One of the most interesting aspects of the current Russian problem with sanctions imposed by the West is the rejuvenation of the Russian Mafia and its role in Russian commerce. Just as the rise of the post-Yeltsin Chekists into positions of great power in Russian industry, administration, finance and banking as ‘siloviki’ the gradual re-Sovietisation of the Russian economy has led to a marked recrudescence of the Mafia as a concomitant source of economic power.
When Putin has acted to put ever greater portions of the Russian economy, especially the oil, gas, energy, armaments and metals, back into majority state control under the care of his siloviki friends and colleagues he has recreated the worst elements of the status quo ante; that which prevailed before the great wash of privatization which swept into Russia under Yeltsin and his Western reformer consultants. The rearrangement of the power structure has also recreated the need for the Mafia.
When Putin complains that the end of the Soviet Union was a disaster for Russia there is a great deal of truth in his statement. The dismemberment of the former USSR into its several constituent parts left the warm-water ports of the Baltic largely in the hands of the newly independent states of Estonia, Latvia and Lithuania. The warm-water Black Sea ports were largely incorporated into the new Ukraine, Georgia and Azerbaijan. The capacity of the remaining Russian ports after the breakup of the Soviet Union was about 187 million tons per year or a reduction of about 58% of the USSR's former capacity. This reduction in its port facilities meant that, even at then current volumes of trade, Russian ports could handle only 54% of this trade. The balance of Russian trade (46%) had to travel to and through other countries. These shipments via foreign ports cost Russia dearly as this trade took place in hard currency; at 1992 rates these transfer payments amounted to about $2.3 billion per year and, in terms of a rapidly declining rouble, made up a geometrically-escalating cost for Russian commerce.
The loss of access to Russia of its former ports was qualitative as well as quantitative. The loss of the Baltic ports meant that Russia lost modern transshipment complexes it had built for potassium salt (8.8 million tons per year); petroleum products (39 million tons per year); chemical wet cargoes and compressed gas (1.3 million tons per year); grains and pulses (5 million tons per year); perishable goods (0.5 million tons per year); as well as a key train ferry reloading facility for Germany (5.3 million tons per year). The main grain port and grain silo area in Novo Tallinn, only operational in 1986, with over 370,000 ton grain storage space was lost. The major Soviet oil export terminal at Ventspils was lost as was the modern container port at Riga. In the south, Russia lost port facilities for handling black oil and light petroleum products (1.7 million tons per year); chemical wet cargoes and condensed gas (3.6 million tons per year); urea (1.5 million tons per year; grains (9 million tons per year) as well as six major grain elevators in the port, especially at Odessa, the major grain port. Special port handling complexes for ore and coal reloading were lost (10 million tons per year) and a train ferry for handling cargo to Bulgaria (4.8 million tons per year). The last loss was compounded by the fact that its loss denied Russia direct access to the newly-opened international trade channel of the Rhine-Main-Danube Canal.
Western Russia has only shallow depth, highly congested ports with little capital infrastructure to handle the bulk of its trade. With the end of the Soviet Union Russia had only one port grain elevator and one import complex for raw sugar; at Novorossisk. The sugar facility had a capacity of 0.8 million tons a year although Russia urgently required an import of sugar of about 4 million tons a year at current levels of consumption. On the Azov Sea there was only the shallow water port of Taganrog; and on the Caspian Sea only Makhachkala with a maximum of 7.0 million tons per year capacity. Over 60% of Russian ports were shallow depth ports incapable of handling modern vessels. Northern ports are frozen for large periods of the year and are kept open only by expensive nuclear-powered ice-breakers. Western insurance companies couldn’t agree to approve regular trade to these ports like Archangelsk or Murmansk. Also, in many ports like Makhachkala, Poti, Baku and others, there were civil wars and ethnic strife where rail lines had to pass through such troublesome areas as Chechnya, 'Free Georgia', etc. where the security of goods in transit could not be guaranteed.
