A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | R | S | T | U | V | W | The Author

F

Fimaco

Russia's Audit Chamber - with the help of the Swiss authorities and their host of dedicated investigators - may be about to solve a long standing mystery. An announcement by the Prosecutor's General Office is said to be imminent. The highest echelons of the Yeltsin entourage - perhaps even Yeltsin himself - may be implicated - or exonerated. A Russian team has been spending the better part of the last two months poring over documents and interviewing witnesses in Switzerland, France, Italy, and other European countries.

About $4.8 billion of IMF funds are alleged to have gone amiss during the implosion of the Russian financial markets in August 1998. They were supposed to prop up the banking system (especially SBS-Agro) and the ailing and sharply devalued ruble. Instead, they ended up in the bank accounts of obscure corporations - and, then, incredibly, vanished into thin air.

The person in charge of the funds in 1998 was none other than Mikhail Kasyanov, Russia's current Prime Minister - at the time, Deputy Minister of Finance for External Debt. His signature on all foreign exchange transactions - even those handled by the central bank - was mandatory. In July 2000, he was flatly accused by the Italian daily, La Reppublica, of authorizing the diversion of the disputed funds.

Following public charges made by US Treasury Secretary Robert Rubin as early as March 1999, both Russian and American media delved deeply over the years into the affair. Communist Duma Deputy Viktor Ilyukhin jumped on the bandwagon citing an obscure "trustworthy foreign source" to substantiate his indictment of Kremlin cronies and oligarchs contained in an open letter to the Prosecutor General, Yuri Skuratov.

The money trail from the Federal Reserve Bank of New York to Swiss and German subsidiaries of the Russian central Bank was comprehensively reconstructed. Still, the former Chairman of the central bank, Sergei Dubinin, called Ilyukhin's allegations and the ensuing Swiss investigations - "a black PR campaign ... a lie".

Others pointed to an outlandish coincidence: the ruble collapsed twice in Russia's post-Communist annals. Once, in 1994, when Dubinin was Minister of Finance and was forced to resign. The second time was in 1998, when Dubinin was governor of the central bank and was, again, ousted.

Dubinin himself seems to be unable to make up his mind. In one interview he says that IMF funds were used to prop up the ruble - in others, that they went into "the national pot" (i.e., the Ministry of Finance, to cover a budgetary shortfall).

The Chairman of the Federation Council at the time, Yegor Stroev, appointed an investigative committee in 1999. Its report remains classified but Stroev confirmed that IMF funds were embezzled in the wake of the 1998 forced devaluation of the ruble.

This conclusion was weakly disowned by Eleonora Mitrofanova, an auditor within the Duma's Audit Chamber who said that they discovered nothing "strictly illegal" - though, incongruously, she accused the central bank of suppressing the Chamber's damning report. The Chairman of the Chamber of Accounts, Khachim Karmokov, quoted by PwC, said that "the audits performed by the Chamber revealed no serious procedural breaches in the bank's performance".

But Nikolai Gonchar, a Duma Deputy and member of its Budget Committee, came close to branding both as liars when he said that he read a copy of the Audit Chamber report and that it found that central bank funds were siphoned off to commercial accounts in foreign banks.

The Moscow Times cited a second Audit Chamber report which revealed that the central bank was simultaneously selling dollars for rubles and extending ruble loans to a few well-connected commercial banks, thus subsidizing their dollar purchases. The central bank went as far as printing rubles to fuel this lucrative arbitrage. The dollars came from IMF disbursements.

Radio Free Europe/Radio Liberty, based on its own sources and an article in the Russian weekly "Novaya Gazeta", claims that half the money was almost instantly diverted to shell companies in Sydney and London. The other half was mostly transferred to the Bank of New York and to Credit Suisse.

Why were additional IMF funds transferred to a chaotic Russia, despite warnings by many and a testimony by a Russian official that previous tranches were squandered? Moreover, why was the money sent to the Central Bank, then embroiled in a growing scandal over the manipulation of treasury bills, known as GKO's and other debt instruments, the OFZ's - and not to the Ministry of Finance, the beneficiary of all prior transfers? The central bank did act as MinFin's agent - but circumstances were unusual, to say the least.

There isn't enough to connect the IMF funds with the money laundering affair that engulfed the Bank of New York a year later to the day, in August 1999 - though several of the personalities straddled the divide between the bank and its clients. Swiss efforts to establish a firm linkage failed as did their attempt to implicate several banks in the Italian canton of Ticino. The Swiss - in collaboration with half a dozen national investigation bureaus, including the FBI - were more successful in Italy proper, where they were able to apprehend a few dozen suspects in an elaborate undercover operation.

FIMACO's name emerged rather early in the swirl of rumors and denials. At the IMF's behest, PricewaterhouseCoopers (PwC) was commissioned by Russia's central bank to investigate the relationship between the Russian central bank and its Channel Islands offshoot, Financial Management Company Limited, immediately when the accusations surfaced.

Skuratov unearthed $50 billion in transfers of the nation's hard currency reserves from the central bank to FIMACO, which was majority-owned by Eurobank, the central bank's Paris-based daughter company. According to PwC, Eurobank was 23 percent owned by "Russian companies and private individuals".

Dubinin and his successor, Gerashchenko, admit that FIMACO was used to conceal Russia's assets from its unrelenting creditors, notably the Geneva-based Mr. Nessim Gaon, whose companies sued Russia for $600 million. Gaon succeeded to freeze Russian accounts in Switzerland and Luxemburg in 1993. PwC alerted the IMF to this pernicious practice, but to no avail.

