Supplement 2. THE ECONOMY OF CHECHEN TERROR
THE ECONOMY OF CHECHEN TERROR
By Mikhail DELYAGIN, Doctor of Science (Economics), Director of the Institute of Globalisation Problems
Kommersant-Dengi magazine, September 15, 1999
A war is going on in Russia. It is going on not only in the Caucasus but also in Moscow. The most terrible thing in the current war is not the impotence of the military and the militia, not the lies, which we have already grown tired of and not even the coffins, however cynical it may sound. The most terrible thing is that we pay our murderers ourselves. Armed with Russian weapons, the Chechen bandits drive Russian KAMAZ trucks, which run on gasoline produced from Russian oil. They torture prisoners of war with electric current generated by Russian electric power stations and heat with Russian gas luxury homes which they have built on the money from the Russian budget. The most terrible thing is that with our own hands we are continuing to support up to this very day the economic base of the Chechen terror.
What the Chechen Economy Originated From
The foundation of this nightmare was laid eight years ago. It all began in the summer of 1991 when Ruslan Khasbulatov, First Deputy of Boris Yeltsin who was then Chairman of the Supreme Soviet of the RSFSR, decided to help his fellow countrymen and instructed head of the Central Bank of the RSFSR Grigory Matyukhin to provide peasant farms in Chechnya with credits. After the defeat of the state emergency committee, when disturbances had already begun in the Chechen-Ingush Republic, Matyukhin reported: "The peasant farms' needs for credits has been satisfied." In conditions of total shortages, which still existed in the country, this phrase testified to unprecedented state care, and nearly to the construction of communism in a separate region. Indeed, after the fulfilment of Khasbulatov's assignment, the tiny republic became the largest issuer in the RSFSR. The share of the incomes of the population paid through money printing exceeded 40% (17% on average across the country). The cash sums received by co-operatives in banks exceeded the cash which they returned by 50 times, which was also far above the level of other territories.
This credit policy meant that Chechen entities acquired financial independence from the state. It was also evident that economic independence was a prologue to political independence, especially in the Caucasus.
By the beginning of the Chechen war, the teip (clan) had finally become the structure-forming element of Chechen society. Almost all economic activity was carried out by teips which worked as diversified family corporations. By the end of 1994 the main directions of their occupation were the wholesale contraband import of household goods with their subsequent re-sale to Russian firms; the illegal transit of cargoes (in particular, narcotics and weaponry); property management, racket and robbery (from false letters of advice to hijacking cattle) on the territory of Russia.
A considerable role in the Chechen economy was played by exports (including on the basis of official quotas) and oil refining. Basically, it was supplied from the territory of the rest of Russia, although the volume of its transportation was on decline (the deliveries totalled 11,077,000 tonnes in 1991, 6,433,000 tonnes in 1992, 1,063,000 tonnes in 1993 and 89,000 tonnes for the first eleven months of 1994). This fall was precipitated not only by economic but also by political reasons. According to media information, back on July 16, 1993 Sergei Shakhrai recommended that Boris Yeltsin stop any deliveries of oil to Chechnya and authorise the Russian Ministry of Security to control the receipt of petroleum products from Chechnya. This is what he wrote at the time: "The formal presence of oil deliveries to Chechen refineries has a number of negative consequences for Russia. Using oil deliveries to refineries in the Chechen Republic, corrupted elements in Russia and Chechnya refine unaccounted-for oil and the sale of petroleum products abroad. Since the law-enforcement bodies in the Chechen Republic do not function, it is impossible to stop the theft of oil upon continuation of the oil pipeline's operation. This inflicts damage on Russian regions, which produce and deliver oil to oil refineries in the Chechen Republic at internal prices since there are no reciprocal equitable deliveries of petroleum products. Oil delivery and refining are used by the Dudayev regime to purchase arms, give out petroleum products to the population, pay for flour with petroleum products and maintain the reduction of the prices of bread (the bulk of flour is stolen), pay mercenaries, etc. Oil delivery and refining are also used for foreign policy goals. The image of a serious oil country (mainly at the expense of stolen oil) is being created for the West; in relations with Georgia and Armenia the deliveries of petroleum products serve as the means of political bargaining. Having become stronger through the uncontrolled sale of petroleum products abroad, the Dudayev regime is turning the republic into a trans-shipment base of narcotics and weapons. Officials of Russia's bodies of state power are also being drawn into this process either voluntarily or under threat.
The war in Chechnya and the gradual normalisation of economic life in Russia have reduced the scope of these operations but increased at the same time the scope of the embezzlement of federal funds, and also external financing (according to the principle: "peace is poor, war is rich"). But the main change in the Chechen economy has been its transition from diversified activities to specialisation: now some villages in Chechnya mainly get money from robberies, others from kidnapping and still others from oil refining, etc.
