#31 | March 5 - 12, 1998  

by Matt Taibbi

Maria Krivikh, the public relations officer for the Moscow office of the Siemens corporation, had a quick answer when asked to respond to reports that the German firm had gained a controlling share in a Russian factory that produces sensitive atomic submarine technology.

"If they're selling it," she said, "why shouldn't we buy it?"

The Siemens story, which appeared two weeks ago in Profil magazine, is just the latest in a string of dozens, if not hundreds of instances in which foreigners have obtained large stakes in strategic Russian factories. Siemens bought into a Kaluga plant that owns a state monopoly in welding technology needed for the construction of nuclear subs; over the course of the last five years, other foreign investors have bought stakes in plants that produce everything from attack helicopters to optical equipment for spy satellites and even stealth technology.

Although the Defense Ministry, Kaluga FSB officials, and the State Accounting Chamber disagree, Siemens claims its purchases were legal, and in fact it probably will get to keep its stake in the Kaluga Turbine Factory (KTZ). That's because complaints by all of these bodies over the last two years have been ignored by the Prime Minister's office and by the Presidential administration.

No matter how the Siemens story ends, it's already proved one thing conclusively: the system of bureaucratic checks and balances that exists in normal countries to prevent the outflow of state secrets is hopelessly fractured here in Russia. Ten years ago, Kaluga residents hesitated even to say the name of the KTZ aloud. Now a German company can buy KTZ's controlling share and a seat on its board of directors above the objections of the Defense Ministry, simply by trading on the secondary market.

Whether their motives are strictly financial or whether, as Russian conspiracy theorists are quick to claim, their motives are more sinister, foreigners who buy into military enterprises automatically exit the realm of pure economics.

"He might have been a CIA agent," Luttwak said of Hay, when told of the NII-Grafit story.

The question of who has access to state secrets or control over military production is at the heart of the entire concept of statehood.

In this country, the myriad ways in which Westerners have fallen on the carcass of the militaryÐindustrial complex can't help but be seen by some Russians as an attack on their sovereignty. And as time goes on, they'll have more and more trouble distinguishing transnational investors from hired spooks out to get them-especially since they have good reason to think both have been operating with near-total impunity here in the last five years.

There's a very recent historical precedent for Western powers disregarding their own ethical guidelines in order to seize the military secrets of a defeated adversary. In 1946, the CIA, in conjunction with NASA and the War Department, instituted Operation Paperclip, which was designed to bring the German scientists and engineers who had built the Nazi war machine to America for debriefing.

The trouble was, American law at the time prohibited the immigration of anyone with a Nazi past. Which was a problem for the above-mentioned agencies, since more than three-fourths of the scientists the War Department was interested in were former Nazis. There was no getting around the law, though; when Harry Truman authorized Paperclip, he insisted that Nazis still be excluded from the program.

Soon afterward, however, CIA director Allen Dulles began a campaign of manipulating the background checks of targeted Nazis to cleanse their political pasts and make them clear for immigration. As a result, ex-Nazis like Arthur Rudolph and Wehrner Von Braun, designer of the V-2 rocket, eventually became U.S. citizens. Rudolph even went on to design the Saturn 5 rocket for the Apollo moon landings.

Russian intelligence officers must certainly be aware of the thorough job the U.S. did in cannibalizing the remains of defeated West Germany, particularly since they themselves were just as thorough in making use of the military resources of the East. And for obvious reasons, they and many other Russians view the collapse of the Soviet Union as being analogous to the defeat of Germany. Both were huge militarized powers with advanced military research programs, and both, in defeat, turned over the task of rebuilding their societies to Western advisors.

The only difference was, the Allies in 1945 openly admitted to a policy of dismantlement and disarmament of the enemy, while in 1991, the West only talked about Russian disarmament as a means of better using factory space. Many Russians believe that latter difference is purely cosmetic.

It makes sense that government officials like the ones who protested the Siemens sale are likely to assume the worst intentions of Westerners in any vaguely suspicious situation, even when a case can be made that no real wrongdoing has been committed. In this atmosphere, overt attempts to gain improper access to sensitive military secrets can only vastly increase the paranoia level on the Russian side.

