized criminals in Russia far exceeds the criminal control exercised by drug cartels in countries such as Colombia. Arms trafficking, alien smuggling, money laundering, trafficking in vital materials such as oil and timber, and (potentially) nuclear trafficking are among the Russian criminal enterprises on the international scene.

1 P. Lilley, Dirty Dealing: the Untold Truth about Global Money Laundering (London, 2000), p. 39. 2 Ibid. 3 P. Klebnikov, Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia (New York, 2000), p. 5. 4 Ibid., p. 320. 5 Ibid., p. 319. 6 P. Lilley, Dirty Dealing, p. 27. 7 Klebnikov, Godfather of the Kremlin, p. 3.

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Those of us who lived for extended periods of time in Russia during the Yeltsin era (1991-1999) and remember the acute suffering of our Russian friends will find recently published books about the Russian kleptocracy and organized crime sad and shocking. Chrystia Freeland’s Sale of the Century: Russia’s Wild Ride from Communism to Capitalism analyzes the economic breakdown and rise of the “oligarchs.” In Godfather of the Kremlin, Paul Klebnikov examines the business and political career of arguably the most powerful oligarch, Boris Berezovsky. Two other books discuss Russian organized crime as it has taken root outside Russian borders: Red Mafia: How the Russian Mob Has Invaded America by Robert Friedman and Russian Mafia in America by James O. Finckenauer and Elin J. Waring. Finally, in The Merger, Jeffrey Robinson alerts us to the limitless possibilities for international criminal syndicates in the global markets of transparent borders and urges greater cooperation among law enforcement agencies worldwide.

Chrystia Freeland, Moscow bureau chief for the Financial Times, chronicles Russia’s roller-coaster ride from communism to crony capitalism. A protégée of Timothy Colton at Harvard University’s Russian Research Centre, Rhodes Scholar, and recipient of a Master’s degree in Slavonic studies from Oxford, she writes poetically, with creative metaphors, colourful word pictures, and a keen insight into Russian history. The copious adverbs, adjectives, and details — sometimes superfluous — may, however, irritate those reading her book for the “bottom line”. The book also omits analysis of organized crime in general. On the other hand, a key strength of Sale of the Century is Freeland’s ability to bring to life the key players in Russian politics: Yeltsin, Gaidar, Chubais, and the handful of wealthy oligarchs. As a journalist, she was able to meet most of them often. The book enables the reader to develop a more refined and differentiated understanding of the oligarchs. Among these are Mikhail Friedman (“the outsider”) who heads the Alfa Group, an oil, industrial, trading, and financial conglomerate; Mikhail Khordokovsky (“the apparatchik”) who leads Menatep, the bank and financial-industrial conglomerate; Vladimir Potanin (“the blueblood”) who founded Oneximbank, which handles the “juiciest” government accounts, like the State Customs Agency and the state arms-trading company “Rosvooruzheniye”; Vladimir Gusinsky (“the impresario”) who established inter alia the consortium of banks known as the Most group, the newspaper Segodnya, and the first independent television channel (NTV); and finally, Boris Berezovsky (“the nomad”) who took over a number of enterprises and directly influenced the presidential elections of 1996 and 2000.

In Paul Klebnikov’s Godfather of the Kremlin the reader gets extensive background on Berezovsky, secret KGB plots, the more nefarious “mob wars”, and key events in the 1990s, like the murders of journalists Dmitri Kholodov (October 1994) and popular talk show host Vlad Listyev (March 1, 1995), and acts of terrorism in Budyonnovsk (June 1995) and Moscow (September 1999). Like Freeland, Paul Klebnikov has extensive background in Russian history. He earned a PhD in Russian History from the London School of Economics before joining Forbes Magazine as senior editor. Klebnikov’s subtitle is perhaps more apt than Freeland’s (“the looting of Russia” as opposed to “the sale of the century”). On several occasions he interviewed Oleg Kalugin, head of the KGB’s foreign counterintelligence division, who revealed the KGB’s double game in the landmark elections of 1990. We now know that the KGB actually helped to create the first non-Communist Party, promoting ultra-nationalist groups such as Vladimir Zhirinovsky’s Liberal Democratic Party and “Pamyat” (Memory). According to Klebnikov, the KGB also created in 1990 a network of banks

