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Proceedings of the Standing Senate Committee on
Foreign Affairs

Issue 13 - Evidence

OTTAWA, Tuesday, September 25, 2001

The Standing Senate Committee on Foreign Affairs met this day at 7:05 p.m. to examine and report on emerging political, social, economic and security developments in Russia and Ukraine; Canada's policy and interests in the region; and other related matters.

Senator Peter A. Stollery (Chairman) in the Chair.

[English]

The Chairman: I call the meeting to order. I wish to note that after the meeting, we have some important business to deal with in camera. This is the first meeting of our committee since the summer recess, and I wanted to assure my colleagues that there has been a large amount of work done during the summer; however, this is the first time we have had a chance to discuss matters.

Honourable senators, we are proceeding with our mandate on Russia and Ukraine; the emerging political, social, economic and security developments in Russia and Ukraine; Canada's policy and interests in the region; and other related matters.

Our witnesses today are Mr. Lorne Cutler and Mr. Fergal O'Reilly from the Export Development Corporation, and Mr. Angus Smith from the Royal Canadian Mounted Police. Welcome.

Mr. Angus Smith, Royal Canadian Mounted Police: Mr. Chairman and honourable senators, as you can well imagine, this has been an extraordinary couple of weeks for all of us in the RCMP. I am just coming off six days of straight night shifts.

It is a pleasure and an honour to be asked about what I do all day, which in normal times, is to think about organized crime and what it means, not only for my organization, but for Canadian society as well.

Russia and Eastern Europe are of professional interest to me and, I should add, a personal passion, although at this point, my main focus tends to be on more broad-spectrum and emerging organized crime issues.

Tonight I will provide you with something of a strategic overview of Eastern European and, in particular, Russian organized crime, because that is where our focus is. I will talk about the situations in Russia and in Canada, and some of our responses to that. I will try to highlight some of the Eastern European organized crime's unique features and the challenges that these represent.

I know our concerns seem to pale a little in comparison to recent events in the United States, but organized crime can and does inflict significant and lasting damage, so it remains a priority for the RCMP, even in this time of crisis and heightened vigilance.

I need not tell you that Eastern Europe is a big place. Every country, not only Russia and Ukraine, but also Poland, the Czech Republic and Slovakia, has serious indigenous criminal problems. Generally, because of our focus, when we refer to "Eastern European organized crime," we are referring primarily to Russian organized crime.

It is interesting that in many Eastern European countries, it is the Russian, or FSU, organizations that drive or control indigenous crime. It is almost as though the political hegemony of the Soviet era has been replaced by criminal feudalism. I have seen this in action in the expensive hotels of cities such as Prague and Bratislava, where you will see Russian individuals surrounded by a coterie of local criminal figures. It is most interesting.

It is not a new phenomenon. There have been highly organized criminal and bandit groups throughout Russia and the territory of the FSU for centuries. If you are, as I am, an aficionado of Russian literature, you can turn to readings such as Pushkin's Captain's Daughter, Tolstoy's Cossacks or Gogol's Taras Bulba for confirmation of that. Despite the political rhetoric, they did flourish during the Soviet era as smugglers, currency speculators and drug traffickers. In certain cases, they coexisted quite happily with the central authorities, particularly the internal security apparatus, and common criminals in gulags were often used to maintain control over political criminals. Again, to turn to literature, this is documented in enormous and horrifying detail in Solzhenitsyn's monumental work, A Gulag Archipelago.

It was, in fact, in the context of the Soviet penal system that most of what we recognize as Russian organized crime evolved, with its Thieves-in-Law, its Avtorityety, and elaborate codes of conduct and behaviour. The history of the gulag is quite fascinating, and in some respects, the history of its criminals forms the secret, or alternate, history of the Soviet Union.

The gulag was often convulsed by epic battles between the various criminal factions. For example, the so-called "Bitches' War" that raged for 10 years during the 1940s and 1950s resulted in thousands of casualties.

Yet for all of that, they came into their own in the post-Soviet era, when they bought up state enterprises and assets, often at bargain-basement prices because they were privatized. They made alliances with key political figures and entered the financial and banking sector. If we can characterize organized crime as the "ultimate free market," Russia's downfall has been that, when it did all fall apart, the Russian criminals were some of the few people who actually knew how to operate in a free market.

The real point is that when society breaks down, fringe elements will invariably emerge to fill the void left by the disappearance of legitimate political, economic and social structures. That is a lesson for us as well.

At this time, sectors of the Russian economy have fallen, in whole or in part, into the hands of organized crime. There are estimates that up to 40 per cent of its private enterprises and up to 85 per cent of its commercial banks are under direct or indirect criminal control. "Protection" and extortion are rampant, and even clean businesses find it difficult to function without a "roof" - a criminal patron or a protection racket.

Today, Russian organized crime is continuing to grow, perhaps faster than any other organized crime group in the world. As I travel about Europe, police officers and intelligence officers from many European countries often tell me that they had no serious organized crime problem until the demise of the U.S.S.R.

To bring us up to the present, in the aftermath of the Russian financial catastrophe of 1998, they have increased their foreign expansion and their intrusions into other countries. Their search for new markets and new fields of endeavour has become even more aggressive.

There are currently three major Russian organized crime groups operating in Canada, including one led by a putative Thief-in- Law. Most of them function as integral parts of major groups back in Russia and other parts of Eastern and Central Europe. Most are extremely well financed through the large common pools of criminal integrity funding. Their stronghold in Canada tends to be in Toronto and Southern Ontario, but they are also active in Vancouver, Montreal and the Maritimes. Their activity in the Maritimes is interesting because there is a long history of a Russian presence there. Generations of Soviet men came in off the fishing fleet and often viewed cities like St. John's and Halifax as their second homes.

Their activities include various white-collar crimes, immigration fraud, and theft and smuggling of automobiles. I have seen, in the streets of Prague and Bratislava, cars being driven around bearing Ontario licence plates and CAA bumper stickers - right off the boat.

They are increasingly involved in sophisticated technological fraud using counterfeit credit and debit cards. In Western Europe and North America, there is organized prostitution involving trafficking in women. It is interesting that mail-order brides are increasingly coming from Eastern Europe - Russian, Ukrainian and Lithuanian girls - and in many respects they are replacing Thai and Filipino girls in popularity. However, that may simply be an economic consideration.

Their use of technology is increasingly worrisome. There are extraordinarily clever hacker groups operating in Russia and Ukraine. This year, for example, the papers reported on Russian hackers who broke into U.S. e-commerce and e-banking sites and downloaded client information, including credit card data. This EEOC interest in fraud and financial crime will encourage them to reach out to this hacker subculture. There is a thriving hacker subculture in Eastern Europe, and in Russia in particular, because traditionally, the level and the quality of technical education in that part of the world have been superb. There are many talented people looking for jobs.