The Soviet system was faced with the climatic challenges of Siberia as well. One of the most difficult aspects of developing the Siberian region was the skewed pattern of distribution developed over the last seventy years of Moscow rule. The Soviet system was one in which planning played a very important part. This had both positive as well as negative effects. On the positive side, the Soviet system sourced and delivered regular supplies of food, clothing, fuel, hot water and heat to remote areas of the nation. The ability of the Soviet system to keep up the supply of food stuffs, hot water and fuel to even its most remote areas was a remarkable achievement. This achievement enabled factories to continue producing goods for the larger Soviet market and delivered raw materials for this productive base from incredible distances.
This was coupled with a policy of deterring internal mobility through the use of internal passports and closing off whole regions and cities to even internal immigration. The vast military-industrial complex of Russia was largely buried in the center of Siberia; from Tomsk to Khabarovosk and concentrated in major industrial towns like Krasnoyarsk, Bratsk, Novosibirsk, Bernaul and Omsk.
Another aspect of this distribution system was the use of massive state trading companies to make the purchase and sale of goods to and from Russia. A giant trading company like Razno (Raznoimport and Raznoexport) handled the purchase of the total requirements of whole industries; e.g. the aluminum industry and the sale of the products produced by this industry. So, Razno would arrange the import of bauxite from Africa, petroleum coke and other carbon products from Europe; soda ash from the Middle East, etc. and would arrange the sale of the finished aluminum to internal Russian customers as well as overseas. This type of mass buying and selling by giant state enterprises was the rule throughout the whole of the Soviet economy. This was facilitated by the use of a central bank clearance system in which internal accounts were calculated in rouble credit and debits across an industry, a ministry, or a state trading organization. The accounts were all paid into and out of the "center". There they were allocated by the “Gosplan” planning committees as part of a "plan" for the needs of the industries and matched by establishing quotas for production. External payments in hard currencies and hard currency sales were conducted by the central banking system without regard or reward to the importer, exporter or producer. As long as the "center" existed and functioned this planning model creaked on.
The system stressed mutual dependency as much as it stressed efficiency. This system broke down in an effort to establish "perestroika". The first people to lose their jobs were the planners at “Gosplan”. The Yeltsin victory and the introduction of Gaidar's and later Chernomyrdin's reforms sought to decentralize the control of the CIS and later the Russian economy. This was a positive step towards establishing a market economy but a dreadful wrench for the existing manufacturing sector. Because all purchases and sales were made through the "center" there was no aggregation of capital which belonged to any factory or ministry or trading company. There had been no "profits" so there were no accrued earnings. Productive enterprises owed goods to the system and requisitioned materials from the system. There were no real cash transactions among the enterprises nor was there an accounting system which measured who owed whom, for how long or why it owed it. The introduction of reforms made life terribly difficult for state enterprises and trading companies. In Soviet industry there were high levels of production reported but these were a facade (the Russians use the term ‘pokazuka’ for this type of charade).
The introduction of the “shares for cash” privatization provided for the introduction of young men, groomed for their tasks by the KGB and political leaders like Silayev, Kabulatov and Soskavets, to take over many corporations and set themselves up as ‘oligarchs’. These new oligarchs had limited political power and, when Putin took office, he instantly moved to control the political powers of the oligarchs by appointing Chekists to their boards and began a program of increasing state ownership of these companies. The oligarchs soon learned that they could keep their money but should not dabble in politics. Most agreed.
During this same period another group of ‘biznizmen’ were forming international ties. In the early years of the Yeltsin government organized crime began to establish itself as an important economic player in Russian business. There is a great deal of misunderstanding in the analyses of the development of organized crime in Russia because the analysts do not differentiate between ordinary crime and international financial manipulation. Every country in the world has organized criminals and has done since time immemorial. The traditional businesses of these criminals are the protection rackets, gambling, labor racketeering, prostitution, stealing, money lending and drugs. These are non-intellectual businesses and require more brawn than brains. The criminals may take over some businesses or control them, but their aim is shaking-down money not achieving the possibilities inherent in the company’s business plan.
