#29 | February 19 - 25, 1998 
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by Alexander Hinshtein
Hinshtein writes for Moskovsky Komsomolets. This article is reprinted with his permission
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EDITOR'S NOTEThe only official response to Hinshtein's piece after it was published in Moskovsky Komsomolets last week was a quote from an unnamed U.S. embassy official who spoke to Nezavisimaya Gazeta for their follow-up. That official said that the $500 million in new $100 bills were stored at the embassy because no Russian bank-not even the Central Bank-would guarantee the security of such a large sum. Hinshtein added this comment to that U.S. response for the reprint of his story in the eXile: |
"A special reserve of 500 million dollars, not released with the issuance of the new 1996 series 100-dollar notes, will be placed in the U.S. Embassy in Moscow. The Federal Reserve Bank of New York will deliver the banknotes to Sheremetyevo-2 in the form of diplomatic cargo, addressed to the U.S. Embassy." This is an excerpt from a secret memorandum of the American Embassy. Is it just me, or does this seem a little strange, even very strange?
What reason could the yankees possibly have for using their embassy as a cash depository? War? Revolution? A plot hatched by the forces of international capital?
Official representatives of the Embassy explain the story in the following way: in early 1996, the American Federal Reserve System planned to release its new $100 bills in Moscow. But...
"We didn't have any confidence that crowds of people wouldn't rush to exchange booths and trade in all of their old $100 bills for new ones, despite countless assurances that the old bills would be worth just as much as the new ones."
As a result, "it was decided to prepare in advance a large enough reserve supply of these new banknotes that Russian citizens wouldn't be faced with any problems in the early stage of the circulation of these bills."
There is some logic in the American explanation. But only some.
Many people may remember that the issue of the new $100 bills was accompanied by a massive ad campaign in the press instituted by both the U.S. Embassy and the Russian Central Bank. Newspapers which didn't print pictures of the bills and descriptions of their characteristic features were few and far between. It was hammered home over and over again that the old bills would not lose their value, that they would be removed from circulation gradually, over a period of several years.
I don't know about you, but it never entered my head to run to a currency exchange in a panic and exchange my old bills for new ones.
You don't need to be a great economist to understand that no great cataclysm could possibly have occurred. People have other things to worry about. There was no fuss at all, for instance, when the Germans issued their new marks with the magnetic strips.
Whatever. We could write the entire thing off to American shortsightedness. But even in that case, the whole affair doesn't seem any less strange.
Why was it necessary to hold a half billion dollars on the territory of the embassy? After all, there is a decent enough cash depository in Moscow, in the form of the Central Bank. Brink's, the company which transported the money from the Federal Bank in New Jersey to Moscow, could just as easily have transported the money to the Central Bank vault.
No one among the embassy spokesmen could answer that question. There was no basis for not having confidence in the Central Bank. From the point of view of security, the embassy was no better.
Excepting one thing. The complex on Novinsky Boulevard enjoys the right of extraterritoriality-without permission, even Boris Yeltsin can't enter.
If darkness is the friend of youth, then extraterritoriality is the patron saint of all traders in secrets and mysteries. It isn't for nothing that embassies way back when were headquarters for operations against another young country, the Soviet Republic.
Money-Changers With Diplomatic Passports
It would be foolish to think that the Russian government was left in the dark about all of this.
Central Bank Press Secretary Irina Yasina told me that the entire operation was completed in agreement with the Bank, the Customs Committee and the FSB. The heads of government, including the Prime Minister and the President, were also fully informed about the delivery.
Yasina confirmed that Russian government agencies completely controlled the movements of the banknotes that had arrived in Moscow right up to the time that they were delivered to their new owners.
The thing is, according to official embassy press releases, the entire haul of a half billion dollars was sold to Russian banks within two weeks of their arrival.
The banks, of course, paid by wire transfer, paying money directly to the accounts of American banks, who in turn purchased baksi from the American Federal Reserve System.
I never managed to determine who exactly acquired the 500 million zelyennikh. An unofficial source within the embassy said that the buyers were for the most part big banks, including first and foremost some of the top 100 largest Russian banks.
It's worth noting that this is the only incident in American history in which a strictly financial transaction was conducted as a diplomatic operation. U.S. officials admit that they have never held a currency reserve in an embassy in any other country in the world.
"In those countries where there is a large demand for U.S. currency, central banks have always acted as cash depositories."
The Yankees could easily have gone along that route. But they didn't, preferring to break the law.
A reminder: at that time, article 162 of the criminal code was still in effect, a law which prohibited all unregulated hard currency exchange operations. In order to buy or sell foreign currency, one had to have a license issued by the Central Bank.
The embassy, of course, did not have and could not have had such a license. Nonetheless, Yasina believes otherwise.
"The actions of the U.S. Embassy did not fall under the auspices of the criminal code, as any embassy reserves the right of extraterritoriality on its property."
There's one more mystery. Why was it necessary to undergo such a complicated operation when it would have been much easier to transfer the currency, as I've already noted, to the special vault of the Russian Central Bank.
Then-Ambassador Thomas Pickering, rather than clear the matter up, only threw grease in the fire. In discussions with Russian authorities, he deferred to instructions from Washington when he said that the American side attached special importance to the "smooth completion of the operation."
Translating from diplomatese to common human language, "smooth completion" generally means complete secrecy. It's not surprising that for almost two years, practically no journalists knew about the events of March 1996.