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and trading companies both in Russia and overseas to collect billions of dollars of government funds during the “period of emergency” and hold them for the Communist nomenklatura as “a stable source of revenue, irrespective of what may happen to the Party.”8 Several days after the failed putsch in August 1991, Nikolai Kruchina, the man who controlled Communist Party funds and knew the most about the secret capital flight, “jumped” out of his office window.9

Klebnikov portrays Berezovsky (dubbed the “apotheosis of sleaziness” by the popular General, Alexander Lebed) as a particularly ruthless and cunning tycoon who perhaps profited more than anyone else from Russia’s slide into the abyss. He stood closer than the other oligarchs to all three realms: crime, commerce, and government. His success both in making money and in claiming to be a valuable statesman in the government’s service was due in part to his relationships with some of Russia’s strongest gangsters, particularly the Chechen mafia.10 In contrast to entrepreneurs like Vladimir Gusinsky, Berezovsky did not enrich any of the enterprises with which he became involved or took over (e.g. the car dealership Avtovaz, Sibneft, public television station ORT, Omsk Oil Refinery, National Sports Fund, and aluminium smelters Bratsk, Krasnoyarsk, and Novokuznetsk), but instead drained them of cash.

Klebnikov also provides insight into the cause of the first Russian war with Chechnya (1994-1996). Apart from Yeltsin’s desire to appear strong for electoral reasons, preserve the Russian Federation, divert attention from military scandals, and maintain access to oil in the region, there is some reason to believe that Russian leaders wanted to punish Chechen mafia groups who had stopped sharing their profits from protection fees (krishi or “roofs”) with them. During his extensive interviews with Chechen and Russian mafia leaders, Klebnikov learned that many restaurants and casinos in Moscow were owned by Chechens. Berezovsky’s own interactions with the Chechens began when he hired them, rather than the Moscow-based Solntsevo mafia, to protect his car dealership Logovaz.11

Klebnikov acquired tapes of intercepted telephone conversations between Berezovsky and Movladi Udugov (a Chechen deputy minister in the Maskhadov administration) that suggest that the Chechens’ series of kidnappings of Russian and foreign visitors to the tiny Caucasian republic were contrived. Ostensibly as a crass publicity stunt, Berezovsky apparently arranged the kidnappings and later paid ransom to the Chechens to free the captives. While other Russians travelling to Chechnya did so only under heavy security, Berezovsky frequently flew back and forth without even one bodyguard.

Klebnikov describes other shady incidents in which Berezovsky was apparently involved, including the attempt to murder Gusinsky (the “Faces-in-the-Snow” incident in December 1994), the murder of Listyev (who sought to break Berezovsky’s advertising monopoly with the television station ORT), the abrupt firing of Alexander Lebed as secretary of the Security Council in October 1996 for his attempts to curb corruption, the abrupt dismissal of Yevgeniy Primakov in May 1999 as prime minister, the bombings of Moscow apartment buildings in September 1999, and the promotion of KGB functionary Vladimir Putin to replace Yeltsin in March 2000 as Russian President.

8 Ibid., p. 59. 9 Ibid., p. 76. 10 Ibid., p. 319. 11 Ibid., p. 12

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As a scholar, Klebnikov carefully assesses his sources, citing only information that he has been able to corroborate. Because politics and business in Russia are often conducted orally, with a handshake, Klebnikov taped all his interviews. He states: “In telling this story, I have tried to be conservative in asserting what I believe to be true. Throughout, my sources are noted to allow the reader to judge for himself their solidity or lack thereof. I have left a trail of my research, so that the reader may be in a position to decide for himself what to believe and what not to believe.”12

Like Godfather of the Kremlin, Russian Mafia in America is also careful investigation. The authors are James O. Finckenauer and Elin J. Waring. Finckenauer, a professor of criminal justice at Rutgers University, received a grant from the National Institute of Justice to study typical crimes committed in the United States by Soviet and Russian émigrés. He travelled to Moscow in 1990 to discuss organized crime with Russian scholars at the Academy of Sciences. Waring is an associate professor of sociology at the Herbert Lehman College, City University of New York.