These criminals are very rarely political people or political actors. To a large extent they are anti-communist because communist states have generally frowned on criminal activity conducted by non-communists. This is why it was so useful to the Allies to use the deported anti-communist mafia leadership in Italy, Vito Genovese and Charlie Lucky Luciano, to prepare for the Allied invasion of Italy in the Second World War. Mussolini had declared war on the Mafia so the Mafia declared war back by joining the Allies. Organized criminal gangs played an important role in the Cold War as well. The Allies used anti-communist gangsters from the Union Corse (Pierre Ferri-Pisani in particular) and some of the French mafia to attack the communist unions who sought to stop the entrance of Marshall Plan aid to Europe. These same Union Corse leaders were later used against the Viet Cong in Indochina, a process which helped create the initial drug routes from the Shan states in addition to fighting communism.
While most governments are capable of generating and pursuing their own corruption without the necessity of partnering with organized crime, sometimes the governments act in such a way as to foster an immense amount of activity in the criminal world. This was true in both the US and Russia when the state introduced Prohibition. In the US the prohibition of the legal sale of alcohol created a giant smuggling and bootlegging industry that put millions into the coffers of organized crime. In Russia, Gorbachev launched the anti-alcohol campaign in 1985 by closing down most liquor stores and limiting per person vodka consumption to two bottles a month. As in the US the campaign turned out to be a failure, creating huge bootleg liquor industry and pouring money into the “obshak” (mob treasury) of the various criminal organizations.
The financial rewards from the responses to prohibition had a more far-reaching consequence. In both cases organized crime was faced with having to deal with cash mountains from the illegal sale of alcohol. In Russia it was worse. The banning of alcohol took place at the same time as quantities of opium and heroin were arriving in Russia from the failing Afghan War. The Russian organized criminal fraternity had the revenues from bootleg alcohol as well as its substitute, heroin. They were unprepared to deal with such a large cash flow.
In the early 1990s the Russian state collapsed. Many of the former vory had maintained their organizations intact and were doing their usual crimes across Russia. But this sudden opportunity of prohibition and heroin attracted a new group of younger, less traditional criminals into ‘the life’. They were aided by the fact that the traditional vory concerned themselves primarily with crime and didn’t see the opportunity of turning their newly acquired cash into political power. Perhaps the best example of this rise to power was Sergei Anatoliavic Mikhailov (‘Mihas’). In 1984 Mihas was sent to the Gulag for a short spell. He learned many skills there and made useful contacts. On his return to Moscow he, and some colleagues, set up their own criminal family. He named it after the zone in which he operated and the gang became known as the Solsnetskaya Organization. In the beginning Mihas concentrated on the normal criminal activities: extortion, counterfeiting, drug trafficking and blackmail. The existing criminal organizations fought the Soslsnetsvo gang for turf, but Mihas’ people won and their gang expanded. He could now expand into more lucrative businesses like arms dealing, money laundering and drugs. He walked free from an arrest in 1989 when the witness disappeared. In Russia, as in parts of Latin America, the verb “to disappear” is a transitive verb; it is grammatical to say “I’ll disappear you”.
With the collapse of the Soviet system and the rise of Yeltsin new horizons beckoned for the new group of criminals like Mihas. Crises are opportunities to the criminal fraternities. These young criminal groups took advantage of the confusion and moved to join up allies in the political establishment left without a power base. Using these political connections they soon owned banks, casinos, car dealerships, hotels, restaurants and real estate. Mihas even acquired control of Vnukovo Airport.
Mihas was not alone in setting up a powerful ‘krysha’ which blended criminal activity with political power. Another successful leader was the late Anton “Antoha” Malevsky who was the head of the Izmailovo group until his unfortunate parachute dive in which his chute didn’t open). The most successful entrepreneur was Semion Yudkovich Mogilevich, the Russian equivalent of Meyer Lansky. While vory like Antoha and Mihas headed their own gangs Mogilevich turned his skills to the financial opportunities which were opening. In 1994 he took control of Inkombank; one of Russia’s biggest new banks. He used cash of his own and cash of others to invest in a wide range of legal businesses (especially in the gas industry) and the worldwide spread of criminal enterprises. He was the banker for the Russian mobs. Grigory Luchansky was the Bugsy Siegel of Russia, using his company, Nordex, to open up new frontiers across the globe for Russian criminal activity. The Chekists in the government joined up with the criminal fraternity to smuggle goods, money and financial instruments into the world market, avoiding state activity.
