The Gangster State: The Clinton Administration Hoped Yeltsin and His Reformers Would Be Able to Lead Russia toward Democracy. Instead, What Russia Got Was Kleptocracy

Newsweek, September 6, 1999 | Go to article overview

The Gangster State: The Clinton Administration Hoped Yeltsin and His Reformers Would Be Able to Lead Russia toward Democracy. Instead, What Russia Got Was Kleptocracy


It began as a spore of suspicion --a tip that British investigators picked up in some boxes of corporate documents last summer. That led them to Canada, and then, along with the FBI, to several accounts at a respectable, midsize New York bank. Nothing very startling--until authorities realized that billions and billions of dollars were getting "laundered" through the Bank of New York accounts, apparently shunted through a maze of companies traced to Russia. Today the case has become a scandal that threatens to unravel the whole threadbare structure of relations between Russia and the West.

The facts of the case, first reported by The New York Times on Aug. 19, remain murky. A senior FBI official familiar with the investigation cautioned it is still at an early stage, and along with other officials he expressed concern the story may have been prematurely overblown by some media. "All we know is that lots of money was going in and out of these accounts. Whether it's nefarious or not we really don't know," the FBI official said. "Basically we don't know if this is legitimate money or illegitimate." Investigators say at least $4.2 billion and as much as $10 bil- lion may have been laundered--funneled through legitimate accounts so it appears clean--from as early as October 1997 to March of this year. This was done through Bank of New York accounts largely in the name of Benex Worldwide Ltd., a firm that authorities say is controlled by Semyon Mogilevich, allegedly a vicious mafioso known as the "brainy don." The accounts flowed through a department managed by Natasha Kagalovsky, a bank executive who has since been suspended. Her husband is Konstantin Kagalovsky, an admired economic reformer who was, as recently as 1995, Russia's chief delegate to the International Monetary Fund. Neither she nor her husband has been charged with any wrongdoing.

The biggest mystery is where all these billions came from. It's too much cash, most investigators agreed, to have flowed only from "traditional" Russian mob pursuits like prostitution, drugs or even arms sales. More likely, authorities believe, the money was looted from IMF loans (The IMF has asked for a new audit of Russian central-bank transactions, NEWSWEEK has learned) or represents revenues from state assets like oil or aluminum. It might even be legitimate capital fleeing Russia. Whatever the source of the money, it probably originated with some of Russia's leading political and business figures, many of them engaged in what seems to be an unholy alliance with Mogilevich.

How do two men like Mogilevich and Kagalovsky--seemingly from opposite poles of Russian society--get linked to the same scandal? Investigators say it's the main problem in Russia today. Virtually no one, from the nation's business elite to Presi- dent Boris Yeltsin to his major political opponents in next year's presidential election, seems untainted any longer by corruption. Here the connection may amount only to innuendo. But if it turns out that massive laundering is involved, "this [case] is a dagger aimed at the heart of the Russian elite we have built up in the post-communist era," says a U.S. official with knowledge of the investigation.

Authorities are fairly convinced that Mogilevich is a kind of lodestone drawing in a vast network of official Russian corruption. One U.S. official familiar with the probe says Mogilevich and other principals in the case have corporate links with both of Russia's main power centers: Boris Berezovsky, the industrialist and media baron who is Yeltsin's main financier; and Systema, a group of companies supporting Yeltsin's main political rival, Moscow Mayor Yuri Luzhkov. Indeed, by last weekend both the Yeltsin and Luzhkov camps were hurling charges of corruption at each other based on the case. …

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