Arms Trade

By JONATHAN BEATY/YEKATERINBURG

RUSSIA'S YARD SALE Psst! Wanna buy a MiG jet fighter? How about 200 lbs. of uncut emeralds or a little nuclear-reactor fuel? In once secret military-industrial cities, all this and more is for sale. But beware: the mafia, the KGB, old party officials and new Moscow bureaucrats may want a piece of the action.

It was late November, the temperature outside hovered near zero, and six of us were sitting fully clothed in an unused basement bathhouse beneath a rundown hotel in central Russia. The water in the green-tiled pool had long ago turned an oily, opaque black, and from the cavernous banquet room directly above our heads rock music reverberated. Hardly an ideal venue for a business meeting, but there are few safe places to discuss the sale of 200 lbs. of stolen emeralds.

The four Russians were interested in a joint venture with their guest of honor, a foreign businessman, but had little desire to meet anywhere they could be seen by KGB types. (Russians still call the secret police the KGB, even though the domestic side of the agency has been renamed the Federal Counterintelligence Service.) Nor could they afford to be spotted by anyone from the vast, amorphous gang of criminals and hustlers that make up the Russian mafia. Only a few months ago, one of the Russians explained apologetically, the hotel manager had been killed because he failed to show the local mafia proper deference. "They didn't shoot him; they cut him and broke his bones to teach him a lesson." The visitor, an international broker with diverse interests -- major weapons systems, oil, gold -- was intrigued by the emeralds and wanted advice from his well-connected hosts. A month earlier, he had traveled deep into the Ural Mountains, driving over forest roads not shown on any map, following a trail of whispered rumors that a cache of gem- quality stones was up for grabs. A group of miners, fed up with laggard paychecks, had supposedly been holding back emeralds in hopes of finding a private buyer.

The businessman found the mine, 200 lbs. of uncut emeralds in sacks and a tangled dispute over who was going to sell them. Unearthed for use in laser- weapons programs, the emeralds technically belonged to MINATOM, the Russian ministry in charge of the former U.S.S.R.'s vast nuclear program. But as each man in the bathhouse well knew, there was nothing unusual about a squabble over the right to sell state assets. Since the demise of the Soviet empire, no one knows for sure who has the right to sell such assets. Meanwhile, billions of dollars' worth of weapons and raw materials has been exported, much of it illegally and for private gain.

So, the broker wanted to know, should he return to the tiny mining enclave on the Siberian border to negotiate in earnest for the emeralds? "Nyet," declared two of the Russians. The disagreement between the mine operators and bureaucrats might have been resolved by paying off both sides, but the foreigner's previous visit had aroused dangerous interest among the locals. A mafia group headed by a fearsome gangster nicknamed the Gorilla had got wind of the deal and was demanding a piece of any sale. The curiosity of the local KGB had also been piqued, and it too had no intention of permitting the emeralds to change hands without taking a cut.

The businessman, who had invited me to accompany him on his five-week foray through Russia, where he introduced me with deliberate vagueness as his associate, struggled back into his heavy coat and fur hat and pushed out the door into the frozen night. His shopping trip had only begun, and there were plenty of other bargains to be found.

The vital centers of Russia's military-industrial complex had long been hidden away in closed cities referred to only by code names -- Chelyabinsk-65 or Sverdlovsk-45 -- located far from Moscow, in the Urals or Siberia. Today the cities are no longer secret, but life there has changed for the worse. Scientists earn less than $100 a month, and political control remains in the hands of the military, the KGB and former Communist Party officials. As factory subsidies erode and payrolls shrink, thousands of Russia's most talented researchers and millions of factory workers are struggling just to survive. They have thrown open the doors on a backcountry yard sale, offering all comers bargains in everything from highly sophisticated conventional- weapons systems to rare and strategic metals. "This is a very worrisome problem," says U.S. Secretary of Defense William Perry. "The only good news I have is that it does not seem to be happening with nuclear weapons." (See box.)

Some of the sales are approved by the government. Others are extralegal but have been authorized by bureaucrats and politicians in Moscow expecting a piece of the profits. Still others are hatched locally and executed clandestinely by factory supervisors. In the scramble for hard currency, the line between government-approved transactions and private enterprise becomes difficult to discern, raising questions about the fate of Russia's arsenal of nuclear and conventional weaponry. The U.S. has found it hard enough to convert obsolete sectors of its own defense establishment to the production of consumer goods. In Russia, where military factories are rarely reliable sources of goods that can be sold for hard currency, the task is far more difficult. With a working free market years away, there is little to sell but raw materials and military technologies.

