U.S. Aid to Russia Farmers Fails to Make It to the Silo

Viktor S. Kuzmin, one of Russia’s pioneering private farmers, had a brave new idea: Break the state grain monopoly.

American officials approved, and in September, Kuzmin and 12 other farmers in the southern Russian region of Saratov were given a no-interest loan to build grain storage and milling facilities that would allow them to market their own products.

But what happened next bears out some U.S. policy-makers’ suspicions about the fate of American aid to Russia: The Russian bureaucracy--and its new commercial partners--keeps most of the aid from reaching the new private sector it is meant to nourish.

“We got snookered,” said Brian M. Foster, an Iowa dairy farmer who heads the Volunteers in Overseas Cooperative Assistance (VOCA) agricultural program in Russia. “That’s the bottom line.”

Bureaucratic and banking delays at the Russian Humanitarian Commission, which administers foreign aid, kept Kuzmin from receiving his money for five months, while inflation shrunk its ruble value from the equivalent of $336,000 in September to $219,000.

The Humanitarian Commission instructed Kuzmin to open an account at Megapolis Bank, a private commercial bank with branches in Moscow and Saratov. He said Megapolis also required him to close his accounts at another Saratov bank and transfer the money to Megapolis.

Finally, Kuzmin said, the Megapolis branch in Saratov told him that before he could draw on the money, he would have to purchase--through Megapolis--insurance for the equipment he intended to buy with the American loan. The insurance premium would cost more than 10% of the loan, Kuzmin said.

“This is corruption!” Kuzmin said.

“This is blackmail!” fumed Foster, whose agency supported Kuzmin’s project.

Anatoly I. Shvedov, chairman of the Megapolis board of directors in Moscow, denied any wrongdoing.

The Humanitarian Commission imposed conditions on the loan to prevent misuse of the money, he said. But Shvedov had not heard of the 10% demand.

“What insurance?” Shvedov asked. “Why 10%? If there are any complaints about our bank in this respect we will sort it out.”

The United States spent about $1 billion on agricultural aid to Russia in 1993. A team from the U.S. Inspector General’s Office is expected to arrive in Moscow today for a six-week audit of where the food and the money went.

The audit follows allegations of profiteering on U.S. agricultural aid by the Russian bureaucracy. The complaints began reaching Washington as early as last spring, even as American farm commodities were still being loaded onto ships bound for Russia.

Of the $1 billion in aid, about $700 million was used to buy U.S. commodities and about $300 million was spent to ship them to Russia.

As the food arrives in Russia, the Humanitarian Commission sells it at auction and gives part of the proceeds to the Russian treasury. The commission is supposed to give the rest of the money in grants to social services, health care and agricultural projects, such as Kuzmin’s, that are meant to develop private farming and food processing.

The money for such grants should total an estimated $29.5 million once money from auctions held in December arrives, said the commission’s executive director, Georgy K. Maltsyn.

But since the first auction in August, the Humanitarian Commission has distributed $8.5 million, its records show. Of this, $882,000 has been spent on agricultural projects.

Neither U.S. nor Russian officials could specify how much of the proceeds from the original $700 million in commodities was supposed to go to the treasury, how much was to be distributed by the Humanitarian Commission and why the share given to grants appears to be so small.

“Who knows where it all went?” Foster asked. “But it did not support the development of market structures.”

U.S. Congress members have also questioned the program.

“I believe the current Russian Humanitarian Commission is another public relations disaster waiting to happen,” wrote Timothy J. Penny (D-Minn.), chairman of the House subcommittee on foreign agriculture and hunger, in September. “If the U.S. government does not diligently monitor the distribution of commodities and funds, it will be impossible to maintain congressional support for additional assistance.”

The Saratov story is not encouraging. It suggests that the very Establishment that Kuzmin is trying to circumvent--the state grain monopoly, Roskhlebprodukt, and its allies--is working closely with the Russian agencies assigned to administer the American aid.