Why do we worry so much about this? Well, they are very good at penetrating and suborning legitimate economic structures. Unlike other organized crime groups in this country, they seem to direct their resources and energies outward towards forms of criminal activity that are not nominally "criminal." Therefore, our targets are a commodities trader, a petroleum dealer who runs a string of gas stations in the Toronto area, and a well-known gold and diamond merchant. Although I did not wear it tonight because I have a rash, I normally wear a Russian wedding ring. Everybody in Toronto who has a wedding ring like that bought it from one of these guys.

The crime is not in the nominal activity but rather in what it facilitates - money laundering, fraud, tax evasion, commodity smuggling, theft, establishment of monopolies, et cetera. What sets them apart is that to a large extent, their wealth is based on the wholesale plunder of the Russian economy.

Organized crime is responsible for a major portion of Russia's capital flight problem, which some estimates put at $2 billion per month, and interestingly enough, that is often in the form of art and cultural objects. Not only are we looking at a capital flight problem and a criminal problem, but we are also looking at the destruction of the Russian patrimony.

I have a personal interest in this. There has been a proliferation of Russian art and church furnishings in dealerships in Toronto, London and New York. When the dealers are questioned about the provenance of the art, they are extremely cagey about the information.

They have also demonstrated the ability to inflict damage on the Canadian economy, and that was exemplified by the YBM Magnex case. YBM Magnex first appeared on the Alberta Stock Exchange in 1995, ostensibly as a supplier of industrial electronic equipment. It did extremely well on the Alberta Stock Exchange, moved on to the Toronto Stock Exchange in 1996, and by 1997 it was on the TSE 300 Index. In 1998 it was suspended from trading after failing to file a financial audit, and it quickly became obvious that the entire operation was fraudulent, right down to the photographs in the catalogues. It transpired that the company had been established by the Semion Mogilevich organization as a front for money laundering. The important thing is that Canadian investors were left holding the bag for $635 million worth of worthless stock. That is significant.

The situation is not totally bleak. From an investigative point of view, this process of legitimization at least forces some portion of their criminal operations out of the shadows and, as with YBM Magnex, opens them up to a degree of legal and regulatory scrutiny that is impossible under normal circumstances. It makes them more vulnerable to aggressive proceeds of crime investigations. There is no magic bullet against organized crime, but such investigations are certainly an effective way of getting at them. Not only do they need money to function, but it is also their goal, because they are motivated fundamentally by greed. I do not think we can ever forget that what finally put Al Capone in Alcatraz was income tax evasion, which is a form of proceeds of crime.

There are certain factors that are unique to this particular form of organized crime and present real challenges to us in the manner in which we deal with them. In its North American manifestation, Russian organized crime has come out of nowhere. They have transformed themselves from faceless underworld thugs to major international criminals in less than a decade. They have managed to avoid that process that we so often see with organized crime - Italian or Asian, outlawed motorcycle gangs - of gradual assimilation, entrenchment and multi-generational evolution. This has meant that the learning curve for the police has been steep. We have not had a chance to observe, adjust to them, get used to them and grow up with them, in effect.

Also, a more personal observation is that in the West, we see a popular view of Eastern Europeans in general, and Russians in particular, as victims. I believe that this is a flawed view, because these are people who see themselves as survivors - as souls who have come, figuratively and literally, through slaughter. When we consider Eastern European organized crime, including Russian organized crime, we can never forget that as a society, and as individuals, these are people who survived Stalin, Hitler and the gulag. They have lived in circles of hell that we will only ever visit, if we are lucky, in our worst nightmares.

We are looking at organized crime, yes, but in certain respects it is almost crime as a form of cultural survival. If you have survived the siege of Leningrad, or the Kolyma goldfields, where they had political prisoners out digging gold in open pit mines at 75 degrees below zero, then the collective might of Canadian police and law enforcement is not particularly intimidating. The onus, therefore, is on us to come up with imaginative ways of dealing with them.

Our response is essentially threefold. First, in investigation and prosecution, we have completed a number of successful EEOC- related investigations; in 1997, Project OSADA resulted in the deportation of Toronto area EEOC figure Vyacheslav Sliva to Russia. He came here as one of the first Russian organized crime figures and he was a close associate, through both marriage and professional connections, of Vyacheslav Ivankov, aka Yaponchik, who was the first major post-Soviet EEOC figure in the United States as leader of the Brighton Beach Mafia. OSADA 2 culminated in the arrest of Sliva's successor, Yuri Dinaburgski, along with a number of co-conspirators throughout Ontario, Quebec, the United States and a number of other countries. That was an investigation that took us all the way around the world, into Russia, the United States, Holland, the Caribbean, et cetera.

The second part of our means of dealing with these people is through the process of reaching out. I should say that perhaps because of my personal proclivities, I view the last two here that I will talk about as, in some respects, the most important. The RCMP has had an MOU with the MVD, the Russian Ministry of the Interior, since 1993. Our relations have primarily been in the area of training, particularly our international observer attachment program, in which Russian police officers cycle through RCMP divisions. It gives them a broad understanding of RCMP tasks and responsibilities, and hence the role of the police in Canadian society. We have also had various senior officers of both the Russian police and various law enforcement agencies visit us and our facilities for varying periods of time, either directly through RCMP funding or through third parties such as the Yeltsin Foundation.

We have mounted, and continue to mount, numerous training programs throughout Eastern and Central Europe, particularly in the Baltic, the Czech Republic and the Slovak Republic, under the auspices of CIDA. This is not operational training. We are not teaching them how to be police officers per se. We do training in management, adult education techniques, intelligence analysis, ethics, alternate philosophies of policing and so on.

I have been personally involved in a number of these initiatives, in Eastern Europe as well as in South America, which does not concern us here. I can attest to their success. One of the most important things is that we always include a trainer component so the locals can carry on and adapt the training to their needs and requirements as they change. We are currently in the early stages of developing training packages with CIDA for Central Asia, and these may also include Russia proper, depending upon demand.

Our third prong involves one of our strategic priorities. Peacekeeping and peace building together form a long-term strategic priority for the RCMP. We are all familiar with the RCMP role in Haiti and the Balkans, but peace building, to put the emphasis in the right place, includes a range of initiatives far beyond our United Nations obligations.

I see all of our international training and development initiatives as an integral part of the RCMP's and Canada's role in institution building, particularly in emerging democracies, be cause it goes without saying that one of the features of a civil, open society is a functioning, well-ordered and well-disciplined police structure in which the citizens have implicit trust. This is the foundation stone of a functioning democracy.

