Russia’s Fiscal Whistleblower

Chief auditor Venyamin Sokolov says Western loans are hijacked by the corrupt Yeltsin government


Facing financial meltdown at the end of May, Russian Federation President Boris Yeltsin sent a high-level delegation to Washington in hopes of arranging a pre-collapse bailout from the West. Russia’s former economic policy chief and privatization honcho Anatoly Chubais and senior Kremlin aide Sergei Vasilyev proposed that the International Monetary Fund and the Group of Seven nations put up a new $10 billion fund to back the shaky ruble. As a short-term fix, the IMF promised to disburse $670 million under its existing $10 billion loan by the end of this month, and President Clinton said the U.S. would support additional emergency bailout loans if necessary to buttress the ruble.

But not everyone in Russia thinks that’s a good idea. Coinciding with the Yeltsin team’s visit was that of another official, Venyamin Sokolov. An astrophysicist by training and rector of the Krasnoyarsk State University, in 1995 Sokolov was elected chief of the Chamber of Accounts, the only state body independent from the president and his government; its watchdog role is often compared to that of the U.S. General Accounting Office. As head auditor, Sokolov is now Russia’s chief controller of the use and disposal of federal property—and an outspoken critic of the Yeltsin government and Western lending.

Mother Jones spoke with Sokolov in Washington on May 31. While his compatriots put on a happy face for the West, Russia’s fiscal watchdog blew the whistle on how Western loans are squandered on speculation and siphoned off by American profiteers, how Russia’s cash-flush “oligarchical” economy masks runaway inflation in its cash-starved national economy, and how the corruption of the Yeltsin government is killing the hopes of ordinary Russians in a country where jet planes are bartered for butter.

Q: What is the most significant aspect of the financial meltdown now occurring in Russia?

A: Under the guise of establishing a market in Russia, the authorities have created an economic monstrosity that has nothing to do with a market system. First of all, in the Russian market there is no money, without which it is impossible to buy or sell. Consequently, the owners and directors of firms, instead of selling what they produce and buying what they need, are forced to exchange what they produce for something they need. Our present barter system is much the same as that which existed in primitive societies when people exchanged stone axes for mammoth skins. Only today our producers of jet planes, a product unknown to primitive societies, are forced to exchange aircraft not only for fuel, but for eggs, butter and sugar as well.

What this means for average Russians can be seen alongside the roads outside of Moscow, which are lined with mounds of goods—frying pans, tires, brass piping and fixtures, whatever. The people guarding these mounds received the products as payment for their labor, and they are compelled to sell the product or barter it for something closer to what they really need. By the way, one especially debilitating feature of this huge barter system is that no taxes whatsoever are paid.

While a significant part of the population receives their wages in the form of goods, millions of people don’t receive any wages in any form for many months, years even. These workers—teachers, scientists, miners—are demanding the government’s resignation. The miners were the first to raise the question of impeaching the president, and that left the Communists with no choice but to adopt the same stance in response.

Q: It is extraordinary to Americans that Russian workers continue to report for duty in such conditions. Why do they?

A: This is explained by certain peculiarities of our people and our country. First of all, a significant part of these people had believed wage arrears were a temporary condition and would soon pass. Second, in our country a job has never been just a source of income; consequently the average person reasons in the following way: “Well, there’s no work, so what else am I to do?”

Q: What do you mean when you say “in our country a job has never been just a source of income”?

A: Much of the Russian workforce is in the position of serfs; they receive a few benefits—substandard housing, modest medical services, and their children have access to a deteriorating school system—in return for their labor, and nothing more, just like under the tsars.

The situation of nonpayment of wages throughout Russia has led to individuals reasoning, “Why go to the expense of moving, only to end up in the same situation? Unlike the Great Depression in the U.S. when the unemployed rode the rails chasing seasonal work, there is no illusion amongst Russians that if you move you might find work elsewhere. They know they won’t.

Q: What is today denying the Russian people a means of exchange?

A: First, it was a state policy that led to a lack of currency, and I mean specifically monetarism as conducted by the IMF. The official economy about which you read in your newspapers has absolutely nothing to do with our national economy. When Americans read that Russia has an inflation rate of 14 percent, that figure refers only to the oligarchical economy and hides an 80 percent inflation in the national economy. But since the national economy is cash-starved and lives now by negative barter, meaning I’ll give you this and you give me that but neither one of us will pay the other, nearly our only product is debt. Our enterprises have finally used up all their reserves and this is why we are in crisis.

Q: Are you agreeing then with statistics that indicate the IMF insisted Russia pursue tight money policies so aggressively that the end result is a supply of rubles which is only a sixth of what an economy the size of Russia’s needs to operate?

