Russia's Enron Mirror
(this story is a month old sorry if it's a repeat post..pb)
In Russia, some in the greed-is-good elite are taking an odd sort of comfort in the collapse of Enron and WorldCom.
As Yevgeny Yuryev, the president of Moscow's Aton brokerage, put it: "For many years we were told that Russians are corrupt and nontransparent. Now this stereotype has finally been broken, and people will see that Russia is no worse than other countries, probably even better."
Only in Russia could one crow of being "no worse than other countries." Imagine Americans surveying Wall Street and pronouncing with satisfaction: "We've made a mess of it--but so has Russia, so that's OK."
This sort of perverse complacence is troublingly common in Russian financial circles. William Browder, head of Moscow's Hermitage Capital Management fund, told the Moscow Times, "I have already heard a lot of people saying: 'Look how bad America is, why do we need to improve ourselves?' "
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Time spent in Moscow over the past decade was actually excellent preparation for understanding America's twenty-first-century corruption. For example: Anyone following post-Soviet business would have realized years before Enron imploded that the international accounting business has become a self-parody.
Consider just that PricewaterhouseCoopers (PwC) and one of its predecessors, Coopers & Lybrand, repeatedly signed off on the books of the Russian Central Bank in the 1990s--even though the auditors knew the bank was taking all of the dollars out of its vaults and sending them abroad to something called FIMACO, a shell company in the British Channel Islands with no employees.
Even after the FIMACO story came to light--fallout from the August 1998 ruble crash--PwC was there to paper it over. The Russians handed the audit firm some carefully selected documents, PwC wrote a guarded report saying those particular documents indicated no wrongdoing, and Central Bank Chairman Viktor Gerashchenko brandished the resulting report as "an audit" and exoneration.
Gerashchenko says all of the money shipped out to FIMACO eventually came home. But to this day he and other Russian leaders are evasive and contradictory about why it was shipped abroad in the first place--or what happened to any investment profits. The whole arrangement looks like corrupt bureaucrats investing $50 billion of the nation's wealth--including IMF funds--and then keeping the dividends for themselves. Minus, of course, the scraps thrown to the auditors as professional fees.
FIMACO alone ought to suggest that as corrupt as American business is, Russia is worse. Things are bad, but Alan Greenspan has yet to admit to laundering US currency reserves through a shell company in the Bahamas.
Indeed, Russia's 1990s will likely stand as one of the most economically debauched eras in modern history--from the theft of the oil- and gasfields and the disappearing IMF and World Bank loans, to the unveiling of both the domestic debt market and the banking sector as Potemkin pyramids. Nor should one forget the wave of contract killings that accompanied it all.
And yet...one can forgive Russians for wondering whether America might secretly be just as debauched. After all, we sent "aid" to Boris Yeltsin's Russia in the form of...Big Five accounting firms. That's right: A healthy chunk of the money the US Agency for International Development (USAID) spread about the post-Soviet world came in the form of mega-payments to Arthur Andersen, PwC, Ernst & Young, Deloitte & Touche and KPMG.
In Kazakhstan, I briefly worked in the mid-1990s for something called the USAID Consortium. It was a collection of foreign "consultants"--big accounting firms and public relations companies, all beavering away on that nation's embarrassingly corrupt drive to put Soviet state assets into private hands. Never mind that those private hands usually belonged to the likes of President Nursultan Nazarbayev's daughter. Even Nazarbayev himself was outraged by the way the accountancies sucked up all the US aid money earmarked for his people. In 1997, Nazarbayev famously dressed down his Central Bank chief on television, demanding to know what had come of $60 million in aid money. "Mostly this goes to consultants," the bank chief said. Nazarbayev shot back angrily, "To what consultants? $60 million?!"
When they weren't advising the government on how to privatize state assets, those consultants were letting the private sector know how best to get around the government. Tax evasion was endemic in Russia throughout the 1990s: Seemingly every corporation set up a shop in tax-easy Cyprus, and many paid their employees not salaries but in (tax-free) insurance annuity checks. The Big Five helped facilitate all of this.