Kathy Farley, a VOCA staffer who attended a number of the auctions in Saratov, said the sales were poorly advertised and most of the bidders were regional branches of Roskhlebprodukt.

Russia does have a handful of private grain traders, but they were apparently not invited to some of the auctions. The commodities sold at rock-bottom prices.

“There was definitely collusion,” Farley charged. At a poultry auction in December, Farley said, only three buyers showed up. The chicken sold for one-third the Russian market price, she said.

U.S. officials knew the commodities would not be sold at world prices, but why were they sold at below Russian market rates?

Needy Russians did not benefit--the agencies that serve them receive some of the auctions’ proceeds, so lower profits reduce their share. Saratov’s 13,129 private farmers didn’t benefit either, as the cheap sales only depressed prices for their products.

So who benefited? The same commercial companies with ties to the Humanitarian Commission appear to have made money from the sale of the American commodities and from the distribution of the proceeds.

According to Farley, the Humanitarian Commission had an agent in Saratov that arranged the grain auctions.

The company, Povolzhye-S, received a 5% commission, she said. Povolzhye-S is also a shareholder of Megapolis Bank.

Povolzhye-S “is a firm we have been in cooperation with from the beginning,” Megapolis Chairman Shvedov said.

He said distribution of Kuzmin’s money has been delayed because the farmer has been unwilling to comply with terms aimed at preventing misuse of the funds.

In an interview, the commission’s Maltsyn called the farmer “a criminal” and a manipulator who hoped to use the American loan as collateral for bigger financial schemes.

Asked to explain the accusation, Maltsyn said the farmer had put a non-functional telephone number and a wrong address on his grant application. Kuzmin said he moved his offices, and getting a phone took some time.

Both Maltsyn and Shvedov remarked bitterly in interviews that Kuzmin had complained about them to his American patrons.

Business in Moscow--even the aid business--is dangerous these days. Maltsyn’s well-tailored Italian-style suit hides the gun he wears to work each day, and an aide strolled the Humanitarian Commission office with a holstered gun strapped over a sweat shirt.

Maltsyn explained that part of his job is to certify humanitarian aid shipments arriving at Russian customs.

He told of an incident in which he suffered “a certain unpleasantness” after he refused to certify as humanitarian aid a shipment that clearly wasn’t.

For similar reasons, Kuzmin wanted to pick up his aid grant from a Moscow bank instead of getting it in small-town Saratov. Bank accounts are not very secret in Russia, and Kuzmin feared that when a big deposit arrived in Saratov, local extortionists might come calling.

As of last week, Kuzmin said he had access to only a quarter of the money approved for his project via the Megapolis branch in Saratov. The rest will be doled out as Kuzmin shows that he is spending it for the grain-storage equipment and materials approved in his grant application, Shvedov said.

The farmer will not receive interest on the money--though he could have earned a 170% annual interest rate during the five months since his grant was approved. Instead, while his money sits waiting to be spent, it will continue to depreciate by the rate of inflation, which hit 900% last year.

However, Kuzmin’s money probably isn’t sitting idle. Russian commercial banks are lending money at 200% per year and more. The longer it takes Kuzmin to get his money, the more his bankers earn--and it is the bankers who will judge whether Kuzmin is using his loan appropriately.

“What kills me is the interest on the money,” Farley said. “You have no evidence, but it’s obvious to anyone who has lived here that they’re lending the money out in between at commercial rates.”

Kuzmin worries that if the delays continue, he will have to scale down the size of the grain storage facility planned by the 13-farmer Golden Grain cooperative.

In Soviet days, the state collected all the grain at harvest time and shipped it off to huge central storage facilities. Now collective farms are being privatized, but they are still forced to sell to Roskhlebprodukt at artificially low prices. If not, their grain will rot before they find a buyer.

Kuzmin argues that if reform is to succeed in Russia, it must begin with a free market for affordable food.

Kuzmin sees little progress: “Nothing is happening. Reforms are still being obstructed.”

Sergei Loiko in The Times’ Moscow Bureau contributed to this report.