I'll try here to lay out a chronology of events.
On March 19, 1996, the Embassy sent an official letter to the Russian Foreign Ministry. In its communication it informs the the Ministry of the operation and announces that it "would be grateful for any help towards the successful realization of the operation. Specifically, the Embassy requests the support of the Customs Committee in the acceleration of the delivery by diplomatic channels of the Federal Reserve cargo beginning on March 21..."
Incidentally, some sources say that the sacks of the dollars already began arriving by diplomatic channels (i.e. exempt from customs duties and legally immune from inspection) into Sheremetyevo on March 14.
Other sources put the date of the first delivery on March 21-two days after the letter to the Foreign Ministry. The transport ended on March 25.
The new dollars were then transferred to the U.S. embassy, where they sat and waited for official release into circulation.
They were then sent out to Russian banks. Notably, as U.S. officials themselves put it, "the Embassy will for all intensive purposes be used as a point of sale."
At that point, of course, when the money is finally disbursed for use as a freely traded currency, neither the Central Bank, nor the Embassy, nor the Customs Committee had any control over its movements.
Please indulge me one more time as I list all the unusual characteristics of this apparently harmless financial transaction:
1) the money was kept in the embassy, even when it would have been easier for U.S. officials to deliver it to the Central Bank;
2) Both the embassy and then-Ambassador Thomas Pickering were active participants in the operation, even though such operations are not among the normal duties of diplomats;
3) The whole process took place at breakneck speed. On March 19 the embassy applied to the Foreign Ministry, and on March 21 the money was already arriving.
4) Russia was the only country where the U.S. undertook such an operation; in other countries, it used central banks.
5) The very reason for the operation-the creation of a special reserve "in the event of an extreme set of circumstances, when it might become necessary to satisfy an elevated demand for new banknotes" (as the U.S. put it in its letter to the Foreign Ministry)-seems frivolous and argumentative.
Clearly there are a lot of unanswered questions here. Particularly since Americans are almost certainly the most sober-minded people in the world. They don't do things like this just for the hell of it.
Millions by Lend-Lease
I don't claim to know the full truth behind these events. All of the possible explanations offered below are the exclusive result of my own ruminations and guesses, guesses which are bolstered, true, by consultation with people in the know. That includes members of the Russian secret services.
I'll start with the big picture...
The spring of 1996 was not a simple time for Russia. All the weight of the state power structure was thrown behind President Yeltsin's reelection campaign. The choice was crucial: either sick, but ours-or healthy, but communist.
And what was the most important thing in the reelection campaign? The "Golosui Ili" concerts? The "Yeltsin-Our President" t-shirts? The payment of salaries and pensions?
No. The most important thing was money. No money, no concerts. No t-shirts. No salaries.
Part of that reelection campaign money, without a doubt, came from foreign countries. As a rule, "humanitarian aid" came in the form of government credits issued at laughably low interest rates.
There weren't one or even two major Western powers who threw money at Yeltsin before the election. It was many more. Top officials in the Russian government travelled abroad personally to "extract" credits throughout that entire period. (I don't name names here only because some of them told me about this themselves).
All of this, of course, was a flagrant violation of the law. Article 45 of the Federal Law "On the Presidential Elections of the Russian Federation" stipluates:
"Contributions to campaign funds are not allowed from...foreign governments, organizations, or citizens."
But Yeltsin and his cohorts didn't have time for laws. The stakes were too high to worry about stuff like that. There's no place in politics for the clean at heart.
It's also logical to assume that the Clinton administration wasn't standing on the sidelines. The U.S. was almost certainly more interested than anyone else in the victory of Yeltsin. If Zyuganov had come to power, it would have meant a loss of control over a great power. From there, a third world war is just around the corner again.
But at that moment even Clinton's personal position was unenviable. The U.S. presidential elections were approaching, and U.S. voters were divided about equally in their support for Clinton and Dole.
If Clinton had openly campaigned for Yeltsin, it would have lent enormous support to Yeltsin's opponents. Bill had nothing to gain by risking it.
The new banknote operation was the one way to kill two birds with one stone.
The important thing was that, formally, Washington played no role whatsoever in the election. The half-billion was sold to Russian banks, not to the campaign headquarters. And how those banks used those baksi afterward was their own private business. The whole thing was seamlessly done. And nobody really knew about it while it was happening anyway.
Unfortunately, I don't know the exact conditions under which the Americans sold their dollars to the Russian banks. I wouldn't be surprised at all if they were more than a little flexible.
But I do know one thing. As you remember, the dollars were acquired by Russia's largest banks.
Our largest domestic banks actively participated in the reelection campaign. A minimum of ten banks became "guarantors of democracy." Each of these transferred tens of millions of dollars to the campaign fund. Or else just handed the money over in cash.
On the memorable night of June 20, 1996, officers of the Presidential Security Service arrested Lisofsky and Yefstafiyev in front of the White House, where they were caught carrying $538,000 in exactly those brand new $100 banknotes.
It would be interesting to compare the serial numbers on those bills with the bills which were kept in the embassy. Just imagine if they coincided! But nobody did that. Here that old extraterritoriality came in handy again.
How the Americans sold off their half-billion, on what terms, to whom, and in what quantities-it all remains a diplomatic secret. And we'll never know whether Lisofsky's walk out of the White House was the end of a journey which began in New Jersey.
