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Apr 16, 2008 | 18:47 GMT

23 mins read

Organized Crime in Russia

Summary
Editors Note, Nov. 17: Alleged Russian arms dealer Viktor Bout plead not guilty to charges of supplying Colombian terrorists with weapons intended to kill Americans today. In this Stratfor analysis written in 2008, we discussed the connection between Bout's Russian military and KGB background and his smuggling activities. Following the collapse of the Soviet Union, Russian organized crime flourished. Russian industry fell into the hands of corrupt oligarchs who worked with organized criminals to secure their hold on nearly every aspect of the Russian state. President Vladimir Putin has worked to reassert central control over a stronger Russian state, but he realizes that eradicating organized crime is impossible.
During the 1990s, organized crime expanded into all sectors of the Russian economy, government and society, sustaining Russia at first but eventually threatening the sovereignty of the state. Russian President Vladimir Putin — eager to consolidate power and resources under his own control — has reined in some aspects of Russian organized crime and has weakened the influence of the oligarchs. However, considering Russia's historical dependence on organized crime and its recent proliferation throughout the world, organized crime will remain a fixture in Russian society for some time to come.

A Brief History of the Russian Mafia

Russia's history, like that of many other nations with such stature, is largely cyclical. Russia's historical cycle runs roughly as follows: Catastrophe strikes the centralized state and the social order is shattered; a "white rider" comes along to pick up the pieces and restore power to the state, only to come up short and yield to a "dark rider" willing to do whatever is necessary regardless of moral implications; and an era of decline follows until the next catastrophe strikes and the cycle begins anew. As the power of the centralized state changes during the cycle, other actors — whether internal or external — prey upon Russia when it is weak and cooperate with Russia when it is strong. Organized crime is just as beholden to Russia's historical cycle, with its power inversely related to the power of the state. When the Russian state is in a crisis, organized crime spreads and becomes the functioning arbiter of state affairs. Once power is restored to the state, organized crime never fully disappears but recedes into the background, usually cooperating to some degree with the state, until another catastrophe hits and allows it to expand again. The modern era of organized crime in Russia began with the 1917 revolution. Czar Nicholas II was overthrown, creating a period of instability during which organized crime picked up. During the revolution, food and other basic goods were scarce, and organized crime sought to provide them — for a price. When Vladimir Lenin (the white rider of that era) took over, he asserted the central government's power and attempted to subdue organized crime, though he was largely unsuccessful. His successor, Joseph Stalin, cracked down even harder, sending criminals to the infamous Soviet gulags. Organized crime continued to survive under Stalin, but only the best-connected criminal bosses enjoyed protection from Stalin. Upon Stalin's death, 8 million prisoners were released from the gulags, and the vory v zakone ("thieves in law") — as organized crime was known in prison — were released upon Soviet society. By the time Leonid Brezhnev was in office and overseeing an economically feeble Soviet Union, organized crime had infiltrated the highest ranks of the Communist Party. The vory were allowed to buy goods outside of the Soviet Union and operate smuggling routes in return for supplying the Communist Party with foreign luxury items, which were given as rewards for good behavior within the party. By the 1990s, Russia found itself again in a crisis of state authority that nurtured the expansion of organized crime. After the Soviet system collapsed, organized crime exploded, filling every state and nonstate void. Since laws concerning property and asset control were not enforced following the collapse, those who took advantage of the situation acted with impunity. Organized criminals' internal and external connections from their days of operating under the Soviets ensured they gobbled up the oil, gas, mineral and telecommunications industries; their smuggling routes (later to become supply chains) let them exploit these assets for financial gain. The organized crime bosses and their colluding political contacts from the Soviet era helped to create the enormously powerful oligarchs of Russia's chaotic post-Soviet era. Some oligarchs were former politicians, some were former criminals and some were well-connected businessmen operating in the gray area. The oligarchs worked with organized crime, either because they had to in order to conduct business or because crime was their business strategy. Following the collapse, basic government functions — such as social security, the pension system, some electrical grids, dispute settlement and the distribution and protection of property — either disappeared or were hopelessly inefficient. Government workers were woefully underpaid or even cut from the payrolls. Thousands of ex-KGB officers left the state and joined the organized crime network. This increased the amount of security that Russian organized crime could provide and also gave it access to state assets controlled by the KGB. Without a functioning state police to ensure the well-being of Russia's citizens and their property, the oligarchs were left to their own devices but — along with their organized criminal associates — profited from the void the Soviet Union left behind. In 1994, then-President Boris Yeltsin called Russia "the biggest mafia state in the world," referring to "the superpower of crime that is devouring the state from top to bottom." Enter the white rider again. By the time Putin came to power in 1999, the organized crime world and the oligarchs were seriously threatening the Russian state. First, organized crime was arguably the most stable Russian institution. Where the state was ineffective in settling disputes, enforcing laws and providing security, organized crime was imposing its own version of justice. Second, state assets such as energy, minerals, telecommunications and transport networks were under the control of the oligarchs. Since 1999, Putin has made it a point to adjust the balance between organized crime and the state. To do this, he has asserted control over the state to reduce corruption and break up the oligarchs' hold over state assets; and now he is looking to increase the power of state security forces and reduce the power of organized crime. Organized crime is far too entrenched in Russia ever to go away completely, and Putin knows this. However, Putin — who will still be powerful as prime minister when his successor Dmitri Medvedev is sworn in as president — will continue his campaign to strengthen the state and weaken its competition.