So much money dedicated to the Russian budget was shipped abroad in these years that there was precious little left for, say, Russian teachers--who earned a shocking pittance and routinely went unpaid for months at a time. In Cyprus, meanwhile, the stock market--led by the island's commercial banks, which were in turn fattened on a diet of Russian cash--rose 700 percent in 1999. So in early 2000, we had the spectacle of the Russian Education Ministry admitting teachers would again not be paid on time--all the wealth was in places like Cyprus--even as the Cypriot Education Ministry had to formally reprimand its teachers for crassly interrupting class to check their burgeoning portfolios.
Fast-forward to 2002, and suddenly the headlines in America sound distinctly Yeltsin-era: We have companies reincorporating in Bermuda to dodge US taxes (I guess Cyprus is full); we have Enron's 874 offshore subsidiaries in places like Aruba, the Caicos and the Caymans; we even have the incredible phenomenon of "janitor's insurance." As the Wall Street Journal revealed in a series of amazing articles in April, hundreds of leading American companies--among them Walt Disney, Procter & Gamble, Nestle USA and AT&T--have bought life insurance on millions of their current and former employees. These employees are neither asked their permission nor informed, and when they die, the companies quietly collect--a perversion of corporate-owned life insurance that apparently dates to the 1980s. Corporations privately call it "janitors insurance" or, in some cases, "dead peasant insurance." ("I want a summary sheet that has...the Dead Peasants in the third column," says a Journal-quoted memo from the insurance consultants for Winn-Dixie.)
So what came first? Russia's 1990s-era insurance games to dodge taxes? Or America's 1980s-era "dead peasant" insurance games? Perhaps it all dates back to Nikolai Gogol's Dead Souls, a classic tale of a scam to cheaply buy up serfs who have died but nonetheless live on in outdated state ledgers.
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Such is the nature of international business: It's often impossible to divide the Third World locals from the First World advisers. Consider James Harmon, who was president of the US Export-Import Bank in 2000 when it decided, over the objections of the State Department, to lend a half-billion dollars to Russia's Tyumen Oil Company. Harmon left Ex-Im last year, founded his own consultancy, Harmon & Co., and in July was appointed to the supervisory board of, yes, Tyumen Oil.
Or consider Ruth Harkin, the Clinton-era president of the US Overseas Private Investment Corporation, who in the 1990s oversaw $3 billion in financing and political risk insurance for projects in Russia--including a $65 million insurance policy for a United Technologies aircraft engine-making joint venture. In 1997, Harkin left OPIC to join the executive suite of, yes, United Technologies. Consider the US government-hired experts from Harvard University--now being sued by that same US government for making more than a half-million dollars in personal investments in the very markets they were hired to provide impartial advice in designing. Or consider the American managers of the Pentagon's Defense Enterprise Fund, who invested tens of millions of dollars from Congress meant for converting Soviet military infrastructure to modern-day civilian use. Their investments repeatedly soured -- yet that didn't stop them from showering more than $1 million on themselves in the form of taxpayer-funded fine dining, golf club memberships, vacations to warmer climes and tickets to theaters and the symphony.
It was surreal living in Moscow in the 1990s--listening to Westerners lecture Russians about "transparency" and "proper corporate governance," and watching the Russians suspiciously scrape and sulk. And it was predictable they would take a certain glee when their suspicions--that American businesspeople, though natural-born preachers, are not necessarily saints--would be so spectacularly confirmed.
And it's just as surreal today. We now have the American Chamber of Commerce in Moscow boasting it knows how best to clean up Wall Street. How? With a plan from the Enron playbook: "voluntary" codes of behavior and deregulation of the stock market.
The AmCham is a lobbying group in Moscow representing about 650 corporations--among them Xerox (penalized $10 million for overstating revenues), Hewlett Packard (where management has merged with Compaq, pay itself $337 million in "retention bonuses" in return for promising not to quit and promptly sack 15,000 people ), Halliburton (our Vice President's alma mater, currently under SEC investigation), the Big Five accounting firms, the Russian and foreign oil majors and hundreds of other typical businesses.
AmCham's president, Andrew Somers, thinks the US Securities and Exchange Commission should heed the Russian experience--apparently because the Russian stock market has been more resilient than its American counterpart in recent months. Never mind that Merrill Lynch was penalized $100 million, Arthur Andersen was destroyed, the Adelphia founders have been jailed, the Harvard advisers sued--while virtually no one in financial Moscow has ever been penalized for anything. Look how bad America is--why should the Russians improve? |