Moreover, FIMACO paid exorbitant management fees to self-liquidating entities, used funds to fuel the speculative GKO market, disbursed non-reported profits from its activities, through "trust companies", to Russian subjects, such as schools, hospitals, and charities - and, in general, transformed itself into a mammoth slush fund and source of patronage. Russia admitted to lying to the IMF in 1996. It misstated its reserves by $1 billion.

Some of the money probably financed the fantastic salaries of Dubinin and his senior functionaries. He earned $240,000 in 1997 - when the average annual salary in Russia was less than $2000 and when Alan Greenspan, Chairman of the Federal Reserve of the USA, earned barely half as much.

Former Minister of Finance, Boris Fedorov, asked the governor of the central bank and the prime minister in 1993 to disclose how were the country's foreign exchange reserves being invested. He was told to mind his own business. To Radio Free Europe/Radio Liberty he said, six years later, that various central bank schemes were set up to "allow friends to earn handsome profits ... They allowed friends to make profits because when companies are created without any risk, and billions of dollars are transferred, somebody takes a (quite big) commission ... a minimum of tens of millions of dollars. The question is: Who received these commissions? Was this money repatriated to the country in the form of dividends?"

Dubinin's vehement denials of FIMACO's involvement in the GKO market are disingenuous. Close to half of all foreign investment in the money-spinning market for Russian domestic bonds were placed through FIMACO's nominal parent company, Eurobank and, possibly, through its subsidiary, co-owned with FIMACO, Eurofinance Bank.

Nor is Dubinin more credible when he denies that profits and commissions were accrued in FIMACO and then drained off. FIMACO's investment management agreement with Eurobank, signed in 1993, entitled it to 0.06 percent of the managed funds per quarter.

Even accepting the central banker's ludicrous insistence that the balance never exceeded $1.4 billion - FIMACO would have earned $3.5 million per annum from management fees alone - investment profits and brokerage fees notwithstanding. Even Eurobank's president at the time, Andrei Movchan, conceded that FIMACO earned $1.7 million in management fees.

The IMF insisted that the PwC reports exonerated all the participants. It is, therefore, surprising and alarming to find that the online copies of these documents, previously made available on the IMF's Web site, were "Removed September 30, 1999 at the request of PricewaterhouseCoopers".

The cover of the main report carried a disclaimer that it was based on procedures dictated by the central bank and "...consequently, we (PwC) make no representation regarding the sufficiency of the procedures described below ... The report is based solely on financial and other information provided by, and discussions with, the persons set out in the report. The accuracy and completeness of the information on which the report is based is the sole responsibility of those persons. ... PricewaterhouseCoopers have not carried out any verification work which may be construed to represent audit procedures ... We have not been provided access to Ost West Handelsbank (the recipient of a large part of the $4.8 IMF tranche)."

The scandal may have hastened the untimely departure of the IMF's Managing Director at the time, Michel Camdessus, though this was never officially acknowledged. The US Congress was reluctant to augment the Fund's resources in view of its controversial handling of the Asian and Russian crises and contagion.

This reluctance persisted well into the new millennium. A congressional delegation, headed by James Leach (R, Iowa), Chairman of the Banking and Financial Services Committee, visited Russia in April 2000, accompanied by the FBI, to investigate the persistent contentions about the misappropriation of IMF funds.

Camdessus himself went out of his way to defend his record and reacted in an unprecedented manner to the allegations. In a letter to Le Mond, dated August 18, 1999 - and still posted on the IMF's Web site, three years later - he wrote, inadvertently admitting to serious mismanagement:

"I wish to express my indignation at the false statements, allegations, and insinuations contained in the articles and editorial commentary appearing in Le Monde on August 6, 8, and 9 on the content of the PricewaterhouseCoopers (PWC) audit report relating to the operations of the Central Bank of Russia and its subsidiary, FIMACO.

Your readers will be shocked to learn that the report in question, requested and made public at the initiative of the IMF ... (concludes that) no misuse of funds has been proven, and the report does not criticize the IMF's behavior ... I would also point out that your representation of the IMF's knowledge and actions is misleading. We did know that part of the reserves of the Central Bank of Russia was held in foreign subsidiaries, which is not an illegal practice; however, we did not learn of FIMACO's activities until this year--because the audit reports for 1993 and 1994 were not provided to us by the Central Bank of Russia.

The IMF, when apprised of the possible range of FIMACO activities, informed the Russian authorities that it would not resume lending to Russia until a report on these activities was available for review by the IMF and corrective actions had been agreed as needed ... I would add that what the IMF objected to in FIMACO's operations extends well beyond the misrepresentation of Russia's international reserves in mid-1996 and includes several other instances where transactions through it had resulted in a misleading representation of the reserves and of monetary and exchange policies. These include loans to Russian commercial banks and investments in the GKO market."

No one accepted - or accepts - the IMF's convoluted post-facto "clarifications" at face value. Nor was Dubinin's tortured sophistry - IMF funds cease to be IMF funds when they are transferred from the Ministry of Finance to the central bank - countenanced.

Even the compromised office of the Russian Prosecutor-General urged Russian officials, as late as July 2000, to re-open the investigation regarding the diversion of the funds. The IMF dismissed this sudden burst of rectitude as the rehashing of old stories. But Western officials - interviews by Radio Free Europe/Radio Liberty - begged to differ.