How the Chechen Economy Works
Today Russia continues to deliver to Chechnya gas and electricity free of charge. These deliveries were not terminated either during the assault on Grozny or the seizure of the hospital in Budyonovsk. On the one hand, using the fact that Chechnya is a constituent member of the Federation, like Moscow, for example, and, on the other hand, being afraid of terror, Russian companies and state governance bodies transfer resources to it. A portion of pensions is paid on the territory of Russia, while the rest of the sum goes to Chechens and there are no guarantees that these deliveries are not used against Russia.
The actual volume of resources sent to Chechnya is unknown. While Prime Minister, Sergei Stepashin managed to get information only on the delivery of gas and electricity. Thus, from 1995 to July 1st, 1999 the federal centre delivered to Chechnya almost 4 billion KWt/h of electricity and 14 billion cubic metres of natural gas worth a total of over 1.5 billion roubles (however, official statistics give rise to doubts: according to information of the mass media, in 1997 and January-July 1998 alone, Chechnya did not pay for the delivery of gas and electricity from Russia worth more than 1.7 billion roubles).
In 1997 Russia allocated to Chechnya 963 billion non-denominated roubles (including 88 billion roubles as transfer payments, 300 billion roubles as payment of pensions by the Russian Pension Fund, 72 billion roubles as payment of transit of Azeri oil, 2.8 billion roubles as payment for the servicing of the oil pipeline). In January-July, 1998 Chechnya received more than 200 million denominated roubles (40 million roubles as transfer payments; 118 million roubles as payment of pensions by the Pension Fund; 25,361 million roubles as payment for the servicing of the oil pipeline). In the first half of 1999 Chechnya received only 122.54 million roubles out of 284.4 million roubles due to it from the federal budget: 50 million roubles "to pay wages to the employees of the budget-financed sphere of the Chechen Republic," 7 million roubles "to render assistance to socially unprotected layers of the Chechen population," 0.54 million roubles to pay for special flights and finally, 65 million roubles "to compensate for the expenses of the state concern "Chechentransneft" for ensuring the transit of Azeri oil." The last item cannot but cause the greatest surprise: as is known, out of 120,000 tonnes of Azeri oil pumped in 1992 into the pipeline, the entire 120,000 tonnes were stolen on the territory of Chechnya (in 1998 Transneft pumped through the Baku-Novorossiisk oil pipeline 2.87 million tonnes of oil instead of the planned 2 million tonnes).
As for the revenue items of the Chechen economy, one of the most important of them is the production of petroleum products, in the first place, diesel fuel, and its delivery to Russia. Meanwhile, the production of its own oil in the republic is insignificant. Chechnya produced over 4 million tonnes of oil in 1991, 3 million tonnes in 1992, slightly over 1 million tonnes in 1994 and about 500,000 tonnes in 1996. In 1997, according to official data, oil production constituted 2 million tonnes but in 1998 it dropped dramatically again due to banditry: the republic extracted 120,000 tonnes in March, 57,000 tonnes in June and 57,000 tonnes in July and about 30,000 tonnes in August. Overall, out of the planned figure of 1.5 million tonnes of oil production in 1998, Chechnya produced only a half of the required amount; moreover, 50% of this volume was produced illegally. At the end of the year, the production and transportation of oil from wells to refineries was completely stopped due to theft, which totalled, according to the statements by Chechen officials, about 700,000 tonnes for the year. According to figures of the State Statistics Committee, in January-May 1999 Chechnya extracted 96,000 tonnes of oil (as compared to 530,000 tonnes in the respective period of 1998). These figures are very illustrative.
The following facts also testify to the scope of the thefts: in October 1998 out of 6,276 tonnes of oil produced by the oilmen of the company "Oktyabrneft," only 1,246 tonnes reached the refinery. Over 80% of it was stolen. Over 300 holes were made in the 1,850 m. pipeline extending from the oil base to the Grozny refinery: "a golden valve" was made every 10 metres of the pipeline. In the area controlled by him, Shamil Basayev possessed not simply stills but a small oil refinery made in Germany. A mini-pipeline led from the oil pipeline to the mini-refinery. Not only pipes but also the very deposits began to be seized. By the beginning of 1999 the bandits had seized most of the oil derricks owned by the company "Starogrozneft" and now it has only five operating wells.