Smuggling Routes and International Connections

Russia's unique geographical position is both a boon and a curse for those operating within the country. Russia is at the intersection of Asia, Europe and the Middle East, giving it access to some major markets and producers. The country's sheer size and position mean that any agent operating within Russia, be it organized crime, railroads or the Federal Security Service, can access a number of strategic areas while staying relatively close to "home base." On the other hand, its expansiveness also means that Russia is paranoid about its vulnerability on many fronts. The Russian mafia has been able to take advantage of Russia's position in the Eurasian heartland much as the Soviet Union did in the 20th century. The Russian mob (concentrated in Moscow) is able to work with suppliers and clients in East Asia and the opium-rich Golden Crescent through the former Soviet states in the Caucasus and Central Asia. It can smuggle goods to and from the Middle East and send commodities to and from the European and American markets through ports on the Baltic and White seas. However, its sheer size, location and harsh conditions make Russia difficult to navigate. Any entity that seeks to control this land mass must be very well organized and have a wealth of resources to coordinate on all fronts. Russian organized crime's resurgence speaks volumes to the effectiveness of its network and its access to resources. Russian organized criminal groups oversee a network that colludes with criminal entities all over the world. The list of their contacts is a virtual index of worldwide organized crime and includes:
  • Triads, criminal societies in China running many counterfeit operations;
  • Yakuza, Japanese criminal groups involved in extortion and smuggling;
  • Korean criminal groups active in rural Korea, dealing in drugs, extortion and illegal fishing;
  • Turkish drug traffickers serving as a gateway for drugs traveling between Asia and Europe;
  • La Cosa Nostra ("Our Thing"), the Sicilian mafia;
  • N'dranghetta, an Italian crime outfit based primarily out of Calabria;
  • Camorra, an Italian criminal organization operating out of Naples and the Campania province;
  • and
  • Colombian drug cartels, individual drug trafficking groups that usually focus on cocaine.

Crime and Business: From Black Market to 'Free Market'

