   
Investing, Pentagon-StyleThe Moscow Times, Wednesday, Apr. 4, 2001. Page 7 By Matt Bivens They had millions of dollars and a mandate from Washington: Help demilitarize the Russian economy, and feel free to get rich along the way if you can. But six years later, a former employee has accused them of frittering away the money, and the Pentagon is conducting a criminal investigation. The program's backers concede some mistakes, but argue the jury is still out on the Defense Enterprise Fund. Matthew Maly is passionately holding forth in his kitchen about everything wrong with U.S. foreign aid to Russia. It's a field in which he has worked for the past few years, and he spins tales of greed and incompetence: of a failed scheme to coax gold out of trash; of a bungled telecom investment that sucked the American and Russian governments into a little-known spat; of a book published by USAID and then bought back and shredded by USAID. Maly's harshest stories involve the U.S. Defense Enterprise Fund, an organization given $67 million by Congress and told to shepherd Russian military scientists and factories into civilian work. Maly worked at the DEF from 1996 to 1999, right up until management laid off the last 16 employees of what had once been a 48-person staff. Struggling to communicate his exasperation with his time there, he launches into what seems a long digression: In 1985, Maly was a recent emigrп to the United States and a graduate student at Columbia University. One day, a fellow countryman is steered to Maly's New York doorstep by relatives back in Moscow. This man, Vladimir Furman, introduces himself as a brilliant inventor who has developed a vague sort of water heater that will be able to cheaply satisfy the energy needs of the entire planet known as Earth. All he needs is some money. "He says, 'Introduce me to George Bush,'" Maly said. "I tell him I don't know George Bush. He says, 'Then introduce me to some millionaires.' I don't know any millionaires, I'm a poor grad student. 'Who do you know?' 'I know my geography professor.' 'OK, let's go meet your geography professor.'" They go. Furman waxes eloquent about his miracle heater and tells the professor he could sell the technology to him for $2 billion. Perhaps the professor should get some investors together? "Later, we are all three walking down the street in New York, and Furman stops and stares up at this skyscraper. We say, 'What are you doing?' and he says, 'I'm contemplating buying this building after I sell my technology.'" Thirteen years later, Maly was working in Moscow at the DEF, and growing ever more frustrated with the fund's management. One day his boss told him he had just met a Russian scientist - a Vladimir Furman - and the DEF was going to invest in some of his ventures. It was the same Furman. Maly says he immediately told his boss, DEF senior vice president Richard Nordin, that Furman was crazy. Nordin - a 47-year-old burly former U.S. military paratrooper who runs the DEF's Moscow operations - confirmed that in an interview. "Matthew claimed he knew Furman and that he was crazy," Nordin said. Maly's cautions aside, the DEF and Furman went into business. Nordin said the DEF invested $110,000 into a project brought to them by Furman to commercialize a lubricant to make machinery less abrasive. Nordin said the science belonged to another man, and the DEF's technology experts judged it sufficiently promising to flirt with. Therefore Furman himself, Nordin said, "was not all that critical to the deal." Among other things, the $110,000 investment let the DEF test-run the lubricant on the equipment of AvtoVAZ, Russia's largest car manufacturer. DEF officials concluded the lubricant did not work well enough to justify pursuing it commercially. Another consideration was that Furman - who could not be found for this article - was apparently a pain in the neck. "Mr. Furman was doing ever increasing amounts of screaming and shouting, and we just cut him off," Nordin said. A 'Missing' $41 Million?Over the years the DEF has spent $67 million on obtaining and managing stakes in businesses in Russia, Ukraine and Kazakhstan. The businesses all must somehow qualify as "conversion" - as somehow moving an institution or its personnel out of the Soviet military past and into a free-market future. Early on, the DEF indulged itself in six offices in four nations (including offices in Richmond, Virginia, and Washington), and managers were asserting that business was too good to handle - that they would have to set up a second, private fund to deal with it all. That never happened. Instead, the DEF managers have spent lots of time over the years trying to extract themselves from bad situations. These days, Nordin manages the portfolio out of the offices of Russia Partners, a Moscow-based fund manager. It's a far cry from the 