Today the bulk of oil comes to Chechnya from Russia (back in 1997 these deliveries amounted to 2 million tonnes). Oil comes not only from pipelines but also from small deposits on the territory of the North Caucasus. Stable ties have been established between Chechen field commanders and Russian enterprises: Chechnya has become an off shore zone, in which our oil is refined and is supplied back without the payment of any taxes. At the very beginning of the gasoline crisis, when the price of Russian diesel fuel came to exceed 2 roubles per litre, Chechen fuel cost less than one rouble. It is not surprising that the sowing and harvesting campaigns in the regions bordering on Chechnya are almost entirely carried out with the use of Chechen fuel: it meets up to 70% of the requirements of the Stavropol Territory and over 33% of the requirements of Kabardino-Balkaria.
Precisely the oil business is the economic basis of the independence of many field commanders from the central Chechen authorities and, correspondingly, one of the main reasons for chaos in Chechnya. Currently, there are about 300 oil stills operating in the republic and each of them yields $1,000-$1.200 of profits per day on average. At the beginning of 1998, incomes from the illegal oil refining in Chechnya were estimated at $3 million per month.
Of course, oil is not the sole source of income for Chechnya. There are other sources as well. It is clear that agriculture and other types of honest business, which by chance have been preserved in the republic, do not play a noticeable role in financial flows. The basic source of money is crime: from the theft of federal transfer payments to hostage-taking: from January 1997 to the middle of 1999 over 60 Chechen criminal groupings abducted 1,094 people, including 270 people in 1999 (17 of them were militia men and 80 - servicemen). As of the middle of the year, 514 hostages continued to be held in captivity. The trade in narcotics continues to play a large role in the Chechen economy: assistance from the Afghan Taliban movement mainly comes in the form of narcotics, which are then sold in Russia. It is believed that precisely these narcotic substances contributed to the explosive development of the pandemia of drug addiction in Russia last year: whereas at the beginning of the year Russia had one million drug-dependent people, at the end of the year this figure rose to 2 million.
Although incomes from oil refining constitute not less than 25% of Chechnya's overall incomes, it is precisely this that is of principal significance for the republic. The point is that incomes from it are the most regular and the least centralised. That is why, as distinct from regular but centralised federal transfer payments and foreign support (including the delivery of narcotics), and also as compared to non-centralised but irregular receipts from robbery, incomes from oil refining contribute to the greatest degree to the maintenance of Chechnya in its contemporary fragmented and chaotic state.
How to Destroy the Chechen Economy
Sergei Stepashin was almost the first Russian politician to realise the role of Russian oil for Chechnya and began to close the border. Everything was simple. Russia was not setting the task of destroying Chechnya as such; its task was to stop terror and, therefore, to form a central authority in Chechnya at the first stage. To make this authority strong, it was only necessary to ensure that the central authority had maximum and the bandits minimum regular financial resources. As soon as the field commanders begin to get incomes from the Chechen President, they will turn into ordinary normal heads of local administrations. Consequently, the key task for Russia in Chechnya was to divert the financial flows from field commanders to the central authority.
But it was impossible simply to close the border, even if the shortage of power resources were ignored. The temporary success of this measure could lead to the disruption of agricultural works, at least in the Stavropol Territory. On the eve of the grain crisis looming before Russia already in spring, this economically foolish thing would have amounted to political suicide. That is why the border was closed only for illegal oil transported by tank trucks. For the central Chechen authorities the oil which had been supplied mainly via pipelines and by rail, continued to be delivered. This was the beginning of the course towards strengthening the central Chechen authorities and making them more dependent on the centre, re-channelling in their favour Chechnya's financial resources and, therefore, establishing in the republic real political power.
To all appearances, Stepashin achieved definite success on this front and thus enraged field commanders: precisely the reduction of their incomes due to the fall of the refinery of "illegal oil" was one of the reasons of their invasion of Daghestan. The field commanders began the war also because they wanted to attract foreign "sponsors" and at their expense compensate for the fall of incomes from the oil business.
However, Stepashin's success turned out to be very limited. First of all, this was due to the fact that the mechanism of off shore Russian oil refining in Chechnya remained untouched. By means of force Stepashin tried to re-orient the established and mutually advantageous economic ties between collective farms, field commanders, transport operators, the developers of small oil deposits, etc. while violence over economic interests is in principle impossible. As long as our oil is refined in Chechnya, it will be refined not in its centre but in the nearest place to the border and not by the President of Chechnya but by the person who controls this area. It is simply useless to burn tank trucks: the mechanism will be revived until there is an acute need for it on both sides of the border.