Yuri Skuratov, the former Prosecutor-General, ousted for undue diligence, wrote in a book he published two years ago, that only c. $500 million of the $4.8 were ever used to stabilize the ruble. Even George Bush Jr., when still a presidential candidate accused Russia's former Prime Minister Viktor Chernomyrdin of complicity in embezzling IMF funds. Chernomyrdin threatened to sue.

The rot may run even deeper. The Geneva daily "Le Temps", which has been following the affair relentlessly, accused, two years ago, Roman Abramovich, a Yeltsin-era oligarch and a member of the board of directors of Sibneft, of colluding with Runicom, Sibneft's trading arm, to misappropriate IMF funds. Swiss prosecutors raided Runicom's offices just one day after Russian Tax Police raided Sibneft's Moscow headquarters.

Absconding with IMF funds seemed to have been a pattern of behavior during Yeltsin's venal regime. The columnist Bradley Cook recounts how Aldrich Ames, the mole within the CIA, "was told by his Russian control officer during their last meeting, in November 1993, that the $130,000 in fresh $100 bills that he was being bribed with had come directly from IMF loans." Venyamin Sokolov, who headed the Audit Chamber prior to Sergei Stepashin, informed the US Senate of $2 billion that evaporated from the coffers of the central bank in 1995.

Even the IMF reluctantly admits:

"Capital transferred abroad from Russia may represent such legal activities as exports, or illegal sources. But it is impossible to determine whether specific capital flows from Russia-legal or illegal-come from a particular inflow, such as IMF loans or export earnings. To put the scale of IMF lending to Russia into perspective, Russia's exports of goods and services averaged about $80 billion a year in recent years, which is over 25 times the average annual disbursement from the IMF since 1992."

DISCLAIMER

Sam Vaknin served in various senior capacities in Mr. Gaon's firms and advises governments in their negotiations with the IMF.

Foreign Direct Investment (FDI) (in Central and Eastern Europe)

Foreign direct investment (FDI) in Lithuania is projected to have grown by at least 15 percent this year. Its FDI stock - accumulated in its decade of independence - reached c. $4 billion, or c. $1000 per capita. Pace has picked up dramatically in the past four years in many second-tier investment destinations in central and east Europe, including Slovakia, and formerly war-torn Macedonia and Armenia. Of the latter's $600 million in post-communist foreign inflows - two thirds have been placed since 1999.

Prime investment locales, like the Czech Republic, or Hungary, are still attracting enthusiastic fund managers, multinationals and bankers from all over the world. In a startling inversion of roles, Russia became a net exporter of FDI. According to official figures - which are thought to under-report the facts by half - Russia invested abroad more than $3 billion every single year since 2000. This is double the figure in 1999 and translates into $300-500 million in annual net outflows of foreign direct investment.

Moreover, the bulk of Russian capital spending abroad is directed at rich, industrialized countries. The republics of the former Soviet Union see very little of it, though Russian stakes there have been growing by 25 percent annually ever since the 1998 meltdown. Russia's energy behemoths compete, for instance, with western mineral and oil extraction companies in Kazakhstan and Azerbaijan.

Levels of worldwide FDI declined by more than 50 percent - to c. $730 billion - between 2000 and 2001. Yet, astoundingly, the major downturn in emerging markets FDI in the last three years has hitherto largely bypassed the region. Net private capital flows - both FDI and portfolio investment - shot up six-fold from $1 billion in 2000 to $6 billion a year later. Most of the surge occurred in the Balkans and the Commonwealth of Independent States (CIS).

According to the European Bank for Reconstruction and Development (EBRD) in its latest Transition Report Update, the region grew by 4.3 percent in 2001 and by 3.3 percent last year. This is way more than most developed and emerging markets managed. Eight countries in central and east Europe drew rating upgrades, only two (Moldova and Poland) were downgraded.

But all this may be changing. The global recession is already one of the most prolonged, trenchant and all-pervasive in history. Its effect on the region's traditional export markets is pernicious.

Central and east Europe were spared the first phase of financial gloom which affected mainly mergers, acquisitions and initial public offerings. But now that multinationals are scrapping projects, scaling back overseas expansion and canceling long-planned investments, the countries in transition are bound to hurt.

According to the latest report by the Vienna Institute of Economic Studies, FDI flows to the countries of central Europe were halved in the first quarter of last year, despite their looming membership in the European Union in May 2004. Export transactions were frequently delayed and privatizations attracted scant interest.

The Vienna Institute predicts a particularly bleak year for Poland and a Czech economy redeemed only by sales of state assets in the energy sector. Still, the statistics do not cover reinvested profits. These amount to $1.5-2 billion in Hungary alone - equal to its average annual FDI.

The picture is mixed. Forecasts prepared in November 2002 by the United Nations Conference for Trade and Development (UNCTAD) showed marked declines in FDI in Moldova, Estonia, Hungary, Poland, Slovakia, Macedonia and Ukraine. Flows should rise in Albania, Bulgaria, the Czech Republic, Latvia, Lithuania and Slovenia, and remain unchanged in Bosnia and Herzegovina, Croatia, Romania and Russia, said UNCTAD.

Some countries fare better than others. Slovakia sold, last March, 49 percent of its gas transport company for $2.7 billion. Slovenia will book yet another record year in 2002 due to the long-deferred privatization of its banking sector and to the sale to foreign investors of assets originally privatized to cronies, insiders and communist-era managers. The Slovenian Business Weekly expects the country to have drawn in more than $600 million last year - up 50 percent on 2001.