Finckenauer’s and Waring’s key argument about Russian organized crime in America is perhaps not as provocative as it initially sounds. They write that the “Russian Mafia,” is “first, not Russian; second, not a mafia; and third, not even organized crime”.13 When they state that the Russian mafia is not “Russian,” they simply mean that many émigré criminals hail from many of the other former Soviet republics, such as Ukraine, Moldova, Azerbaijan, Armenia, and Georgia. Nevertheless, they are still Russian speakers, many of whom grew up in the Soviet system.

By stating that the Russian mafia is not a mafia, the authors beg the question: what is a mafia? The generic definition is “a secret organization composed chiefly of criminal elements and usually held to control racketeering, peddling of narcotics, gambling, and other illicit activities throughout the world”. That definition does seem to fit Russian organized crime.

The claim that the Russian mafia is not “organized” will also strike the reader as rather specious. The authors simply mean that Russian émigré criminals are not organized in a strictly hierarchical fashion according to families. Rather, they are organized arbitrarily or by geographical region. They operate in a “mix of opportunistic groupings of individuals, with a small number of networks.” 14For the authors a “network” refers to “connections between individuals, organizations, or other entities” that “engage in joint, reciprocal, preferential, and mutually supportive actions”. They can be “complex or relatively simple”.15 In Chapter Eight entitled “The Structure of Soviet Émigré Crime” the authors provide intricate schema to show the criminals work together (188-189). Moreover, in their study of crimes according to level of organization, the authors found that 43 percent involved offences carried out by “two or more affiliated persons,” and 31 percent (or 21 crimes) were executed by criminal organizations. The authors appear to split hairs in stating that “although the criminals involved might not have been engaged in organized crime, they had created an organizational entity whose sole purpose was to carry out crimes. Such entity is, indeed, a criminal organization”.16 In short, it appears that Russian organized crime is organized, since the criminals do operate systematically, in a structured fashion. 12 Ibid., p. xi. 13 James O. Finckenauer and Elin J. Waring, Russian Mafia in America: Immigration, Culture, and Crime (Boston, 1998), p. xiv. 14 Ibid., pp. 198-99. 15 Ibid., p. 6. 16 Ibid., p. 263.

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The authors go on to stress the magnitude of Russian organized crime, which further tends to undercut their argument. The majority of the crimes perpetrated in the United States had “sizeable financial impacts”; 60 per cent of them “involved losses via fraud or theft of $100,000 or more, and 16 per cent involved losses of $2.5 million or more”.17 Like Klebnikov, they attest to the tight, symbiotic relationship among business, crime, and politics in Russia itself. “Organized crime is much more sophisticated and powerful in Russia than it is almost anywhere else in the world,” they write.18

Like Klebnikov, Finckenauer reminds the reader that organized crime is difficult and dangerous to study, unlike juvenile delinquency or other types of crime. The typical tools of the criminologist — observation, surveys, interviews, samples, and questionnaires — are nearly impossible to use. Therefore the authors joined the Tri-state Joint Soviet Émigré Organized Crime Project to identify the extent of Russian émigré crime within the tri-state region of New York, New Jersey, and Pennsylvania. In this way, Finckenauer and Waring had unique access to surveillance, informants, undercover investigation, intelligence reports, telephone records, and public information such as indictments and newspaper reports.

Finckenauer, Waring, and Klebnikov are to be applauded for their courage in exposing Russian organized crime. In the course of his investigations of Berezovsky’s shenanigans, Klebnikov received warnings that he was jeopardizing his personal safety, given the oligarch’s ties with mafia hit men.

Another investigative reporter, Robert Friedman, actually received death threats from at least two mafia bosses for his own exposés of their activities in the United States: Budapest-based Semion Mogilevich and Vyacheslav Ivankov from his prison cell. In his book, Red Mafia Friedman claims that the Russian mafia differs from the Italian Cosa Nostra. Whereas the Italians usually refrain from harming journalists, prosecutors, judges, and innocent family members, the Russians will — in the words of a retired New York City policeman — shoot anyone “just to see if their gun works”.19 Friedman is the author of Zealots for Zion: Inside Israel’s West Bank Settlement and has written numerous articles on Russian mobsters in Details, Vanity Fair, and New York. He impresses upon the reader the degree to which the Russian mafia is already deeply entrenched in the United States (especially Brighton Beach, Miami, San Francisco, Los Angeles, Las Vegas, and Denver) and overseas (in far-flung cities like Moscow, Hong Kong, Bangkok, Bogotá, and Toronto). It is apparently involved in a wide variety of activities such as car theft, prostitution, gasoline bootlegging, arms smuggling, cocaine and heroin trafficking, extortion (even of players in the National Hockey League), and an array of sophisticated white-collar computer crimes like counterfeiting, credit card schemes, and insurance frauds.