To cut a long story short, it is impossible to break this mechanism; it is only possible to change it. To achieve this, it is just enough to set up in the Stavropol Territory a small factory to refine local oil and provide the region with cheap fuel. Let it even be an off shore mechanism, like in Chechnya, to make fuel cheap. The main thing is that Russian oil must be refined in Russia. In Chechnya the missing money can be obtained through transfer payments or the receipt of the share of profit from that refinery. But this money must go not to all the field commanders but to the President of Chechnya. Then he will become the basis of the Chechen central authority and the person for the federal centre to speak to.
Of course, this way is difficult. First of all, money is needed to set up a refinery. There is little money in Russia. It will be rather difficult to find an investor to put in funds and take away from Chechnya such a titbit as Stavropol oil. The second problem concerns the Chechen field commanders. As soon as the Stavropol refinery begins to reduce their incomes; to be more precise, as soon as there is a serious talk on this score, shooting will begin. Field commanders will defend their business with arms and, what's more, on the territory of Russia. Finally, the extreme right forces and possible, the IMF, will stand against the Stavropol refinery. The point is that to make fuel produced by the Stavropol refinery cheap, it is necessary to grant the refinery some privileges, and liberals are principally against this idea.
All these obstacles are serious but not insurmountable. To stop the war, it is necessary to destroy its economic mechanism, especially if we take into account the fact that by getting down to the solution of economic problems, it is possible to start solving the problems of not only Chechen rebels but also of the Russian army. Indeed, one of Russia's problems is that the Defence Ministry does not have money for the purchase of modern armaments. Meanwhile, one salvo of "Uragan" will accelerate by several days any operation and save dozens of the lives of our soldiers, to say nothing of the fact that this will be an advertisement for our military and industrial complex and, correspondingly, additional revenues for the budget as well. The way out of the situation is simple: producers should lease out armaments to the Defence Ministry or provide them for test purposes. This does not require money; this requires only a slight administrative effort. Then Russian weapons can be demonstrated as is required and not to Stepashin in Nizhny Tagil but to Basayev in Daghestan.
During the preparation of this article the materials of the report: "The Economic Aspect of Settlement in Chechnya" prepared by the Institute of Globalisation Problems were used.
* * *
Nikita KIRICHENKO. THE ECONOMY OF WAR
Rebels Get From the Russian Budget More Than Our Army and Militia
Expert magazine, September 20, 1999
Klausewitz considered war the continuation of politics while Lenin considered politics the concentrated expression of the economy.
In his "Das Kapital" Karl Marx cited "The Merchant of Venice": "You take away my life when you take away the money I live on."
Which do the economy, politics and, what is the main thing, the war staged by Ichkeria, live on?
On the whole, the answer is as follows: on the money of Russian citizens; that is, the victims of this very Ichkerian war.
The Secret of Initial Accumulation
The starting capital of the aggressor was formed in 1991 when the Central Bank of Russia, not without the patronage of the Supreme Soviet of the RSFSR and personally Ruslan Khasbulatov, began to send to the republic multi-billion credits for the development of agriculture, after the encashment of which by Ichkerian peasants additional credits already in cash had to be sent there to prop up the local territorial department of the Central Bank.
Incidentally, even upon the introduction of the "Matyukhin rouble" after disintegration of the USSR Chechnya received from the Central Bank of the Russian Federation an especially large sum of cash during the exchange of banknotes.
This actually emission-based money was used in Russia to buy more liquid and reliable assets - freely convertible currency and precious metals. Precisely Chechen envoys organised the purchase from the Russian population, organisations, including classified establishments, radio boards containing precious metals. The network of precious metals refineries was the first business, which directly began to work in Chechnya to finance the war.
Chechen business people were the first to react to the temporary cancellation of import duties, a mistake made by the Gaidar government in 1991. 96% medicinal spirit began to flow into Russia from the Netherlands, Germany and Yugoslavia. According to data collected that time, all the five European factories producing this excise-free spirit (it was considered a medicine in Europe) were flooded these months with Caucasian orders for three years ahead. The duty-free and non-excisable spirit brought Chechen entrepreneurs in 1991-1993 from $1.5 billion to $3.5 billion of net profits.
Apart from that, Chechen business people immediately drew their attention to a number of highly profitable banking operations, in which they began to invest the money received from the Russian budget and also profits from the alcohol business. The Central Bank of Russia skilfully used interventions to push down the US dollar rate on the exchange even below the exchange rate of cash US dollars in exchange booths. When purchasing US dollars on the exchange for the importation of alcohol, the Chechen "enterprising people" quickly came to realise that it was advantageous to transfer more money by written order abroad, encash it in off shore zones, bring cash to Russia and sell it to get up to 25% of profits after each cycle.