In the western Balkans, only Croatia stands out as an inviting and modernization-bent prospect. Yugoslavia is reawakening, too. It has privatized cement companies and rationalized the banking sector with a view to becoming a preferred FDI destination. In the first 6 months of 2002, it garnered $100 million in realized deals and another $60 million in commitments.

Romania and Bulgaria are laggards, though intermittent privatization in both countries is counterbalanced by cheap and skilled workforces in their growing and labor-intensive economies. Macedonia is reviewing, with a view to annulling, at least 30 suspect privatization deals. This will not endear it to anyhow reluctant multinationals.

Per capita, FDI stock is highest in the Czech Republic ($3000), Estonia ($2600) and Hungary ($2400). These are followed by Slovenia ($2000), Slovakia ($1800), Croatia ($1700) and Poland ($1200). All, with the curious exception of Croatia, are slated to join the EU next year.

The total realized FDI in 2000-2002 in central Europe amounted to more than $50 billion, with Poland and the much smaller Czech Republic attracting the most ($14 billion each), followed by the Slovak Republic ($7 billion) and Hungary ($5 billion). The regional FDI stock comes to a respectable $100 billion.

Southeastern Europe (the politically correct name for the Balkans), excluding Greece and Turkey, attracted rather less - c. $12 billion in realized FDI since 2000. Croatia tops the list with $3.8 billion, followed by Romania ($3.3 billion), Bulgaria ($2.3 billion), Macedonia ($1.1 billion), Yugoslavia ($0.7 billion) and Albania and Bosnia-Herzegovina ($0.5 billion each).

Yet, the Balkans, impoverished and war-scarred as it is, accumulated a surprising $22 billion in FDI stock. According to the 2003 Investment Guide for Southeast Europe, published by the Bulgarian Industrial Forum, the share of FDI per GDP is much higher in the Balkans than it is, for example, in Russia. In 2001, the ratio was c. 5 percent in Bulgaria, 7.5 percent in Croatia and about 12 percent in Macedonia.

The former USSR as a whole enjoyed $57 billion in FDI since 1991. The bulk of it went to Russia ($23 billion) and the Baltic states ($8 billion). In the last 3 years, Ukraine absorbed $1.9 billion in FDI flows - one half the receipts of the puny Baltic trio: Lithuania, Latvia and Estonia. Belarus and Moldova scarcely register, each of them with barely above three fifths the FDI in Albania, or ravaged and precariously balanced Bosnia-Herzegovina.

The weight of FDI in the local economies cannot be overstated. Two fifths of the exports of countries as disparate as the Czech Republic and Romania are produced by foreign affiliates. In some countries - like Romania  - 40 percent of all sales are generated by foreign-owned subsidiaries. The banking sectors of many - including Bulgaria, Croatia, the Czech Republic and Macedonia - are mostly owned by outside financial institutions.

Foreigners bring access to global markets, knowledge and management skills and techniques. They often transfer technology and train a cadre of local executives to take over once the expats are gone. And, of course, they provide capital - their own, or gleaned from foreign banks and investors, both private and through the capital markets in the west.

Initially, foreign investors provoked paranoid xenophobia almost everywhere in these formerly hermetically sealed polities. Deficient legal and regulatory frameworks, rapacious insiders, venal politicians, militant workers, opaque and politically compromised institutions, disadvantageous tax regimes and a hostile press obstructed their work during the first half of the 1990s.

Yet, gradually, the denizens of these countries came to realize the advantages of FDI. Workers noticed the higher wages paid by foreign-owned plants and offices. The emergent class of shareholders, invariably members of the powerful nomenclature, having sucked their firms dry, sought to pass the carcasses to willing overseas investors. Currently - with a few notable exceptions, such as Belarus and Ukraine - multinationals and money managers are actively courted by eager governments and keen indigenous firms.

Proofs of this grassroots turnaround in sentiment and priorities abound.

FDI is a good proxy for a country's integration with the global economy. It is an important component in A.T. Kearney and Foreign Policy Magazine's Globalization Index. The Czech Republic made it this year to the 15th place (of 62 countries), higher than New Zealand, Germany, Malaysia, Israel and Spain, for instance.

Croatia in 22nd rung and Hungary in the 23rd slot compare to Australia (21) and outflank the likes of Italy (24), Greece (26) and Korea (28). Slovenia is not far behind (25), followed by Slovakia (27), Poland (32) and Romania (40). Even hidebound Ukraine made it to the 42nd place, ahead of Sri Lanka (44), Thailand (47), Argentina (48) and Mexico (49). Russia lags the rest at the 45th location.

A.T. Kearney's Global Business Policy Council - a select group of corporate leaders from the world's largest 1000 corporations - publishes the FDI Confidence Index. It tracks FDI intentions and preferences. Its September 2002 edition ranked 60 countries which, together, account for nine tenths of global FDI flows. The companies interviewed were responsible for $18 trillion in sales and seven out of every ten FDI dollars.

Revealingly, central and east European countries made it to the first 25 places. Poland, right after Australia, preceded Japan, Brazil, India and Hong-Kong, for instance. The Czech Republic, Hungary and Russia - closely grouped together - were found more alluring than Hong-Kong, the Netherlands, Thailand, South Korea, Singapore, Belgium, Taiwan and Austria. Russia - whose economy improved dramatically since 1998 - leaped from beyond the pale (i.e., below the top 25) to 17th place. Hungary moved from 21 to 16.

The report concludes with these incredible projections:

"Russia ... could well be a target for almost as many first-time investments as the United States ... China, Russia, Mexico and Poland combined ... are expected to accumulate about one quarter of all proposed new investment commitments."

