Last night I had the great good fortune of attending the special preview screening of a new series on BBC1 to be broadcast in the new year. It is called “McMafia” as it was based on the excellent and informative overview of the international organised crime scene, McMafia: Seriously Organized Crime (Bodley Head, 2008) by Misha Glenny, a distinguished investigative journalist and historian.
This miniseries was created by Hossein Amini and James Watkins and directed by James Watkins. The stars of the series include James Norton,David Strathairn, Juliet Rylance, Maria Shkshina, Alexey Serebyakov, David Dencik, Merab Nididze and many other notable international actors of stature.
The writers, Amini and Watkins have succeeded in turning a non-fiction work into a compelling theatrical production by creating a microcosm of the sprawling details of the rise and spread of international organised crime in Glenny’s book into a compelling tale of the latest generation of Russian-based high-level financial crime in the twenty-first century and the forces which drive and limit its operations.
For those of us who have lived and operated in that world it was a very special experience to see the preview. There was an authenticity in the details of the plot, the language used and the mise-en-scene which recreated many memories for me from real life. The underlying values of protecting the ‘family’ and the group were underscored by the ever-present sense of menace created by corporate, criminal and political competitors.
There is an important footnote to this drama which deals with the role and influence of the Russian Mafia on the transformation of Russia. In many ways the transition from a communist command economy to today’s world of high finance on an international scale could not have been achieved without the Russian Mafia.
By 1990 Russia stood in a very precarious position. It had vast wealth in terms of resources but no way to trade them; a mighty army but an army that was retreating from Eastern Europe without a shot being fired; a banking system with no liquidity as all funds were held in Moscow and there were no regional banks. There was a gold rubble trading at $1.20 to the U.S. dollar and a free rubble trading at $0.66. Behind all of this was a hostile West, especially the glavni vrag, the ‘main enemy’ the U.S., who would certainly prevent Russia from dumping its products on the world market and who was refusing realistic credits to Russia. In addition, the break-up of the USSR into Russia and the CIS left many of Russia’s ports in the hands of local nationalists in Lithuania, Estonia and Latvia which restricted Russian access to the markets.
There were several major crises with which the Russians had to deal. The first was food. There was little food in Russia at the best of times, exacerbated by the problems of logistics and supply. Under the Soviet system the factory or place of work in rural Russia often offered most of the social services provided by the State, including food. With the end of the Soviet system these factories or places of work had no ability to fulfil these tasks. Because their factories operated under the strictures of the command economy there were no profits, no accumulated savings or other funds upon which they could draw. They couldn’t buy raw materials; they couldn’t pay for utilities or services; and they had no market for their goods. In the giant aluminium plants there was no way to pay for the alumina (which was derived from bauxite imports from Guinea); no way to pay for electricity; and no way to pay wages and no way to get the finished aluminium to market.
Equally there was no way to price these internal transactions as there never was anything other than notional prices for transport, notional prices for raw materials and notional prices for finished products. There was no money in the system, only notional internal clearing mechanisms.
The leaders of KGB developed a plan. The first part of the plan included inviting in foreign capitalists to prepay the expenses of the factories to get production moving. These capitalists would pay for raw materials, pay for transport and earn the right to sell the completed goods on the world market. They would pay, in addition, a fee or ‘toll’ to the factory for producing the goods. This system of tolling would only work if there were an internal currency which could be used to start the payment system and establish prices. There was no state mechanism capable of handling this. So, the planners decided on an ambitious, if risky, system. They would make an alliance with the small and disorganised criminal groups in Russia to develop a parallel system to the government’s business. The Russian Mafia dealt in cash – for vodka, cigarettes, prostitution, kidnapping, blackmail and protection. The criminals, unlike the businesses, were liquid. The Russian government spurred on the creation of the Russian Mafia and opened up the floodgates on a massive haemorrhage of rubbles onto the world markets to get hard currency and to prime the rubble pump inside Russia.
Russian organised criminal groups, generically referred to as the ‘Mafia’ grew up alongside nascent Russian capitalism. Its growth paralleled the growth of legislation enabling private ownership of factories; the private ownership of banks; and the private ownership of stocks and shares. All of these were absent from the Russian economy for seventy years and, as they returned or were permitted, the Mafia was in a good position to take a piece of the businesses being transacted. The Mafia should be considered as relatively low-level players in these businesses. They were largely the muscle in the protection rackets and the carriers of wood and drawers of water in the major transactions. The business brains in the rise of organised crime came from the ranks of the intermediaries; the traders and deal makers who were associated with several of the Mafia families but who were also independent of their structures. It was these intermediaries who consulted with the Party officials or the plant managers. It was these intermediaries who travelled abroad and made deals with foreign businessmen.
There were two kinds of intermediaries in this development. The first were the top-level traders who arranged the purchase of products or resources and offered them for sale to others. They used the Mafia family to which they were affiliated to assist them and to share the proceeds, but they considered themselves separate and apart from their associates. They considered themselves businessmen, not criminals. They set up their financial empires with the active participation of the Russian political elite. Despite being associated with a Mafia Family, their deals were often legitimate and the structures they built genuine businesses. The Mafias infiltrated the banks but didn’t actually do any banking.
