[House Hearing, 106 Congress] [From the U.S. Government Publishing Office] U.S. POLICY TOWARD RUSSIA, PART II: CORRUPTION IN THE RUSSIAN GOVERNMENT ======================================================================= HEARING BEFORE THE COMMITTEE ON INTERNATIONAL RELATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS FIRST SESSION __________ THURSDAY, OCTOBER 7, 1999 __________ Serial No. 106-76 __________ Printed for the use of the Committee on International RelationsU.S. GOVERNMENT PRINTING OFFICE 62-963 CC WASHINGTON : 2000 COMMITTEE ON INTERNATIONAL RELATIONS BENJAMIN A. GILMAN, New York, Chairman WILLIAM F. GOODLING, Pennsylvania SAM GEJDENSON, Connecticut JAMES A. LEACH, Iowa TOM LANTOS, California HENRY J. HYDE, Illinois HOWARD L. BERMAN, California DOUG BEREUTER, Nebraska GARY L. ACKERMAN, New York CHRISTOPHER H. SMITH, New Jersey ENI F.H. FALEOMAVAEGA, American DAN BURTON, Indiana Samoa ELTON GALLEGLY, California MATTHEW G. MARTINEZ, California ILEANA ROS-LEHTINEN, Florida DONALD M. PAYNE, New Jersey CASS BALLENGER, North Carolina ROBERT MENENDEZ, New Jersey DANA ROHRABACHER, California SHERROD BROWN, Ohio DONALD A. MANZULLO, Illinois CYNTHIA A. McKINNEY, Georgia EDWARD R. ROYCE, California ALCEE L. HASTINGS, Florida PETER T. KING, New York PAT DANNER, Missouri STEVE CHABOT, Ohio EARL F. HILLIARD, Alabama MARSHALL ``MARK'' SANFORD, South BRAD SHERMAN, California Carolina ROBERT WEXLER, Florida MATT SALMON, Arizona STEVEN R. ROTHMAN, New Jersey AMO HOUGHTON, New York JIM DAVIS, Florida TOM CAMPBELL, California EARL POMEROY, North Dakota JOHN M. McHUGH, New York WILLIAM D. DELAHUNT, Massachusetts KEVIN BRADY, Texas GREGORY W. MEEKS, New York RICHARD BURR, North Carolina BARBARA LEE, California PAUL E. GILLMOR, Ohio JOSEPH CROWLEY, New York GEORGE RADANOVICH, California JOSEPH M. HOEFFEL, Pennsylvania JOHN COOKSEY, Louisiana THOMAS G. TANCREDO, Colorado Richard J. Garon, Chief of Staff Kathleen Bertelsen Moazed, Democratic Chief of Staff Mark Gage, Professional Staff Member Jill N. Quinn, Staff Associate C O N T E N T S ---------- WITNESSES Page Mr. Richard Palmer, President, Cachet International, Inc., U.S. Central Intelligence Agency, Retired........................... 4 Mr. Keith Henderson, Co-Director, Trans-National Crime and Corruption Center, American University, Former Senior Adviser on Rule of Law, Crime, and Corruption, U.S. Agency for International Development...................................... 7 Mr. David Satter, Visiting Scholar, Johns Hopkins School for Advanced International Studies, Senior Fellow, The Hudson Institute...................................................... 11 Mr. Matthew Murray, President, Sovereign Ventures, Inc........... 14 The Honorable Konstantin Borovoi, Deputy, Russian State Duma, Chairman, Economic Freedom Party............................... 17 APPENDIX Prepared statements: The Honorable Benjamin A. Gilman, a Representative in Congress from New York and Chairman, Committee on International Relations...................................................... 34 The Honorable Christopher H. Smith, a Representative in Congress from New Jersey (In lieu of appearance)........................ 94 Mr. Richard Palmer............................................... 36 Mr. Keith Henderson.............................................. 49 Mr. David Satter................................................. 72 Mr. Matthew Murray............................................... 75 Deputy Konstantin Borovoi........................................ 83 Additional material submitted for the record: Statement by Professor Lynn Nelson of Virginia Commonwealth University, submitted by Representative Gilman................. 87 Excerpt from Dr. Michael Waller's testimony of October 6, 1999, with referenced e-mail attached, submitted by Representative Campbell....................................................... 92 U.S. POLICY TOWARD RUSSIA, PART II: CORRUPTION IN THE RUSSIAN GOVERNMENT ---------- Thursday, October 7, 1999 House of Representatives, Committee on International Relations, Washington, D.C. The Committee met, pursuant to call, at 10:15 a.m., in Room 2172, Rayburn House Office Building, Hon. Benjamin A. Gilman (Chairman of the Committee) presiding. Chairman Gilman. The Committee will come to order. I have no doubt that the corruption within the Yeltsin government and within Russia is extensive. Our hearing this morning will seek to assess just how widespread that corruption is, and how high it goes. I suspect that it goes to the top of the Russian government. I will cite just a few cases and reports that would lead one to that conclusion: The Swiss investigation into the financial links between top Kremlin staff and President Yeltsin's family and a little- known Swiss company called Mabetex. The Swiss investigation into links between the Russian airline Aeroflot, whose vice president is President Yeltsin's son-in-law, and Swiss companies set up by Russian tycoon Boris Berezovsky, to which Aeroflot's hard currency revenues have been diverted. A decree issued by Mr. Yeltsin in the early 1990's granting a sports foundation set up by a close friend an exemption from export and import taxes that, in turn, allowed that foundation to retain an estimated $4 billion or more that would otherwise have gone to the government in tax revenues. As reported in a comprehensive review by U.S. News and World Report magazine, an investigation was begun by our FBI in 1994 into the activities of a company called Golden A.D.A., which was set up by a top official and a close associate of President Yeltsin's in San Francisco. After its establishment, that company shipped tens of millions of dollars worth of diamonds, gold, and antiquities out of the so-called ``Kremlin vaults'' and sold them, with the money allegedly disappearing into high-priced real estate and foreign bank accounts. The 1996 arrest of a top aide in Yeltsin's re-election campaign who was caught leaving the Russian Government House in the company of a reputed Moscow Mafia figure and holding half a million dollars in cash in a briefcase, an arrest that never resulted in any prosecution. Then the notorious ``loans for shares'' privatization program of 1995 and 1996, under which the crown jewels of Russia's oil and metals companies, such as Sidanko and Norilsk Nickel, were sold to Russia's tycoons for a mere pittance. Then there were allegations linking a former Yeltsin government representative at the International Monetary Fund to the ongoing investigation into the possible laundering of billions of dollars of Russian moneys through the Bank of New York. We have also learned recently of the use, by the Russian Central Bank's top officials, of an offshore company called FIMACO for financial purposes that may yet not be fully understood. Then the alleged massive corruption in the Russian military that cost the lives of, first, a young reporter and, second, a member of the Russian parliament, both of whom sought to bring that corruption to light. I should note that this is by no means a full or comprehensive list. But let me turn to another question we should be considering. In a hearing this Committee held yesterday, one of our witnesses, a former analyst for our intelligence community, stated his suspicion that there may be American partners having some self-interest to make certain that IMF moneys continue to flow to Russia, as Russian moneys are siphoned out of its government and economy and into western banks and accounts. That suspicion is something we should be looking at with great concern. As our Members may know, our Department of Justice is now investigating allegations that personnel of a top AID contractor in Russia, the managers and overseers of our U.S.- financed privatization program in that nation, engaged in personal investment activities while carrying out their work for our government in Russia. In 1996, before that Justice Department investigation began, I commissioned an investigation by the United States General Accounting Office into the work of those managers in Russia out of concern that the Administration may have channeled $40 million in noncompetitive grants to them. As the Justice Department's investigation was beginning, we also asked the GAO to look into the activities in a key subgroup of the Gore-Chernomyrdin Commission of one of those allegedly under investigation by AID and Justice. At the request of the Justice Department, however, we later suspended that GAO investigation. I now note, however, that press reports have alleged that another American under investigation in this matter by Justice has been named in a lawsuit that alleges that a pricing conspiracy was organized to siphon off millions of dollars from a Russian company into offshore accounts. I mention this matter today because I believe we should be interested and willing to learn whether we have not just a Russian corruption problem, but whether, in fact, there may be something of an American problem as well. As one Russian analyst has stated, it is interesting that one American firm managed to obtain over 10 percent of the vouchers that were issued under the Russian privatization program set up with American assistance in the early 1990's. The question is how such things have come to pass. [Prepared statement of Chairman Gilman appears in the appendix.] Before I recognize our Ranking Minority Member, Mr. Gejdenson, for any opening remarks he might like to make, I would like to briefly introduce our distinguished panel of witnesses. First, we will be hearing from Mr. Richard Palmer, who is retired from the U.S. Central Intelligence Agency Operations Directorate. His last assignments for the agency were in the region of the former Soviet Union. Our next witness, Mr. Keith Henderson, is Co-Director of American University's Transnational Crime and Corruption Center, and served as the U.S. Agency for International Development's Senior Adviser on Rule of Law, Crime and Corruption, with the Agency's Bureau on Europe and the Independent States. Our third witness, Mr. David Satter, is a visiting scholar at the Johns Hopkins School for Advanced International Studies, Senior Fellow at the Hudson Institute, and has written extensively on the issue of corruption in Russia. Our next witness, Mr. Matthew Murray, is the President of the firm Sovereign Ventures, which has offices in Washington, DC and St. Petersburg, Russia. Finally, our last witness, Mr. Konstantin Borovoi, is a member of the Russian parliament whom I am pleased is able to be here with us today to give us a Russian perspective on this issue, which is important not just for Russia, but for America as well. I now recognize our Ranking Minority Member, Mr. Gejdenson, for any opening remarks he might like to make. Mr. Gejdenson. I think it is clear that there is no surprise that a society which, for 50 years, lived under a totalitarian regime has had serious adjustment problems in trying to develop a civil society and democratic institutions with transparent laws dealing with accountability. We have some of those problems in our own country, of course. A citizen of my State just left with $200 million of investors' money and ended up in, I think, Germany for a short stay before our government convinced him to come back. If you talk about losses--I forget the name of the company, again not in my district in Connecticut but in the western part of the state--there was a hedge fund that seemed to have lost somewhere to the tune of $3 billion. So the fact that there is crime, corruption, and thievery in a society that has gone through the transitions that Russia has gone through shouldn't shock us. Given that, and I will do something I generally don't do, I am going to quote something from a former Secretary of State, James Baker, who said that it clearly follows that engagement with Russia is the only sensible approach in dealing with the problems she faces and the strains in our relationships. A peaceful, democratic, and prosperous Russia is strongly in our national interest, and it is clear we need to continue to work on the numerous initiatives that we have begun. We need to make sure that when there are assistance programs, that the money really goes where it is intended to go. We need to make sure that the Russians set up a law enforcement system that functions with the kind of judicial code and criminal code that most of the civilized world functions in. We need to make sure that development occurs not just by who is politically connected, but by who has the best chance economically. Russian corruption is a serious problem. We cannot minimize it, but I certainly hope that the hearings that this Committee and the Banking Committee are holding are not some attempt to politicize what is an obviously difficult transition that no one should be surprised would occur. We have important issues at stake here. We want to make sure we stay engaged. We want to make sure that, like