In closing, I believe the RCMP, which is, for better or worse, practically an archetype of policing, both in Canada and throughout the world, has a critical role to play in this regard, both in terms of the resources and expertise it can bring to bear, but perhaps more importantly, in its ability to lead by example.

Mr. Fergal O'Reilly, Export Development Corporation: I will begin by introducing myself and giving some EDC context. I work as a political risk analyst and I have responsibility for Russia, CIS and Eastern Europe. My role within the corporation is to monitor political and regulatory developments and their impact on Canadian companies that are either investing in or trading with these countries. I will give some more context by explaining how we perceive political risk at EDC. It is not always what you might imagine it to be at first.

There are three broad areas that also reflect the risk categories we look at when providing political risk insurance to Canadian investors. The first category is transfer and inconvertibility, which deals with the investor's ability to convert locally earned currency into hard currency and, thereafter, to transfer that currency out of that country to either a bank account in Canada or the U.S., or outside the country.

Although this risk is affected to a great extent by macro-economic factors, it also depends to a considerable extent on the attitude of the government and its policy choices. For example, in Russia, the government requires projects earning hard currency to convert 50 per cent of that currency back into rubles and bring it back into the jurisdiction of the Russian banking system.

The second risk category we look at is expropriation risk. Although this does deal with outright expropriation, what we are seeing increasingly becoming a problem is "creeping expropriation," which basically looks at any sort of government action or inaction that gradually impinges on a project's ability to make money and to remain profitable. This can be anything from revocation of an export permit to an anti-foreign bias in court rulings, et cetera.

The third risk category is political violence, which is fairly self-explanatory and covers a whole range of events. Projects lose money if their assets are damaged or they can no longer be operated due to prolonged violence.

Together with these three risk factors, we also monitor the overall level of government stability. This impacts on their ability to enact and to implement policy, which in turn impacts all the other risk categories.

Having given that context, I would like to apply it to Russia. I will break my presentation up into three parts. First, I will give a brief summary of how we at EDC view political developments over the past 18 months or so since the rise to power of Putin and his election to the presidency. Second, I would like to look at the situation as it exists today, after those 18 months. Finally, we will try to gaze into the future to see what it holds and how it will affect Canadian business interests.

First, there is no doubt the Putin succession brought about a fundamental change in the political landscape in Russia. The year 2000, and through 2001 so far, has been all about rebuilding the power of the state in Russia. Under Yeltsin, the weakness of the centre had allowed other political actors to take the initiative in Russia. There are three major sets of actors here. The first is, of course, the Duma. Prior to the 1999 parliamentary elections, which saw the rise of the pro-Kremlin and pro-Putin Unity bloc, the Duma had been a consistent oppositionist force to the Kremlin. There was a lack of a pro-Kremlin majority to support government policy, and new legislative initiatives were constantly bogged down in partisan bickering, with the result that there was a legislative deadlock or paralysis.

The second set of actors who had taken initiative was the regional authorities. Some regions had established themselves with considerable autonomy from the centre - legally, administratively and, most importantly, fiscally. The result of that was a very confusing patchwork of authority across the country that made life especially difficult for foreign investors, because in most cases, one simply did not know with whom one was dealing or what kind of legal regime one was operating under.

The last group of actors in the political scene here were the oligarchs, people like Boris Berezovsky, who had used their political connections to considerable advantage in the business environment, especially during the latter period of Yeltsin's rule following his re-election in 1996. Their influence overgovernment decision-making had grown dramatically.

To differing degrees, all these groups and individuals had undermined the ability of the government to impose its will and to accomplish its policy goals.

Putin's goal, when we talk about rebuilding the power of the state, was to reverse this trend and take back power.

After 18 months of consolidating that power, what is the situation like today? The first thing that has to be said is that the project of rebuilding the state power is not yet complete in Russia. There is a lot that has been done. The Duma is now supportive and there is a growing consensus around a pro-Kremlin bloc. We saw, earlier this summer, the former opposition Fatherland group join with Unity to form a more powerful pro-Kremlin bloc. The communists generally do not have much to say in the Parliament any more. They are constantly outvoted and out-talked.

The regional authorities are increasingly bringing their laws into line with the centre, through a kind of policy of sticks and carrots from the centre. The centre has shown a much greater willingness and ability to impose its will on wayward regions, to punish those that do not comply and to reward those that do.

Finally, the oligarchs themselves have withdrawn from at least overt interference in the political process.

In some respects, however, I think the opposition to the regime is simply dormant. I do not think it has been defeated. Much of this is dependent on Putin's continued popularity. As long as he remains popular, he is not likely to be opposed.

Today, however, Putin is still engaged in the task of rebuilding state power. He has not given up on that yet.

This manifests itself in a pattern of constant manoeuvring to see who is in favour and who is out, and a pattern of alliance-shifting by individual political actors. Prime Minister Kasyanov and Chief of Staff Voloshin, both of whom have strong ties to the old Yeltsin regime and family, and who are closely associated with the oligarchs, now seem to be adopting a much more pragmatic stance, rolling along with Putin and looking out for themselves.

This continued political manoeuvring comes at the cost of progress on other issues, and the ones we are concerned about are mainly economic and market reform. On that front, we have seen fairly limited incremental progress during the first 18 months.

This is exacerbated by several factors. One of them is Putin's caution. He does not do anything that would be politically difficult. Most of the political fights he has had are ones he knew he was going to win. Otherwise, he is not going to engage in spending his political capital on these kinds of adventures.

Also, there is quite a lot of debate within his own team over which direction to take. On the economic front, we see different centres of expertise. It is not entirely clear who is responsible for making economic policy. This January, we had various different government ministers making statements on Paris Club debt payments, with one minister announcing initially that payments would not be made, and a few days later another minister announcing that payments would be made. There are individuals like Prime Minister Kasyanov, Finance Minister Kudrin, Economics Minister Gref, and also presidential adviser Andrei Ilarionov. All of these individuals have at various times made economic policy statements. It is never entirely clear what is going to happen or who will be listened to at any given time.

Despite the lack of progress, however, and the incrementalism, certainly the regime has become much more focused over the last year. We have seen a crystallization of priorities in the field of economic and market reform. I will identify three that have become particularly prominent. There is legal reform, first, which deals with both reform and training of the judiciary, and legislative reform, which is tidying up the mess of former Soviet and post-Soviet legislation.

The second element of reform is de-bureaucratization, which is, as the name suggests, the process of drawing in the bureaucratic interference of the state in the affairs of enterprise.

Finally, the last element that has been identified is reform of the natural monopolies: gas transport and production, electricity, transit, and rail transport.

These three elements of reform have been identified as important because they are seen as key impediments to reform in other sectors of the economy. The argument is that if the logjam can be cleared here, then other elements of reform will fall into place of their own accord.