With the beginnings of privatization the increased levels of regional autonomy grew. The governors had their own budgets which were gleaned by imposing local taxes and duties, instituting a wide range of taxes and fees for government services which they often made up on the spot. The police and criminals established a good symbiotic working relationship in which the protection racket thrived and the cash sales of vodka and cigarettes saw a piece of each transaction find its way into the regional and municipal coffers. The government agencies sold licenses and permits and the criminals shook everyone down and sold everything na leva (outside the normal channels). Moscow had no money to pay the regions nor harbored any great intention to do so. Traditionally, Moscow took; it didn’t pay.
The most obvious aspect of the monetarization of blat was the concomitant development of “kryshas” (‘roofs’) which served to provide a parallel economic and legal structure to the post-Soviet system which had suffered a stunted growth. For Russian businessmen there was no security that contracts could be enforced; no way in which supplies or materials could be guaranteed; no security measure that would allow finished goods to reach the customer. There was no guarantee that the cash reserves which were building in the banks could be secured. The police and security services were unreliable and expensive.
One characteristic of the development of kryshas in Russia was the simultaneous development of “Red” kryshas. These Red kryshas were policemen, spetznaz soldiers, and other uniformed guardians of the public peace who the state organizations rented out to businessmen to act as their ‘protectors’. This was a lucrative business but not too remunerative to the people with ’boots on the floor’. The big money for the Red kryshas most often went to their officers and the politicians. Sometimes one Red krysha ended up fighting with another Red krysha. It was not a well-run endeavor. There were several more successful ’security firms’ set up by the Red kryshas. Many were tied in directly with the governor’s or mayor’s office (for example in Chelyabinsk and Vladivostok).
As a result of the privatizations the new Russian companies suddenly found that they had plants and offices across the wide expanse of Russia. While the leadership was primarily Muscovites the facilities were spread all over the country. The new Russian capitalists suddenly had to deal with internal Russian industrial problems. As these budding oligarchs took over factories, refineries and smelters across the ten time zones of Russia they soon realized that they had very little management control of their scattered operations. Taking over the shares and ownership of a company, especially one which was moving from a state-owned structure to a private structure left, at best, a management vacuum at the factory, refinery or smelter. The ownership of these new assets required installing an effective management structure among them to make them work and which could establish a working relationship with the regional and municipal authorities. This would be a management structure that would have to deal with resource allocations, finances, transport and ‘human relations’. None of these new enterprises were ready or staffed for this.
In many areas there was an immediate conflict with the former managers of the plants. Local mayors resisted change; governors fought against the changes in traditional practices; and the labor force was unprepared to face a distant management in Moscow or St. Petersburg whom they didn’t know or trust.
However, there were local organizations who were organized, in place, and who would be of immediate use to these new oligarchs. These were the groups of organized criminals who controlled the on-the-scene structures and who had worked out a symbiotic pact with the local politicians. These smaller gangs, after a flurry of violence and conflict, were quickly incorporated into national criminal enterprises and an initial dividing of the turf took place in key sectors. The Solnestvo Gang led by ‘Mihas’ moved quickly to take over the oil and gas industries. The Ismailovo, under Malefsky, took over the aluminum industry. The Uralmash fought its rivals in a bloody battle for the Urals copper industry. This was mirrored in every region, factory, port and rail center across Russia. There was no way for these oligarchs to manage the vast and uncoordinated sprawl of Russian industry on their own and the Russian government was of no use at all. Despite the active investigations by the Prosecutor’s office and an extensive monitoring plan run through Interpol, the criminal authorities were unable to have much of an effect on policing this.