A: I think a sixth of what is needed is a generous estimate. For instance, the United Energy System, which is a monopoly provider of electricity, only has an eighth of the capital it needs to operate. One of our better known firms, Gazprom, has 12 percent of working capital it needs to function. All firms are saddled with debts to one another and to the government which itself is in arrears. On January 1 of this year, Gazprom had a significant ruble debt to the government even though it was owed a larger amount by those it supplies. By May 1, Gazprom’s debt to the government had grown to 5 billion at the same time it was owed 15 billion, an increase of five times the previous January’s debt.

Q: Is it true that the elite, say the top 5 percent of the Russian population, have successfully socialized what money there is amongst themselves? In other words, the remaining 95 percent of the population have no money at all?

A: Exactly. Today even Communists joke that we need to nationalize our money supply, since all the money that does exist is concentrated in the hands of the banks and the trade sector. For instance, the Accounts Chamber has a copy of a letter written to Central Bank chairman Sergei Dubinin in which a certain Mr. [Yusuke] Horaguchi of the IMF gives a defined schedule regarding Russia’s ruble supply. Additionally, Mr. Horaguchi felt himself free to give specific instructions regarding bank credits, the state budget, energy policy, price levels, trade tariffs, agricultural policies, and so on, and the instructions were quite harshly worded, I might add. There is even an instruction that acts of the Duma regarding these matters will be vetoed [by Yeltsin], and so they are. In other words, we have a government that doesn’t follow the nation’s laws, but instead the dictates of the IMF.

Second, the present government is completely unaccountable. For instance, upon finishing our audit of the Central Bank, we were unable to certify their financial report. It was the same in the Finance Ministry where we had a team of 150 auditors working for six months. On just one line of their report, “Reconstruction of Chechnya,” they had recorded an expenditure of 14 trillion rubles, a sum 15 times larger than what was allotted according to the budget. Worse, of that only 8 trillion was accounted for, and that mostly improperly. In one instance, we were handed an unsigned paper which instructed the transfer of 500 billion rubles to a single individual—and by the way we received many such papers during the audit. The remaining 6 trillion allotted for Chechnya’s reconstruction had no supporting documentation whatsoever regarding how those funds were spent. In the end, we determined that the Ministry had no system for recording simple inputs and outputs, and what, in fact, they were attempting to devise was a system to conceal rather than to reveal the truth.

Third, the Yeltsin government is immoral and deeply dishonest. Most of the funds which are available are embezzled by government officials. Not only by government officials but by a huge percentage of the burgeoning number of speculative firms acting as intermediaries in the barter chain. To exchange an airplane for butter is not so simple; the system requires specialists.

Q: And what is the fate of the billions in grants and loans Western institutions and governments have made to Russia?

A: All loans made to Russia go to speculative financial markets and have no effect whatsoever on the national economy.

Q: Are you saying that that the government is the beneficiary of all the domestic and foreign capital Russia is capable of attracting?

A: You are correct, but with one minor difference concerning our current government, in which all resources support not so much the state as they do state officials and select foreigners. For instance, one $90 million loan for the development of the equities market proved to have no positive economic result. The audit turned up payments as high as $200,000 to individual American citizens “for services rendered,” but which were undefined. Seven million dollars of the same loan created an institute with 11 staff people who were to manage a $31 million fund sequestered for satisfying the claims of Russian citizens who were swindled by pyramid schemes. Not a single claim was paid, and all that this institute achieved was the spending of the $7 million on the satisfaction of their own needs, and the realization of an opportunity to speculate in our bond market with the money meant for deceived Russian citizens. Another $400 million loan we audited turned up a $479,000 payment to a certain American, again “for services rendered” which were not spelled out.

Q: And yet those loans are the obligation of the Russian people to repay.

A: Yes, that’s right.

Q: What pressure does the Accounts Chamber experience?

A: Mostly it is psychological pressure. We are subject to disparaging remarks by officials in the Yeltsin government and attacks in the press. We often read accusations stating that the Accounts Chamber is “incompetent” or that it is “working outside their mandate” or that our “conclusions are too politicized.” Sometimes the media reports that the courts have ruled against our findings, which is simply untrue. In every case in which we were subjected to a court challenge, the court has upheld our findings.

I myself have been accused of a broad range of villainy; everything from being “a diehard Communist” though I belong to no political party and was elected to my position by the Federation Council [Russia’s upper house] on a secret ballot for a term of six years. [Privatizer and former director of the Federal Bankruptcy Agency] Pyotr Mostovoi, an ally of Anatoly Chubais and Harvard University, said that since the findings of the Accounts Chamber had led the Procurator to open a case against him, a minister of the Russian government, it could only mean that I am an American spy.