many of the things done in the Gore-Chernomyrdin meetings, we deal with the issues of setting up bureaucracies that are responsible, that follow the law, and that carry out the interests of the Russian people. We are better off with a Russia that works than one that doesn't work, and I hope we will learn, from these hearings, more of what we can do to be helpful. Chairman Gilman. Thank you, Mr. Gejdenson. Do any other Members seek recognition? If not, we will proceed with the testimony. Before we begin with our testimony, I ask unanimous consent that a written statement on the issue of corruption in Russia, submitted by Professor Lynn Nelson of Virginia Commonwealth University, be inserted in the record at the end of our witnesses' testimony. Without objection. Professor Nelson has written extensively on the subject, but was unable to appear before the Committee this morning. Chairman Gilman. We will now hear from our witnesses. Mr. Richard Palmer holds a Master's Degree in international relations from the University of Southern California. He served over 5 years with the U.S. Army, including service as an infantry officer in Vietnam, and then served with the U.S. Central Intelligence Agency's Operations Directorate for 20 years, with his last assignments with the agency focusing on the former Soviet Union. Mr. Palmer now heads up an investigative firm specializing in asset recovery, business intelligence, and due diligence work. Welcome, Mr. Palmer. You may summarize your written statement, which, without objection, will be inserted in the record. Please proceed. STATEMENT OF RICHARD PALMER, PRESIDENT, CACHET INTERNATIONAL, INC., U.S. CENTRAL INTELLIGENCE AGENCY, RETIRED Mr. Palmer. Thank you, Mr. Chairman, and other Members of the Committee. I welcome the opportunity to address this Committee on a subject that presents serious threats to Western nations, as well as involving the use of U.S. taxpayers' funds to continue the looting of the Russian state. After 25 years' government service, I retired from the CIA in 1994 and I then spent another 2\1/2\ years in the former Soviet Union. I felt that the subject of Russian organized crime, official corruption, and the peculiarities of their developing financial system deserved more attention, and we needed more information on it. Therefore, I spent 2\1/2\ years researching that. I worked briefly in training, as a training director for a Russian bank--nothing to do with accounts, nothing to do with their business--and then I worked on behalf of some Russian- European banks in the former Soviet Union. I can say that during that period of 1994 until I returned to the United States at the end of 1996, finding information about Russian organized crime was not difficult. Indeed, I gathered hundreds of pounds of documents. Now, this was outside of any official capacity after my retirement, as basically a normal businessman, a normal person. What I am saying is the information was there if anyone wanted to look. You must remember that when I returned to the United States, I felt that I had something particularly valuable because I had direct insight into corruption, not only in Russia, but some of the former republics, and I had some detailed knowledge of how Russian organized crime worked and also how Russian organized crime worked in moving not only funds to the United States but creating companies in the United States through which to transfer their funds back to Russia. Now, I am speaking here of only a small amount of funds. There is a gentleman at Brookings Institute who has done a thorough study of money laundering and capital flight, and he agrees with my findings--although he has done much more research--that an extremely small percentage ever goes back to the country that it left. He asked a Russian official once does any of this money ever come back, and the Russian official immediately answered nyet, nyet. Then he thought a moment and he said, well, there was one idiot who brought some money back to buy GKOs, but very small amounts. When we talk about some of the American investment in Russia, sometimes we are talking about Russian organized crime funds that are going back under the guise of the U.S. corporations, which is then looked at as U.S. investment and also as, then, a responsibility for the U.S. Government to protect. There has been very little research into that area. In 1996, when I returned, I offered to talk to U.S. intelligence agencies, U.S. law enforcement agencies, and I was told that this was not a problem, there had been corruption, but the problem had been basically solved and that, boy, if you had come in 1992, this would have been interesting. Now, the problem is solved. We would not be here today if the problem were solved. Very quickly, this is a current problem that is going to go on into the future. The idea that this is like Chicago in the 1920's, and this will also evolve into good legitimate money like our robber barons is nonsense. As I mentioned in detail in my testimony before the House Banking and Financial Services Committee, this would be as if they controlled the entire government, the Federal Reserve, all the police, the Congress. Why should they change? I can tell you that they are not only not going away, if we look at the subject of spent nuclear fuel for which the United States has set aside hundreds of millions of dollars, there are Russian organized crime-connected groups, companies, right now, who are getting ready to bid for that money. They are looking to the future. Unfortunately, we have not been as far-seeing as them. In watching the recent television hearings--and I must say I don't vote regularly, and this is not a partisan hearing--but I was watching the TV show about the biography of President Reagan, and he kept referring to this term of ``trust but verify,'' and I think we have lost track of that. We have not verified where the funds have gone. We have not tied our funds to a quid pro quo. We don't even have a treaty to protect U.S. investors at a time the government is still promoting U.S. investment in Russia and the former Soviet Union. The European Union has one, because they said you don't get investment from us until we have the treaty. As you are aware, there has been no movement on a money laundering law in Russia. In fact, the last two attempts have been vetoed by President Yeltsin. I am rather reliably informed that there has been a decision in Russia that, following the scandal of the Bank of New York and money laundering in the United States, you will see a watered-down money laundering bill before the end of this year. There is a cause-and-effect relationship here. The Russians have a phrase that says, the guy who pays for dinner picks the meal. I think we should be able to put some requirements on this. Like our food assistance program, the Administration did everything possible to make sure that that food was not traced. Frankly, large amounts of that are going to go for graft, and that is very easily shown. The last thing I want to say is that we now see a government that, I think, Yeltsin and the circle around him, it is rather well documented, the level of corruption. You have the new Prime Minister, Putin, who allegedly left the KGB a few months after the KGB issued a directive asking its officers to go out and found companies to move money. One of a few ways of moving money was the sale of what they call tolling, using intermediary firms to buy Russian resources, particularly nonferrous metals. Mr. Putin's first job was giving permits to sell nonferrous metals. After that he worked for Mr. Borodin, which was the office in charge which had the contracts with Mabetex. I believe he was chosen because if any of those areas are prosecuted he also is in danger. What I am saying is that the corruption is rampant through the government. It has been obvious for a long time. I hope we will focus on it. I am not calling for disengagement. Russia is too large, it is too important. But we have to take a closer look. We have to be honest, and we have to be objective. Corporate America has tried to look the other way as well. Corporate America has also said, well, we can assume that we can continue to make 200 percent a year on GKO bonds and, if anything happens, IMF funds will bail us out, so it is a protected investment. I am afraid that there has to be an investment site like any other. We have to be more realistic and depersonalize this. This is not a matter of a few officials on the other side having a personal relationship. This is something where our Congress should literally have more direct contact with their government. We have to work together with them. The last point I want to make is, when we consider Russia, we must also remember that not all of the former republics became instant democracies overnight. In fact, some of the former republics are literally more corrupt than Russia. While we are on this downhill race to bring these people into the European Union and to bring them into NATO, I think that we should seriously stand back and look and see if we should not ask for more development in these countries, and more proof that they are on a democratic path before we bring them into organizations they can weaken or dilute. I thank you very much for allowing me to make these comments today. Chairman Gilman. Thank you Mr. Palmer. [The prepared statement of Mr. Palmer appears in the appendix.] Chairman Gilman. Our next witness is Mr. Keith Henderson, Co-Director of American University's Transnational Crime and Corruption Center. He served as the U.S. Agency for International Development's Senior Advisor on Rule of Law, Crime and Corruption in the Agency's Bureau for Europe and the New Independent States. Mr. Henderson has also participated in the State Department's Policy Working Group on Corruption, he has written on corruption, and is a member of the United Nations' Expert Group on Corruption. Mr. Henderson, you may summarize your written statement which, without objection, will be inserted in the record. You may proceed. STATEMENT OF KEITH HENDERSON, FORMER SENIOR ADVISER ON RULE OF LAW, CRIME, AND CORRUPTION, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT, CO-DIRECTOR, TRANS-NATIONAL CRIME AND CORRUPTION CENTER, AMERICAN UNIVERSITY Mr. Henderson. Thank you, Mr. Chairman, and Members of the Committee. I first want to apologize. Our computer system crashed yesterday at American University, and I was unable to provide some final edits to the testimony. I notice some grammatical errors, and it arrived late. Again, apologies, but we will make those changes. The good news is that there were too many students on-line, but some of us are wondering exactly what those students were doing on-line. But I am very pleased to be here today. I will try my best to share my candid thoughts and reflections on my past and current anticorruption work, and welcome your questions. My main interest is in advancing the global and Russian anticorruption agenda, and in sharing lessons learned during my tenure at USAID and my current activities at American University. You may know that our center is the brainchild of my esteemed colleague, Professor Louise Shelley, who formed the center in 1995 with seed money from the MacArthur Foundation. Our main objective is to undertake academic and applied research on global crime and corruption problems through creative multidisciplinary partnerships with scholars and practitioners in targeted countries. With support from the U.S. Department of Justice and others, we have now established four centers in Russia and one in Ukraine. With the Chairman's permission, I will now summarize my testimony as requested. In 1997, Elena Bonner, former dissident, human rights activist, and widow of the Nobel Peace Prize laureate, Andrei Sakharov, made an observation that I believe sums up the current general state of affairs in Russia: ``The intelligentsia seems to have abandoned its historic calling of compassion and assistance in the favor of grabbing crumbs dropped by the corrupt and powerful.'' She noted that while considerable freedoms had been achieved in a relatively short period of time, the collapse of the education and health care systems, forced military conscription, unconstitutional predetention law enforcement policies, abominable prison conditions, and substandard living conditions made many of the former concerns of dissidents look trivial. She called upon the international community and the Russian leadership to refocus its attention on core societal values and goals such as freedom of the press and rooting out corruption. I believe her comments set the stage, not only for today's discussion, but they also argue for a global and anticorruption summit and raise several important questions. First, is corruption both a Russian and international problem that requires global solutions? I know this Committee believes that it is, but a historical