Foreign buyers of all sorts and sources come shopping. Some work for multinational corporations with an eye to cheap supplies. Others are front men for organized crime or outlaw regimes, part of a swelling tide of agents who haunt export harbors on the Baltic Sea and travel the countryside. For help, many turn to Russians skilled in the use of blat (personal connections) and vzyatki (bribes) to oil the gears of the postempire black market.

Many buyers look to current and former military and KGB officers, trapped in a system that can no longer afford to pay or house them adequately. At least one admiral has intentionally scuttled submarines in order to sell them for scrap. Ranking officers of the Russian fleet at Liepaja naval base in Latvia temporarily immobilized ships last year, when they sold the base's stores of fuel to international traders.

TIME traced one secret multimillion-dollar sale of osmium 187, a by-product of nuclear reactors that is not weapons related but is an extremely expensive metal with applications in nuclear-energy production. The middlemen in the deal included a former party official and a member of the KGB, who acquired the element worth $40,000 a gram from the factory and sold it to a Swedish company for $70,000 -- though it is not clear whether the profits went into private pockets or the depleted coffers of the KGB.

DOING A DEAL

One three-day jaunt to an isolated military factory city, where my traveling companion initiated a multimillion-dollar weapons-system purchase, shows how the system operates. Only a promise of confidentiality precludes revealing exactly what weapons were for sale.

The Siberian factory director, his thick fingers playing with the end of his tie, eyed his two foreign visitors carefully and then leaned back in his chair to listen to the international businessman. An outsize copper relief of Lenin hanging on the wall behind him provided the only splash of color in an office that probably saw its best days about the time Sputnik was launched.

Yes, his factory made the system my companion was interested in, even though the particular production lines were temporarily shut down. But why, demanded the factory director, had we come to the far reaches of Russia, when a certain East European country had similar units for sale? The answer established my companion's bona fides: his client, a Middle East country, wanted to buy those very units and after months of negotiation reached a satisfactory price. But a shuffle of ministers ushered in a new set of officials, who also demanded to be cut in on the deal, making the price too high.

The manager nodded as if he knew this all along. "We could supply those items for perhaps $6.5 million a unit, including spares," he offered. My companion said he had $5 million in mind. But if the Russian-built weapons had the latest navigation and guidance systems, his Middle East buyer might be willing to pay more.

"I will call Moscow," the factory manager said, glancing at the yellow telephone on his desk. The special vertushka phone network still connects industrial managers across the 11 time zones of the former Soviet Union with the new nomenklatura -- the unofficial network of bureaucrats, former party elites and military officers -- neatly bypassing political leaders in Moscow who might attempt to stand in the way of deals such as this.

In less than 24 hours, authorities in Moscow gave the green light for the factory to resume production of my companion's desired items. There was only / one hitch: because of delicate political considerations involving a large sale to an Islamic client, the factory director explained, Moscow would prefer to create the appearance that a private company in Slovakia had purchased the units and exported them. The manager scrawled a note and handed it to my companion: "This is a Slovak trading company in Moscow. Go there, and they will make the necessary arrangements."

The businessman, who had brokered occasional arms deals from the old Soviet Union to Third World countries for two decades, wasn't surprised. The Soviets had long ago set up routes to disguise Moscow's involvement in clandestine ventures by shipping arms through East bloc countries. Now, because newly independent but still cash-hungry Bulgaria, Poland, Hungary and Slovakia all support networks of privatized export firms to stimulate arms sales from their own faltering factories, it is easier than ever to use such channels. Even so, my companion was impressed at the influence wielded by powerful members of the military-industrial establishment eyeing a $100 million deal: overnight the old comrade's network had worked out methods to obtain supplies and components from several different factories to restart production and persuaded the government to enlist the aid of another country to give cover to the sale.

RARE-METALS CONSPIRACY

Our final stop was Yekaterinburg, formerly known as Sverdlovsk, the provincial city in the Urals where the Bolsheviks assassinated Russia's last Czar, Nicholas II, and his family in 1918. It is also the place where Boris Yeltsin rose to power as a party boss: he was there in 1979 when a leak from a biological-warfare plant released a cloud of deadly anthrax virus that killed 64 people.