This is part of a more comprehensive trend:

"Europe has become the most attractive destination for first time investments. More than one third of global executives are expected to commit investments for the first time in Europe over the next three years (especially in) Russia, Poland and the Czech Republic."

A relatively new phenomenon is cross-border investments by one country in transition in another's economy and enterprises. At four percent of Slovene FDI stock, the Czech Republic has invested in Slovenia as much as the United States, or the United Kingdom. Slovenes and Bulgarians have ploughed capital into the banking, industrial and food processing sectors in Macedonia. Hungarians in Serbia, Czechs in Romania, Croats in Slovenia - are common sights.

Traditional FDI destinations feel threatened by the surging reputation of central and, to a lesser extent, east Europe. In a series of articles he published on radio Free Europe/Radio Liberty, Breffni O'Rourke summed up Irish anxieties expressed by his interviewees thus:

"There's a certain unease developing in Ireland as the 10 Central and Eastern European candidate countries move toward full membership in the European Union. The Irish are not unaware that the Czechs are heirs to a fine tradition of precision manufacturing; that the Poles are considered quick-thinking and innovative; that Bulgarians have a way with computers; that the Baltic nations have powerful Scandinavian supporters; and that Romania has extraordinarily low costs to offer investors. In fact, rising costs - in comparison to the Eastern candidate nations - are one of Ireland's main worries. The question troubling the Irish is: Could incoming Eastern member states prove so attractive for foreign investment that the country would find itself eclipsed?"

Football

The Champions League is a rich man's club, complain football teams from nine south and east European countries. They are bent on setting up an alternative dubbed the "Eastern League". The revolt is led by Dinamo Bucharest and Greece's Olympiakos Pireu and has been joined by 14 other clubs: Steaua and Rapid from Romania, The Turkish Galatasaray Istanbul and Besiktas PAOK Salonic of Greece, the Serbian Steaua and Partizan Belgrade, Hajduk Split from Croatia, the Cyrpiot Apoel Nicosia, Maribor from Slovenia, the Bulgarian teams TSKA Sofia and Levski Sofia and the Ukrainian contributions of Shakhtor Donestk and Dinamo Kiev.

It is partly about pride and partly about money.

In the past decade eastern footballers, trounced by well-heeled competitors from the West, consistently failed to qualify to participate in the Union of European Football Associations Cup and the Champions League games. This translates into a loss of up to a million dollars per team per year as they miss out on lucrative advertising and broadcasting deals when they are matched against giants from Spain, Germany, Italy, or even England.

The Eastern League is not a done deal, though. It first has to be voted on and recognized by both the Federation of International Football Associations and UEFA, the world and European football federations, respectively. This may prove to be a tall order. The game is still organized as an old-fashioned cartel, with each regional association envious of its market share and clout.

Still, football in the eastern nether regions is in dire straits. As its economics worsen - the inventiveness of managers and players alike blossoms. in January, the Bulgarian Levski club offered, with great fanfare, 250,000 of its shares to fans, aiming to break the Guinness Book of Records entry of Manchester United.

It was promptly castigated for ripping off the innocent. The "free" shares, found out embittered takers, came attached to a season's ticket at full price. Alternatively, would be shareholders were asked to purchase a club membership for $25 - a few days wages in the impoverished country. Quoted by the newswires Presstext.Europe and Newsfox, a Levski official Todor Batkov said that "real fans must give and not take from the club".

Football teams in the former communist countries realize that it is either big time or no time at all.

Romanian club Universitatea Craiova has recently courted Paul Gascoigne, a British asset known more for his exploits off-field than for anything he has accomplished on it. The figure floated was $170,000 - a fortune in Romanian terms, where the average annual intake is rarely about $2000.

Omnipotent president Islam Karimov of Uzbekistan granted immediate citizenship - by a constitutionally dubious presidential decree - to Bulgarian football striker Georgi Georgiev and defender Alexsi Dionisiev. This allowed them to keep their Bulgarian passports even as they played for the host country in the World Cup.

Football has always been about politics. Violence inspired by virulent nationalism often vents itself most visibly in bilateral matches.

In a typical case last year, three police officers were wounded and nine Bosnian Serb fans were detained in the wake of a riot following the first football match since 1992 between Borac from Republika Srpska and Zeleznicar from Sarajevo. The Muslim-Croat team and fans required police escort out of Banja Luka to escape the wrath of the local yobs. Borac had to play two games to empty stadiums and part with $1500 in fines.

The Bosnian Football Federation - representing 14 clubs from the Croat-Muslim parts of the divided country - teamed up in May last year with 6 counterparts in Republika Srpska. They formed a joint league and a common professional association. Moreover, the two entities already fielded a joint team in the Olympic games in 2000 and maintain a single basketball federation. Yet, even this apparent reconciliation failed to prevent the outpouring of hostilities.

Nor is football-related aggression confined to zealous nationalists. Slovak fans taunted black English players Emile Heskey and Ashley Cole with racist slogans in October last year. The vast majority of the crowd - and the medical teams on the sidelines - balefully recited "monkey, monkey" at the top of their lungs for minutes on end.

Quoted by Radio Free Europe/Radio Liberty, Michal Vesecka, a research fellow with the Slovak Institute for Public Affairs, linked the abuse to problems in cultural development and identity:

"Slovakia is a country that is the most ethnically heterogeneous in Central Europe, but the 'culture of tolerance' is not as well developed [here] as in the European Union, or even with respect to neighboring countries like the Czech Republic and Hungary ... [Slovakia] is still a country that is trying to solve its own identity problem, and precisely [during] such times, the people are relatively aggressive toward those people who are different."