Unfortunately for Western businessmen, and for WesternÐRussian relations in general, you don't have to look far to find examples of these incidents.

On November 18, 1994, a Komsomolskaya Pravda article entitled "Did the CIA Privatize Our Secret Factory?" hit the newsstands all over the country. The article reported that shareholders of a Moscow factory called NII Grafit had sent a letter to both the Duma and the Federation Council, complaining that a foreigner had improperly invested $700,000 in the venture through a dummy Russian company called "Graniks." NII Grafit produced Russian stealth technology. The foreigner's name? Jonathan Hay.

When the eXile first heard about that story last year, we couldn't do much but sit on it. Although the piece had already been published in a major newspaper and had been written by two well-known and reputable investigative journalists (Leonid Krutakov and Sergei Sokolov), it was just too wild a story to run without stronger evidence. That a tweedy Harvard grad like Hay, a man too dumb to keep from being caught investing spare change in his girlfriend's mutual fund, could take time off from his heavy day job designing the disastrous American aid effort to act as bagman for daring cloak-and-dagger deals in obscure factoriesÉ well, that was frankly too goofy a story for even us to believe. Even after we interviewed NII shareholders who confirmed the story off the record, we still couldn't publish it with any confidence.

Then last week, while researching this story, we learned from the State Accounting Chamber that the Hay-NII Grafit deal was on public record and had been circulating in the Russian government for years. In early 1995, some six months after the Krutakov piece first appeared, the Accounting Chamber-which incidentally did not exist in 1994, and could not have been a source in the Krutakov story-did an audit of the State Property Committee (where Hay sat on an expert commission) and passed the results on to the Duma and the Prime Minister's office. Included in that report is the following passage:
"Éabout 40% of the joint-stock venture Moscow Electrode Factory, which includes the research laboratory NII Grafit, which produces uranium-graphite compounds for nuclear submarines, nuclear power plants and nuclear warheads, as well as cloaking surfaces for Ôinvisible' airplanes similar to the American B-2 ÔStealth' bomber, as well as other compounds used for space exploration, was purchased for $1.5 million dollars by a Russian company called "Graniks." Funds for the purchase had been paid to "Graniks" by U.S. citizen Jonathan Hay, an employee of Harvard UniversityÉ"

Hay long ago made it clear that he would not speak to the eXile under any circumstances. But if you're thinking that you know what exactly it is he would have denied, if he had he made a comment in this case, you're not the only one. When asked for his opinion as to what Hay might have been doing with NII Grafit, Edward Luttwak, senior fellow and intelligence analyst at the Center for Defense and Strategic Studies, had a ready answer:
"He might have been a CIA agent working on an assignment," he said. "Or he might have been someone simply making a bad investment. Those academic types have a tendency to make stupid investments."

If even a conservative Western analyst like Luttwak can publicly entertain the notion that Hay is a CIA agent, then you can imagine what the Russians think. Valery Meshalkin, the Accounting Chamber inspector who authored the State Property Committee audit, says he's even personally insulted by what he calls the low-tech nature of Hay's approach.

"That he's CIA, I have no doubt," he said. "But the point is that he doesn't even bother to cover it up. He's a public figure, out here openly directing the aid movement, and then he's doing these things so brazenly. A secret agent should be more careful. This is the level of contempt they have for us."

Meshalkin is just one of many Russians who probably see little difference between Hay-style half-bright cash investments through shady middlemen and open purchases of shares in factories by large Western corporations like Siemens.

"It's all one kasha," he said, implying that both former and latter are planned actions by intelligence agencies.

Meshalkin sounds hysterical, but the irony is that in the age of global capitalism, you don't even need a conspiracy against you to lose your sovereignty almost overnight. Russia's experience has demonstrated that.

Part of the difficulty these days in keeping military secrets safe, for instance, is the general weakening of nations in the face of increasingly confident and aggressive corporations. Luttwak, for example, believes that Siemens was only playing by the rules of the current game when it made its purchase in Kaluga.

"The standard is that if Russia is selling it, then there's no reason not to buy it," he said. "The only ethical consideration is whether or not the purchasing company is itself publicly held. If any Russian can buy shares in Siemens, then there's no reason for Siemens to feel badly about buying Russian property.