Q: Well, then, if you are an American spy you must report. What is your estimation of the Americans’ newest panacea, tax reform?

A: Our system of taxation is irrational and the rates are simply ludicrous, but it was the IMF who insisted upon high taxes and is doing so again. But the main problem in Russia has nothing to do with the collection of taxes. You can tie our businessmen up, you can imprison them and beat them to near unconsciousness and still they will pay no tax, because they have no—and I repeat—no money. The enterprises are incapable of satisfying the government’s insatiable appetite. For instance, at one factory there is 10 million Deutschemarks worth of new equipment sitting outside the factory in its original packing crates. The enterprise cannot utilize the equipment, cannot so much as open the crates since it is incapable of paying Russian customs the high tariff due on the equipment. The penalties are growing, yet the firm can neither use the equipment nor return the credits used to order it. In other words, the entire business is a complete dead end. There are many such instances.

Q: And what about the planned decrease in government spending?

A: Certainly the government is too large, but not a single bureaucrat will suffer. Instead the plan is to let go 200,000 medical workers and teachers, which will only work to increase social unrest. As is, the average Russian is living worse and worse and they are losing any faith in even the possibility of any improvement. Our situation is absolutely unprecedented. Recently our new prime minister, Sergei Kiriyenko, delivered a government order to cut the budget by 30 percent, but the only budgetary item to actually enjoy an increase is the amount of funds going to service our national debt, which now eats up 45 percent of the government’s income. As a result, the Ministry of Education’s budget for the whole of Russia is not equal to that of Harvard University.

Q: Will further lending by the IMF and the World Bank be helpful?

A: No, of course not. Giving more loans to the Yeltsin government is comparable to giving a drug addict a fresh supply of narcotics. Any new loans will only go to the realm of financial speculation and to prop up support for Boris Yeltsin. Russia does not need any further such lending. Russia needs loans only for the purchase of new equipment or the restructuring of enterprises, and such funds can be attained from the private sector.

Russia has a powerful potential—natural resources in abundance, a high level of intellectual capital, an infrastructure, and a willing workforce—we truly have all that we need to develop economically if we can but achieve an accountable government willing to implement and execute rational policies. Western loans only undermine any attempt to attain the latter conditions, and we are left with a Boris Yeltsin who stays in place through inertia and the lack of a mechanism to remove him, thanks to his self-authored constitution.

The West has essentially three alternatives as I see it. First, you may continue the same policies. This will lead to a collapse of the economy and possibly of the Russian state itself. In that case, the West must prepare itself for a repeat of the events of 1917, with a nationalist and not a Communist-inspired ideology. Or the West can execute a calm and quiet exit. Or finally, the West can begin talking to people besides Anatoly Chubais, Yegor Gaidar, and their American cronies, in order to devise a new policy towards Russia. It would even be possible for your specialists and ours to collaborate on a mechanism to monitor assistance money so that it is used in an economically literate manner.

If these policies are not changed, I fear they will have a result that is very bad not only for Russia, but for the U.S. as well. But more IMF lending under present policies and conditions is but another noose around the neck of the Russian economy.

I have an anecdote that illuminates perfectly the effect of the IMF’s Russian program. Many decades ago when the Soviet Union was attempting to develop the hydrogen bomb, the man responsible for the project was KGB chief Lavrenty Beria. The chief physicist on the project was a man by the name of Igor Kurchatov. When Kurchatov was able to report to Beria that the project was working, that neutrons were forming, Beria shouted back over the telephone wire that he was coming immediately—”I want you to show me how the neutrons are forming!”

Of course, it is impossible to show anyone neutrons forming, but Lavrenty Beria was a man of such a reputation that no sane individual would admit to that fact, and so Kurchatov devised a plan, which though risky he managed to pull off. A dummy instrument board was set up on a table in an otherwise empty room. Kurchatov instructed one of his graduate students, who is the man who told me the story many years later, to sit at the control board, and when he escorted Beria into the room, he was to frantically turn the knobs and dials so that needles on indicator gauges would jump wildly, lights would flash, and so on and so forth. The then-young student did as instructed and after Beria witnessed the demonstration he raced to a telephone in order to shout triumphantly to the Central Committee the news: “I have seen it, I have seen the neutrons forming! The experiment is a great success!”

Yet, of course, Beria had witnessed exactly nothing but some improvised theater. You see, this story outlines perfectly the truth of Western lending to Boris Yeltsin’s government.

Anne Williamson has published widely on Soviet and Russian affairs. A selection from her new book, How America Built The New Russian Oligarchy, is posted at www.bookagency.com