That is the situation today. Now I will look into the future. The question of Putin's commitment to reform seems to have been well and truly answered. It is answered positively. He is committed to reforming the system. However, and this is important from the point of view of Canadian business interests and Canadian interests in general, his motivation is not altruistic, and it is certainly not altruistic towards foreign investment. I think foreign investment is still seen as, in many ways, a necessary evil and it is often treated as such.

Beyond that, there are still significant barriers to reform. On the one hand, vested interests, whether they be bureaucrats in government ministries or oligarchs, will still try to do all they can, and are trying to do all they can, either to stall the reforms or to steer them towards their own ends. At the same time, as I said earlier, the government still shies away from taking the really politically unpopular decisions. Reform of the natural monopolies, which I have mentioned, would leave many ordinary Russians unable to pay for their basic necessities such as electricity, and would be incredibly unpopular politically.

Long-term political stability, on the one hand, is assured to the extent that Putin has stopped the rot that set in under Yeltsin. The central government appears to be in more control of the country, and the risk of imminent collapse seems to have been averted.

On the other hand, these early trends are not irreversible. Much is dependent on Putin's own initiative to keep the trends progressing. One person summed it up by saying there is "lots of movement but no momentum, as yet." He has not yet put in place durable institutions that would survive the end of his own presidency. The key here is time. There is a very real risk that the government will not have time to set these trends in motion.

I am not talking about the looming debt crisis and infrastructure problems, which are due to hit in 2003, or the fact that oil prices are now largely sustaining the economy. Rather, I am talking about the question of Putin's popularity. His failure to meet the very high expectations of the population will result in an erosion of his popularity. This kind of erosion will set in motion a kind of chain reaction whereby his allies will desert him, opposition will grow, and the result will be either a return to the policy stagnation we saw at the end of the Yeltsin era, or alternatively, the promotion of a more authoritarian stance on the part of the regime to stop this descent before it properly starts. That is my take on the future, and I will finish off by trying to figure out what this all means for Canadian business. First, from the point of view of macro-stability, things are better now than they have been for a long time. There is a capable leader who enjoys majority support in the Parliament and who has a high level of public support. These together are recipes for success. However, the current trends are not irreversible and there is still much that could go wrong.

The second issue is that, especially in the natural resource sector, the oligarchs still have considerable influence. Many of these individuals still tend to use political connections at both national and local levels to interfere with business. I do not think this situation will change overnight, no matter what the centre tries to do.

Finally, although we have seen much evidence of commitment to reform, the biggest challenge, especially with new laws, is to make them work on the ground and on a day-to-day basis. There are two major problems here. One is technical capacity to implement the laws and the other is political interference, which continues to undermine the legal structure.

Mr. Lorne Cutler, Export Development Corporation: I am also with the Export Development Corporation. My role is that of regional manager for Russia. In this capacity, I am responsible for taking the views of my colleague, Mr. O'Reilly, and our economists, and translating that into how we can do business in Russia, working with our business teams, who themselves are working with Canadian exporters and investors interested in the market.

I am taking the theory and the macro overview and trying to convert it to the practical. In a country such as Russia, that presents many challenges and we face many issues.

After the August 1998 crisis, we took a timeout from doing business with Russia, just as most other credit export agencies and commercial banks did. Over the last year, the political situation in Russia has improved significantly, and stability has returned. At the same time, the economic situation in Russia has also improved significantly. A small part of this has been due to economic reform that has occurred in Russia, but the catalyst was high oil and gas prices. As a net exporter of natural resources, Russia has benefited significantly from the increase in prices for oil and gas and other minerals.

As the Russian economy was improving, and as other export credit agencies and banks were becoming more interested in the market again, Canadian exporters were also becoming more interested in dealing with Russia. Given these pressures, EDC reviewed its position earlier this year to determine whether we could reopen in the market, to determine what the issues were for business in this country, and to determine how we could minimize the risk to us while trying to help our Canadian companies.

As a result of our review, we reopened in Russia earlier this year, but on a very limited basis. It is reflective of what we consider to be the ongoing political, economic and credit risk issues in the market.

We reopened for lending with the Russian government. At the time of the August crisis, the Russian government did say publicly that they would honour their foreign post-Soviet debts, but that they would not honour some of their Soviet-era or domestic debts. They have kept their word in this matter. EDC post-Soviet debt has been serviced, so we feel comfortable working with the Russian government again.

The Russian government, however, is now reluctant to enter into loan agreements with either export credit agencies or banks, and they are limiting their borrowing. They have a surplus budget, so they are in a position to do that.

We looked at the banking sector, which presented the biggest challenges and problems for us. By and large, there have been many areas of reform since 1998. The banking sector has been left untouched. The Russian government is just now looking at reform in this sector. As lenders, the Russian banks present many serious problems for us. For most international lenders, the biggest sums of money were lost lending to Russian banks, as well as lending to the Russian government internally - not from international loans.

There are several issues with the banks that continue to be ongoing. As I said, we were greatly concerned about the lack of cleanup in the banking sector. If you followed what happened at the time that these banks walked away from their debts, you know that there were a number of factors that caused problems for them: the collapse of the Russian currency; the default by the Russian government on their treasury bonds - GKOs; improper ly hedged foreign currency markets; poor credit decisions; and outright fraud and theft by owners and managers of these banks.

Some of these issues have been resolved. Government debt and currency speculation are really not issues now because of the overall stability of the Russian economy. However, there are still issues of poor credit decision-taking and the integrity of the management.

We are also looking at the fact that much of the previous banking mess has not been touched. Banks and their owners were allowed to walk away from their debts and reopen, virtually in the same premises, under a new name, while maintaining the assets. They walked away from the creditors.

I cannot speak to the ownership of the Russian banks. Mr. Smith mentioned a figure of 85 per cent, which I assume is by number of banks, because actually, two government-owned banks, Sberbank and Vneshtorgbank, control about 70 per cent of the banking assets in Russia. There may be problems, but those are partially or wholly owned government banks.

We have continued to be cautious about Russian banks. At this time, we are looking at dealing solely with some of the state-owned banks and those that are primarily owned by Western banks.

The other key area where we believe that we can work successfully is with Russian blue chip corporations. These are primarily in the resource sector, including companies such as Lukoil and Gazprom. Some other names are perhaps a little less familiar. These companies present certain opportunities for us, but they also present certain challenges. By and large, they are all successful and wealthy corporations and have been extremely profitable over the last few years because of resource prices. They also have significant sales in the West that can be used as security for loans.

These companies are becoming increasingly financially trans parent. Most major Russian blue-chip companies produce financial statements now that meet the IAS or U.S. GAAP accounting standards. I have discovered over the last couple of months that those companies not publicly traded do not necessarily admit that they have these types of statements, but when they want to deal with Western bankers they can pull them out of a drawer. We do not need to deal with Russian accounting standards any more. Once you go below the level of blue chips, accounting transparency is extremely limited in Russia, which does constrain us.

