The reformers of the Yeltsin period clearly sought to break up the
collapsing structures of the Soviet order so that they could not
possibly stage a political comeback. This was primary. Their
secondary aim was to encourage the emergence of a true market
economy--through elimination of price controls and other regulations,
as strict a monetarism as they could manage, and privatization of
state assets. It is impossible to exaggerate how much this aim rested
on the dogma, embraced by both the reformers and their Western
supporters, that, as the state was removed from the economy, real
market capitalism would arise naturally and rapidly even in the
conditions of Sovietized Russia.

This did not happen. What did happen was a puzzling combination of
some genuine reform, failed reform, perverted reform, no reform and
deep depression. The Russian experience also made glaringly obvious a
truism too often neglected by the reformers and their Western allies:
market capitalism depends on a pervasive environment of congenial
law, business custom and skill, and popularly respected institutions.
These took centuries for the West to evolve; history left Poland and
other Central European states more receptive to them; history left
Russia without them, and with a political culture inimical to their
creation.

The largest part of the Russian economy is what two American
economists, Clifford Gaddy and Barry Ickes, have called the Virtual
Economy. Other experts quarrel with their analysis, but their
metaphor is instructive. The Virtual Economy is, in essence, the
living rubble of the old Soviet economy--i.e., the old state
enterprises--without the Soviet state machinery to hold it together.
It continues to function by using barter and other non-monetary
devices to generate products less valuable than the required inputs,
while pretending to add value. Managers pocket cash revenues and keep
workers pseudo-employed in company-town settings. Given the huge
populations and interests involved, these dinosaurs refuse to commit
suicide through bankruptcy or what the IMF gently calls
"restructuring." Except for private plots and some farms that work
for McDonalds, most of agriculture is sadly mired in this sector.

Beyond the Virtual Economy is what the Russians call wild capitalism,
mistaken by many as a reformed economy. This is where the "new
Russians", working with organized crime and corrupt officialdom,
extract wealth as quickly as possible and send abroad what they don't
ostentatiously consume. The most powerful actors in this sector are
deeply invested in phony banking, controlled media and patronage
politics.

A third portion of the economy is an archipelago of real capitalism,
in which genuine private entrepreneurs assemble capital and put it to
productive work, mostly, but not solely, in small service and
consumer-oriented businesses. This is the smallest part of the
economy, politically and economically the most vulnerable--but also
the most promising.

Sorting out this triadic domain is a mighty challenge for analysis,
policy making and investment. It cannot be done at a distance. Many
enterprises participate in all three sectors. Much of the illusion
about reform in Russia rests on the mistaken beliefs that the first
sector is receding, that the second is really like the third, and
that the third is increasingly dominant. Collusion in this illusion
lies at the heart of the policy failures of reformers and their
Western supporters.

There are other aspects of the Russian economic crisis well deserving
of treatment, which space does not allow: the collapsing physical
infrastructure, calamitous environmental conditions and the public
health disaster. One topic deserving more than a few words is crime
and corruption.

What Did We Know and When Did We Know It?

The criminalization of the Russian state is now a standard theme in
assessment of the Russian crisis by both Russian and American
analysts. It is also a common thread in all eulogies to Galina
Starovoitova, the liberal Duma member recently assassinated in St.
Petersburg. According to the U.S. Deputy Secretary of State, Strobe
Talbott, it is an offensive stereotype brandished by Hollywood.
Unfortunately, it is much more than that.

Russian crime and corruption are deeply embedded in the failure of
Russia to advance toward real democracy and capitalism since 1991, as
cause, consequence and symbol of Russian realities. They constitute,
in the perceptive terms of a senior State Department official with
whom I have discussed the topic, an "environmental problem." They are
pervasive in government, politics, business and security affairs;
even foreign relations are affected. They are regional, national and
international, and can threaten America by enabling the proliferation
of weapons and by infiltrating American business and politics.

At the crime end of the spectrum are assassinations, theft,
protection rackets, drug and arms trafficking. At the corruption end
one finds bribery for all manner of state services, privileged
arrangements for export and import without taxes and duties, insider
privatization deals at fire-sale prices, speculation for private
profit with state funds, off-budget commercial operations by
government agencies. Hardly any institutions or public figures are
free from taint, certainly not the police.

