The Russian Roots of the Texan Mafia
"Enron seemed to have banked on a similar formula for success.
Its Chairman and CEO, Kenneth Lay, has close personal and
business ties to the Bush family. As one of the largest and
earliest contributors to George W. Bush's presidential
campaign, he "earned" the title of a "pioneer" - as one of those
contributors whose contribution to the President's campaign war
chest exceeded $100,000.
While Mr. Lay himself was considered a candidate for
Energy Secretary, other former Enron executives figure prominently in the Bush administration
At the Pentagon, Thomas E. White serves as the Secretary of the Army. Previously,
he was Vice Chairman of Enron Energy Services."
On the Richter Scale
By theGlobalist
U.S. Corporations > Transparency
The Russian Roots of the Texan Mafia
During the 1990s, Russian energy companies
were notorious for cooking their books,
defrauding their shareholders - and using
political connections to cover shadowy deals.
So, readers of Russian newspapers were not at
all surprised over recent stories about an energy
giant that was misbehaving in this manner. What
was unusual was that the company in question
was Enron - as quintessentially American as the
Texan heartland where it is based.
A fter the Soviet Union's
collapse, the country's
centralized oil sector was among
the first to be privatized. In that
process, a number of new, private
oil companies sprung up. They all
boasted vast reserves - and a
huge potential of export revenues.
Avoiding split-ups
Meanwhile, Russia's natural gas
industry avoided a split-up. It was
neatly folded into Gazprom, one of the largest
natural resource companies in the world.
Not surprisingly, the fantastic
prospects of the Russian energy
sector became one of the
leading global investment stories
of the 1990s. Foreign investors
rushed headlong into Russia.
Eventually, they triggered the
ascent of the Russian stock
market, based on such energy
blue-chips as Gazprom, Lukoil,
Surgutneft and Tatneft.
And in those heady days of the
go-go 1990s, many American
officials grew hoarse criticizing
Russia's dubious financial
management practices and demanding better
disclosure and shareholder protection. Almost
inevitably, most foreign investors ended up losing
their money.
Strange similarities
Now let's switch the scenes completely. At least in
hindsight, it's uncanny how much events at
Houston-based Enron ended up resembling the story
of Russia's crooked energy giants.
In essence, Russian energy companies lacked
transparency and hid transactions and revenues in a
Byzantine accounting system. As we are now
becoming aware, despite its much glitzier and
perfectly polished exterior, on the inside, the
shenanigans of Enron senior management echo the
1990s in Russia.
What's the SEC for, anyway?
Only, in the ultimate analysis, Enron's feat must be
considered that much more stunning. After all, it did
not happen in a fluid situation of underdeveloped
supervisory agencies - and in a country lacking the
appropriate depth in financial management skills.
The Enron fiasco occurred right
under the presumably watchful
and experienced eye of the
Securities and Exchange
Commission, independent
auditors, market analysts, credit
rating agencies and an army of
other highly-skilled professional
watchdogs in the United States.
Despite all these deep layers of
professionalism, Enron was able
to engage in the same kinds of
activities sported, if not
pioneered, by its Russian
counterparts.
Just like Russian oil giants, Enron was able to hide
losses and mislead investors. Of course, one crucial
difference was that Russian companies usually tried
to hide profits - in order to keep them from
investors and tax authorities. Enron, by contrast,
deliberately overstated its profits for a number of
years to push up the value of its shares.
Dummy corporations
When trouble started at Enron, its senior managers
appear to have sold off their shares, leaving
shareholders - including the employee pension fund
- holding the bag. Enron CFO Andrew Fastow,
whose departure prompted the company's meltdown,
set up a number of private partnerships on the side,
which did business with Enron while he managed
them.
His actions have plenty of precedents in Russia. Take
the case of Gazprom's long-time management team
which was investigated earlier this year. It turned out
that the company had routinely guaranteed loans and
also made investments into businesses set up by
close relatives of Gazprom senior executives.
Political ties
In Russia, such practices are often legal - or at least
not expressly forbidden. What's surprising is that in
the United States, accountants and rating agencies
managed to maintain silence, or ignorance, about
Enron's practices for so long.
And legions of U.S. stock
analysts were only too happy to
tout Enron. They must have
been solidly asleep all along. It
should have been a warning to
U.S. mutual fund owners that,
in some cases, the analysts
pushing Enron's stocks were
the same guys who had
promoted Russian energy
companies just before the
Russian stock market bubble
burst in August 1998.
But the potentially most
corrosive aspect of the Enron scandal lies in the
political realm. Russian energy companies have been
able to fool investors largely because they were
protected by powerful political connections.
(Viktor Chernomyrdin, the long-serving Prime Minister
in Boris Yelstin's government, had previously been
the head of Gazprom. He is rumored to have become
Russia's first billionaire as a result of that
connection.)
Political protection for the worst offenders
Hence, it proved very difficult to sue any of the
Russian investors in court. Even if investors win a
decision, it's pretty much impossible to enforce it.
Indeed, Russian regulators are too weak to go after
them.
Enron seemed to have banked
on a similar formula for success.
Its Chairman and CEO, Kenneth
Lay, has close personal and
business ties to the Bush family.
As one of the largest and
earliest contributors to George
W. Bush's presidential
campaign, he "earned" the title
of a "pioneer" - as one of those
contributors whose contribution
to the President's campaign war
chest exceeded $100,000.
While Mr. Lay himself was considered a candidate for
Energy Secretary, other former Enron executives
figure prominently in the Bush administration. At the
Pentagon, Thomas E. White serves as the Secretary
of the Army. Previously, he was Vice Chairman of
Enron Energy Services.
Jail time for offenders?
There are differences, of course. No Russian oligarch
has ever been punished for defrauding investors -
or taking minority shareholders and tax authorities
for a ride. On the contrary, most energy companies
in Russia rushed to support Vladimir Putin once he
became Russian prime minister in August 1999.
They also helped finance his subsequent presidential
campaign. Since then, two of the largest energy
concerns, Gazprom and Lukoil, helped throttle the
two remaining media groups that dared criticize the
government.
While Mr. Putin had promised
voters to eliminate the oligarchs
as a class, in reality they have
become more powerful and
wealthier than ever under his
rule. At least, Mr. Putin sent his
top assistant to clean up the
murky business affairs at
Gazprom.
But in the United States,
Enron's political connections
have not saved the company
from bankruptcy. Investigations
are under way, Congress is
looking closely into the matter - and a myriad of
lawsuits have been filed by duped shareholders.
But despite this pivotal difference between the United
States and Russia, there is one discomforting
parallel. For whatever reason, the rise to political
power is all too often financed by companies that can
only be characterized as having questionable
accounting practices.
December 20, 2001
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