comment on corruption in Russia. I was at an old bookstore on Capitol Hill a couple of years ago and was delighted to find a book that outlined many of the reforms that were being undertaken by Czar Alexander II in the 1860's, and I think this speaks volumes. Over 130 years ago, during the early reform era, Czar Alexander defined Russian corruption as a centuries-old problem that was a major deterrent to Russia's integration with the West. The historian observed that the causes of corruption that existed then remained applicable today. He wrote this in 1896: First, it is a society ruled by men not laws; second, a secretive, restrictive bureaucracy that stifles justice and the press, and the development of strong state institutions; third, weak civil society unable to check government action; and fourth, a disdainful citizenry. These are the same core problems facing Russia today. The political, economic, and social problems facing Russia, the U.S., and the global financial system stem in large part from our collective failure to fully acknowledge, understand, or respond to what is now recognized as one of the biggest threats to global economic growth and political stability-- public and private ``grand'' corruption. This phenomenon has greatly limited the power of the Russian State and others to play a positive role in developing society in countries around the world. While the effects of grand or high-level corruption have economic and political consequences on all countries, including the U.S., they have a disproportionate impact on developing and transition countries, and any subsequently emerging middle- class. Indeed, many CEOs and policymakers now believe that systemic corruption in developing transition countries such as Russia makes long-term sustainable economic and political development virtually unachievable. However, most people in positions of power around the world, whether in the public or private sector, have chosen to treat grand corruption much like the global AIDS/HIV epidemic, either under a cloak of silence, or with rhetoric. There are still no serious concerted holistic efforts under way to address this problem. From my perspective, most in the international business community, the family of multilaterals and donors as well as most public officials, including U.S. officials, are moving too slowly and are behind the learning curve. In the interest of time I will now turn to the question of when could it be said that we first knew that corruption in Russia was a serious problem. While I think reasonable people can disagree on this fact, I think your summation at the beginning of your remarks outlined many incidents that should have given people notice that this is a very serious problem that we had to handle in a very serious way. However, I would point to several events that, in my mind, made me believe that we were not doing enough to address the problem. First, was the loans-for-shares scheme in 1995, and the 1994 Yeltsin organized crime decree. In hindsight, most analysts now identify the 1995 loans-for-shares scheme as a clear indication that some of the reformers were working closely with, and had ulterior, self-interested motives. That event, coupled with the 1994 Yeltsin decree, which gave the Ministry of Interior almost limitless powers to arrest and prosecute individuals outside the scope of the new Russian constitution, should have sent important signals to all that organized crime and corruption were occurring at very high levels within the Russian government. I do not pretend to be an expert on the loans-for-shares scheme and I don't know all the facts intimately. Indeed, I was working in another office at the time at USAID but was watching closely. However, I would like to quote Anders Aslund at Carnegie, who is a well-known and highly respected former Chubais protege and long-time Russia watcher, who said that this scandal ``blemished'' both Chubais and large-scale privatization in general. In a recent 1999 Foreign Affairs article, Aslund notes that a few banks were allowed to privatize some enterprises at auctions that they themselves controlled. Many lawsuits and volatile wars among bankers and managers of these enterprises occurred, both during and after the process. Aslund then goes on to observe that the barrier to reforming Russia has never been the workers or the people, who have been exceedingly complacent. Rather, the threat has always come from elites who want to live on corruption. I concur with this analysis and conclude, like he does, that the best way to control these kinds of forces is through effective democracy. Another telltale point, I believe, is the congressional testimony before this very Committee in April 1996. During that testimony, my colleague Louise Shelley; as well as the Director of the FBI, Louis Freeh; Eric Seidel, the Deputy Attorney General of New York; and John Deutch, the Director of the Central Intelligence Agency; among others, were among the first to sound the political alarm call that crime and corruption was a very serious issue in Russia. Director Deutch noted that: ``A link existed between the government elite and the criminal elements that was impeding the ability of the Russian Government to meet the population's expectations of social justice, a quality of opportunity, and improved living conditions.'' Chairman Gilman. Mr. Henderson, if I might interrupt, we are in the midst of a vote in the House, and I am going to explain to my colleagues that we will continue with the hearing right through the vote. I have asked some of our Members to go ahead and vote and come back so that we don't have to interrupt the testimony. Thank you Mr. Henderson. Mr. Henderson. Thank you. He also noted that the law enforcement forces were understaffed, underfunded, and plagued with corruption. Professor Shelley, Director Deutch, and New York Deputy Attorney General Seidel also testified that organized crime's hold on the Russian banking community was a serious problem that had to be addressed. Finally, several noted that Russian organized crime was estimated to control up to 40 percent of the Russian economy. I would say that an awful lot of discussion ensued after I authored a white paper in 1997 that was widely circulated within the U.S. Government that attempted to outline the causes of the problem, and to propose some programmatic solutions. Since that time, as you know, several international conferences have occurred, and many organizations are now involved in this effort. Finally, I would like to conclude with a few of the lessons I think we have learned from our experience in Russia, which incorporated some comments on the Harvard scandal which you mentioned, and the Bank of New York case. First, do not attempt to create big or little czars. Putting all of your reform eggs in one basket without broad public participation, support, and oversight is a recipe for failure. It also undercuts fundamental democratic principles and opens up the process to corruption. Second, insist on transparency within the donor community. On the giving end, the public has a right to know how their money is being spent, and on the receiving end the public has a right to participate in the decisionmaking process and monitoring of this money. Third, advance an international global anticorruption treaty and minimum terms of conditionality such as my colleague Mr. Palmer mentioned. Donors cannot make specified kinds of loans or participate in certain reforms unless these minimum terms are agreed to in full. Further, adequate support for an independent judiciary, media, and civil society, as well as health and education programs, must be part of this conditionality package. Fourth, give the OECD antibribery treaty and the OAS anticorruption treaty some impetus and teeth. More intensive, creative monitoring mechanisms that include civil society and business community oversight should be part of this package. In addition, international corporations should be held legally accountable for corrupt complicity. Strengthening key multilateral institutions and enhancing U.S. diplomacy and capacity to implement foreign policy is an essential step in this new world order. Fifth, enhance international law enforcement cooperation and communication through informal and formal structures and procedures. More regional sector-focused interdisciplinary training programs that are tied to short- and long-term reforms and strategies are needed. Sixth, promote the flow of corruption information among donors and between donors in the law enforcement community. Seventh, promote more competition in the public procurement process and the international best practices in good government principles in both the public and private sectors. Eightth, promote more long-term institution building and reforms related to entities that can provide a check on governmental action. Nineth, promote policies that promote more cooperation between the executive and parliamentary branches, and more interagency coordination. Tenth, promote more academic and applied research related to understanding the causes and costs of corruption. And, eleven, enhance communication engagement within the global and intelligence communities. Thank you for the opportunity to speak here today, Mr. Chairman. Chairman Gilman. Thank you very much, Mr. Henderson. [The prepared statement of Mr. Henderson appears in the appendix.] Chairman Gilman. Our next witness, Mr. David Satter, graduated from the University of Chicago. He was a Rhodes Scholar at Oxford University, and is currently a Senior Fellow at the Foreign Policy Research Institute in Philadelphia. He is also a visiting scholar at the Johns Hopkins School of Advanced International Studies, and a Senior Fellow at the Hudson Institute. Mr. Satter served in Moscow from 1976 to 1982 as a correspondent for The Financial Times, and has written extensively on corruption in Russia, and other issues, for the Wall Street Journal and other leading publications. Welcome, Mr. Satter. You may summarize your written testimony which, without objection, will be inserted in the full record. Please proceed. STATEMENT OF DAVID SATTER, VISITING SCHOLAR, JOHNS HOPKINS SCHOOL FOR ADVANCED INTERNATIONAL STUDIES, SENIOR FELLOW, THE HUDSON INSTITUTE Mr. Satter. Thank you, Mr. Chairman. The reports of massive Russian money laundering through the Bank of New York have awakened Americans to the victimization of the Russian people by their leaders and the possible consequences for the United States if corruption leads to Russia's social and political disintegration. This new-found awareness, however, raises a disturbing question: How was it possible for the Administration to depict the looting of Russia for so long as the progress of democracy, and to back a coterie of corrupt Russian leaders whose actions were actually antithetical to reform? The answer, I think, lies in the failure to understand that, in the wake of communism, Russia's greatest need was not a correct set of economic policies, but rather the restoration of moral values which was only possible under conditions of the rule of law. By ignoring moral criteria and giving our uncritical backing to a group of leaders whom we identified as reformers, we did not contribute to the welfare of Russia but only to its complete criminalization. The following is a partial list of the events which should have alerted American policymakers that Russian reform was being carried out in a moral vacuum, and the necessary role of the United States was to defend the rule of law. First, in January, 1992, prices in Russia were freed, but no effort was made to index savings. The result was that in a few months, 99 percent of the savings of the Russian population disappeared. Persons who had put money aside to buy a car or apartment, or to pay for a wedding or funeral, were left with nothing. Persons who had worked in remote areas of the country where a differential was paid on salaries were now stranded there, in many cases for the rest of their lives. Second, as the rate of inflation reached 2,500 percent, fraudulent commercial banks and investment companies inundated Russians with advertising offering enormous returns on investment. The government made no effort to limit this advertising or to check on the firms which, in almost all cases, were pyramid schemes, with the result that millions of people with no experience of deceptive advertising or capitalist investment lost their savings a second time. Third, the government began to allow anyone to export who could get a license. Because Russian raw materials were bought for rubles and sold abroad for dollars, export licenses were akin to permission to print money. In Moscow, they were issued by the Ministry of Foreign Economic Ties which functions like a market, granting the licenses in return for bribes, with the fee for the license insignificant by comparison with the size of the bribe. Fourth, in