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. Last Updated: 07/27/2016

Keeping It All in the Family

The ancient Greeks had a rich lexicon that described various forms of government. Several words democracy, plutocracy, theocracy, oligarchy are universal. Had these political philosophers spent some time in the nations western enclave and heard the tale of the chickens and Dresdner Bank, they would most definitely have described the regions government as a kakistocracy. (You can look it up.)

In March 1997, Governor Leonid Gorbenko created the Regional Fund for the Development of Kaliningrad, a state-run agency whose task would be to attract investment and credits for local industry. Such a fund is inherently flawed, since it aims to carry out what the private sector should do for itself. But given the lack of wherewithal of a majority of enterprises and banks, the idea had a degree of mid-term merit.

But that was about all it had. RFDK was abused from the start. The funds first director was Mikhail Karetny, Gorbenkos deputy and previously head of Baltika, a major bank in Kaliningrad. Alas, one week after being established, RFDK opened both ruble and hard currency accounts in Baltika. Its called "keeping it all in the family."

The fund was led by a council of three. Including Karetny, all three were hand picked by Gorbenko. And when one left RFDK, he was replaced by another handpicked type, usually a deputy governor. Everything was kept strictly in the family; no outsiders were let in, especially no nosy reporters. And at the end of 1997, when the fund was forced to allow a regional legislator on board, that representative was provided with only "need-to-know" information. The brick wall was built high around RFDK.

And it was one heck of a wall, because there was lots to hide. In the first months of its existence, RFDK amassed the shares; stakes (consisting of state-owned equity) in shipping, shipbuilding, insurance and trading companies were piled onto the funds balance sheet. From there, the funds managers climbed on board company management and grabbed the steering wheel. Essentially, RFDK boiled down to a mass asset-grabbing campaign.

Finally came the foreign credit. In 1997, Gorbenko and Karetny signed a $30 million credit agreement with Dresdner Bank AG. The loans guarantor was the regional budget (the taxpayers), although Gorbenko liked to say that "his word" was the guarantee (even though the loan wouldnt come due until 2001, when theoretically Gorbenko would no longer be governor). The loan would be handled by RFDK (i.e., Baltika) again, keeping it in the family.

The first tranche of $10 million was borrowed at a rate of 13.75 percent at a time when Russian banks offered currency loans at approximately 12 percent. Even more astounding is the fact that RFDK, after receiving the money, turned around and loaned it to local industry at an ever higher rate even though RFDK claimed to be a noncommercial legal entity.

Most of the $10 million (the remaining $20 was never dispersed), received in early 1998, went to modernize and expand a chicken producer, Ptitsaprom. But when August 1998 hit, the factory couldnt meet its top-line targets. Working capital dried up, and all the companys chickens were unable to make payments on the Dresdner loan. The factorys director tried to arrange a debt restructuring, but his proposal fell upon deaf ears. RFDK responded by taking Ptitsaprom to bankruptcy court.

A year later, when the regions head tax inspector, Viktor Vasilyev, initiated an audit of both RFDK and Ptitsaprom (a feat he accomplished only with Moscows approval), he met stiff resistance and was even called into the governors administration, where Gorbenkos cohorts screamed, threatened and told him he had best keep his eyes and nose where they belong. Karetny, by the way, has since disappeared abroad, and another RFDK official has been accused of breaking the law.

What leadership! Create an opaque bank-fund and staff it with your own people. Capitalize it by borrowing expensive money abroad, then guarantee that capital by leveraging the regional budget. Reloan the money to a local company, which you bankrupt when things get rough. When the auditors come, draw your weapons, start yelling.

Sound incompetent? Thats what a kakistocracy is all about: "government by the least qualified or most unprincipled persons," from the Greek kakistos, meaning "worst." It is difficult to imagine a government worse than the one run by the "family man" Gorbenko.

Gary Peach is an independent journalist living and working in Kaliningrad.