he looting of Russia. (smuggling)

Last fall, Russian customs officers in St. Petersburg noticed something peculiar about a trainload of faucets being shipped out of the country: There was no way water could flow through any of them. On closer inspection, the officers discovered that the faucets were made of solid nickel, which had been cast into hardware in an attempt to smuggle the valuable metal out of the country duty free.

Using everything from oil tankers to offshorski bank accounts, from false bottoms on automobiles to phony ship's propellers made of solid copper to suitcases stuffed with cash, a shady assortment of bankers, mobsters, foreign carpetbaggers, entrepreneurs and apparatchiks is looting Russia. After six years of Boris Yeltsin's halting economic reforms, the world's largest country has become a bazaar in which the easiest ways to make a fortune are those that are least productive for the economy, least useful to the consumer and most profitable to a handful of speculators who pack most of their profits off to banks in Zurich, Cyprus, Latin America and elsewhere. As much as 20 percent of Russia's oil and one third of the metal mined there was smuggled out of the country in 1995, says Anders Aslund, a Swedish economist who until recently served as an adviser to the Russian government. In addition, says Nikolai Petrakov, a Russian economist and adviser to President Yeltsin, $15 billion is siphoned out of the country every year--much of it by exporters tucking their earnings away in offshore bank accounts, safe from Russia's high inflation, high taxes and political instability.

The hemorrhage of natural resources and capital and the criminalization of Russia's economy are crippling Yeltsin's halting efforts at economic reform, convincing ordinary Russians that reform is just a new way for the elite to enrich itself and undermining a $24 billion Western aid effort, championed by the Clinton administration, to foster the development of a market economy in Russia.

In his first address to a joint session of Russia's new parliament, Yeltsin continued his retreat from the reforms the West has been urging and called for a stronger Russian state. Saying "freedom is not enough," he bemoaned the fact that "people who cheat and use violence are having a field day" and called for continued government subsidies to key industries.

A race is underway, Aslund argues in an unpublished paper, between market reform on the one hand and the rise of criminality and the transformation of the old elite into a new privileged group on the other. "The inflation rate is a measurement of how the struggle proceeds," he writes. "The higher it is, the better the old rent-seeking elite is doing."

By almost any measure, the criminals and the apparatchiks are doing well. In London, Russians are eagerly buying up valuable artwork, antiques and jewelry--and they usually pay cash, say retailers and auction houses. Moscow's streets are dotted with top-of-the-line Mercedes-Benz, BMW and Lexus luxury cars. Meanwhile, as the Central Bank keeps taxing consumers and printing rubles to pay for subsidies to big, state-owned enterprises, some of which are skimming ruble profits and turning them into dollars, the inflation rate has reached 21 percent a month and the average Ivan's savings have been wiped out. And while some Russian officials try to crack down on the country's new robber barons, the smugglers and scam artists always seem to be at least one step ahead. Among the most popular looting techniques:

Smuggling. For the past two years, Russia's borders have been more like a funnel than a sieve. Customs officials managed to seize more than 400,000 antique art objects last year; no one knows how many others sneaked through. The Soviet Union's internal borders were as porous as those between U.S. states, and the Soviet collapse left Russia with 8,400 miles of new international frontiers. St. Petersburg, Russia's "window to Europe," has become a back door for smugglers. In September 1993, Lev Savenkov, a vice mayor of the city, was caught on the Finnish border with 8 grams of osmium-187, used to make pen points and electric light filaments, estimated by customs to be worth about $500,000. The hole has been opened widest for Russia's natural resources. During the past four years, smuggling of oil, gasoline, timber and metals has sharply increased. The most popular metals to be smuggled out are nickel, copper and cobalt, which can be purchased at subsidized prices for internal use and sold for much higher ones abroad. Add to that high Russian export duties, and smuggling becomes irresistible.

In the first nine months of 1994, $45 million worth of nonferrous metals passed over the border from Russia to Estonia-- most of it illegally--and out to the West. Tiny Estonia is now one of the world's largest exporters of nonferrous metals, even though it produces none.

Another haven for smugglers is the Russian military enclave of Kaliningrad on the Baltic Sea, separated from the rest of Russia by Lithuania. Like other Russians, Kaliningrad residents can still purchase oil and other resources at subsidized prices. Smugglers have exploited this by setting up phony companies in Kaliningrad to buy oil and other materials.

The result: Virtually every day in 1995, a trainload of as many as 50 oil tank cars--each of which can carry 147 barrels of oil-- would vanish. "There are certain mafioso structures specializing in taking out oil, and they have their own people working at railway stations in the Baltic States, Lithuania and Latvia," says Mikhail Vanin, head of the enforcement department of the Russian State Customs Committee. A train might be taken to a siding at a train station that had oil storage facilities, where the oil would be drained off for sale on the black market or for shipment out of the country. Eventually, the empty train would return to Russia. To avoid export duties, the smugglers would show customs officials a contract between a Russian and a Kaliningrad firm. When customs officials checked to see if such a company existed, they usually found that it not only was properly registered but also had a bank account. "We start investigating, and find out that it was a 24-hour company, set up for this single operation," says Vanin. A new rule now requires oil purchasers in Kaliningrad to deposit enough money to pay the export duties if the oil is being sold outside of Russia. If the oil arrives, the deposit is refunded. Now smugglers must either bribe customs officers, use false documents or transport their cargo by truck on back roads, a much less efficient method of smuggling.