Crime and corruption lead naturally to the offensive stereotype noted
by Talbott, because they are so extensive and dramatic. Most
businessmen, however, regard organized crime and contract killing as
less of a problem than is capricious corruption in government. A
viable legal and tax system could legitimate and regulate many now
dubious activities, such as private security services and tax-exempt
organizations. But they are undeniably a huge part of the Russian
political and economic crisis, undermining the state, deterring
investment, spurring capital flight and alienating society.

This raises a touchy question: long a visible, ubiquitous and
powerful threat to reform, should the extent of Russian crime and
corruption not have warned American policymakers that Russian reforms
were not on track? A recent article in the New York Times raised this
question obliquely by reporting allegations that the Clinton
administration ignored or discouraged intelligence about corruption
in the Yeltsin regime. I can shed some light on this matter by
recollecting what I observed from the sidelines, tracking the topic
and the struggles of intelligence analysts to report it.

To start with, any analyst worth his salt should have been alert to
the threat to reforms posed by Russian crime and corruption. What
first-year Russian history student does not remember the following
apocryphal exchange: Czar Nicholas I tells his son, "You and I are
the only ones in Russia who do not steal"--and the son replies, "Yes,
father, but that's because we own everything." Here one begins to
understand the shaky status of private property in Russia since the
Mongols. All students of Soviet history heard such aphorisms as "blat
vishe Stalina" (corrupt influence is higher than Stalin) or "Soviet
power is built on matye, blatye and tuftye" (profanity, corruption
and falsification). Arguably the most important development in the
history of Russian organized crime occurred in the late Stalin years:
the "Bitches' War", in which old-time vory v zakonye ("thieves under
their own law", who refused any dealings with the state) battled the
"bitches" (new-type crooks who found collaboration with state
authorities, in running the gulag for example, quite acceptable). The
"bitches" came out ahead. Soviet totalitarianism did not eliminate
crime and corruption; rather it made the nomenklatura the greatest
mafia of all.

Crime and corruption grew visibly after Stalin, especially in the
late Brezhnev years. The scandals of Boris the Gypsy, Galina
Brezhneva's diamonds and her MVD general husband Churbanov (who later
went to jail) played a significant role in Yuri Andropov's rise and
were widely reported in the West. In 1985, based on work by two
superb CIA analysts, the National Intelligence Council produced the
first and only comprehensive National Intelligence Estimate (NIE) on
the internal condition of the Soviet system (since entirely
declassified). It identified growing crime and corruption as a major
pathology threatening the Soviet system. Konstantin Simis and Arkadii
Vaksberg wrote books that spelled it all out.

Toward the very end of the Gorbachev era, in May 1991, I vividly
recall the eminent Russian sociologist, Vladimir Shlapentokh, warning
a conference of intelligence community analysts that the
criminalization of Russian society was the most profound trend we had
to assess.

For me personally--and for a number of younger analysts more
influential than me in later years--an important learning experience
was the "Saga of the KGB Money." In mid-spring 1992, early in the
Yeltsin regime, a retired colleague visited me to report that the
international detective firm for which he now worked had been hired
by the Yeltsin-Gaidar government to find vast sums essentially stolen
by the KGB on behalf of itself and the CPSU and deposited abroad in
bank accounts and front companies. Might not U.S. intelligence help
to recover this money for the benefit of Russian reforms?

Our specialists on the KGB had, indeed, observed such activity since
the late 1980s. Subsequent evidence reveals that it stemmed from
top-level CPSU instructions in the mid-1980s. Using semi-private
cooperatives, the KGB sold cheaply acquired Soviet commodities abroad
at world prices, putting the proceeds into disguised foreign accounts
and front companies, including, according to many public sources, the
later notorious Nordex case. Initially the KGB objective was simply
commercial cover. But the program evolved into operating businesses
for off-budget revenues, and from there into avenues for squirreling
away funds for the safe retirement or political comeback of embattled
communist leaders. Lines of business came to include money
laundering, arms and drug trafficking, and other plainly criminal
activities. Before long, intelligence, business, politics and crime
blurred indistinguishably into each other.