a move described as ``people's capitalism,'' the government gave each Russian the right to acquire a voucher which was redeemable for a share in Russian industry. The vouchers, however, were useful only for those who could acquire them in great numbers, and criminal structures began to buy them up on the street, and used them to purchase the most desirable factories, often at giveaway prices. Fifth, gangsters, businessmen, and corrupt officials in Russia began to work together, in many cases becoming part of a single economic unit. Sixth, in 1993, President Yeltsin illegally dissolved the Supreme Soviet and, in the wake of a massacre outside the Ostankino television tower, which he may have provoked, persuaded the Defense Minister to authorize the shelling of the deputies who were still holed up in the parliament building. In a vote which is now believed to be falsified, a new constitution was adopted that emasculated parliament and provided for the creation of a new, authoritarian presidential regime. Seventh, the government began to sell off Russia's enterprises for cash in rigged auctions. If in a rare case there was true competitive bidding and a powerful group was outbid by an insistent competitor, the successful bidder could easily pay for his tenacity with his life. Eighth, the government launched an invasion of the self- proclaimed independent republic of Chechnya in hopes of having a short, victorious war. Unable to defeat the Chechen resistance on the ground, the regime began the carpet bombing of civilian areas, resulting in the massive loss of innocent life. At the same time, more than 1,500 Chechen civilians were picked up by Russian interior ministry troops, taken to filtration camps and never heard from again. Ninth, in 1993 to 1994, the government ceased paying for state orders and began delaying payments on pensions and salaries for state employees, initiating the nonpayment crisis which became Russia's leading source of social tension. Finally, the government, in the loans-for-shares scheme, began to borrow money from commercial banks in return for shares in desirable, nonprivatized enterprises. The bidding was supposed to be competitive, but, in reality, the shares went to the banks with the closest informal ties to government officials. When the government failed to pay back the loans, which was always the case, it was up to the bank holding the mortgage to organize the sale of the enterprise. In every case, the enterprise then became the property of the bank providing the original loan. In this way, the crown jewels of Russian industry were acquired for a song. The attempt to transform Russian society without the benefit of either moral criteria or the rule of law led to one of the gravest crises in Russian history. In the resulting atmosphere of moral anarchy, the country was looted. The gross domestic product was cut by half, which did not occur under Nazi occupation. Russia suffered a demographic catastrophe in the period since 1990--. Chairman Gilman. Mr. Satter, I am going to have to interrupt you for a moment. We have only a few minutes left for the vote now under way in the House. As soon as one of our Members returns, we will continue, but at this point I am going to call for a brief recess. [Recess.] Mr. Bereuter. [presiding] The Chairman has asked me to resume the sitting of the Committee. Mr. Bereuter. Mr. Satter, please continue. Mr. Satter. In this situation, there was a historic role for the United States. With the fall of communism, the United States had overwhelming moral authority in Russia and could have insisted on moral practices and the strict rule of law, using political pressure and our influence over international loans. Instead, we used our power, not to advance the rule of law, but to promote the interests of a specific group. It is often argued that the United States had no choice but to help Yeltsin, and that the only alternative was to help the communists and nationalists. In fact, however, insisting on honesty and fair dealings from the reformers would have been the greatest favor that anyone could have done for them. The reformers lost popularity in Russia not because they backed democracy but because they facilitated the criminalization of the whole country. The answer now is rethinking our entire approach to Russia, which must begin with an understanding of the moral vacuum that communism left in its wake. Only by recognizing that Russia's first requirement is a structure of law and morality valid for everyone do we have the possibility to lay the framework for real economic reforms capable of saving Russia from its present desperate situation. If we continue, however, to pretend that Russia is on the path to reform and Yeltsin and his confederates are the embodiment of democracy we may soon find that the growing desperation in Russia will produce a reaction capable of affecting not just Russia, but also the rest of the world. Thank you. That is the conclusion. Mr. Bereuter. Mr. Satter, thank you very much. [The prepared statement of Mr. Satter appears in the appendix.] Mr. Bereuter. Next, we will hear from Mr. Matthew Murray. He served as Legislative Assistant to Senator Edward Kennedy from 1982 to 1984, working on national security issues, and later worked with the law firm of Baker & McKensie from 1988 to 1991. I 1991 he founded the firm Sovereign Ventures Incorporated, which has offices in Washington, DC and St. Petersburg. Mr. Murray, your entire statement will be made a part of the record. You may summarize as you wish. STATEMENT OF MATTHEW MURRAY, PRESIDENT, SOVEREIGN VENTURES, INC. Mr. Murray. Thank you very much, Congressman. Let me start by saying that I think the reason I have been invited here today is that I have been conducting small business in St. Petersburg for the last 10 years. I lived in St. Petersburg between 1992 and 1998, conducting different types of business; and in the process, because I have insisted on doing business legally and ethically, I have developed a great appreciation for what are the cultural barriers to small business in Russia. I am also here today to share with you the knowledge that the Russian people have already found the answer to combating corruption, and the answer is the profit motive. It is a powerful motive, and it is particularly powerful when you combine it with the desire to feel good about what you are doing. Many Russian small businesses are gravitating to the idea that conducting business legally and ethically for profit is much more interesting and stable than the alternative. While it is a potentially powerful force, it also faces huge cultural barriers, as I mentioned. One of the main problems is that the Russian people must learn to be dependent on each other, as opposed to being dependent on the government. The United States can play a vital role in the future by staying engaged and reinforcing the desire of Russian small businessmen and women to get organized and fight to develop accountable government institutions. The U.S. can provide a combination of small grants and ethical business know-how that can help unleash the powerful democratic force that is provided by small business. Perhaps a useful way of dramatizing this point is to start by comparing Russia with Poland and the Czech Republic. Poland and the Czech Republic have been very successful in removing barriers to small business in the past 10 years. By contrast, during Russia's transition small business has been severely regulated. The most mundane activities are subject to licensing and reporting requirements. Taxes are imposed not simply on profits but also on revenues and the mere movement of capital and goods. A small business that challenges government authority risks sanctions and state interference. The main element in Russian culture stifling entrepreneurs is the unrestrained role of government, not only in regulating the economy but also in profiting from the economy. Many officials in Russia have an expectation of financial reward for serving in public office. Many government positions are for sale, and votes on legislation have an established market price. During Russia's transition to capitalism this expectation of reward has led to what economists call ``rent-seeking.'' Rent-seeking is conducted by political elites in transitional economies who use their access to power to privatize state property spontaneously at nominal prices and turn state assets into cash by renting them to business. At times rent-seeking takes the form of demand for a bribe or extortion. Often, however, rent-seeking is quasi-legal, making it harder to detect. The use of public position for private gain didn't start with Perestroika or privatization, nor can it be explained simply by Russia's low government salaries. To comprehend the phenomenon you must first examine Russian history. Due to the absence of a strong idea of the state, government officials have traditionally been inclined and permitted to take care of their personal interests first. The czar's provincial representatives were expected to: ``feed themselves from official business.'' Under Soviet central planning, state resources were exploited by those with access to power, the members of the communist party, whose positions were bought and sold like commodities. This government behavior takes place against a backdrop of public tolerance and weakened institutions. Traditionally, the Russian people have shown extreme dependency on the government and have been reluctant to hold officials accountable. Currently, the Russian constitution provides Duma members with immunity from prosecution. Russia lacks an independent judiciary capable of prosecuting government officials, or an independent press capable of protecting investigative journalists. While Russia engages in privatization and other market reforms, official corruption adds a layer of rent on economic activity. Official corruption increases transaction costs for small business and the price of goods and services for consumers. By imposing an enormous number of different taxes and collecting them arbitrarily, the Russian government extracts additional rent from small business. At this time in the debate over aid to Russia there is a consensus that the introduction of capitalism needs to be accompanied by the rule of law, but the motivation for legal reform will not come from the Russian government. Historically, Russia's public officials have not relinquished their unilateral powers of interpretation and enforcement. Due to lack of resources and political will, currently the government is unable to enforce existing laws or adopt new legislation to protect small business and private property. Instead, it should be clear that small business itself is the most effective agent for the type of social, legal, and political reform sought in Russia. To date, Russia's market reforms have failed to produce a middle class. Only small business can fill the missing middle by producing independent entrepreneurs with a vested interest in a stable and transparent legal system and the determination to hold government officials accountable. I am pleased, therefore, to have the opportunity to appear before the House Committee on International Relations at this stage. To reduce official corruption and otherwise sustain market reform in Russia, the Russian people must be empowered to remove all barriers to small business. Russia doesn't need western financial capital as much as it needs social capital-- that is, the trust and shared values among individuals, businesses, and government officials which are the very foundation of a market economy. Social capital accrues at the grassroots level through the creation of voluntary organizations such as business, trade, and professional associations, rotary clubs, church groups, charities and nongovernmental organizations. As small business must work together to break down market barriers, they are a natural catalyst for the formation of such voluntary organizations. Due to the special value Americans attach to small business and the rule of law, the United States has already been acting to create social capital in Russia by helping to build voluntary organizations, to reinforce traditional Russian ethics, and to shape government institutions which are accountable. For example, in September 1998, the Eurasia Foundation, a nongovernmental foundation funded by AID, provided Sovereign Ventures an $88,000 grant to begin a private sector initiative to promote business ethics. The grant helped St. Petersburg small businesses create the Declaration of Integrity in Business Conduct, a voluntary statement of international business principles and practices. Between June and September 1999, over 100 businesses voluntarily signed the declaration. All the major business associations in the city, which have a combined membership of over 1,200 companies, have supported the declaration and have