Exporting capital. Legally, private individuals can take only $500 out of Russia each time they leave. But there are ways to get around this stricture. One scheme that has become popular is for a Russian businessman to negotiate a contract with a Chinese firm and ship the goods abroad. After a few weeks, the Russian claims he was never paid. Since there is little he can do about it, he writes off the deal. In the meantime, however, his Chinese partner has paid for the goods by making a deposit in the Russian's overseas bank account. Another method is for a Russian businessman to pay for "services" abroad. For example, a Russian businessman might pay a foreign company $100,000 for consulting services. In fact, the Russian sends the money to a phony company abroad, which in turn transfers it to the Russian's bank account. "Nobody will be able to prove that no one got these services," says Mikhail Sarafanov, the director of the National Market Research Institute, which is part of the Russian Ministry of External Economic Relations. Sarafanov says there are dozens of firms that will perform this job for Russian businessmen, for a fee of 5 to 7 percent of the transaction.

Skimming profits. Owners and managers who can't smuggle their profits out can try to skim them by setting up a shell company as the sole buyer of their products. Company A sells its products to Company B at a minimal or no profit, then Company B resells them at market prices and reaps all the profits. "Usually the chief executive officer of the plant and his deputies are on the board of the [second] company," explains Mikhail Korchemkin of the University of Pennsylvania. "This may seem like a conflict of interest, but there are no regulations preventing this." Privatization was supposed to solve this problem, but so far only 31 percent of enterprises have been privatized. What's more, it's not clear that privatization is really curbing bad behavior. In theory, managers that own part--if not all--of their companies are supposed to have an investment in the firm's long-term viability. But if the new owners think "the economy is going to be unstable in the long term," says Joel Hellman of Harvard University, "what they care about is stripping the firm now to get the maximum profit out of it."

Cooking the books. In a variation of the shell-company scam, some Russian producers of minerals and other raw materials use the difference between subsidized Russian prices and higher world market ones to reap windfall profits, says Sarafanov. For example, he says, a check of contracts for the sale of Russian aluminum in 1992 found prices that ranged from $15 a ton to $1,200 a ton. In one case, 22 million barrels of oil that was supposed to be exported under a quota agreement with India was instead diverted to Europe and sold at higher world prices. The profit was deposited in a Swiss bank. This time the culprits were tracked down and the state export organization in question was forced to repay the state, but analysts at international financial institutions say as much as $2 billion worth of oil sales last year may have been washed off the books using similar scams.

Milking the credit cow. One of the biggest schemes occurs in the open with the tacit consent of Russia's economic overseers. Here's how it works: The Russian Central Bank gives a special loan direct to a factory at a low (for Russia) interest rate of 25 percent a year to pay overdue bills or late wages. The money, however, goes straight to the commercial bank associated with the factory, which relends it at something closer to the country's real interest rate of 250 percent a year. The difference then gets pocketed or parked in an offshorski bank account. That may help explain why, while the Central Bank keeps pumping out more money--the equivalent in ruble credits of 43 percent of Russia's GDP in the third quarter of 1994--the country's enterprises never seem to get any healthier. Some managers and commercial bankers have made enormous profits, but Russia's factories are producing less, not more. The only recourse for the Central Bank, which has no auditing capacity to track the money it lends, is to cut off credits, but so far the political pressure to continue them has been too strong.

Robbing the till. Millions of dollars go missing in the Russian Central Bank each year, say Western accountants in Moscow. Officials at local branches of the Central Bank take bribes to provide banks and enterprises with low-interest three-month credits: Last spring, reports Aslund, "the going bribe from a commercial bank to people in or around the Central Bank for a three-month credit was 13 percent of the credit."

In his speech to parliament last in April, 1996, Yeltsin said crime and capital flight are among Russia's most pressing problems and called for "tough sanctions against those guilty of violations and holding hard currency abroad illegally."

Since 1991, the customs office has beefed up its ranks from 8,000 for the entire Soviet Union to 31,000 for Russia alone, and a new export control system aimed at better tracking of capital outflows was partially introduced in January, 1993. But so far, western analysts have been unable to detect any slowdown in capital flight.

But if the police are also the plunderers, who will stop the looting? It isn't likely to be those with political power; they're making too much money. "As long as the people who hold the power and property rights are doing well, there's not much incentive to change," says Harvard's Hellman. But unless there is change, a beleaguered Russia eventually may be forced to choose between anarchy and fascism.