But the broker was less interested in Yekaterinburg's history than he was in Sverdlovsk-45, the site of Russia's assembly plant for nuclear warheads, 124 miles farther north. There scientists and technicians have begun the process of dismantling most of Russia's 32,000 nuclear weapons, converting the weapons-grade plutonium into commercial-reactor fuel. The KGB still blocks any visits to Sverdlovsk-45, even turning away Yeltsin's nuclear-safety inspectors. But because of its proximity to all the nuclear and missile complexes in the area, Yekaterinburg has become a shopping center for the hottest market in restricted products: the rare- and strategic-metals trade.

There are staggering profits to be made selling Russia's precious metals, especially those mined or produced by MINATOM. These include internationally restricted materials like boron 10, which is used in reactor control rods, and osmium 187, a nonradioactive isotope that can sell for more than $100,000 a gram. International trade in other, less exotic materials, such as zirconium, beryllium and hafnium, is controlled by nuclear nonproliferation agreements.

More sophisticated buyers cultivate contacts with a small community of international brokers, mostly Germans and Americans, who work out of Switzerland. These brokers have sanitized their operations so thoroughly that they never actually meet the seller. According to participants in the trade, couriers deliver the seller's metals and the buyer's cash to one of the Swiss banks specializing in the metals trade. There the metals are tested by an independent laboratory for atomic count and purity. If the metals are certified, the bankers hand them over to the buyer and deposit the cash in the seller's numbered account.

Most rare-metals traders, however, abandon any pretense of legitimacy and begin to act more like characters in a Hollywood thriller. Buyers, accompanied by bodyguards carrying suitcases of cash and by their own scientific experts for testing the goods, fill hotels in Baltic ports, where Russian smugglers congregate. The sellers are most likely to be mafia-connected hustlers or former KGB agents -- some of whom have even set up joint ventures with former CIA agents to smuggle strategic materials. The trade is so brisk that Estonia has emerged as one of the world's leading exporters of rare metals, even though it produces none.

Few buyers take the most profitable -- and dangerous -- route of traveling directly to the mining cities to find a contact and cut a deal without middlemen. After weeks of travel, we knew how risky that could be, but we had also discovered that the KGB was running most of the clandestine trade to generate hard currency to help support the secret-police agency. "The KGB has no real mission anymore. Its budget has been slashed, and Yeltsin has signaled a purge is on the way," explained a Western intelligence source. "But conservatives in the defense establishment believe the KGB may be needed again, and have encouraged them to become more self-supporting."

So my traveling companion and I found ourselves parked at the side of the road, approximately 93 miles south of Sverdlovsk-45, sharing a picnic lunch with a Russian scientist and two former military officers. Ignoring the freezing wind, we ate brown bread heaped with butter and red caviar. We drank tea from a thermos that had given up its heat hours ago, and stamped our feet in the snow as we discussed the import of a meeting held two hours earlier.

The Russians took turns explaining the situation. The plan to buy certain rare metals from a factory dismantling warheads would have to be revamped. Even though my companion was interested in purchasing only "dual use" rare metals (rather than unequivocally illegal material, such as plutonium), there was a problem. Last summer, they said, more than a dozen plant directors and supervisors from Sverdlovsk-45 -- most of them KGB officers attached to the facility -- had been arrested and sent to prison for conspiring with the mafia to sell enriched uranium and plutonium abroad. Moscow had sent in a new KGB colonel to clean up the place.

It had thus been decided, the Russians explained, that it would be preferable if my companion would agree to deal through another nuclear-weapons complex, this one in the Chelyabinsk region. If the businessman agreed, the three Russians were still willing to act as liaisons for the transaction. "You've met the KGB man," the scientist assured us. "There will be no problems. But for Chelyabinsk, they think it would be best if you make a development loan to a private company that has been set up, instead of buying the materials directly." As collateral for the loan, the company associated with the nuclear facility would deposit the appropriate amount of rare metals with a Swiss bank. Reaching under his coat, the former colonel extracted a sheaf of papers. "Here is a suggested contract. This way, it isn't reported to Moscow as an export sale, which avoids certain bureaucratic problems." Then came the clincher: when the deal was completed, the company that had received the development loan would be allowed to go bankrupt, and my companion would collect the "collateral" -- the rare metals -- from the Swiss bank.

The Russians smiled smugly. Perhaps they were simply intelligent, experienced men trying to adapt to a chaotic world and beginning to understand how free-market economies work.