presented it to their memberships for signature. By adopting the declaration, each company takes a no-bribery pledge, and must implement a code of business ethics. After a decade of rent-seeking capitalism, Russians are beginning to accept the fact that government corruption is endemic, a historical burden on economic and political modernization. Russians are beginning to find their own path to root out corruption using a multitude of positive values and ethical traditions found in Russian culture. The St. Petersburg Declaration of Integrity is one example of a process whereby Russians are creating social capital by integrating their strong moral traditions with international standards of business ethics. Faced with the evidence of endemic corruption in Russia, many in the United States are shouting, ``let's call the game,'' as though punishing or sanctioning this powerful nation will enable it to throw off a complex history, as though many other nations are not similarly infected by crony capitalism. Instead, we should recognize that the process of rooting out corruption is long-term, and that Russians must find their own path toward this objective. Under these circumstances it would be a mistake to isolate further the Russian people by depriving them of U.S. support and know-how and moral leadership. On the contrary, the United States should seize upon the evidence of endemic corruption in government to increase aid directly to small business and microenterprises and the nongovernmental organizations and business associations which are needed to lobby their interests. In the process, the U.S. can help Russian citizens prosper and form the social capital needed to protect individual private property from rent-seeking capitalists. Thank you very much. Mr. Bereuter. Thank you, Mr. Murray. [The prepared statement of Mr. Murray appears in the appendix.] Mr. Bereuter. Next, we would like to hear from Mr. Konstantin Borovoi, who is able to join us today. He is a member of Russia's parliament, the Duma, to which he won election in 1995. He holds a degree from the Mechanical Mathematical Faculty of Moscow State University, and began a career in business as the former Soviet Union began to allow the creation of some private businesses in the late 1980's. In 1992, he established the Economic Freedom Party. Welcome, Mr. Borovoi. We look forward to your testimony. STATEMENT OF KONSTANTIN BOROVOI, DEPUTY, RUSSIAN STATE DUMA, CHAIRMAN, ECONOMIC FREEDOM PARTY [The following testimony was presented with the assistance of an interpreter.] Mr. Borovoi. Thank you, Mr. Chairman, for giving me an opportunity to speak to you. It is actually one of the problems and one of the issues I work on in Moscow, the problem of criminalization of political power and the economy, and it is actually the main motive of my statements in Moscow, my press conferences and legislative requests that I make. I would like to touch on a few issues that I think are important for me to make a point of here. Corruption in Russia is a part of a more complex problem, the problem of loss of direction of democratization in our country. What we call uncontrollable growth and expansion of corruption is more characteristic of what we had in 1995 and 1996. Today, we have a new phase of growth of corruption, where corruption now is an integral part of the government. At the same time, this current status of corruption is very convenient for the current rulers of Russia, and they are very happy with it. Today's corruption and criminalization of power structures in government in Russia is influencing not only its domestic and economic policy but also its international foreign policy. The testimony of this process is the current events in the Caucasus and Chechnya, as well as the position of animosity toward NATO, toward the United States, and as well as a number of other initiatives taken on the international arena and also the support for the different rogue regimes in different parts of the world. In 1991, good conditions were created for the forms of democratic Russia, but not all the government and economic structures were abolished, and it was clear for us already in 1992 when we met with the American policymakers and explained to them these negative trends and dangers in Russia. Actually, at a place not far from here at the State Department I was attempting to convince the officials there that there is a danger of uncontrollable development of corruption in Russia, as well as serious threat to development of democratic principles. But they actually accepted a concept of self- propelled, independent process of democratization of Russia, and this process created a paradoxical situation in Russia and a paradoxical situation in the relations between Russia and the United States. As a matter of fact, American taxpayers are financing projects that are implemented in Cuba, Iraq, Iran, and in Belgrade; and, as a matter of fact, right now Russia is not a friendly country toward the United States. As a matter of fact, the American taxpayers' money is now spent on organizing of anti-American, anti-NATO propagandist campaigns. As a result of this anti-American propaganda campaign led by the Russian government, almost 85 percent of the Russian population was willing to support sending Russian volunteers and weapons systems, even advanced anti-aircraft missile systems, to Milosevic. Unfortunately, humanitarian and even food product assistance for Russia is also a matter of increased corruption in Russia, and I think that the following steps are necessary in order to stop the development of this dangerous situation: First of all, we need to say good-bye to the illusions about democratic development of Russia. Right now the only direction of development I see in Russia is the development toward forming of a small evil empire, adversarial to the rest of the democratic world; and I think in order to understand the process we need to have good professional expertise. Unfortunately, here in the United States I frequently encounter very naive views on the situation and process that is happening in Russia. I think that all the programs of support, including the financial support and cooperation progresses, should be halted or stopped, and there should be a coordination between this type of assistance and the political process. Otherwise, the United States can find itself in the situation as it evolved when it will closely resemble what was happening in the events preceding to the tragedy at Pearl Harbor. Also, I think it is important not to lose the hold of the pulse of Russia. I think it is necessary to keep and expand the forms of work that promote further democratization of Russia. Thank you. Mr. Bereuter. Deputy Borovoi, thank you very much for your testimony and for the disturbing information that you give to us. We are very pleased, however, that you took the time to participate with this panel. [The prepared statement of Mr. Borovoi appears in the appendix.] [The prepared statement of Professor Lynn Nelson appears in the appendix.] Mr. Bereuter. We will now move to the question period under the Committee's 5-minute rule. I will begin by mentioning that, in the course of the comments from Mr. Murray, I heard a degree of optimism-- selective, of course--and, at any time, I would like any of you to comment upon his orientation and his comments. I would like to focus in, Mr. Palmer, on you first. Any other persons are welcome to make a contribution as well. We have heard comments in the past--perhaps other Members of the Committee will pursue this--that U.S. policymakers were discouraged from presenting information which suggested the various U.S. programs were being subjected to corruption; and, in fact, information, therefore, was suppressed. Have you seen any evidence of corruption during the course of your time as a U.S. official, or after that point? Mr. Palmer. I can only say that I cannot really discuss my time when I worked for the CIA. I think the fact that I took retirement from what had been a very rewarding career and went on to devote 2\1/2\ years of my life to studying this onsite shows that I believed that there was much more that could be done in looking at the problem. I do know, from some of the programs I saw after retirement, that U.S. officials were constantly told that they had to show progress, that negative comments would only reflect poorly upon the U.S. facilities involved, and that they would only serve to restrain democracy. And so that was a general thread. Mr. Bereuter. How did you pick up that kind of sentiment? Mr. Palmer. Simply in talking to some of the U.S. officials also involved in USAID projects after I retired, and these were just personal comments that they made to me, that they had gotten the word from the country team meetings that there was only room for good news. Mr. Bereuter. Would you encourage us to ask you to come to an executive session or is that--. Mr. Palmer. That could become problematic, actually, sir. But you do have some very good witnesses from State Department officers, Mr. Wayne Merry and Mr. Tom Graham, who both can speak to that with no legal difficulties, and they can speak in open session. I think you might find it more useful. Mr. Bereuter. The former has spoken to one of our Committees. I have forgotten which Committee that I heard him on. The Duma was removed in 1993 by President Yeltsin. Some would say that he substantially reduced the Duma's authority to conduct oversight on the revenues and expenditures of the Russian government, and I would like to ask the Americans here as well as the Russian Duma delegate if, in fact, they believe that today the Russian parliament is in a position to reassert its oversight over the government budget. That would be my last question. I would like to ask any of the gentlemen if they would care to respond, and then I would turn to the Deputy. Mr. Palmer. If I could just say one thing, and you have more expertise sitting here than myself, but the Duma is riddled with corruption to the point that organized crime members are now running for the Duma. Frequently, members of organized crime will pay Duma members large amounts of money so they can be named as staff members for the Duma so they can't be stopped by the police and they can't be searched for weapons. That said, there are honest members of the Duma, and I think we have to encourage that, and we have to work with them. Trying to focus all of our attention only on the presidency of the country is, I think, going in the wrong direction. That is putting all of our eggs in one basket. Mr. Bereuter. Thank you. We hear that frequently, and we have an advocate in the person of Mr. Weldon of Pennsylvania. Who would like to comment on the Duma's ability to conduct oversight on government affairs? Deputy Borovoi? Mr. Borovoi. I absolutely agree with the statement of the gentleman that corruption is an integral element in the work of the Russian parliament. Actually, I had one press conference on the illegal way of lobbying in the Russian parliament, and the theme of this press conference was the state Duma as a private joint stock company. The issues of corruption were raised at the sessions of the joint Duma-Congress commission; and, unfortunately, the majority of the Russian members of the parliament took the formal position that these allegations have nothing to do with reality. It is just the allegation and pretext for some accusation. I don't think that cooperation with the Russian parliament can be an effective or efficient tool in fighting corruption in Russia. Chairman Gilman. [presiding.] Mr. Sherman? Mr. Sherman. Thank you, Mr. Chairman. One preliminary comment, and Mr. Bereuter's comment brought this up. I am disturbed that it is difficult for this Committee to get testimony in executive session from CIA agents and former CIA agents, and that while we are concerned about the transparency and honesty of the Russian government here in these hearings we should never spare effort to assure the honesty of the U.S. Government. Perhaps whatever we could do to get clear and honest executive session testimony from former CIA agents would be a step in that direction. Deputy Borovoi, it is indeed shocking to hear your comments. I wouldn't be shocked if any of these other gentlemen said them, but you are an official of the Russian government and even the Chairman of a party. How many seats in the Duma does your party have, and do you think that your comments reflect the views of a few other parties in the Duma as well? Mr. Borovoi. My party has two seats in the Duma. Fifty percent of the state Duma members are communists. For you to better understand the balance of forces in the state Duma, I can give you the results of the vote on the resolution of support, political and military support, of President Milosevic that was taken in the Russian Duma--372 votes in favor, against 1. Mr. Sherman. I understand. I don't