"Private corporations do not view the protection of secrets as their own problem. Ethical and political considerations do not compute in commercial transactions. As it stands, governments are expected to protect their secrets through classification systems. If something is deemed secret and not fit for sale to foreigners, then it is the government's responsibility to prevent the sale."

All of which makes sense-except that in Russia's case, the bureaucracy has proven itself incapable of defending its secrets. In the Siemens-KTZ case, for instance, the KTZ factory chiefs never received permission for their share issue from the State Anti-Monopoly Committee. The factory, which is the only one in Russia that possesses the special welding technology necessary for the construction of large submarines, was registered back in the Soviet days on the list of state monopolies. But its share sale was conducted in violation of a July 3, 1991 law governing the privatization of such monopolies.

As a result, the Siemens stake, at 20.31%, now exceeds the Russian government's 20% stake. And since it is still a monopoly, the state's failure to enforce its own rules now means that a German company might not only have access to the factory's secrets, but virtual control over Russia's atomic submarine manufacturing capacity.

"They have a representative on the board of directors, and their stake is larger than the state's," said Meshalkin. "Even if they aren't truly interested in our technology, their controlling position is a disaster for Russia. One could imagine, if there were ever a war, how absurd we'd look, having let foreigners control the development of a critical property like this."

This is the reason that Meshalkin, who concedes that not all Russian military factories have secrets the West might be interested in, is so upset about the way the privatization of these factories has been conducted. He believes that incidents like the Siemens purchase have left Russia incapable of maintaining and coordinating its own sovereign military. As evidence to support his claim, he produced a two-page list of factories designated as strategically sensitive, which now are at least partially-owned by powerful Western companies like Boeing (part owner of the Moscow Helicopter Factory), Phillips (part owner of the electronics joint-stock company VELT), Sikorsky, First Boston, and others.

"These are only the companies we came across accidentally, as part of other audits," he said. "We haven't even gone looking specifically for this kind of thing yet. But you can see from the list that foreigners are in a prime position to squelch the development of our arms industry."

Luttwak disagrees with Meshalkin, believing that the vast majority of those companies are in as money investors only. "No publicly held corporation would ever be enlisted to slow down the production of a company it partly owns. That would be a violation of fiduciary responsibility to its own shareholders. And then, anyone who can prove that the directors of a company acted out of any motive other than for profit would be able to sue the directors for everything they had."

The problem with that reasoning, of course, is that Russians don't care too much about fiduciary responsibility, as long as these sales keep happening. In fact, it would almost be worse, from the Russian point of view, if Western companies really were independent of their national secret services and sought constantly to fulfill their fiduciary responsibilities. Because in that case, these companies would actually have to use the technology they paid money for.

Siemens can claim all it wants that it's only interested in the civilian uses of the Kaluga plant-spokeswoman Krivikh even told the eXile on the phone that Siemens does not have a military technology program-but thanks to the miracle of the information superhighway, any Russian these days get get on the web, spot the Siemens Defence Electronics page, and call their bluff. Even Burt the syphilitic monkey is smart enough to know that not using technology as rare as the type developed at KTZ would be asinine.

So there are really only three possible reasons Siemens bought into that plant, whose share price certainly included the value of the technology. One is that they intend not to use the technology on purpose, presumably on behalf of a foreign power. The other is that they intend to use it. And the third is that they shelled out their hard-earned money for the sheer, wacky fun of owning their own Russian submarine plant.

Any way you look at it, Russia in the age of weak bureaucracy and mass privatization loses out to the West. It doesn't matter if there was no conspiracy and only the realities of global economics were at fault: Russians are still going to be pissed off for ages hereafter that companies like Siemens took advantage of Russia's inability to protect state secrets. The excuse "If they're selling it, why shouldn't we buy it?" is only going to temper Russia's future antipathy toward the West by the smallest conceivable fraction. And that's only if the excuse holds up-which it likely won't.

Why not? Because the appearance of conspiracy is simply too conspicuous for any patriot to ignore.