We still must deal with issues of corporate governance with these companies. We have all read the articles about foreign companies that have experienced great difficulty dealing with Russian companies, but in reviewing much of what has happened, we have come to the conclusion that there is one treatment for exporters who are trying to sell to these companies, and a different treatment for those who are investing in them, either as minority shareholders through the stock exchange, or in a direct partnership relationship under a joint venture situation. A little later I will get into my views on why there is a difference, but we have noticed one.

Canadian companies, and European and American companies, have been successfully selling to these blue-chip companies over the last few years, often on a cash-upfront basis. Increasingly, export credit agencies are starting to come back into the market and provide financing, but we have seen companies being successful. Canadian exports to Russia are increasing significantly this year, and the two fastest-growing sectors are oil and gas equipment and mining equipment.

The companies that we are dealing with are, by and large but not exclusively, publicly traded. Most of them are oligarch controlled or founded. There is an oligarch somewhere in the background for the most part. It is difficult sometimes for us to determine if there are organized crime influences on these companies. When we look at Russian companies, we try to differentiate between oligarchs running legitimate businesses in a perhaps illegitimate manner - where they are cutting corners, trading on political influence, using political favours, trying to use their connections - and the real criminal interests. We are aware that all of these companies are new. Sometimes the background can be somewhat shady, and we must try to determine how far removed from that background they are. This can be difficult sometimes.

I mentioned the difference between the treatment of exporters and investors. EDC, through its programs, supports both Canadian exporters and Canadian investors. We are increasingly seeing Russia as two different markets. For our exporters, and in the right sort of circumstances, we feel that we can comfortably make loans into this market; our exporters will be repaid and we will be repaid. We view investment somewhat differently.

To date, our experience, and that of other companies outside of Canada, has often been difficult in Russia, particularly in the resource sector. Predominantly, Canadian investors of any size in Russia have been focused on the oil and gas and mining sectors. By and large, with only perhaps one or two exceptions, the companies have eventually run into trouble.

The most difficult issue for investors has been that of creeping expropriation. The issue of conversion and repatriation of earnings is not a problem now that the currency markets do function in Russia. The central bank of Russia is sitting on foreign exchange reserves of $37 billion. There are no problems with investors taking their money out. It is the expropriation side that is a problem.

Increasingly, the view is that if you are going into Russia, you go in on your own, and with a greenfield site; you do not try to do it as a joint venture. In addition to perhaps the difficulties that the various Russian governments and some of the people have with foreign investors, if you have partners, there is a good chance that eventually they will want to see you leave and to take over the investment themselves.

We have been trying to understand why this situation is the way it is. We have come up with a few thoughts. One is the idea of a contract in Russia, and the idea of an ongoing contract. For exporters, it is a clear-cut contract. You pay for goods, we deliver goods. That is the end of the story. As lenders it is also very clear-cut. We provide them with funds; they must repay them over a certain number of years at a certain rate of interest. It is clean. Once the loan is repaid, it is repaid.

For investors, it is a different situation. You are coming in as an investor and putting in an initial amount of money, but once you are in there, your ownership rights in that investment go on forever, or until you wish to terminate them. You may never put any new money into this investment, but you still have an ownership position and you are still entitled to receive proceeds perhaps well in excess of what you actually invested. This seems to be a difficult concept in the Russian context. I do not know whether it is cultural or perhaps the legacy of communism, but this does seem to be an issue. I strongly believe it is not an issue for our exporters or us as a lender.

As we approach this market, our focus is to assist the exporters as best we can while taking into account the risks that we would face as a lender, but on the investment side, to look closely at what the risks are in any particular deal, and also to recognize that risks vary among sectors and regions of the economy.

I wish to sum up by saying that prior to the crisis, Russia was the market of most interest for Canadian companies, both investors and exporters. From what we are seeing, that continues to be the case. EDC has a significant appetite for doing business in Central Europe, but our commercial activity in those markets is quite limited. The potential and the interest that we continue to see of Canadian companies wanting to do business in Russia continues to expand and, as the Russian economy and political situation improves, my expectation is we will continue to see increased interest.

We are now also seeing that the major Russian blue-chip companies are investing money back into their infrastructure, and this is presenting increased opportunities for Canadian exporters selling capital goods to these companies.

Senator Graham: I would like to address Mr. Smith first. You used a few words in combination that were rather interesting to me, for example, "peace building." We have often heard in our country of "peacekeeping," and sometimes of "peacemaking," but rarely "peace building." Would you elaborate on that term?

Mr. Smith: One of our strategic priorities is peacekeeping. After some thought, we added peace building to that. When we say "peace building," we mean peace in the larger sense. We are talking about a whole range of initiatives as far as the RCMP is concerned, because we have a role to play. That is defined by our own role as a police agency, to build institutions and to strengthen institutions in emerging nations, in emerging democracies particularly, wherever they happen to be, whether in Eastern Europe, Central Europe, South America, or, increasingly, in Africa.

We view that as an essential because, obviously, the RCMP plays an increasingly significant international role. It is not just a matter of peacekeeping, where you go in and attempt to keep the peace between warring parties, but it is an attempt to ensure that the foundation and infrastructures are laid so that the situation never gets to that point where you actually have to do peacekeeping.

Senator Graham: I think the RCMP has played a very commendable role in these undertakings, and I have had occasion to witness it firsthand.

Mr. O'Reilly, could you give us your take on the relationship between Mr. Putin and Mr. Yeltsin, or the Yeltsin family, the Yeltsin followers and supporters?

Mr. O'Reilly: That has evolved over the period of Mr. Putin's reign so far. Initially, Putin was viewed as just another creature of the Yeltsin "machine," as it were. He had come to power, or been made Prime Minister, at a point when several prime ministers had just rotated in very quick succession. It was thought that this nobody from St. Petersburg would go the same way. There has been lots of talk of Putin having guaranteed Yeltsin immunity from prosecution as a quid pro quo for his resignation. Essentially, Yeltsin's resignation at the height of Putin's popularity over the conflict in Chechnya ensured the latter's election. He could not loose at that point.

It has been evolving. The Yeltsin "family," as it is understood, means more than the immediate family. There is Yeltsin's daughter, but the family was understood as a sort of close coterie of Kremlin advisers and cronies of Yeltsin, rather than just his immediate family. It has been demonstrated over the last year or so that Putin has distanced himself from that family structure and has, in many ways, gone on the offensive against key elements of the family. I think his treatment of people like that, and the oligarch "family," has more to do with ensuring that those groups do not interfere in the political process than with a genuine desire to clean up the way business and politics are done in Russia.

