March 11, 1999
Russias Crash Sounds Clinton Alarm,
But Financial Answers Are Elusive
By Robert Parry
The economic collapse in Russia, with its collateral threat of a revived Cold War, finally has stirred some second thoughts within the Clinton administration over the wisdom of unrestrained, worldwide free markets.
The dissent is still a minority voice barely audible over the cheerleading of President Clinton's dominant financial advisers at the Treasury Department.
But the toppling of financial dominoes from Asia through Russia to Latin America has emboldened some administration officials who believe that the invisible hand of the market place cannot alone give the world a stable international economy.
The argument for at least greater government regulation of trans-national financial institutions was made most strikingly by the deputy assistant secretary of state overseeing narcotics and law enforcement, Jonathan M. Winer, in a speech last Sept. 14 in Cambridge, England. Though covered in Europe, the speech received little notice in the United States.
Winer cited the weakness of government supervision over a global system that moves vast sums of money electronically, often through poorly regulated offshore banks. These money flows hide capital flight that can leave a nation near bankruptcy overnight, Winer said.
Winer also argued that the new financial technologies for moving money have dangerously outstripped the abilities of banking regulators to detect fraud, money laundering and other corruption -- part of the problem in the recent Russian crack-up.
"We have had a major crash in the middle of the financial services electronic highway," Winer said, "and hundreds of millions of people are already feeling the shock from the impact, even if they were no where near the site of the impact in Moscow."
Winer added that the Russian shortcomings were recognized years ago, but were not addressed sufficiently.
"Analysts have suggested that the viability of the Russian reforms was threatened by Russia's lack of transparency, inadequate regulation, inadequate law enforcement, corruption and organized crime," he said.
In 1997, the State Department warned that Russia's "shadow economy is a breeding ground for corruption, money laundering and a source for further criminality, criminals and organized crime," he noted.
The warnings, however, failed to dampen the zeal of many neo-liberal financial enthusiasts who saw the top priority in Russia as dismantling the old state-controlled economy. The message from Washington remained cold-turkey market "reform," rather than an effective government civil service to regulate the emerging financial and business markets.
The crisis in Russia is not unique, nor "even that unusual," Winer said. "The global raging bear market (of summer 1998) is merely the freshest reminder that global capital flows and global technologies have out-paced the ability of governments either to discourage or to respond effectively to sudden, wild gyrations in financial markets."
Winer pointed to similar shortcomings in the financial systems of Mexico, Japan and tottering Asian economies.
"As technology globalized financial markets beyond national borders, governments, regulators and law-enforcement agencies stayed at home," Winer said. "We created a financial services electronic highway without enforceable speed limits and without highway patrols."
For example, Winer cited a State Department review of offshore banks located on Pacific atolls known as the Cook Islands. These lightly populated islands of 18,000 residents hosted 3,000 anonymous trusts. Many of these trusts were connected to organized crime, Russian businessmen and some of the most notorious financial players in the Asia-Pacific region, Winer said.
Winer recommended that an initial reform would be to establish stiffer regulations against money laundering.
A model for this strategy, he said, was the case of the Seychelles islands in the Indian Ocean. Seychelles banks tried to attract deposits with promises of immunity from foreign laws.
In response, Western law enforcement asked countries to treat all Seychelle money transfers as "suspicious transactions" with immediate referrals to investigative agencies. The Seychelles' banking customers found a down-side to their immunity.
Similar cooperation could target trans-national organized crime and improve local financial regulation, Winer said. But he admitted such steps alone would not make economies "crash proof, nor will we wipe out financial crime."
Still, with tougher regulations, "we will have hardened our targets to the attacks of the unscrupulous [and] made it harder for criminals and terrorists to get away with financial crimes," he said.
Though Winers speech drew little interest in the U.S. media last year, recently even The New York Times, a leading backer of free-market reform, published a four-part series on the global contagion of currency speculation.
It was bankers and investors in Moscow and the Thai capital, Bangkok, who speculated wildly on stocks and real estate and thus built up catastrophic bubble economies, the Times reported. But it was American officials who pushed for the financial liberalization that nurtured the speculation. [NYT, Feb. 15, 1999]
Unrestrained capital flows also went hand-in-hand with government corruption. Russia is awash in new disclosures about insiders moving government funds around the world.
According to Russias prosecutor general Yuri Skuratov, the Central Bank pumped $50 billion in cash reserves over five years through a mysterious offshore company named Financial Management Co. Ltd. in Britains Channel Islands. Skuratov was ousted soon after initiating an investigation into who may have earned lucrative fees and commissions from managing the money.
While insisting the total was much less than $50 billion, Central Bank officials defended the curious arrangement as a necessary measure to defend the economic safety of the nation. [NYT, Feb. 13, 1999]
Another danger from worldwide dislocations is that the instability could rekindle old political conflicts and possibly re-start the Cold War.
Last Sept. 2, Russian Communist Party leader Gennady Zyuganov warned that extreme free market economic strategies had pushed nuclear-armed Russia to the brink of chaos.
In an interview on ABCs Nightline, Zyuganov sketched a stark scenario for the future -- one in which ambitious generals backed by unpaid soldiers with starving families would battle for control of Russias nuclear and chemical arsenals.
Each area could have its own chemical, its own nuclear weapons, their own military units and all of this will end with that apocalyptic event thats so well described in the Bible, Zyuganov said.