Just imagine if a Russian version of Jonathan Hay- an Ivan Khayev, say- came to America following a political upheaval and went to work auctioning off American industry. This Khayev earned a seat on an expert commission and also secured, through his Russian-speaking American ally in government (Jack Chubaiston, say), a Presidential decree stating that no privatization project can be approved without his say so. Then this same Khayev, in conjunction with an army of other highly paid Russians, writes a whole new set of legislation for American business practice. Then the auctions commence and Russian investors walk away with big pieces of everything from the Stealth bomber to the Space Shuttle to the Patriot missile. The auctions may violate laws, but the average American can't keep the directors of places like Electric Boat from selling out any more than they can keep them from laying off workers. And even when the local FBI office protests the sales, the cases die when Louis Freeh mysteriously refuses to prosecute.

Meanwhile, the American General Accounting Office catches Khayev buying sensitive information through middlemen, but Khayev gets away with it-and not only gets away with it, but goes on to set up a ridiculous scheme to make his middle-aged Russian girlfriend rich off the American Social Security Fund. And gets away with that, too.

Then let's say all this happened, and then Khayev and the Russian government stood back and claimed it had all been just good business and friendly diplomacy.

If that doesn't make sense, well, that's because it wouldn't make sense, just as it doesn't in today's Russia.

What does make sense is just the opposite-that the American military, the CIA, and American corporations found common interests in seizing and dismantling Russia's military, and helped each other make their ambitions reality, becoming at least temporarily richer and more powerful in the process.

"It makes perfect sense that if there were something the CIA considered favorable to the American interest, then they would give a body like USAID a pretty direct shove in a place like Russia," said Christopher Smith, an intelligence analyst at the Center for Defense Studies at King's College in London. "It doesn't take a real leap of imagination to see that."

About the Siemens case, Smith said it was perfectly natural that Russians spun conspiracy theories around the incident. "If laws were broken and whole ministries were ignored, then either somebody screwed up very badly, or somebody let it go deliberately, which for a Russian is a pretty disturbing possibility."

Although Luttwak says fiduciary responsibility and other factors prevent publicly-held corporations from working in concert with security services, common sense would here as well tend to argue the opposite. If the President of the United States can travel abroad to lobby for Boeing contracts or commit his whole armed forces to war to protect the domestic oil industry, then it stands to reason that American intelligence services could be used on behalf of American industry to secure advantageous positions in auctions of foreign properties.

"It is obviously in the interests of all NATO governments to enlarge their own military and economic capacities at the expense of potential enemies," said Smith. "From their point of view, buying controlling stakes in key Russian companies doesn't seem farfetched at all. It seems like quite a smart move." Smart in the short-term, anyway. In the long run, Hay and all the rest of the people who cooked up the privatization miracle here in Russia have almost certainly doomed us to another long and costly cold war through their frat-boy attitude toward foreign policy.

The fact is that Russia was not prepared, either financially or bureaucratically, to compete with the West on even terms in the privatization process. The country was splintered and cash-poor, and by setting the rules as they did, Hay & co. guaranteed a lopsided victory for our side. And they padded the score even more by pulling off cheap stunts like sneaking into stealth technology factories through middlemen after work and ignoring anti-monopoly rules.

All of which is not much better than stealing the away team's equipment bag or leaving their locker room unheated, as frat boys tend to do as a means of winning games-and making longtime enemies.

Worse than anything, the behavior of Westerners in the privatization process, particularly in the military sector, ruined whatever credibility the West ever had among ordinary Russians not only as honest businessmen, but as smooth operators. If we came in in 1991 as champions of fair play, by 1998 we've demonstrated that the only ethical standard we really worried about was not getting caught. But even there, in the case of Hay, the man America sent here to teach Russians the principles of law-based economics, we got caught a lot.

"If there's anything that all of this proves," said Meshalkin, "it's that all those years when we were fighting the cold war against the imperialists, we were right. Most of us had pretty strong doubts until now.

"As for Hay," he went on, "what amazes me is how naive these college boys are. They have no idea what they're getting into. The secrets they know today to get rich on might make them walking targets tomorrow. The stakes are so high that no matter where they went to hide, somebody would find them. And Russians have a lot of experience at that."