Chapter 6

Israel is perfectly located to offer an affordable alternative to expensive and often clogged oil shipping lanes through the Suez Canal or the Cape. A revival of the Trans-Arabian pipeline (Tapline) to Haifa can considerably under-price the politically wobbly Iraqi-Turkish and the costly Suez-Mediterranean (Sumed) alternatives.

With one of every five Israelis a Russian ‚migr‚ and confronted with the common enemy of Islamic militancy, Israel and Russia have embarked on a path of close cooperation. Prime Minister Sharon's visit to Russia last month was a resounding success. Faced with these millennial geopolitical developments, anti-Semitic conspiracy theorists are having a field day.

The Jewish lobby, they say, is coercing America, its long arm, to hijack the Iraqi oil fields in the forthcoming war and thus to counterbalance surging Russian oil exports. Israel, they aver, planned to carry out, in October 2001, an operation - "Mivtza Shekhina" - to secure southern Iraq's oil fields while also mitigating the threat of weapons of mass destruction aimed at its population centers.

Conspiratorial paranoia notwithstanding, it is unlikely that the USA is motivated by oil interests in its war on Saddam. A battle in Iraq aimed solely at apprehending its crude would be fighting over yesterday's oilfields. Only an easily replaceable one tenth to one eighth of American oil consumption emanates from the Gulf, about a million barrels per day of it from Iraq. Moreover, the war is likely to alienate far more important suppliers, such as Russia - as well as the largest European clients of Gulf oil extracted by American firms. Strictly in terms of oil, a war in Iraq is counterproductive.

Additionally, such a war is likely to push oil prices up. According to the Council on Foreign Relations, "for every dollar-per-barrel increase in oil prices, about $4 billion a year would leave America's $11 trillion economy, and other importing countries would lose another $16 billion per year."

Israel understandably did discuss with the USA its role in a showdown with Iraq. Russia, unsettled as it is by America's growing presence in central Asia and exercised by its determination to take on Iraq - may be trying to lure Israel away from its automatic support of US goals by dangling the oiled carrot of a joint pipeline.

Russia also hopes to neuter the rapprochement between Israel and the Islamic nations of Turkey and Azerbaijan, traditional adversaries of Moscow. Israel is the second largest buyer of oil from Azerbaijan. It is one of the sponsors of a pipeline from the Baku oilfields to the port of Ceyhan in Turkey. The pipeline stands to compete with a less costly and more hostile to the West Russian-Iranian route.

These are momentous times. Oil is still by far the most strategic commodity and securing its uninterrupted flow is essential to the functioning of both developed and developing countries. There is a discernible tectonic shift in production and proven reserves from the Persian Gulf, the US except Alaska, the North Sea, and Latin America to northern Europe, Russia, and the Caspian Basin. Yet, oil is still a buyers' market. OPEC has long been denuded of its mythical power and oil prices - even at the current interim peak - are still historically low in real terms.

But Russia stands to gain whichever way. Middle East tensions, in Palestine and Iraq, have ratcheted oil prices up resulting in a much-needed budgetary windfall. Russia's mostly-privatized oil industry has cleverly ploughed back its serendipitous profits into pipelines, drilling, and exploration. When the dust settles in the deserts of Arabia, Russia will emerge victorious with the largest oil market share. Israel is not oblivious to this scenario.

Russia's Idled Spies

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

The Industrious Spies

Russian Roulette - The Security Apparatus

Sweden expelled yesterday two Russian diplomats for spying on radar and missile guidance technologies for the JAS 39 British-Swedish Gripen fighter jet developed by Telefon AB LM Ericsson, the telecommunications multinational. The Russians threatened to reciprocate. Five current and former employees of the corporate giant are being investigated. Ironically, the first foreign buyer of the aircraft may well be Poland, a former Soviet satellite state and a current European Union candidate.

Sweden arrested in February last year a worker of the Swiss-Swedish engineering group, ABB, on suspicion of spying for Russia. The man was released after two days for lack of evidence and reinstated. But the weighty Swedish daily, Dagens Nyheter, speculated that the recent Russian indiscretion was in deliberate retaliation for Swedish espionage in Russia. Sweden is rumored to have been in the market for Russian air radar designs and the JAS radar system is said by some observers to uncannily resemble its eastern counterparts.

The same day, a Russian military intelligence (GRU) colonel, Aleksander Sipachev, was sentenced in Moscow to eight years in prison and stripped of his rank. According to Russian news agencies, he was convicted of attempting to sell secret documents to the CIA. Russian secret service personnel, idled by the withering of Russia's global presence, resort to private business or are re-deployed by the state to spy on industrial and economic secrets in order to aid budding Russian multinationals.

According to the FBI and the National White-collar Crime Center, Russian former secret agents have teamed with computer hackers to break into corporate networks to steal vital information about product development and marketing strategies. Microsoft has recently admitted to such a compromising intrusion.