Russian organized crime has interests in virtually every market and sector. Many factors contribute to organized crime's expansiveness in Russia, but the way in which it developed is what makes it a ubiquitous economic force in the country. The Soviet system stifled competition and allowed the politically connected criminals to thrive; the post-Soviet system opened up endless possibilities for free-market-thinking criminals in Russia. Since they already had dozens of years of experience supplying the Soviet elite with illegal goods and operating illegal private businesses, and since the smuggling routes and suppliers were already in place, the criminals were several steps ahead of the Soviets by the time Mikhail Gorbachev announced perestroika. During the food shortages under Brezhnev, the criminal underworld that had been released from prison upon Stalin's death began to operate private businesses. These businesses were, of course, illegal under the Soviet system, but organized crime networks enjoyed the protection of the Communist Party elite. A relationship based on goods, favors and money already sealed a partnership between the criminals and the politicians. When small food shops started opening up, the Kremlin largely looked away because the criminals were pacifying the public by supplying food, and because crossing the mob would hurt the Communist Party's ability to access the goods and favors the criminals provided. Gorbachev tried to clean up the corruption that flourished during the Brezhnev and Nikita Khrushchev eras. Perestroika was supposed to give law-abiding citizens the ability to participate in commerce, but by then the criminals had a firm grasp on the private sector (which, before perestroika, was the black market). When other shops opened up, thugs intimidated and harassed business owners until they either moved or shut down. Perestroika did not create a freer market; it simply legalized the black market. As the Soviet system collapsed, organized crime expanded and helped to oversee the rise of the oligarchs. Yeltsin's "shock therapy" market liberalization presented bigger and more profitable avenues to organized crime bosses already well-connected to the government. Financial criminals involved in scams, money laundering and fraud became rich during "shock therapy." During this period, boundaries between government, private business (represented by the oligarchs) and organized crime did not properly exist. That is why, once the dust of the 1990s privatization bonanza settled, assessing blame and accountability was (and remains) so difficult. Members of the government and civil services and organized crime bosses used their power and wealth to secure Russia's lucrative assets — thus forming the Russian oligarchy that controlled the fledgling private sector. Oil, gas, minerals, telecommunications, weapons systems (thanks to the KGB) and many other state-owned assets were sold off to oligarchs who had special relationships with the government and who were linked to organized crime. The oil industry, Russia's most promising money maker, was corrupted by oligarchs who cheated investors (including the Russian government, Western countries, the International Monetary Fund and many more) by selling oil at below-market prices to holding companies that they owned, which then turned around and sold the oil abroad at market prices. Such deals enriched private businessmen at the expense of the Russian government, tipping the balance of power away from the state. With the Russian state all but bankrupt, organized crime bosses and networks aligned themselves with the new holders of Russian power: the oligarchs. Organized crime continued to grow, thanks to the activities of the oligarchs operating in a legal gray area. Overall, organized crime began focusing more on financial crimes, which were more profitable and less damning than violent crimes. The United States and Europe were very attractive markets. Organized criminals set up front companies and formed partnerships with foreign banks to defraud investors and launder their earnings. They exploited existing Russian communities in such places as New York, Miami, the Baltic States and Ukraine as both agents and victims of their activities. The marriage of business and organized crime is illustrated in the case of Semyon Mogilevich. Mogilevich was a major actor in Ukrainian oil and natural gas and was considered a kingpin in the Russian mob. Though he was a silent partner in RosUkrEnergo, he used this company as a front to sell oil and natural gas to certain political factions in Ukraine. His activities reached into the United States, where he defrauded investors out of $150 million through a scam that included a magnet producer as a front company and reached up to executives at the Bank of New York. In 2004, the director of Ukraine's secret police accused him of conducting backroom deals with Russia's state-owned natural gas company, Gazprom. In January 2008, Mogilevich was arrested in Moscow after meeting with the owner of a cosmetics company. Mogilevich is an example of the new breed of Russian organized criminal who moved away from violence and mixed crime with business to create a highly profitable form of white-collar crime that ran across industries and borders. Mogilevich also exemplifies how prolific Russian organized crime can be. By expanding, Russian organized crime increased its profile along with its profits. Affected countries' law enforcement — including the FBI — turned their attention to Russian crime bosses in an effort to stymie the proliferation of financial crimes. Russian organized crime is not only prolific, it is pervasive. While its kingpins are very active in the most lucrative business sectors, thousands of neighborhood gangs run the daily protection racket. Foreign businesses operating in major mob-run cities such as Moscow or St. Petersburg count on handing 10 percent of their monthly profits to the local crime syndicate simply for operating in that area. Some businesses will pay up to 30 percent for additional "services," such as physical protection of their property and even suppression of competitors in the area. Cooperating with an organized crime entity to do business is illegal, but without cooperation, there is no business; choosing not to pay the mob can lead to very draconian punishments. In 2000, an estimated 80 percent of businesses in Russia paid protection fees to the Russian mob. This type of parallel state regulatory system scares many foreign businesses away and has hurt foreign investment in Russia, giving Putin a major incentive to go after organized crime.