This has all been about consolidating his power. If Yeltsin comes into conflict with Putin at any time in the future, I believe he will fall victim in exactly the same way. He would be sacrificed, if necessary, to ensure Mr. Putin's continued popularity. At the moment, I do not see that that will necessarily happen. There is no great movement to punish Yeltsin for past crimes or anything like that, but if that were to happen in the future, I have no doubt that Putin would turn on his old master.

Senator Graham: I believe Mr. O'Reilly and Mr. Cutler have been more optimistic than some of our witnesses earlier this year, particularly with respect to the economy and the overall stability in Russia. Mr. Cutler used the term "overall stability of the Russian economy." I do not know that any of our witnesses in the spring would have used those terms. You talked about extending a line of credit. Since when have you felt comfortable in reopening those lines of credit?

Mr. Cutler: Many of the exporters who approach me do not find me sufficiently optimistic. We started to review our position on Russia late last year. We took it forward to our senior executives this March. The reasons we felt comfortable were primarily macro-economic. The country has a strong trade surplus. The foreign exchange reserves were growing significant ly. At the beginning of 2000, they were at $10 billion. Currently, they are in the $37 billion range. The Russian government had a balanced budget, and in fact was in surplus after debt servicing.

We look out over the next few years and still see 2003 as a potential problem, in that there is a debt hump that will arise at that point, but we are seeing signs that the Russian government recognizes it and is talking about dealing with it. Earlier this year, we did see the internal debate in the Russian government between should they try to pay their debt this year, or go to the Paris Club and get a rescheduling. We were pleased to see that ultimately, the forces for paying the debt and not asking for a rescheduling prevailed. It was primarily on that basis that we are saying that the overall economy is improving, but we do recognize that much of it has been predicated on high oil and gas prices.

The level of fundamental economic reform is still not sufficient. Even since you had your hearings earlier this year, a number of areas have improved. New personal and corporate tax codes have come into effect. The land code was just passed yesterday. That only affects urban land, which is 2 per cent of all Russian land, but technically, private ownership of urban land will now be allowed.

We have seen many small steps. Earlier this year, or last year, it was difficult to see if those small steps were going in a certain direction. They do now appear to be going in a forward direction. They are small steps, but there are enough of them that a path is developing.

Mr. O'Reilly: Yes, the small steps are encouraging, but there may not be enough time to execute all those small steps before Mr. Putin's popularity runs out and the current period of political stability starts to come to an end. You may see the same stagnation returning as we had in the latter period of the Yeltsin administration.

Senator Graham: When is the next election?

Mr. O'Reilly: I believe it is 2004.

The Chairman: What you have said is interesting to us because I think the committee has felt for some time, in our hearings, that there was a little progress or optimism. You are telling us that that little bit of optimism is a little bit bigger than it was when we started our hearings. It is consistent with what we have heard. We will see how it goes.

Senator Andreychuk: Mr. Smith, you have listed some of the problems with the negative elements, the criminal elements, in Russia and elsewhere. A number of people believe that the Russian problems, although they originated there, are now global problems. Stopping the prostitution and the sex slavery in the rest of Europe and the rest of the world will demand international enforcement of covenants and falls into the realm of trans-nation al types of crimes.

What is it about Russian criminality, other than we are shocked to find it there? Some people did not believe it existed, but you quite rightly pointed out it has traditional roots there too. What is it about the crime element out of Russia that is unique, or different from some of the other phenomena around the world that we have been trying to track?

Mr. Smith: To reiterate, the police are in a position, with Russian and Eastern European organized crime, of trying to play catch-up. We have had no chance to observe them and to understand them. As I am sure you know, police and organized crime understand each other because we have often had generations to observe and get used to one another. As we know, that can sometimes be a bit of a problem. It is the novelty of Eastern European and Russian organized crime that is particularly challenging. The other thing big challenge is what appears to be a real propensity on their part for involving themselves, to the extent possible, in legitimate businesses.

They also always have a bolt-hole. While I am not an economist, I understand that the situation is improving in Russia in terms of certain macro-economic issues. The legal and legislative situation still leaves something to be desired. There is not a great deal of useful organized crime legislation in Russia. There is still no real money-laundering legislation. This is true right across Eastern Europe as well. I do not like to point fingers at Russia. There are no witness protection programs for this kind of thing.

They can always go back there. Groups such as our main priority, outlaw motorcycle gangs, are pretty much stuck here in Canada and North America. They do not have that kind of bolt-hole available to them. Within Italian organized crime, many of the figures are actually Canadian citizens, but they do not have that bolt-hole available to them because Italy is improving its legislation in that area.

As I say, one of the issues is the bolt-hole, and the other is the novelty and their peculiar ability to disguise themselves as legitimate business people. That was something we were not prepared for, because, of course, we were a little shocked when, even as early as 1993, there were extremely successful business enterprises, both here in North America and in Western Europe, that were, in fact, Russian. It surprised us that people emerging from 70 or so years of Soviet rule were able to establish businesses of that type in such a short period of time. We have learned how they managed it, in some cases.

Senator Andreychuk: My question is directed to the gentle men from EDC. I am concerned about the descriptions of Russia, the investment possibilities, the movement of the larger, more legitimate companies in the resources sector, and how you view them. Do you follow the recent moves of some of these companies into Ukraine? What is your take on Ukraine? What is your take on these seemingly successful companies from Russia moving in and taking over the resource sectors in Ukraine? Is this simply legitimate competitiveness? Is there a fear in certain sectors that it is not only economic control, but also imperialistic, politically driven control, perhaps by Putin or perhaps by others?

Mr. O'Reilly: The natural resource sector in Ukraine has many of the same problems as that in Russia. There are Ukrainian oligarchs to the same extent. We have seen this trend, which started up in the last year or so, of these companies moving into Ukraine. This is partly because they now have a lot of cash in their pockets, thanks to high oil prices, and they are looking around for places to put it. Ukraine is as good a place as any.

However, there is some political drive behind this. Former Prime Minister Chernomyrdin, who has close ties to Gazprom, has recently been appointed the Russian Ambassador to Ukraine. That is a clear signal that the interests of the oil and gas sector are important elements of Ukrainian-Russian relations, and there is definitely a political overtone.

However, I am not sure if it is imperialistic, or simply a pragmatic calculation on the part of the individual Russian corporations, in this instance, who naturally have a great influence over the formation of policy in Russia. However, it is a calculation, on their part, born out of commercial interest; there is money to be made in Ukraine. I do not believe that it is pure imperialism, but that Russian foreign policy is presently driven by pragmatic considerations, rather than a desire to rebuild the old empire, as it were.