Add to this combustible mixture crumbling economies and all-pervasive disillusionment and the spillover to football is hardly a surprise. The game is an inseparable part of daily life in many of these polities where life is unbearably drab, economic opportunities are rare and cultural diversions even scarcer.

For instance, football associations offer a cornucopia of sinecures to cronies and relatives of all degrees and colors. Hence the high turnover and ubiquitous venality which characterize these murky bodies.

Both UEFA and FIFA have warned the Azerbaijan Football Federation Association that it must settle a five years old simmering dispute or else face the suspension of all financial aid and, ultimately, expulsion. AFFA's president Fuad Musaev refuses to go, despite pressure from the government above and at least nine clubs below. This resulted in a boycott by said disgruntled of the national football championship and a feeble attempt to organize an alternative.

Foreign Policy, Economic Instruments of

Foreign aid, foreign trade and foreign direct investment (FDI) have become weapons of mass persuasion, deployed in the building of both the pro-war, pro-American coalition of the willing and the French-led counter "coalition of the squealing".

By now it is clear that the United States will have to bear the bulk of the direct costs of the actual fighting, optimistically pegged at c. $40-50 billion. The previous skirmish in Iraq in 1991 consumed $80 billion in 2002 terms - nine tenths of which were shelled out by grateful allies, such as Saudi Arabia and Japan.

Even so, the USA had to forgive $7 billion of Egyptian debt. According to the General Accounting Office, another $3 billion were parceled at the time among Turkey, Israel and other collaborators, partly in the form of donations of surplus materiel and partly in subsidized military sales.

This time around, old and newfound friends - such as Jordan, an erstwhile staunch supporter of Saddam Hussein - are likely to carve up c. $10 billion between them, says the Atlanta Journal-Constitution. Jordan alone is demanding $1 billion.

According to the Knight Ridder Newspapers, an Israeli delegation, currently in Washington, has requested an extra $4-5 billion in military aid over the next 2-3 years plus $8 billion in loan guarantees. Israel, the largest American foreign and military aid recipient, is already collecting c. $3 billion annually. It is followed by Egypt with $1.3 billion a year - another rumored beneficiary of $1 billion in American largesse.

Turkey stands to receive c. $6 billion for making itself available as staging grounds for the forces attacking Iraq. Another $20 billion in loan guarantees and $1 billion in Saudi and Kuwaiti oil have been mooted. In the thick of the tough bargaining, the International Monetary Fund - thought by many to be the long arm of US foreign policy - suddenly halted the disbursement of money under a two years old standby arrangement with the impoverished country.

It implausibly claimed to have just unearthed breaches of the agreement by the Turkish authorities. This systemic non-compliance was being meticulously chronicled - and scrupulously ignored by the IMF - for well over a year now by both indigenous and foreign media alike.

Days after a common statement in support of the American stance, the IMF clinched a standby arrangement with Macedonia, the first in two turbulent years. On the same day, Bulgaria received glowing - and counterfactual - reviews from yet another IMF mission, clearing the way for the release of a  tranche of $36 million out of a loan of $330 million. Bulgaria has also received $130 million in direct US aid since 2001, mainly through the Support for East European Democracy (SEED) program.

But the IMF is only one tool in the administration's shed. President Bush seeks to increase America's foreign aid by an unprecedented 50 percent over the next three years to $15 billion. A similar amount will be made available over in the forthcoming five years to tackle AIDS, mainly in Africa.

Half this increase will be ploughed into a Millennium Challenge Account. It will benefit countries committed to democracy, free trade, good governance, purging corruption and nurturing the private sector. By 2005, the Account will contain up to $5 billion and will be replenished annually to maintain this level.

This expensive charm offensive is intended to lure and neutralize the natural constituencies of the pacifistic camp: non government organizations, activists, development experts, developing countries and international organizations.

The E10 - the elected members of the Security Council - are also cashing in their chips.

The United States has softened its position on trade tariffs in its negotiations of a free trade agreement with Chile. Immigration regulations will be relaxed to allow in more Mexican seasonal workers. Chile receives $2 million in military aid and Mexico $44 million in development finance.

US companies will cooperate with Angola on the development of offshore oilfields in the politically contentious exclave of Cabinda. Guinea and Cameroon will absorb dollops of development aid. Currently, Angola receives c. $19 million in development assistance.

Cameroon already benefits from military training and surplus US arms under the Excess Defense Articles (EDA) program as well as enjoying trade benefits in the framework of the Africa Growth and Opportunity Act. Guinea gets c. $26 million in economic aid annually plus $3 million in military grants and trade concessions.

The United States has also pledged to cause Iraq to pay its outstanding debts, mainly to countries in Central and East Europe, notably to Russia and Bulgaria. Iraq owes the Russian Federation alone close to $9 billion. Some of the Russian contracts with the Iraqi oil industry, thought to be worth dozens of billions of dollars, may even be honored by the victors.

Thus, the outlays on warfare will likely be dwarfed by the price tag of the avaricious constituents of president Bush's ramshackle coalition. New York Times columnist Paul Krugman aptly christened this mass bribery, "The Martial Plan". Quoting "some observers", he wrote:

"The administration has turned the regular foreign aid budget into a tool of war diplomacy. Small countries that currently have seats on the U.N. Security Council have suddenly received favorable treatment for aid requests, in an obvious attempt to influence their votes. Cynics say that the 'coalition of the willing' President Bush spoke of turns out to be a 'coalition of the bought off' instead'."