know if the vote for Milosevic just reflects misplaced nationalism or whether it reflects corruption. I do know here in the United States we will get criticism for voting for aid for Russia or, frankly, for any foreign aid. I am convinced that at least half of what we send to Russia is wasted, and I am convinced that it is the most important thing we could possibly do with our dollars, to send aid to Russia, if even half of those dollars are used effectively, because I think the peace of the world depends upon many things which are easy to predict, and one thing which we cannot predict, and that is the future of Russia. Corruption is not unknown here in the United States, and we have adopted a number of laws, techniques, and procedures to try to control corruption. These are costly both in terms of dollars and in terms of flexibility. I wonder if the Deputy and perhaps some others could comment on whether Russia has studied, or even implemented American or Western European laws in the following areas: competitive bidding on outside contracts; independent audits of government agencies; civil service protection for the vast majority of government employees; a public documents act to require that any citizen can obtain a copy of public documents for only the copying charge; and, finally, an independent judiciary. I realize that changing the law does not necessarily change culture, but it can be helpful, and I wonder whether there has been adequate attention in those areas. I would like to hear from the Deputy first. Mr. Borovoi. Unfortunately, the entire theme of the fight against corruption is a political theme. I have a very simple example. Mr. Stepashin was Prime Minister of Russia around 3 months ago, and now he is the head of the anticorruption commission. He talks of things during his Prime Minister activity, a lot of things that cannot be in Russian government now, any form of corruption. He is maybe the most active fighter against corruption. It is nonsense. Sometimes some vehicles, some discussions about corruption in Russia can be used for the purpose of corruption. I spoke before that it is an element, a structural element--corruption is a structural element of Russian power. It is maybe the most dangerous thing we faced since the beginning of democratization in Russia. I have a lot of experience, European experience. We have some laws adopted now, but they are on the subject of political fighting against communists and democrats. Mr. Henderson. A comment. I would say that all the laws that you mentioned are extremely important. In fact, I tried to highlight some of them in my written testimony. In response to your question, only one of these laws to my knowledge exists and it exists by decree, not through legislation which, of course, is a large part of the problem in Russia. Many of the laws are issued by decree, and they are never implemented. That really leads to my last and most important point. All of these laws are under consideration. I know that, for example, a Russian Freedom of Information Act law has been under debate for many years. There still seems to be no hope of passing it, according to people I know involved with it. So the short answer really is that even if all of these laws were passed, none of them would be implemented in today's environment. There is no political will to implement any of these kinds of laws. I think that is a serious problem. I did want to go back to one of the initial questions asked--in response to the question as to is there any evidence of the U.S. Government failing to correct problems and procedures that might lead to corruption. I think that might be the way I would ask the question. I would point to the HLID scandal as an example of a situation where I know that there was collusion within the U.S. Government not to properly oversee the way that very sensitive, important program was being implemented. I talked to virtually everyone involved with that program during the time I was at AID because I was floored that there was very little government oversight, and I was finally told that that was intentional by people who know. And that, of course, is what led to the GAO investigation as requested by this Committee. As far as the parliament is concerned, I am glad that issue was raised because the current Russian constitution, at least as seen by many analysts who have been studying this, Russian politics and the development of the law for many years, is fatally flawed. It gives the presidency too much power. The 1993 constitution really decapitated the role of parliament, and it is now not able to serve an effective monitoring function within the Russian government. For more on this subject there are several new books that have just come out, one by Eugene Huskey at the University of Virginia, and another by Robert Charlotte at Union College. They are long-time Russia watchers, real legal scholars. One has been following developments in the presidency and the parliament for many years, and I would encourage anyone to read them who is interested in this subject. Chairman Gilman. Thank you, Mr. Sherman. Dr. Cooksey. DD. Cooksey. Thank you, Mr. Chairman. Mr. Palmer, I would like to direct these questions at you. I had a friend that had done some work over there some years ago, and had gone back and forth, and it was something for the Russian people, not a business deal, just trying to help them out. But he reached the point that he said he was told that he would not be safe because he was not giving a portion of the goods that he was giving to these people, donated goods, to the Mafia people or whatever the underworld people were called. How safe are Americans over there today in Moscow and St. Petersburg, or in the outlying areas like Ekaterinburg, for example? Mr. Palmer. If we leave the Caucasus areas out of the obvious danger areas, and we talk about the major cities, largely, Americans are rather safe. I recently did a study for a U.S. corporation on how much risk was involved in trying to collect debts from Russian firms even with direct organized crime ownership, which you would think would be one of the most dangerous things you could become involved in. What we found was that there really had not been a recorded case, at the time of the report, that any American had been killed or even injured because he tried to exercise his legal rights. So far this year, there were, I think, four Americans who died. One was a T-shirt salesman. The only businessman was a used car salesman. I am saying it is not like any executives or anything of this because of their work. The one case that everyone will point to is the case of Paul Tatum, who owned the Radisson Hotel and had the dispute with the city of Moscow, Mayor Luzhkov's office, one of the front runners for the next president. You can argue that he brought some of the difficulties on himself because he tried to imitate some of the business techniques of organized crime. So it was danger to himself. I suspect that there is normal street crime that you would have in a city like New York. Other than that, I have not seen any more serious risks to Americans. Mr. Cooksey. Good. That answers my question. For several years there have been some allegations that some of the top people in the Russian military have been involved in some of the massive corruption and theft of the government funds, including Yeltsin's First Minister of Defense Grachev. There are also reports that a young reporter that was killed in October 1994--1998 was also linked to this type of corruption. Do you have any views about these allegations that you can share with us in an open session? I mean, do you think that, in fact, people in the military are involved in this corruption and the killings? Mr. Palmer. Graham Turbeville, who works at the National Defense College, wrote an excellent 50-page paper detailing the corruption in the military. It is widespread. I cannot speak to the case of the journalist who was killed. There have been other journalists who were killed by nonmilitary. I would say that probably the stories are true. What we do know, and I can tell you I know for a fact, is that almost every Russian soldier has to give a percentage of his salary to his commanding officer. It works its way up. They rarely ever get the rations they are supposed to. They frequently sell off weapons. I watched as the Russian army was pulling out of the former Soviet Union and they would come up and offer you AK-47s, grenades, and even anti-aircraft missiles offered to me after I retired. What I am saying is it is a very common thing. The other thing I should tell you is that you will notice that Spetsnaz, the Russian special forces, which are involved in more assassination and sabotage than the type of our special forces are involved in, are reported very reliably to have started training Russian organized crime hit men about 3 years ago as a way to make extra money, and they are now one of the leading employers of ex-Spetsnaz people. That is why when they kill people they don't blow up city blocks, they are more likely to get the right guy. That is a leading indicator that, indeed, the military is corrupt. Mr. Cooksey. There is a Russian analyst named Glakena who reported that 13 percent of all the vouchers issued under the U.S.-financed privatization program in Russia ended up in the possession of one American firm. Do you know anything about this allegation, and do you believe that such accumulation of vouchers could have indeed been carried out by one American firm? Do you know who the firm is? Mr. Palmer. I have read the same articles. I am familiar with the background on the firm. I do not have direct knowledge of it. I do know that a Russian government study said that a minimum of 85 percent of all the privatization shares came into the possession of organized crime. Whether they would deal with an American firm, I would say that is not even a serious question. Of course they would. The American firm would not necessarily have to know, in a legal sense, that they were dealing with organized crime, but that is the only way that you could control such a large amount of vouchers. Mr. Cooksey. Mr. Satter from Johns Hopkins, it is reported that a Russian tycoon, Vladimir Pontanin, sold an oil company called Sidanko for $2 million in 1996, and later sold 10 percent to BP for $570 million. It has also been reported that the Russian automobile company Vaz was sold at voucher privatization auction for an estimated $45 million even though Fiat had offered $2 billion for it in 1991. Do you feel that some of these industries have indeed been sold for less than what they are really valued at? Mr. Satter. Unquestionably. The examples that you cite are two among many of the way in which the most valuable enterprises in Russia were practically given away, and they were given away through a variety of means. One of them was the voucher privatization that we just talked about. When I was living in Moscow in late 1992 and early 1993, voucher privatization was at its height. At every metro station and at many bus stops, there were people with signs reading, ``I will buy a voucher.'' These persons bought vouchers for a few U.S. dollars or for a bottle of vodka from alcoholics and other persons who didn't know what the vouchers potentially meant. Then the vouchers were used to purchase enterprises at fire sale prices. Another reason why this was possible was because once the voucher privatization had ended and money privatization began, the auctions at which enterprises were sold were rigged. The victor in the auction was determined in advance. In some cases there never was an auction. It took place only on paper. In situations where an auction was held, if someone was brave enough to bid against the pre-determined winner, he was putting his life in danger. This is the reason for those low prices. Mr. Cooksey. I will give you my opinion. I assume there is someone here from the Russian Embassy. You can send this message back from the Fifth Congressional District in Louisiana. I was in the military 30 years and a month ago. We have people in my district and districts across the United States that are paying taxes. I still have confidence in the goodness of a lot of the Russian people, but we do not want to pay taxes to this government, to our government, our own government and then have it given to the Russian people and squandered or taken by outright theft. Yesterday, in a hearing on this same subject, we were advised that approximately $200 billion has been spirited out of Russia in the last several years. I am sure some of that was American taxpayer dollars and, if we had that, we could have balanced the budget and been home 2 weeks ago. That is a concern that I have no matter what my district is. My concern about this Administration, if there is anyone here from the State Department, is that at times you get the feeling that there is--well, to