In a December 1999 interview to Segodnya, a Russia paper, Eyer Winkler, a former high-ranking staffer with the National Security Agency (NSA) confirmed that "corruption in the Russian Government, the Foreign Intelligence Service, and the Main Intelligence Department allows Russian organized criminal groups to use these departments in their own interests. Criminals receive the major part of information collected by the Russian special services by means of breaking into American computer networks."

When the KGB was dismantled and replaced by a host of new acronyms, Russian industrial espionage was still in diapers. as a result, it is a bureaucratic no-man's land roamed by agents of the GRU, the Foreign Intelligence Service (SVR), and smaller outfits, such as the Federal Agency on Government Communications and Information (FAPSI).

According to Stratfor, the strategic forecasting consultancy, "the SVR and GRU both handle manned intelligence on U.S. territory, with the Russian Federal Security Service (FSB) doing counterintelligence in America. Also, both the SVR and GRU have internal counterintelligence units created for finding foreign intelligence moles." This, to some extent, is the division of labor in Europe as well.

Germany's Federal Prosecutor has consistently warned against $5 billion worth of secrets pilfered annually from German industrial firms by foreign intelligence services, especially from east Europe and Russia. The Counterintelligence News and Developments newsletter pegs the damage at $13 billion in 1996 alone:

"Modus operandi included placing agents in international organizations, setting up joint-ventures with German companies, and setting up bogus companies. The (Federal Prosecutor's) report also warned business leaders to be particularly wary of former diplomats or people who used to work for foreign secret services because they often had the language skills and knowledge of Germany that made them excellent agents."

Russian spy rings now operate from Canada to Japan. Many of the spies have been dormant for decades and recalled to service following the implosion of the USSR. According to Asian media, Russians have become increasingly active in the Far East, mainly in Japan, South Korea, Taiwan, and mainland China.

Russia is worried about losing its edge in avionics, electronics, information technology and some emerging defense industries such as laser shields, positronics, unmanned vehicles, wearable computing, and real time triple C (communication, command and control) computerized battlefield management. The main targets are, surprisingly, Israel and France. According to media reports, the substantive clients of Russia's defense industry - such as India - insist on hollowing out Russian craft and installing Israeli and west European systems instead.

Russia's paranoid state of mind extends to its interior. Uralinformbureau reported earlier this year that the Yamal-Nenets autonomous okrug (district) restricted access to foreigners citing concerns about industrial espionage and potential sabotage of oil and gas companies. The Kremlin maintains an ever-expanding list of regions and territories with limited - or outright - forbidden - access to foreigners.

The FSB, the KGB's main successor, is busy arresting spies all over the vast country. To select a random events of the dozens reported every year - and many are not - the Russian daily Kommersant recounted in February how when the Trunov works at the Novolipetsk metallurgical combine concluded an agreement with a Chinese company to supply it with slabs, its chief negotiator was nabbed as a spy working for "circles in China". His crime? He was in possession of certain documents which contained "intellectual property" of the crumbling and antiquated mill pertaining to a slab quality enhancement process.

Foreigners are also being arrested, though rarely. An American businessman, Edmund Pope, was detained in April 2000 for attempting to purchase the blueprints of an advanced torpedo from a Russian scientist. There have been a few other isolated apprehensions, mainly for "proper", military, espionage. But Russians bear the brunt of the campaign against foreign economic intelligence gathering.

Strana.ru reported last December that, speaking on the occasion of Security Services Day, Putin - himself a KGB alumnus - warned veterans that the most crucial task facing the services today is "protecting the country's economy against industrial espionage."

This is nothing new. According to History of Espionage Web site, long before they established diplomatic relations with the USA in 1933, the Soviets had Amtorg Trading Company. Ostensibly its purpose was to encourage joint ventures between Russian and American firms. Really it was a hub of industrial undercover activities. Dozens of Soviet intelligence officers supervised, at its peak during the Depression, 800 American communists. The Soviet Union's European operations in Berlin (Handelsvertretung) and in London (Arcos, Ltd.) were even more successful.

Russia's Middle Class

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

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Women in Transition

A conference held, at the beginning of the month, in St. Petersburg, was aptly titled "Middle Class - The Myths and the Reality". Russia is way poorer than Slovenia, the Czech Republic, Hungary, or even Poland. But, as income disparities grow, a group of discriminating consumers with the purchasing power to match, is re-emerging, having been submerged by the 1998 implosion of the financial sector.

The typical salary in the large metropolises is now more than $600 per month - four times the meager national average. Some 20 percent of the workforce in Moscow earns more than $1700 a month, comparable to many members of the European Union. Real average wages across Russia have surpassed the pre-1998 level in May.