But this is nothing new. When Yemen cast its vote against a November 1990 United Nations Security Council resolution authorizing the use of force to evict Iraq from Kuwait - the United states scratched $700 million in aid to the renegade country over the following decade.

Nor is the United States famous for keeping its antebellum promises.

Turkey complains that the USA has still to honor its aid commitments made prior to the first Gulf War. Hence its insistence on written guarantees, signed by the president himself. Similarly, vigorous pledges to the contrary aside, the Bush administration has allocated a pittance to the reconstruction of Afghanistan in this year's budget - and only after it was prompted to by an astounded Congress.

Macedonia hasn't been paid in full for NATO's presence on its soil during the Kosovo conflict in 1999. Though it enjoyed $1 billion in forgiven debt and some cash, Pakistan is still waiting for quotas on its textiles to be eased, based on an agreement it reached with the Bush administration prior to the campaign to oust the Taliban.

Congress is a convenient scapegoat. Asked whether Turkey could rely on a further dose of American undertakings, Richard Boucher, a State Department spokesman, responded truthfully: "I think everybody is familiar with our congressional process."

Yet, the USA, despite all its shortcomings, is the only game in town. The European Union cannot be thought of as an alternative benefactor.

Even when it promotes the rare coherent foreign policy regarding the Middle East, the European Union is no match to America's pecuniary determination and well-honed pragmatism. Last year, EU spending within the Euro-Mediterranean Partnership amounted to a meager $700 million.

The EU signed association agreements with some countries in the region and in North Africa. The "Barcelona Process", launched in 1995, is supposed to culminate by 2010 in a free trade zone incorporating the European Union, Algeria, Morocco, Tunisia, Egypt, Israel, Jordan, Lebanon, the Palestinian Authority, Syria and Turkey. Libya has an observer status and Cyprus and Malta have joined the EU in the meantime.

According to the International Trade Monitor, published by the Theodore Goddard law firm, the Agadir Agreement, the first intra-Mediterranean free trade compact, was concluded last month between Egypt, Jordan, Morocco and Tunisia. It will be signed next month and is a clear achievement of the EU.

The European Union signed a Cooperation Agreement with Yemen and, in 1989, with the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates and Oman. A more comprehensive free trade agreement covering goods, services, government procurement and intellectual property rights is in the works. The GCC has recently established a customs union as well.

A similar set of treaties may soon be inked with Iran with which the EU has a balanced trade position - c. $7 billion of imports versus a little less in exports.

The EU's annual imports from Iraq - at c. $4 billion - are more than 50 percent higher than they were prior to Iraq's invasion of Kuwait in 1990. It purchases more than one quarter of Iraq's exports. The EU exports to Iraq close to $2 billion worth of goods, far less than it did in the 1980s, but still a considerable value and one fifth of the pariah country's imports. EU aid to Iraq since 1991 exceeds $300 million.

But Europe's emphasis on trade and regional integration as foreign policy instruments in the Mediterranean is largely impracticable. America's cash is far more effective. Charlene Barshefsky, the former United States trade representative from 1997 to 2001, explained why in an opinion piece in the New York Times:

"The Middle East ... has more trade barriers than any other part of the world. Muslim countries in the region trade less with one another than do African countries, and much less than do Asian, Latin American or European countries. This reflects both high trade barriers ... and the deep isolation Iran, Iraq and Libya have brought on themselves through violence and support for terrorist groups ... 8 of (the region's) 11 largest economies remain outside the WTO."

Moreover, in typical EU fashion, the Europeans benefit from their relationships in the region disproportionately.

Bilateral EU-GCC trade, for instance, amounts to a respectable $50 billion annually - but European investment in the regions declined precipitously from $3 billion in 1999 to half that in 2000. The GCC, on its part, has been consistently investing $4-5 billion annually in the EU economies.

It also runs an annual trade deficit of c. $9 billion with the EU. Destitute Yemen alone imports $600 million from the EU and exports a meager $100 million to it. The imbalance is partly attributable to European non-tariff trade barriers such as sanitary regulations and to EU-wide export subsidies.

Nor does European development aid compensate for the EU's egregious trade protectionism. Since 1978, the EU has ploughed only $210 million into Yemen's economy, for instance. A third of this amount was in the form of food support. The EU is providing only one fifth of the total donor assistance to the country.

In the meantime, the USA is busy signing trade agreements with all and sundry, subverting what little leverage the EU could have possessed. In the footsteps of a free trade agreement with Israel, America has Having concluded one with Jordan in 2000. The kingdom's exports to the United States responded by soaring from $16 million in 1998 to c. $400 million last year. Washington is negotiating a similar deal with Morocco. It is usurping the EU's role on its own turf. Who can blame French president Jacques Chirac for blowing his lid?

Free Zones

Ukrainian President, Leonid Kuchma, told, last week, an assembly of senior customs service officials that "it is necessary to put an end to (Ukraine's 11 free economic and 9 priority) zones (and) liquidate them completely. (They) have become semi-criminal zones, and this refers not only to the Donetsk zone. You pull the meat that Europe doesn't want to eat into these zones and sell it there without [paying] taxes".

According to UNIAN, the Ukrainian news agency, Kuchma was fuming at the mighty and unaccountable oligarchs situated in the country's eastern coal-mining center and their collaborators in the Ukrainian Security Service (SBU) and other law enforcement agencies. The zones dismally failed to attract foreign direct investment, or foster economic growth, he bitterly observed.