their credit, I think some people in the State Department are stronger than the people over in their boss's office--but they just want to try to make everybody feel good. If they go have a meeting and drink a little vodka, we will give them everything and throw in the kitchen sink. But still, that is American taxpayers' dollars, and we just don't want to continue doing that. That is my personal opinion. Mr. Satter. I just want to make one observation. The Russians are very smart people and do not need to be taught by the United States how to invent the wheel. The problem with the truthful revelations about corruption in Russia is that they may turn public opinion against any aid for Russia, and Russia right now is in a desperate situation. While I was completing a book that I wrote about the fall of the Soviet Union, I did a little bit of work for Reader's Digest. One of the articles I had to write was about kids who die in Russia because they don't get timely heart surgery. They have defects that are easily correctable over here. The reason these children are not operated on is that, although there are talented surgeons in Russia, Russian hospitals don't have the necessary equipment. If we had only had the wit at the beginning of this process to orient our aid toward genuine humanitarian needs in Russia and not toward teaching the Russians how to be capitalists--a process which enriched our own consultants and led us to cooperate with a lot of people who spoke English very well and made a good impression on us but turned out to be totally corrupt--we could have done some good there. In the reaction now to what we did do and what, of course, the Russians did for themselves--I mean, after all they are adults--we may turn against the idea of helping Russians in any way, even in those situations where we can help and where our help is badly needed. Mr. Cooksey. There is no question that we could reach that point, and I think that is unfortunate. I am a surgeon, and there are some similar talented, bright people in Russia, good physicians, good surgeons. Anyway, it gets back to the same problem that is a problem the world over. Sometimes you don't always have the best and the brightest in government. There are a lot of bright, capable people, particularly the Chairman and myself. I am being facetious. He is, for sure. But then you get people that just don't do the right thing, and it is a problem. It is a problem in Russia, and I hope that they can evolve to an era where they will have more integrity and do the right thing for their people instead of for themselves. Mr. Palmer. Briefly, but it supports some of your earlier comments, the Russian Ministry of Interior did a study and, as of the end of 1998, from 1991 to today they estimated that total theft out of Russia had been over $300 billion, and Interpol agreed with those figures. That may be a low figure. Chairman Gilman. Is that with a ``B,'' billion? Mr. Palmer. That is with a B, billion, sir. Mr. Cooksey. So that is $100 billion more than we were told yesterday. Mr. Palmer. Those are Russian Ministry of Interior figures, and Interpol supported them. Other estimates run higher. The argument is made, well, there were not that many dollars in Russia. I would make two comments. This also includes Russian resources that go out at low prices for high profit on the outside. And, second, I would remind you that, through 1996, we had weekly planes going to Russia, 747 cargo aircraft carrying $100 dollar bills. At one time, Russia had more U.S. $100 bills in circulation than the United States. Mr. Cooksey. I have heard that. Is that a correct statement? Mr. Palmer. That is correct, and one could assume that those dollars didn't stay in Russia. That is the loss. But in 1998, prior to that last IMF tranche going to Russia, I was at a discussion group here in Washington and we were talking to the Russian desk officer and some of the administrators, and we said why are we sending this money? It will disappear. And they said absolutely not. Corruption has really been beaten. On top of that, they have a new tax collector and he is going to increase tax collections. So, actually, in 2 years time they will have a surplus. Well, everyone there had a laugh about that, but there was no stopping the money. It was going to go. That money went and is gone, and now we are going to replace it. The point is this: The taxes that they do not collect are being made up by money that comes from the U.S. taxpayers. They are stealing that, moving it out for personal gain. We are making up the difference. I think something is wrong with that picture, and I think the average American taxpayer will see it that way too. On the other hand, Mr. Satter said, we cannot shut everything off in our dealing with them, but we have to have more control. It has not come from the Administration thus far. I think it has to come from Congress. Thank you, sir. Mr. Cooksey. One question for Mr. Borovoi. It has been alleged that Russia's Chief Prosecutor, Yuri Skurotov, that the Yeltsin administration had tried to remove from that position, that the government recently brought the investigation in connection between the Kremlin and the Mabetex Construction Company in Switzerland. Is this true? This was in the paper about 60 days ago. I remember seeing it, that there was an allegation that there was a connection between perhaps Yeltsin's entourage and the Mabetex Construction Company that had paid some of his credit card bills. Is that true? Have you heard about that? Are you familiar with that? Mr. Borovoi. I am familiar with this situation. I have no doubt that Pavel Borodin profited from construction and restoration work contracts in Moscow. But I would like to go back to the problem that I have pointed out about the competent professional expertise about the situation in Moscow. The resignation of the chief prosecutor--general prosecutor happened when Mr. Primakov was Prime Minister in Russia. As a matter of fact, that event was the result of a fight between the entourage of Mr. Primakov, which we call the KGB group, with the entourage of Mr. Yeltsin. The process is much more complicated or complex than it is seen from here. Dr. Cooksey. Thank you. Chairman Gilman. Thank you, Dr. Cooksey. I would like to address this question to all of our panelists. We all recognize that there is an extensive amount of corruption in Russia, but what do you recommend now? How should our policy toward Russia change or be revised in order to address this worsening situation? And let me start with Mr. Palmer. Mr. Palmer. Thank you, sir. It seems to me the first thing we have to do is depersonalize the foreign policy. There are some quarters in this town that believe that our relationship with Russia depends on good contacts between a few officials on both sides. I think that has to be broadened. I think we have to deal with all aspects of the Russian political scene. That certainly includes the Duma. That means we cannot focus on only one group or one party. Everyone talks about this. I have seen no change in that. Second, we cannot support one group blindly. Imagine from the American point of view if the Russians sent us 30 election experts to help run the 2000 elections and sent us several million dollars to help organize them. I don't think that we would take that well, no matter which candidate won, and that is precisely what we did with Russia. We sent experts. We sent money. I don't think we can do that. I think we have to stand back a little farther from that. We cannot take sides quite so often. The next thing I think we have to do is make every bit of the not only aid, but loan money, a quid pro quo. That means, yes, we will support investments in Russia after you have come up with a bilateral U.S.-Russian investment treaty. This is a normal thing between states. If we are going to encourage investment, let's protect our investors. I think that is not only prudent, I think it is responsible. I think that we should have audits. If we look at the food aid that has just gone to Russia, that food aid was meant to disappear. Marcy Kaptur argued constantly for more controls on that. They didn't happen. I looked into this with the Department of Agriculture, and they said, well, we are thinking about things, but when we hear something that we like we will let you know. That is not how the government sets the pace. They paid the contractor to come up with the idea of let's distribute information about food delivery on the Internet so that people could track them. The people that we are concerned about don't have enough money to eat. I am sure they don't have computers at home and Internet. They do not have power. Let's be realistic in these things. This food aid is an example. We purposely said we don't want to audit it. Right now we are completely dependent on the Russians bringing us once a week statements that this food was delivered. I know for a fact some of these statements of food being delivered were signed in February and March although the first shipments didn't arrive until May. What I am saying is, let's take a reasonable bipartisan look at this and try and do this government to government like we would anywhere else. Thank you very much. Chairman Gilman. Thank you. Mr. Henderson, would you comment? Mr. Henderson. Sure. I concur with Mr. Palmer's comments but would say that one of the most important issues facing the global community is the security of the world's financial system. I think the Bank of New York case, again, only begins to illustrate that this is a very serious problem for not only the United States, but for the international community. I know there are separation hearings under way on that matter, and there are a lot of discussions that need to be held. But on that point, I think whether you are talking about the banks, private banks, or the World Bank, or the IMF, or USAID, or even corporations, private corporations, much more emphasis needs to be placed on know your customer rules and know your employee rules and when is an employee obligated to report on suspicious, corrupt transactions? Until this culture of silence is broken within the corporate community and within the multilateral donor community and at other donor agencies around the world, I think you are going to see very little progress on any of these fronts. Right now, no one is really reporting on corrupt, suspicious transactions. It is questionable how well written the bank's rules and regulations are in this regard--that is private banks. So this is a very serious issue that must be addressed very promptly. I think, again, the other thing that we could do, as Mr. Palmer was mentioning, is to get our own house in order. We who have been studying the corruption problem for some time see an awful lot of corporate complicity in the corruption process. Everyone knows that it takes two to tango, and it doesn't appear as though the laws that we have on the books, not only the U.S. but in other countries, are properly being enforced. The OECD antibribery treaty is going to have little meaning unless we find ways to enhance the way that it is implemented. The last and maybe most important point in my mind is that you hear a lot of rhetoric now about the need to work more with civil society and small business associations and the private sector. This is the kind of conversation going on now within the World Bank and within other donor agencies, including AID. But the reality is that most of these institutions don't have the mechanisms or policies in place to begin to work with civil society. Until civil society becomes more involved in corruption oversight, if you will, and providing a real check on governmental action, again, I think you will see little progress on this front. Chairman Gilman. Thank you, Mr. Henderson. Mr. Satter? Mr. Satter. Policy must be based on principles, not personalities. Russia is a country which has suffered a 70 year assault against its moral sensibility. Therefore, what the country needs and what it is often incapable of generating internally is an appreciation of right and wrong and a sense of fidelity to law. If we enter the Russian situation and, irrespective of the morality of its actions, back the political faction that we consider to be progressive, we actually further undermine the moral fabric of society. We did this many times. We did it over the war in Chechnya. We did it at the time of the forcible dispersal of the Russian parliament in 1993. We continue to do it when we close our eyes to the corruption in Russia and the way in which organized crime is terrorizing the ordinary Russian citizen. Russians were inculcated for 70 years with the idea that capitalism and criminality are more or less the same thing. Now they are living in a state which is largely run by criminals to whom we give our rhetorical support. Therefore, we confirm them in their previous prejudices. The