Moreover, Russians are unburdened by debt and their utility bills and food are heavily subsidized, though decreasingly so. Few pay taxes - lately dramatically reduced and simplified - and even fewer save. Every rise in disposable income is immediately translated to unadulterated consumption. Takings are understated - Russia's informal economy is probably half as big as its formal sector.

A study, financed by the Carnegie Foundation, found that only 7 percent of Russians qualify as middle class. Another 12 percent or so have some bourgeois characteristics. Sixty percent of them are men, though the Komkon marketing research agency says that the genders are equally represented.

Figures culled from the census conducted this year throughout the Russian Federation - the first since 1989 - are expected to confirm these findings. About one fifth to one quarter of all Russian households earn more than the average monthly income of $150 per person.

Political parties which purport to represent the middle class - such as the Union of the Forces of the Right (SPS) - garnered 10-15 percent of the votes in the 1999 parliamentary elections. Direct action groups of the "third estate" may transform the political landscape in forthcoming elections.

In a recent study by sociologists from the Russian Academy of Sciences' Institute of Philosophy, more than half of all Russians self-flatteringly considered themselves middle class. This is delusional. Even the optimistic research firm Premier-TGI pegs the number at 19 percent at most.

Businesses adapt to these new demands of shifting tastes and preferences. The St. Petersburg-based cellular operator Delta Telecom, owner of the first license to provide wireless-communications services in Russia, intends to test the market among middle class clients.

Ikea, the Swedish home improvement chain, has plunged $200 million into a new shopping center. French, German and Dutch cash-and-carry and do-it-yourself groups are slated to follow. Russian competitors, every bit as sleek, have erupted on the scene. The investment spree has engulfed the provinces as well.

Last month, Citibank opened a retail outlet for affluent individuals in Moscow - though its standards of transparency may yet scare them off, as Gazeta.ru observed astutely. A private cemetery in Samara caters to the needs of the expired newly rich. Opulently-stocked emporiums have sprouted in all urban centers. TV shopping and even online commerce are on the up. According to the Washington Post, Moscow retail space will have tripled by the end of next year from its level at the beginning of 2002.

The Russian Expert magazine says that the middle class, minuscule as it is, accounted last year for a staggering 55 percent of all consumer goods purchased and generates one third of Russia's gross domestic product. The middle class is Russia's most important engine of wealth formation and investment, far outweighing foreign capital.

Russia's post-1998 fledgling middle class is described as young, well-educated, well-traveled, community-orientated, entrepreneurial and suffused with work ethic and a desire for social mobility. It is almost as if the crisis four years ago served as a purgatory, purging sins and sinners alike and creating the conditions for the revival of a healthier, longer-lived, bourgeoisie.

But being middle class is a state of mind more than a measure of wealth. It is an all-encompassing worldview, a set of values, a code of conduct, a list of goals, aspirations, fantasies and preferences and a catalog of moral do's and don'ts. This is where transition, micromanaged by western "experts" failed.

The mere exposure to free markets was supposed to unleash innovation and entrepreneurship in the long-oppressed populations of east Europe. When this prescription - known as "shock therapy" - bombed, the West tried to engender a stable, share-holding, business-owning, middle class by financing small size enterprises. It then proceeded to strengthen and transform indigenous institutions.

None of it worked. Transition had no grassroots support and its prescriptive - and painful - nature caused wide resentment and obstruction. When the dust settled, Russia found itself with a putative - and puny - middle class. But it was an anomalous beast, very different from its ostensible European or American counterparts.

To start with, Russia's new middle class is a distinct minority.

Prism, a publication of the Jamestown Foundation, quoted, in its August 2001 issue, the Serbian author Milorad Pavic as saying that "the Russian middle class is like a young generation whose fathers suffered a severe defeat in a war: with no feeling of guilt and no victorious fathers to boss them around, the children of defeat see no obstacles before them."

But this metaphor is misleading. The Russian middle class is a nascent exception - not an overarching rule. As Akos Rona-Tas, Associate Professor in the Sociology Department at the University of California, San Diego, notes correctly in his paper "Post Communist Transition and the Absent Middle Class in Central East Europe", a middle class that is in the minority is an oxymoron:

"In democracies the middle class is the nation proper. The typical member of a national community is a member of the middle class. When democratic governments need a social group they can address, a universal class that carries the overarching, common interest of the country, they appeal to the middle class. This appeal, while it calls on a common interest, also acknowledges that there are conflicting interests within society. The middle class is not everyone, but it is the majority and it represents what everyone else can become."

Russia has a long way to go to achieve this ubiquity. Its middle class, far from representing the consensus, reifies the growing abyss between haves and haves not. Its members' conspicuous consumption, mostly of imports, does little to support the local economy. Its political might is self-serving. It has no ethos, or distinct morality, no narrative, or ideology. The Russian middle class is at a Hobbesian and primordial stage.