The Structure of the Mob

The term "Russian organized crime" is a loose one. It comes from the fact that the primary node of the criminal network's modern incarnation is the Moscow mob. The Moscow mob is a highly politically connected umbrella organization that oversees a network of criminal groups bound together by at least one of the following factors: ethnicity, family ties and geography. These disparate groups receive support from the Moscow mob in the forms of political cover, money and organizational oversight. It is not like traditional Italian mafia groups that have a clear, delineated hierarchy; rather, it is a network of influential kingpins, semi-autonomous bosses and gangs willing to contract their services. Organized criminals often lose or gain power depending on political conditions in Moscow, making it difficult to identify a "head" of Russian organized crime. At the fall of the Soviet Union, the Russian Interior Ministry estimated that there were 100,000 criminals working for 5,000 to 8,000 Russian organized crime gangs operating throughout the world. First, there are the groups bound by ethnicity. Not all criminals involved in Russian organized crime are Russian. But just about all of these criminals come from areas that were under Soviet rule, including Chechnya, Armenia, Azerbaijan, Ingushetia, Ukraine and Dagestan. Many gangs from the Baltic countries, Poland and the former Yugoslavia are often considered part of Russian organized crime. It is important to note that these groups are ethnically bound and not geographically bound. They operate not only in their areas of origin, but also throughout Russia, the former Soviet Union and — as in the case of Chechen drug traffickers in Argentina — the world. They deal in everything from drugs to physical protection to weapons. Then there are the groups bound by kinship. One such outfit, the Tambov group, run by two brothers, was a highly powerful and profitable player in St. Petersburg until Russian special police broke it up. At its peak, the Tambov group controlled up to 80 percent of the traffic in the ports of St. Petersburg, Murmansk, Arkhangelsk and Kaliningrad. The Tambov group was responsible for contract killings and extortion and essentially controlled the fuel, lumber, tobacco and alcohol exports. All the while, various members of the group (some related, some not) held seats in the Duma to protect the family business. Examples of groups bound by geography are the gangs that control the various suburbs of Moscow. Groups such as the Dolgoprudnenskaya, Podolsk and Solntsevskaya gangs run protection rackets and traffic drugs, weapons and humans in their respective Moscow neighborhoods. Other gangs rule entire cities, such as the Uralmash boys who ruled over the southern city of Yekaterinburg, 900 miles southeast of Moscow. This group essentially took over the Ural Machine Factory (from which it got its name) and from there expanded into telecommunications, utilities and copper processing. The Uralmash boys took over a great deal of the Yekaterinburg economy and eventually went into politics. Those involved in Russian organized crime are usually very highly educated. In the early 1990s, the state was unable to retain the brightest in the country because it simply did not have the money. However, organized crime outfits did have the money to employ these highly skilled professionals. Many organized criminals hold master's degrees or doctorates and are very rational thinkers. They do not choose crime because they are necessarily bloodthirsty or power hungry; in Russia during the 1990s, crime was simply the most lucrative business.

KGB Connections

After the Soviet Union collapsed and government agencies splintered, many talented, well-connected government professionals left to start new careers. Many of those were KGB agents — the experts who made up the Soviet security intelligence apparatus domestically and abroad. Up to 40 percent of KGB agents found jobs in the criminal sector that paid very well and used their unique skills. By bringing in a significant piece of the KGB, Russian organized crime gained access to security and military hardware, including arsenals of personal weapons, vehicles and even a few rogue submarines, as well as KGB contacts around the world. These items were either used by organized crime and the oligarchs to protect themselves and their newly gained assets or sold off to bidders around the world with the cash and desire to own a piece of Soviet military hardware. One man who found a way to profit from the KGB's close ties to Russian organized crime was Viktor Bout, the recently arrested arms smuggler. Bout entered the weapons trade after his air force unit was disbanded when the Soviet Union fell. During the 1990s, Bout supplied guns, ammunition and even helicopters to rebel groups in Africa, Latin America, the Middle East and Southeast Asia. His background in the Russian military service and the KGB gave him a network and the ability to get materiel anywhere in the world — advantages that supposedly earned him the business of Kremlin politicians and even interest from the CIA when it was fighting the Taliban. He was known to supply anything to anyone for the right price and, given the lack of security in Russia, it is conceivable that he could have procured nuclear materials (though there have been no confirmed reports that he did sell nuclear material). Bout's is an extraordinary example, but thousands of other ex-KGB officers were active in the weapons trade on smaller scales and in more specific geographic areas. Meanwhile, the oligarchs' control over the Russian state went deeper as ex-KGB agents got involved. During the Soviet era, organized crime was protected from above by patrons within the Communist Party. In the lawless state of Russia after the Soviet Union, dependable protection from politicians was no longer available, so the organized criminals and oligarchs had to protect themselves. The most efficient and effective form of security came from organized crime, thanks in large part to the involvement of former KGB agents. Security itself became a commodity that organized crime could provide to those who could afford it. And, eventually, nobody could afford not to have mob-provided security. The mob used its monopoly on security as extortion. This led to the existing situation in which businesses pay the mob for protection.