first thing we have to do is sever the link in the minds of the Russian people between capitalism and crime, and to do that, we need to insist on fidelity to law and fidelity to ordinary moral principles and stop making excuses for the people that we describe as ``progressive'' and who, in fact, are not progressive. To implement this idea further, there are a couple of concrete steps that we can take. First of all, we should take care with our rhetoric. We should not say that President Yeltsin, when he is authorizing the carpet bombing of civilian areas in Chechnya, is comparable to President Lincoln defending the American union. We should not endorse the forcible and illegal dispersion of the Russian parliament. We also should not try to interfere in the Russian elections. But, beyond this, we can make it clear that people who have obvious ties to organized crime figures are not welcome in the United States and that the organized crime figures also are not welcome here. Since these two categories include many of the leading people in government, such action will have psychological significance both for the government and for the Russian population. In general, rhetorically and with our influence over international loans we need to, in every concrete situation, back crime-fighting techniques, back institutions which will be resistant to crime and end the previous tolerance that we have shown over the last 7 years for those people who believe an economy is organized stealing and behave accordingly. Chairman Gilman. Thank you, Mr. Satter. Mr. Murray? Mr. Murray. Yes, Chairman Gilman. In my view the best way to both combat corruption and otherwise sustain market reform in Russia is to reduce the barriers to small business. To date, this has not happened. As I indicated in my earlier testimony, in fact, the barriers to small businesses have increased over the last 10 years due to rent-seeking behavior on the part of the government. If barriers to small business are reduced, we will see the creative business potential of the Russian people unleashed for the first time. We haven't witnessed that yet. Small businessmen have not been allowed to create wealth and to create a middle-class without being extorted or preyed upon by the tax authorities. The best way to help them do this is not by simply throwing money at Russia, of course, but rather by helping the emerging small business community create what is called ``social capital'' which is to say the values and the mores that are needed to run businesses honestly. Earlier, Congressman Bereuter commented that I sounded very optimistic and that it was unusual. The reason I am optimistic is that, to date, business and moral aspirations have been kept in quite separate categories during this reform period in Russia. They are treated as being two separate endeavors. In this project we have conducted on behalf of the Eurasia Foundation to create the Declaration of Integrity in St. Petersburg, we have found that when moral aspirations and business are combined, there is a new level of enthusiasm and determination to conduct business on the part of the average citizen. I believe that once the barriers to small business are broken down you will see people with the profit motive take care of this corruption problem efficiently, more efficiently than it has been addressed to date. Chairman Gilman. Thank you, Mr. Murray. Mr. Borovoi. Mr. Borovoi. First of all, it seems dangerous to me, the trend of stepping back from involvement in the political process in Russia or being bystanders and just observing what is going on. If this point of view was prevalent in 1948, then 70 percent of German parliament would consist of Nazis. I think that the major highlights of democratization of Russia are programs targeted for development of education and democratization. I think that the $600 million that was spent on the procurement of food products would much better be spent on purchasing mass media and providing programs for education and enlightenment of the Russian population on economics and democracy, free market economy. Chairman Gilman. Thank you. Mr. Campbell. Mr. Campbell. Thank you, Mr. Chairman. I would like a member of our staff to give this to Mr. Henderson if you could, kindly. I am telling you what this is. At yesterday's hearings on the same subject, Dr. Michael Waller, Vice President of the American Foreign Policy Council testified. He put into the record this e-mail--and I am going to read to you what he said about it--you were in the e-mail, but I am going to take a second and explain it. The suggestion is that the principal contractor for USAID for the rule of law project, ARD-Checchi--and I am quoting from Mr. Waller's testimony--tried to suppress a noted expert in Russian crime and corruption from voicing concerns about the USAID-sponsored privatization program. That expert, Professor Louise Shelley of the American University, and a colleague of Dr. Waller's at Demokratizatsiya journal, had early evidence that organized criminal elements had exploited the U.S.-backed privatization program. In June, 1994, ARD-Checchi rule of law project director David Bronheim sent an e-mail notice to offices in Moscow, Kiev and elsewhere with a warning about Dr. Shelley that appears to be intended to suppress and discredit her, and he then quotes the e-mail, a copy of which I have given to Mr. Henderson. ``Professor Shelley. Please treat this with enormous care. If I had known what Shelley was up to I would have resisted Henderson's instruction to put her on the consulting contract. She is a bomb with a lit fuse. Her hobby horse is that the AID privatization program has been exploited by organized crime. ``The privatization program is the showpiece, the flagship, et cetera, of the AID program in Russia. Shelley, without understanding what she is doing, is trying to sink the flagship. Under no circumstances can we be seen as helping that effort. We have no interest whatsoever in damaging the centerpiece of the AID program in Russia.'' end quote of the e- mail. I continue with Dr. Waller's testimony: ``there you have it, as frank an admission as possible that experts concerned with corruption of U.S. assistance programs were simply not welcome. A copy of the e-mail is attached.'' . That copy is what I have just supplied to Mr. Henderson. [The information referred to appears in the appendix.] Mr. Campbell. As you might guess, I am interested--knowing that you were on the witness list today, I brought this--I am interested in your advice to us as to whether, much more importantly AID, but not trivially, whether a contractor of AID actually tried to suppress an expert as was described by Dr. Waller in his testimony. Mr. Henderson. Thank you. I am familiar with this situation, and I would provide by way of background a note that this memo was written in response to internal memos at AID by some in the privatization office. They were concerned that Professor Shelley, as well as myself, were beginning to raise some questions about their privatization program. David Bronheim, who is a brilliant analyst, a former AID employee, and he is now deceased--he was actually killed in a car wreck in Georgia working on an AID program--was, I think, mainly trying to respond to this concern within the privatization office at AID that its centerpiece program was going to be called into question by folks. They were not at all happy with the fact that people like myself and the democracy and governance office were giving her the opportunity to, at least, express her opinion. I did not know at the time, to be honest with you, whether the information she was provided was completely accurate or not, but I felt like, as did some others at AID, that this was an issue that needed to be openly discussed, and encouraged her to provide testimony to Congress when called to do so. I guess the good news is that she was retained for a limited amount of time, even after this occurred, that the contractor's opinion had no impact on her employment or her ability to speak out on this issue. But this memo and in particular, the memos that I saw that were circulated by people in the privatization office were of great concern to me because they were clearly trying to stifle any discussion of this issue. Mr. Campbell. Then let me ask the most important question, to me at least; and I am going to put it in a way that sounds leading, but you are an intelligent person, able to address it, so don't say anything you wouldn't otherwise. But I take your testimony to be that, to the best of your knowledge, USAID did not attempt to suppress research indicating corruption of the privatization program; is that correct? Mr. Henderson. I was trying to say that some employees within AID were, in fact, trying to suppress research and open discussion on this issue. I am referring to discussion that occurred at the programmatic level. I know of no intervention on the part of high-level AID or State Department employees. These were people operating more at a senior programmatic implementation level. Mr. Campbell. Thank you. I have one last question for Deputy Borovoi. I would like to ask what the prospects are for the Economic Freedom Party and other members of the Duma who believe, as you do, in the upcoming elections? Mr. Borovoi. Unfortunately, Russian politics today is dominated by nationalistic and isolationist forces. In the current composition of the Duma there are about 50 percent of these forces. I think that after the next election there will be about 80 percent of them. This is the result of a very powerful, mighty antiwestern campaign that was modeled after Soviet-style propaganda campaigns trying to picture western community as an enemy. The examples of these campaigns, there was a campaign of support for Iraq and a campaign of support of Milosevic and a campaign against NATO expansion. So, if this trend is going to continue, I don't think there are any prospects of any democratically inclined parties in Russia. Chairman Gilman. I think we have overstayed the patience of our experts. We want to thank our witnesses for their participation in the hearing today. I am certain that your thoughts and your comments will assist the Members of our Committee as we seek to better understand developments in Russia today and as we make recommendations for the direction of U.S. policy toward that important country in the future. This hearing of the Committee on International Relations is now adjourned. [Whereupon, at 12:25 p.m., the Committee was adjourned.] ======================================================================= A P P E N D I X October 7, 1999 ======================================================================= [GRAPHIC] [TIFF OMITTED] T2963.001 [GRAPHIC] [TIFF OMITTED] T2963.002 [GRAPHIC] [TIFF OMITTED] T2963.003 [GRAPHIC] [TIFF OMITTED] T2963.004 [GRAPHIC] [TIFF OMITTED] T2963.005 [GRAPHIC] [TIFF OMITTED] T2963.006 [GRAPHIC] [TIFF OMITTED] T2963.007 [GRAPHIC] [TIFF OMITTED] T2963.008 [GRAPHIC] [TIFF OMITTED] T2963.009 [GRAPHIC] [TIFF OMITTED] T2963.010 [GRAPHIC] [TIFF OMITTED] T2963.011 [GRAPHIC] [TIFF OMITTED] T2963.012 [GRAPHIC] [TIFF OMITTED] T2963.013 [GRAPHIC] [TIFF OMITTED] T2963.014 [GRAPHIC] [TIFF OMITTED] T2963.015 [GRAPHIC] [TIFF OMITTED] T2963.016 [GRAPHIC] [TIFF OMITTED] T2963.017 [GRAPHIC] [TIFF OMITTED] T2963.018 [GRAPHIC] [TIFF OMITTED] T2963.019 [GRAPHIC] [TIFF OMITTED] T2963.020 [GRAPHIC] [TIFF OMITTED] T2963.021 [GRAPHIC] [TIFF OMITTED] T2963.022 [GRAPHIC] [TIFF OMITTED] T2963.023 [GRAPHIC] [TIFF OMITTED] T2963.024 [GRAPHIC] [TIFF OMITTED] T2963.025 [GRAPHIC] [TIFF OMITTED] T2963.026 [GRAPHIC] [TIFF OMITTED] T2963.027 [GRAPHIC] [TIFF OMITTED] T2963.028 [GRAPHIC] [TIFF OMITTED] T2963.029 [GRAPHIC] [TIFF OMITTED] T2963.030 [GRAPHIC] [TIFF OMITTED] T2963.031 [GRAPHIC] [TIFF OMITTED] T2963.032 [GRAPHIC] [TIFF OMITTED] T2963.033 [GRAPHIC] [TIFF OMITTED] T2963.034 [GRAPHIC] [TIFF OMITTED] T2963.035 [GRAPHIC] [TIFF OMITTED] T2963.036 [GRAPHIC] [TIFF OMITTED] T2963.037 [GRAPHIC] [TIFF OMITTED] T2963.038 [GRAPHIC] [TIFF OMITTED] T2963.039 [GRAPHIC] [TIFF OMITTED] T2963.040 [GRAPHIC] [TIFF OMITTED] T2963.041 [GRAPHIC] [TIFF OMITTED] T2963.042 [GRAPHIC] [TIFF OMITTED] T2963.043 [GRAPHIC] [TIFF OMITTED] T2963.044 [GRAPHIC] [TIFF OMITTED] T2963.045 [GRAPHIC] [TIFF OMITTED] T2963.046 [GRAPHIC] [TIFF OMITTED] T2963.047 [GRAPHIC] [TIFF OMITTED] T2963.048 [GRAPHIC] [TIFF OMITTED] T2963.049 [GRAPHIC] [TIFF OMITTED] T2963.050 [GRAPHIC] [TIFF OMITTED] T2963.051 [GRAPHIC] [TIFF OMITTED] T2963.052 [GRAPHIC] [TIFF OMITTED] T2963.053 [GRAPHIC] [TIFF OMITTED] T2963.054 [GRAPHIC] [TIFF OMITTED] T2963.055 [GRAPHIC] [TIFF OMITTED] T2963.056 [GRAPHIC] [TIFF OMITTED] T2963.057 [GRAPHIC] [TIFF OMITTED] T2963.058 [GRAPHIC] [TIFF OMITTED] T2963.059 [GRAPHIC] [TIFF OMITTED] T2963.060 [GRAPHIC] [TIFF OMITTED] T2963.061 [GRAPHIC] [TIFF OMITTED] T2963.062 [GRAPHIC] [TIFF OMITTED] T2963.063 [GRAPHIC] [TIFF OMITTED] T2963.064