The International Monetary Fund (IMF) concurs as does the European Union. The future status of special economic zones is hotly contested in the accession negotiations with the Czech Republic, Poland, Hungary and Malta. Nor is the criminalization of such zones a Ukrainian deviation. Russia's Deputy Interior Minister, Vladimir Vasiliev, admitted last year that Russia's mafia now focuses its unwelcome attentions on its ubiquitous free economic zones.

Yet, the proliferation of these fiscal monstrosities - tax free, low customs, export processing, flexible labor delimited regions - is likely to continue. Even bastions of free trade make profligate use of them as do all the countries of the rich world.

According to a November 2002 report titled "Employment and social policy in respect of export processing zones" and published by the United Nations' International Labor Organization (ILO), the number of countries with export processing zones surged from 25 in 1975 to 116 last year. The number of such havens jumped to 3000 from a mere 79.

A January 2002 amendment to Estonia's value added tax law allows its fishermen to export to Russia more than $100 million worth of catch via tax free enclaves. Virtually all the countries of central, east and southeast Europe (the Balkans) either toyed with the idea, or established such zones, the first being Russia, Poland and Bulgaria.

Even hidebound and xenophobic Belarus founded in 2000 four Free Economic Zones (FEZs), located in Brest, Minsk, Gomel-Raton and Vitebsk, to, in its words, "attract foreign investment, promote high-tech manufacturing and increase economic diversification". The zones, claim the authorities, have been a success. The Brest one drew in excess of $120 million in investments and has created 5000 new jobs.

Multilateral lenders and international trade partners are unhappy. Exemptions from taxes and customs duties amount to overt export subventions. The goods thus subsidized often end up in the local market, unfairly competing with both indigenous producers and importers.

Responding to such pressures, Kyrgyzstan now requires enterprises located within the free-economic zone to pay customs and other taxes on goods they sell domestically. Both the European Union and the United States expressed extreme displeasure at the formation of Macedonia's Taiwan-financed free zone in Bunardzik in 1999.

It has since flopped and has been leased last September for 30 years to Ital Mak Furnir, an improbable German-Italian-Macedonian partnership. The only occupant of the sole building constructed in the zone by the Taiwanese is rented to the NATO mission in Macedonia - hardly a business enterprise.

The free economic zone of the Russian exclave of Kaliningrad, formed in 1992 and revamped in both 1996 and in 1997, under the new law on Free Economic Zones, shares a similar fate. Lithuania's industrial parks are not successful either. The free zone of Kukuljanovo in the industrial zone of Bakar, about 17 km from the Port of Rijeka Free Zone in Croatia, actually serves as a trans-shipment and off-shore area, rather than a classic export processing district. It is one of 13 such fiscal havens.

Tax free, customs and export processing territories - though they may enhance employment, as they did in China, for one - distort the economic decisions of investors, manufacturers, importers and exporters. Budget revenues are adversely affected. The zones attract shady "industrialists" and "financiers" who set up fronts for illicit activities, such as smuggling, unauthorized assembly of consumer goods, or piracy of intellectual piracy.

These extraterritorial hubs are major centers of money laundering, parallel imports of shoddy or counterfeit goods and forbidden re-importation of merchandise originally sold to poor, developing countries at substantial discounts, or provided as international aid.

The Ukrainian Vice-Premier Kozachenko estimated, last May, that one fifth of all meat sold in Ukraine was smuggled through the special zones, reported UkInform. Most of it is unfit for human consumption. The impoverished country lost $56 million in customs duties on these products in 2001 alone. In the meantime, the local meat industry is "choking" in the words of Yuri Melnik, Deputy State Secretary for the Ministry of Agrarian Policy.

Yet, the undermining of local production is not the only impact on oft-struggling host economies. According to the ILO, throughput from special zones accounts for 80 percent of all the merchandise exports of the Czech Republic and Hungary. But very little of this abundance trickles down:

"Legal restrictions on trade union rights in a few EPZ operating countries, the lack of enforcement of labour legislation and the absence of workers' organizations representation were among the factors noted as undermining the ability of zones to upgrade skills, improve working conditions and productivity and thereby to become more dynamic and internationally competitive platforms."

And the contribution of these zones to economic growth and subsequent prosperity? Dubious, at best. The ILO concludes:

"(There is a) lack of reliable ... statistics regarding the costs and benefits of zones. While some data exist relating to the amount of investment, exports and employment in zones, there is very little ... on the quality, cost and duration of those jobs, on the degree of skill and technology transfer and on the opportunity cost of the fiscal incentives and infrastructure costs. (We don't know) why export processing zones (EPZs) have failed to take off in some countries. While political stability and investment in the basic infrastructure in ports, airports, roads, water, sanitation and power supply are necessary conditions for EPZs, they are not sufficient on their own to attract FDI. Macroeconomic conditions such as extreme inflation and high interest rates (are important) ... Research suggests that zones are most effective when they form part of an integrated economic strategy that includes fiscal incentives, investments in infrastructure, technology and human capital, and the creation of linkages into the local economy. It is important for EPZs to upgrade their activities to higher value-added products and services (requiring a more skilled workforce) and find their niche in the international production network ... (EPZs strategies must, therefore, be) continually adapt(ed)."

The countries of east Europe and The Balkans lack the skills and experience to do so - and the money needed to hire international consultants to monitor and modify the zones' performance and characteristics. Hence the hitherto abysmal performance of these contraptions - and the emerging trend to disassemble them.

Home | Up