There is information that a bit later Chechen business representatives began to buy for a song from enterprises (sometimes taking advantage of the shortage of money at enterprises, sometimes bribing their heads) their foreign currency funds frozen at Vneshekonombank of the USSR. When the state converted the debt into securities, even their immediate sale on the secondary market yielded 200-300% of foreign currency profitability. Part of frozen foreign currency, even before its conversion into VEB securities, was contributed to the authorised capital of many Russian commercial banks. As a result of this, by the middle of the 1990s experts estimated the Chechen control over the banking sphere at $25 billion-$30 billion of working banking assets.
After that the Chechen state received from Russia a gift in the form of military equipment left in Chechnya, including armour, worth a total of $500 million, according to some estimates.
Purely criminal incomes of Chechens (rackets, kidnapping, the contraband of weapons and narcotics) at the very beginning of the 1990s were relatively insignificant. The sudden change occurred when Chechen unscrupulous dealers, after gaining experience in banking operations, launched large-scale operations for forging payment documents ("Chechen letters of advice") while Chechens of a smaller calibre organised on a large scale the issue of false Russian roubles and US dollars which were not adequately protected at that time.
The damage caused to the Russian economy by the counterfeited payment documents, which proved to be of Chechen origin, was estimated by experts at over $1 billion.
It is said that when Russian troops were entering Grozny for the first time, the building of the Central Bank's territorial department was destroyed together with the documents located there on the order of officials, by a massed fire; moreover, no less intensive fire on the building was delivered by the Chechen side as well.
The War of Economies
Now the Ichkerian "enterprising people" have organised on a large scale all types of purely bandit incomes. Apart from that, they have bought in the West mini-factories for oil and alcohol distillation, and also seized state factories - taken together, even after the year 1995 they ensure a rather healthy inflow of cash into the republic. Naturally, these factories are working on the raw materials stolen from the Russian pipelines and the contraband alcohol from Georgia.
However, the inflow of precious "gifts" from Russia has not ceased.
Spending in an unknown direction the funds generously allocated by the Russian budget for the restoration of Grozny, the Ichkerian economy willingly accepted all types of current energy and social subsidies as well.
The assistance to Ichkeria authorised by the Russian government and rendered by the Russian budget (from the time of the Khasavyurt agreement to this day) can be estimated at about $3.5 billion.
In war conditions this situation looks completely absurd from any possible point of view.
Speaking in the State Duma, Prime Minister Putin proposed to review the legal assessment of the Khasavyurt accords. It would be very desirable that this formulation should have behind it the desire to introduce a full energy and budget blockade of Ichkeria and not until the authorities surrender bandits but until the operation of the Constitution of Russia is fully restored on the territory of Chechnya. The budget must not work where the Constitution is not in effect.
As far as we know, Ichkeria has debts not only to the budget but also to private Russian firms, which, incidentally, are sometimes close to the state, for communications services, aviation corridors, railway carriages and commodity deliveries. It would be highly beneficial for the state to use all its influence on these companies so that they cancel their contracts with Ichkerian contracting parties and, fortunately, there are purely legal grounds for this.
For its part, the Central Bank can break off any connection of Russian banks with Chechen lending institutions through correspondent accounts and block in general any payments through the administrative border of Ichkeria. In war conditions, it is legally possible in Russia even to ban the purchase of foreign currency by residents of Ichkeria.
To our mind, it is also possible to raise the issue of terminating on Russian territory the practice of applying budget subsidies and constitutional rights guaranteed by the budget to the residents of Ichkeria. In the event that a resident of Ichkeria receives from the state the official status of a political emigrant from the unconstitutional territory, part of the economic rights from the Russian Constitution may apply to him.
Together with purely police measures, the establishment of the border with Ichkeria not transparent for the movement of money, goods and people, and the budget blockade of its residents will deprive the war of its economic support, at least from the Russian territory.
On Russian territory, the authorities can announce as their priority measures to ensure the transparency of property and incomes of the residents of Ichkeria and, in general, all Chechens living in Russia, structures in which they work, affiliated organisations and their basic partners.
In the final account, the state may demand unilaterally a check of loyalty to it of any private individual or legal entity that are within its jurisdiction.
One should not be offended by the logic of war and its manifestations in the economic sphere. For example, Chechen Akins who constantly reside on the territory of Daghestan were even ready to rise up as a human shield between Ichkeria and Russia to prove their loyalty to their neighbours - Daghestani people.
So, tax checks are just a trifle in comparison to that. Moreover, the state will not isolate them from society, say, on the basis of the law on universal military service, in military camps or in the construction of strongholds. It only requires guarantees that the economy of Russia, including the personal economy of its every citizen is isolated from the military economy of the Ichkerian regime.
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