Mr. Cutler: The reasons may be different in different circumstances. Mr. O'Reilly talked a little about Gazprom, where there may be some elements of imperialism. Also, Ukraine has not paid a significant portion of its gas bills, so it is a bit of quid pro quo.

Lukoil is establishing gas station chains and refineries throughout Central Europe, and even purchased a 300-station chain in New England. They simply want to become a multinational.

During the Soviet era, the government would decide where to locate industries. They would decide to put one part of an industry in one spot and another part of it in a different location. In that way, the industry, from the raw material up to the finished product, was scattered throughout the entire Soviet Union. Some of these companies, the Russian companies being the strongest of the region, are now trying to put the pieces back together again. It does make economic sense for them.

Senator Andreychuk: I have a question, if you feel that you are able to answer it, given last week's events.

Putin gained his popularity by the actions in Chechnya against a movement that had links with Afghanistan and some of the other bordering countries. To what extent are you monitoring this action? Do you think this will be the real test for Putin that could set him on the road to some stability, or will this lead to more instability, having heard the views from the political analysts, who said that this would be an opportunity? Does anyone feel that he can answer that question?

Mr. O'Reilly: Yes, we have been very closely monitoring the aftermath of the events of September 11. I, as an analyst, cover Russia, Eastern Europe and the Middle East. My entire region is going up in smoke at the moment.

I do not think this will have much domestic impact, if that is the question you are asking, on Putin's popularity. There certainly has been a great outpouring of genuine grief on the part of the Russian people and the Russian political elite. There is also some degree of opportunism, although I do not like to use that word. The leadership has sensed an opportunity to create a linkage between the events in Chechnya and the events of September 11, to identify their struggle with the Chechen separatists as a struggle against Islamic terrorism.

There are definite links between the Taliban regime, Osama bin Laden and the Chechen extremists. However, I do not believe this has a major domestic impact on Putin's popularity. The only case where that would come to pass would be if Russia were to again become embroiled in Afghanistan. There is currently an incredibly strong public reaction in Russia against that. Not only is Russia clearly not wishing to get itself involved in Afghanistan, but there is a constant stream of Russian veterans in the newspapers and on television describing their experiences and warning the U.S. against getting involved there. They are saying this, not for reasons of geopolitical stability, but simply because this is a place you will end up in a long war.

The Chairman: I would have thought, with the problems in Central Asia, that this situation might increase Putin's popularity.

Senator Di Nino: We understand that the Russians have offered military equipment and so forth to those fighting the Taliban. Is that correct?

Mr. O'Reilly: The Russians have been arming the Northern Alliance for a long time. It is not a recent phenomenon. The figure is 15,000 troops and border guards stationed along the border between Tajikistan and Afghanistan to protect Tajikistan, obviously. There is a potential for Russians to become more involved in that. At the moment they are still, and probably more so in the last couple of weeks, maintaining a hands-off attitude. They are willing to provide military equipment and diplomatic support, but beyond that they do not wish to become involved.

Senator Di Nino: In regard to the money that is being made by the oligarchs, we have heard from other witnesses that a great deal of it has actually flown the country as capital outflow to other places. As unpalatable as it may sound, history has taught us that those who may have made money in similar ways, like the robber barons building the railroads, and others, have made some contribution, if you can call it that, to the economic success of the country. Has this capital flight ceased? If not, is it still as severe as it was before?

Mr. O'Reilly: Mr. Smith pointed out that the capital flight is still at $2 billion a month, or approximately $25 billion a year. That was the figure for last year. Many people will make the analogy with the robber barons of the 19th century in the U.S. One key difference between what we see in Russia and what was seen in 19th century America is that, in Russia, many of these individuals made their money through taking control of existing enterprises, systematically stripping them of their assets and cash flows, and siphoning off that money through capital flight. They did not build railroads or new enterprises, in many cases. There is some argument that now these individuals are legitimizing themselves and may be trying to reinvest some of those ill-gotten gains, as it were. The predominant trend is still toward asset stripping followed by capital flight.

Mr. Cutler: Most of the blue-chip companies are announcing ambitious investment plans. Some companies had ambitious plans to invest in businesses that had nothing to do with their core areas. The most notable example is Gazprom. What has also happened in the last few years, with high oil and gas prices, and even though the capital outflow may still be $2 billion a month, is that the revenue that Russia is receiving from its exports has become so great that they have still been able to increase their foreign exchange substantially. The banks are still small, but they have been growing, and companies have been able to invest even though the same amount of money may be leaving.

Senator Setlakwe: As a former director of EDC, I am happy to note that the prudent risk management of the corporation is as impeccable as ever.

Following the remarks of Mr. Smith and Mr. O'Reilly, I would question the optimism that has been manifested here about the improvement of the situation in Russia. Mr. Cutler, you mentioned that EDC was interested in aiding Canadian exporters, but certainly not, from your experience, witnessing any improvement in the investment philosophy of foreigners. If foreign investment remains as stagnant as it has been, and if it as low as it is in comparison to China, where foreign and direct investment seems to be much higher, what are the real prospects for substantial improvement in the Russian economy?

Mr. O'Reilly: It is probably not fair to compare Russia with China. Investment in things like manufacturing is still at an early stage in Russia. There are indications, without contradicting Mr. Cutler's earlier statements, that investment in sectors other than natural resources, for example, in greenfield manufacturing or retail operations, can be more lucrative and profitable. There may be prospects for growth in that field, rather than concentrating on essentially old economy areas like the natural resource sector. That may be the light at the end of the tunnel that we are looking for.

Aside from that, my role is, in many ways, to be a professional pessimist. I often do paint a pessimistic picture. To know the risks is one thing, but that should not necessarily stop one from doing business there. It is simply necessary to know what you are getting into. Does that answer the question adequately?

Senator Setlakwe: Partially, and only to the extent that it is my understanding that the greater the foreign or direct investment in a developing economy, the better the chances for more stability in that economy. That does not seem to be the case at the moment.

Mr. O'Reilly: There is significant domestic investment potential within Russia. For example, if the problem of capital flight ceased to exist, there would be much more money that would not be leaving the country. That is part of that potential for growth that could be tapped.

Senator Setlakwe: The difference being that capital there is fleeing, whereas there are countries where that is not the case.

The Chairman: I just bicycled 805 kilometres from West Berlin to the borders of Lithuania and Kaliningrad. One of the observations that I made to someone I was with was that we were in what we started to refer to as a "kiosk" economy.

Everything was a kiosk. There was no money. You would see a big store once in a while, but the customers all had a dollar or two. It was interesting. You wondered how they could possibly keep a large store open. You could see from the little baskets that it was a kiosk economy. Eight hundred kilometres is a long way.