The second type of intermediary was the young men who were taken from the universities and assisted in setting up banks and financial institutions. These young men, Khordokovsky, Aven, Fridman, to name a few were, set up by the political establishment (Silayev, Korzhakov, Soskovets and Kasbulatov) to provide a legitimate banking system that could channel the funds coming in and out of Russia and to be the intermediaries in businesses with the new overseas financial investors. These later expanded to stock brokerages as privatisation moved forward. Occasionally they had to provide financial services to the local Mafia families.
As this system worked and metals and oil were produced and sold, these companies retained a part of the hard currency earnings; the foundations of Russian capitalism were laid. As these banks and investment trusts prospered, Russia became less and less dependent on the Mafia for the liquidity in its businesses They also became less and less dependent on Western capitalists to introduce them to commodity trading. The Russians brought the roubles home, and, in the various stages of privatisation, they invested these in Russian businesses. Quite often this privatization was a sham but that wasn’t the point. The point was to bring the money home and take over the shares and the businesses. An open tender for these might otherwise have attracted Western investment interest. A great deal of the money used to pay for the fake privatisations was money squirreled away in overseas banks by those in power and returned through the new ‘oligarchs’ who were empowered to take over the shares in Russian companies.
One might well ask on what basis these “oligarchs” were chosen. The main reason, in addition to their competence, was that they were mainly Jews or outsiders (Potanin’s father was a trade official and he lived outside Russia for years). As Jews they were without a political base. No Russian member of the Duma would dare stand up to protect a rich Jew; as Berezovsky and Gusinsky soon found out. These oligarchs were initially dependent on their KGB bosses, but as they took control of these businesses they began to operate as real entrepreneurs and sought modernisation, a Western-style management, and integration in the world economy.
They set up financial institutions in the West. The moved many of their assets to offshore havens. They moved their children to England to get an education. They, or at least their money, were welcomed into British and European banks. They also distanced themselves from the Mafia as much as possible as they no longer needed them. However, some of the oligarchs’ accumulated wealth belonged to the Mafias and they were unwilling to abandon the money or the control, as they needed these sums and international companies owned or controlled by the oligarchs to finance and shelter their international criminal activities. As the oligarchs, particularly those settled in the West, began to accumulate wealth legitimately there was additional friction with the Mafias.
This became even more difficult under Putin. When Putin rose to power he brought with him, putting his friends in the seats of power. The new and powerful people (‘siloviki’) have been almost exclusively drawn from the ranks of the ‘Chekists’. A ‘Chekist’ is a general, if pejorative, term for those who are or once were employed in the security operations of the Soviet state- KGB, GRU, MVD, FSB etc. (the ‘Organs’) Dzerzhinsky’s original agency was the Cheka. Under Putin, these new ‘siloviki’ have been firmly installed in the corridors of power. Under Putin, the Chekists, primarily the St. Petersburg flavour of Chekist, openly took power as ministers, government advisors, governors, bankers and politicians. There may be as many as six thousand of these Chekists in powerful positions in the Russian state.
What is important about the siloviki is that they have created a system of parastatal corporations in Russia; semi-private corporations controlled by state-appointed directors. Theoretically these state-owned companies are the responsibility of a board of directors and management appointed by the state, but their retained capital and cash-flows are controlled outside of the company structure. This effectively removes the linkage between the individual performances of a private company, a parastal or an industry from the funds it generates. Because of the configuration of the siloviki economy the profits from the various producing entities and service industries are not kept in the name of the generating company or service but effectively put into a central pot (like the ‘obschak’ of the Russian Mafia) for distribution by the political leadership. This divorce from a direct line between earnings and capital accumulation makes corporate planning a subject of political discussion and debate. This is inimical to the notion of ploughing back profits towards R&D, maintenance and the renewal of plant and equipment. This is the central weakness of the Russian economy and a powerful reason for the stranglehold of the siloviki on the direction of the economy.
This has proved useful when the state wishes to purchase more shares in companies. The state uses mirrors and smoke and fake transfers to acquire companies like Yukos; pretending that these funds have been made available to Rosneft or Gazprom. There are enormous amounts of funds transferring around the Russian economy for share purchases; but no cash. The state can acquire companies this way, but they cannot make them work. Work requires investment in capital equipment; cash for repairs and maintenance; money for research and development, etc. The re-nationalised companies are all competing for the small cash reserves of the state and are dependent on which group of competing siloviki has the ear of the keepers of the purse string.
Many of the previous ‘oligarchs’ are still in business, but they have virtually no political power inside Russia. Russian businessmen and siloviki have been pulling their money out of Russia as fast as they can. Russian flight capital is of epic proportions.
The Russian oligarchs in the West are caught between the pressures of the siloviki on them to adapt to the new rules of their economic model and allow their international banking and investments to support that model and the Mafia who want access to their overseas capital for their expanding criminal enterprises.
It is this struggle which the hero of McMafia is facing, caught between two hostile forces seeking access to his money and reputation while trying to protect his family and companies from the threats from these sources.
The miniseries is an excellent exposition of the microcosm of this struggle and everyone should block off their viewing calendars and assure themselves that they do not miss such a brilliant production.