Whether it emerges from its narcissistic cocoon to become a leading and guiding social force, is doubtful. The middle class' youth, urbaneness, cosmopolitanism, polyglotism, mobility, avarice and drive are viewed with suspicion and envy by the great unwashed - the overwhelming majority of Russia's destitute population. Empowered by their wealth, the new bourgeoisie, in turn, regards the "people" with naive admiration, patronizing condescension, or horror.

Granted, this muted, subterranean, interaction is not entirely deleterious. It is the social role of the rich to generate demand by provoking in the poor jealousy and attempts at emulation. The wealthy are the trendsetters, the early adopters, the pioneers, the buzz leaders. They are the engine that engenders social and economic mobility.

A similar dynamic is admittedly evident in Russia - but, again, it is tampered by a curious local phenomenon.

Writing for the Globalist, two Brookings Institution scholars, Carol Graham, a Senior Fellow of Economic Studies and Clifford Gaddy, a Fellow of Foreign Policy and Governance Studies described it thus:

"The eyes of Russia's middle class, on the other hand, are figuratively directed downward, towards the poor. In fact, as poverty in Russia increased dramatically in the 1990s, the middle class's reference norms shifted downward as well. As a result, Russia may be the only country in the world where the "subjective poverty line" is falling.

That is, the amount of money that Russians say that they need in order to stay out of poverty has been steadily falling over the past five years. It is even below the objective poverty line. For the time being, at least, these curious Russian attitudes, along with the existence of the non-monetary virtual economy, have insulated the country against political upheaval."

The list of anomalies is not exhausted.

The new middle class comprises the embryonic legitimate business elite - entrepreneurs, professionals and managers - but not the remnants of the financially strapped intelligentsia. It is brawn with little brains. In dissonance with western Europe, according to a survey published in the last two years by Expert magazine, the majority of its members are nationalistic, authoritarian and xenophobic. Their self-interested economic liberalism is coupled with social and political intolerance. But two thirds of them support some kind of welfare state.

Thus, there are major differences between the middle class in the West and its ostensible counterpart in Russia.

The Russian parvenus - many of them women - do not believe their state, their banks, or their compatriots. They fear a precarious future and its inevitable calamities though they are not risk averse and are rather optimistic in the short run. They keep their money under the proverbial mattress, invest it surreptitiously in their ventures, or smuggle it abroad. They are not - yet - stakeholders in their country's stability and prosperity.

Often bamboozled by other businessmen and fleeced by a rapacious bureaucracy, they are paranoid. Tax evasion is still rampant, though abating. They trust in equity and avoid debt. Some of them have criminal roots or a criminal mindset - or are former members of Russia's shady security services.

Three fifths, according to the Expert-Komkon survey, find it "hard to survive" when "observing all laws". "Strong leaders are better than all sorts of laws" is their motto, quoted by Izvestia. Generally, they are closer to being robbers than barons.

Early capitalism is always unruly. It is transformed into a highly structured edifice by the ownership of land and realty (the prime collateral), the protection of private property, a functioning financial system comprised of both banks and capital markets and the just and expedient application of the rule of law.

Russia has none of these. According to Business Week, bank deposits amount to 4 percent of the country's mid-size GDP - compared to half of GDP in other industrialized countries. Mortgages are unheard of, deposits are not insured and land ownership is a novel proposition. The judiciary is venal and incompetent. Might is still right in vast swathes of the land.

The state and the oligarchs continue to represent a rent-seeking opportunity. Businessmen spend time seeking concessions, permits, exemptions and licenses rather than conducting business. The "civic institutions" they form - chambers of commerce, clubs - are often mere glorified lobbying outfits of special and vested interests. Informal networks of contacts count more than any statute or regulation. In such a mock "modern state" no wonder Russia ended up with a Potemkin "middle class".

Russia in 2003

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Contrary to recent impressions, Russia's Western (American-German) orientation is at least as old as Gorbachev's reign. It was vigorously pursued by Yeltsin. Still, 2002 marks the year in which Russia became merely another satellite of the United States - though one armed with an ageing nuclear arsenal.

Russia's economy has revived remarkably after the 1998 crisis, but it is still addicted to Western investments, aid and credits. Encircled by NATO to its West and US troops stationed in its central Asian hinterland, Russia's capitulation is complete. In the aftermath of conflicts to be engineered by the United States in Afghanistan, Iraq, North Korea, Iran, Syria and, potentially, Cuba - Russia may feel threatened geopolitically as well as economically. Both Iran and Iraq, for instance, are large trading partners and leading export destinations of the Russian Federation.

If anything can undo the hitherto impressive personality cult of Russia's new "strong man", Vladimir Putin, it is this injured pride among the more penumbral ranks of the country's security services. Russia's history is littered with the bloodied remains of upheavals wrought by violent ideological minorities and by assorted conspirators.