Friedman provides colourful portraits of key Russian mafia leaders, such as Marat Balagula, Vyacheslav Ivankov, Monya Elson, and Semion Mogilevich, many of whom he interviewed in prisons and gaudy strip bars in Brighton Beach and Miami.

Friedman helps the reader understand the sizeable obstacles that the FBI faces. Given the global scale of Russian organized crime, the FBI simply cannot combat it effectively without international cooperation. Each sovereign country has its own laws

17 Ibid. 18 Ibid., p. 121. 19 Robert I. Friedman, Red Mafia: How the Russian Mob Has Invaded America (Boston, 2000), p. xvii.

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that must be followed. Friedman uses Israel as an example. He cites a senior State Department official, Jonathan Winer: “There is not a major Russian organized crime figure who we are tracking who does not also carry an Israeli passport.”20 Since Israel will not extradite citizens, US law enforcement authorities cannot prosecute criminals, thereby weakening their ability to deter mafia members from committing future crimes. Other citizens from Eastern Europe and Eurasia with unsavoury backgrounds continue to emigrate to the United States, because US immigration officials cannot screen them, lacking legal access to their criminal records.

In short, Red Mafia complements Finckenauer’s and Waring’s more scholarly and dispassionate study. Friedman writes colourfully and wittily, plying the reader with rich anecdotal information.

In The Merger, Jeffrey Robinson goes further than the abovementioned four authors in emphasizing the increasing cooperation among disparate criminal organizations in several countries, including the Sicilian Mafiosi, the Chinese Triads, the Russian, Hungarian, and Czech “mafiyas,” and organized crime groups from Columbia, Mexico, Nigeria, Thailand, and Vietnam, to name a few. Robinson is the international best-selling author of eighteen books, including the authoritative work The Laundrymen. He has served as keynote speaker on money laundering for the United Nations, Interpol, US Customs, the FBI, and other organizations.

As he points out, while these groups’ core activities remain the same — car theft, drug trafficking, fraud in all its guises, alien smuggling, weapons trafficking, counterfeit production and distribution, murder, kidnapping, extortion, money laundering, and the smuggling and sale of nuclear materials — organized criminals flourish in the global markets of transparent borders and meaningless trade restrictions. Unlike their predecessors, they do not limit themselves to single forms of illegal activity, but deal in anything and everything that can make money for them. Unless jurisdictional barriers can be eliminated to allow law enforcement authorities in these countries to pool information, the situation will only worsen, Robinson warns.

Disraeli may dissuade us from high expectations, but Henry David Thoreau’s words also warrant attention: “It is remarkable that men do not sail the sea with more expectation. Nothing was ever accomplished in a prosaic mood.”21 If we want to curb international organized crime, we must expect that we can. All five books reviewed here take us a step closer to solutions by raising our awareness of Russian organized crime, challenging some widely held assumptions, and suggesting more stringent methods of law enforcement. All would be suitable for courses in Russian politics, sociology, and international relations. Undergraduate students tend to favor the sprightly writing styles of Freeland, Klebnikov, and Friedman. Freeland’s book would be especially useful, given its detailed chronology and list of key individuals. For further coverage, readers may also want to consult Russian and Post-Soviet Organized Crime (The International Library of Criminology, Criminal Justice and Penology) edited by Mark Galeotti; The Russian Mafia: Private Protection in a New Market Economy by Federico Varese; Bandits, Gangsters and the Mafia: Russia, the Baltic States and the CIS Since 1991 by Martin McCauley; The Oligarchs: Wealth & Power in the New Russia by David E. Hoffman; Casino Moscow: A Tale of Greed and Adventure on Capitalism's Wildest Frontier by Matthew Brzezinski; and for more

20 Ibid., p. 277. 21 The Writings of Henry David Thoreau (New York, 1906), Vol. 4, pp. 120-121.

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general background, Transnational Criminal Organizations, Cyber Crime, and Money Laundering: A Handbook for Law Enforcement Officers, Auditors, and Financial Investigators by James R. Richards.