The takeover of Yukos by Khordokovsky was initially of particular interest to the security agencies. Just as the gas industry was linked to Itera and Semyon Mogilevich, Yukos was believed to be closely linked to the Solnestvo Gang. The Prosecutor’s office investigated several ‘leaks’ from their ‘stukachi’ that there was a “special relationship” between Khodorkovsky, his Yukos Oil concern and the Solnestvo Organization of Moscow. One of the attractions was that these new private enterprises provided a giant international money laundry for the criminals. They had reported that Sergei Mikhailov (‘Mihas’) had invested large sums of his money into Yukos Oil projects. One such project was identified by the source as Mikhailov and the Solnestvo Organization’s financing of the adaptation by Yukos Oil of new drilling technology from Canada. This activity began in early 2000. One of the individuals who was reportedly involved in this activity was Aleksandr Sedov, a.k.a. “Moskovsky,” a central Moscow “brigade leader” of the Solntsevskaya Organization. It was thoroughly in Mikhailov’s interest to be a “partner” in the development of foreign technology such as the Canadian drilling equipment. By investing his and his criminal organization’s funds in the Yukos Oil project, Mikhailov, in effect, “laundered” vast sums of money into the legitimate operations of a major Russian petroleum company. The coordinator of this relationship was said to be Arnold Arnoldovich Tamm.
Equally as important the internal oil refining structure was structured to allow participation by local kryshas. Yukos Oil did not have distributors or “intermediaries.” Instead, it had its own personnel serving as the company’s representatives in marketing its products. Yukos Oil had a rather large structure consisting of between twenty and fifty refineries located throughout the Russian Federation. Petroleum was pumped into each of these refineries or processing facilities, or “MPZs,” and at these refineries the material was turned into residual oil, gasoline and diesel fuel.
In Yukos, as in other big petroleum companies in Russia, each MPZ facility was controlled by a particular criminal group. According to the investigators, the control exercised at the MPZ by the various criminal groups provided discipline out of chaos. The communities surrounding each MPZ saw the facility as a source of money in a country where such resources were otherwise scarce. The criminal organization, therefore, was able to impose a sense of order by prioritizing who could get access to this large source of funding and its products. The controlling criminal group got exclusivity to provide services to each MPZ, including such areas as distribution of products and protection from extortionate demands. In return, the major oil companies, such as Yukos, got “control” over the anarchy, particularly in the more remote areas of the Russian Federation.
At that time, the three largest Yukos MPZ facilities in Russia and their controlling organizations were Kemerovo, Omsk and Uha. Kemerovo and Omsk were controlled by the Kemerovo, a Russian criminal organization, which was headed by an individual identified as “Kostya Schram” (a.k.a “Kostya the Scarface”). “Kostya Schram” was further described as a close associate of Solntsevskaya Organization leader Sergei Anatolyevich Mikhailov. A different branch of the Solntsevskaya group controlled Uha, in Bashkortistan. As part of Yukos’ and other companies’ arrangements with the criminal structure at each MPZ, the organized crime leaders controlling the facility had the option and the right to set up “independent deals” for large-scale clients. The expansion of organized crime into the oil, gas and metals industries was an important element of their stability and the culmination of several years of attempts at symbiotic relationships.
As the years have passed this role of organized criminal enterprises as the middle management providers has been institutionalized across Russia. These criminal enterprises do not interfere with the macro-economic decision making of the company. They maintain order and discipline. They have been institutionalized.
Now, with the imposition of sanctions by the West the criminal enterprises are coming into their own. Just as it used to be the job of the “tolkach” (the company representative who negotiated ‘deals’ for the company) the criminal enterprises are busy arranging for supplies of materials to the plants and their transport to the market. They are managing scarcity. There is nothing in the sanctions which impeded them and their international contacts are growing ever more important in arranging the supply of needed goods to the factories. This has reached its high point in the dealings with the Ukraine. The smuggling of goods and weapons into the Ukraine has been facilitated by the Russian Mafia and their counterparts in the Ukraine. There is a lot of money to be made in scarcity and the Russian government has found the Mafia a valuable partner in its relations with “Novorossiya”.
Indeed this is a new dawn for the Russian and Ukrainian Mafias. It’s just like deja vu all over again.
Note: For a more detailed analysis of the development of post-Soviet Russia see “Free For All: The Post-Soviet Transition of Russia”. Gary K. Busch, Virtualbookworm Publishing (May 31, 2010)
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