When we discuss Russia in our study, we are always talking about industrial development in petroleum and minerals, but in the world that we all live in, when you walk down the street, is it also a kiosk economy? I have not been there for 25 years. Is that the sort of place it is, and is it because people do not have money to spend?

Mr. Cutler: Most of us who deal with Russia, particularly bankers, deal with Moscow. It is a very centralized economy. All the major corporations are there, the head offices, the governments and the banks. We tend to equate Russia with Moscow. They are quite separate.

I would say Moscow has gone beyond the kiosk economy. When I first went there, in 1991 or thereabouts, it was a kiosk economy. Those kiosks of 1991 are now fully-fledged stores. The little kiosks of a few years ago are concrete bunkers on the sidewalk. They are very permanent.

The quality and variety of stores in Ottawa pale in comparison to what you would see in Moscow, but once you get outside of Moscow - and St. Petersburg is a step down - it does get very bleak. You are probably getting back into that kiosk economy.

The Chairman: The people that I spoke to are waiting to get into the European Union - not all of them, because we know there is opposition to the European Union in Poland - because that is where they will get the investment that they hope will bring things up. It sounds a little outrageous, but is there any possibility that Russia would also be interested in the European Union? It would make such a huge difference to investment and to their economy.

Mr. O'Reilly: I think the chances of Russia being invited to accession negotiations any time in the future are quite slim. Even those countries that are now at the top of the queue - you mentioned Poland; Hungary and the Czech Republic are two others that come to mind - are still quite a long way off from accession.

Yes, it probably would have a very positive impact, but there is a growing trend of thought in many of the countries at the top of the list that perhaps EU accession will not be the best thing for them. There will be a lot of costs associated with it, and the benefits may be watered down somewhat. We are seeing the EU now saying they will have seven-year waiting periods during which workers from Hungary will not be able to go to the other EU countries, so there may even be a trend towards a backlash against the EU in some of these countries, which in large part is also motivated by the delays in actually getting the accession process going. Countries like Poland feel they have made all the sacrifices and taken all the difficult macro-economic measures, and they are now being told they still have to wait because the EU does not have its house in order yet.

The Chairman: I understand the difficulties. We are quite knowledgeable about the European Union. Still, the Baltic states are former parts of the Soviet Union. You notice things on the ground. What happens if this part of the former Soviet Union eventually becomes part of the European Union? What happens to the part that is only 100 kilometres away in St. Petersburg?

I wonder about this Brighton Beach business, Mr. Smith. I have been to Brighton Beach quite often. It is such a gloomy, miserable place. Why is it so large in the thinking of overseas Russians? What is the story of Brighton Beach?

Mr. Smith: Perhaps I am just drawn to gloomy places, but I always really enjoyed Brighton Beach. It has been the centre of immigration from the Soviet Union going back to the early 1970s, when the first Jews started leaving. They would go to Vienna and choose between Israel and the United States. There has always been, at least since the early 1970s, an enormous Russian- speaking population there. When the first post-Soviet immigrants started going to New York - because of course, like everybody else in the world, they were drawn to New York like moths to a flame - Brighton Beach was the natural place to go. There are a few other Russian neighbourhoods in Brooklyn, specifically Kings Highway and Sheepshead Bay, but Brighton Beach is really the centre.

Senator Grafstein: My question relates to the current situation on the southern borders of Russia and with the "stans." I was trying to remember which think tank we attended in Washington where there was an expert who talked about the "stans."

The Chairman: She was very good.

Senator Grafstein: Which one was it?

The Chairman: The Brookings Institute.

Senator Grafstein: It might be useful to re-circulate that document, because I think it has more currency today than it did at that time.

She is an outstanding expert on Uzbekistan and Tajikistan. We had a discussion about the implied domino effect of Chechnya. If Chechnya goes, the Russians feel their security on their southern periphery is in peril. That was of interest to us.

The Chairman: We think it was the Carnegie Institute, Senator Grafstein.

Senator Grafstein: I think it was the Carnegie Institute. It would be useful to get that report and circulate it.

I think it is very cogent, because she told us, if I recall her testimony correctly, that she was concerned that the fundamenta lists were moving to destabilize those governments. They were essentially being funded by the drug trade and the gun trade. In effect, these insurgents swim in a large pool of supporters in Tajikistan and Uzbekistan.

Have you, from either a security or a policy standpoint, re-examined that question in light of current events? I would assume that the consequence of any coalition using Uzbekistan or Tajikistan as a launching pad for any action in Afghanistan is very crucial.

I raise that because I notice that those two states have agreed to provide land facilities already, and have not limited it in the same way that Pakistan has. My question is whether or not this presents a material threat to the security of Mr. Putin. In other words, how will Mr. Putin be looking at this? We are studying Russia. Would Putin view this favourably or unfavourably? He has paid lip service to the issue, but we do not know yet what he will do in concrete terms. It is a very important issue in how the coalition, which might include Canada, should be involved.

Mr. O'Reilly: I think this creates a bit of a dilemma for Mr. Putin in foreign policy terms because, on the one hand, he has been committed for a long time, through the events in Chechnya, to battling international terrorism, especially Islamic- sponsored terrorism, and the Russian regime has provided substantial support to the anti-Taliban alliance in Afghanistan. It is concerned with Islamic extremism, particularly in Uzbekistan, which creates problems there and in Tajikistan and Kurdistan.

However, it is a dilemma, in that at the same time, I do not think Mr. Putin would want to see long-term U.S. or Western involvement along the southern periphery of Russia, especially in the former Soviet republics.

We have certainly seen that happen further to the west, in the likes of Georgia, where any overtures it has made towards talking about eventual membership in NATO have been very swiftly put down by the Russians.

As I say, that creates a dilemma. At the moment, Mr. Putin is leaning towards supporting the West, but I believe it will be qualified, on the basis that this Western involvement will be very clearly defined, will have a short-term objective, and thereafter the region will revert to being, essentially, a Russian sphere of influence.

Senator Grafstein: When I visited Georgia several years ago, I tried to find out a little about the "stans." We do have a former member of Parliament who is a consul to Kazakhstan in Toronto. However, I was surprised to find out that we do not have any direct representation in any of the "stans." We have a roving ambassador that covers all this area.

How do we obtain any knowledge or information from these areas without Canadian representation on the ground?

Mr. O'Reilly: I had the opportunity to visit Kazakhstan this past March. There is probably a new embassy there. I am not sure how long it has been there. I believe it is a micro-mission in Almaty that deals with all the "stans," as you pointed out. That is where I get my information. I go out into the field and talk to people.

Aside from that, I cannot answer that question more fully.

The Chairman: Honourable senators, on your behalf, I thank our witnesses. It was amazingly interesting.

We will wait five minutes for something to happen electronically, and then we will discuss the future business of the committee.

The committee continued in camera.

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