Putin's Crackdown on the Mafia

The Russian organized crime network derives much of its protection and success from political patrons in the Duma. Organized crime in Russia strengthened with Soviet political cooperation, and, with the exception of some turbulent years during the 1990s, it has remained a group effort. However, while the politicians were firmly in control during the Soviet era, the balance has shifted so that organized crime has far more power than it did 20 or 30 years ago. Putin is wary of organized crime's threat to the sovereignty of the state and has been working to rebalance the relationship between the state and the organized crime network. He has sought to counter the rise of organized crime by seizing assets and addressing police corruption. He cut into the demand for illicit protection services by reclaiming public safety as a responsibility of the state. In 2002, public prosecutors in Russia earned a 160 percent pay raise as an incentive to remain loyal to their government employers. To encourage legitimate business, Putin somewhat clarified the murky world of business and finance regulation; those wanting to open a business in Russia have shorter waiting times and fewer hoops to jump through now than in 2000. Fewer restrictions mean more soon-to-be business owners are willing to pursue their interests in accordance with Russian law. Putin has also reined in regional and local political officials as part of his crackdown on organized crime and political corruption. It appears that his next target will be Moscow Mayor Yuri Luzhkov. Luzhkov is known to be an integral leader in the Moscow mob, mostly in political corruption activities. Putin is pressuring Luzhkov to go, which would radically shake up the structure of Russian organized crime and weaken it vis-a-vis the state. Although Putin will give up his position as president May 7, he handpicked Dmitri Medvedev as his successor and will still hold quite a bit of power as prime minister. This means that the current drive to increase the state's power and weaken the oligarchs and organized criminals will continue for at least the next four years. From Putin's point of view, the problem with organized crime is that it has corrupted key assets such as oil, gas, minerals and telecommunications that used to be completely controlled by the Soviet state. This is not to say that the Soviet state was not corrupt, but it at least offered uniformity. The oligarchs, criminals and corrupt politicians who oversaw this transfer of assets have varying styles of business that can differ wildly. The state has, in turn, been discredited by foreign governments and companies that are unwilling to invest in or cooperate with Russia due to the lack of transparency and uneven regulatory standards that are the result of rampant organized crime. Without investment from foreign companies, regardless of energy windfalls, Russia faces a bleak future. Putin is seeking to restore domestic and foreign trust in Russia's institutions and economy and reassert control over traditional responsibilities of the state such as security, tax collection and control over the borders. By reasserting control over the state and strengthening it, Putin can regain control over the state's assets and correct the imbalance that has favored organized crime recently.

The Mob's Vulnerabilities

As powerful and pervasive as organized crime is in Russia today, it faces challenges that stem from its rapid growth. Russian organized criminals' international activities have caught the attention of authorities in Italy, Switzerland, the United States and South Korea. They also have captured headlines and risen in stature among the general public. Increased scrutiny and cooperation from foreign police agencies — including Interpol — have helped Russian authorities to track activities and shut down operations in Russia, the United States and elsewhere. All of these advancements in recent years have led criminals to reconsider their business models. The cost of doing illegal business is rising and — considering the money to be made in the booming Russian energy and real estate markets — many criminals are investing their illicit funds into legitimate businesses. A more legitimate, regulated Russian economy has meant that on one hand, violent organized crime is declining (though crime overall is not), but on the other hand, corruption and financial crimes are still serious problems. Organized crime in Russia will not go away any time soon. As in other countries, as long as there are laws and regulations, there will be networks operating to get around them. As long as the balance between organized crime and the state favors the state, Putin will be content to live with a manageable level of crime (by Russian standards) that can be controlled and monitored by the police so that the executive branch can focus its energy on strengthening the state instead of wrestling over control of it.

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