50-person DEF team of 1998, which Nordin said some years cost as much as $7 million to run. Managing the modern-day DEF is so low-key that last year Nordin had time to take on an extended stint as acting president of another Russia Partners property, MTV Russia. On busier days, when Nordin needs help on a DEF project he can mobilize a dozen or so Russia Partners employees. But instead of scouting for the next big thing, the job now is unraveling old problems, recovering long-lost money and planning for the day when the DEF's modest portfolio - stakes in six companies worth about $26 million - can be "harvested" for cash. (More fun is planning what to do with that cash. Nordin said the Pentagon's Defense Threat Reduction Agency - the DEF's main supervisor - would put the money back into conversion in Russia, this time probably as a grant of some sort.) How did the DEF turn $67 million into a handful of investments worth less than half that? Where did the other $41 million or so go? There are many ways to tell that story. One way would be to reject the premise: The figure of $26 million can be reached by updating a Pentagon report issued last August that said the DEF portfolio included seven companies valued at $31 million. (One company valued at $5 million has since dropped out). But Nordin said it was he who gave the Pentagon that figure, and he characterized it as a back-of-the-envelop guess. He also argued against trying to put a value on the DEF portfolio before it is harvested. But it is Maly's version of events - angry, impassioned, at times unapologetically speculative - that has launched a series of official investigations in Washington. About $20 million, according to Nordin, was spent just running the DEF for six years - on the rent, the staff compensation, the legal and consulting fees. That might raise some questions about costs, and indeed an internal DEF study rapped the American managers for running an expensive shop. It would also leave another $21 million or so to account for. At least some of those "missing" millions can be chalked up to Furman's super lubricant and other investment misadventures. For Maly, 42, this has always been the story: bad investments, bad management. In July 1999, as he and others were laid off, he was furious to think DEF's managers might consign talk of mismanagement to the fires of the ruble devaluation. That month he wrote a six-page letter to William Taylor, a top State Department official in Washington who then oversaw assistance to the former Soviet bloc, asking him to look into "a catastrophic situation with the DEF's investments." Maly wrote that the DEF's troubles were caused by "serious wrongdoing" on the part of its managers, and he singled out Nordin by name. He said DEF managers failed to do proper due diligence before investing, failed to keep control over money once invested, hired incompetent staff, did not avail themselves of enough legal advice and were generally sloppy and free with the money in their care. The managers of Enterprise Funds like the DEF (see related article) are allowed to set up their own venture capital funds and start beating the bushes for private cash. But this is hard to justify unless they are well on their way to having fully invested their public monies. Maly and other DEF employees say there was a constant urgency to invest rapidly, and Maly argued in his letter that DEF managers were in a rush because they had their eyes on the prize of their own fund. "The DEF rule was: Never, ever do any due diligence lest it interfere with the speed of investment," Maly says. Maly also wrote that DEF management "may have violated U.S. law," although in that letter he was vague as to how. Later Maly made clear he was referring to payments the DEF made to a former deputy prime minister, Valery Serov, for lobbying work. Maly suggested the DEF's 1998 payments to Serov - who at that time was out of office and who today is a vice president of the natural gas company Itera - were cash delivered in brown envelops, and so may have been bribes. That's a serious allegation, and it's worth noting it's based on hearsay: Maly claims no direct knowledge of dollar-stuffed envelops, he only says he was told of them. (He has named his sources to investigators, but those people could not be reached for this article.) Serov in a telephone interview dismissed talk of being paid in cash as "complete delirium." Nordin is equally testy on this point. He refuses to comment on the size of Serov's payments - Maly, again citing office colleagues, has put them at $20,000 a month - but he said flatly Serov did not get paid in cash "in brown envelopes, or in any other color envelopes." Many who worked at the DEF or had dealings with it - including some who, like Maly, believe the fund was poorly managed - recoiled when told of Maly's suggestion Nordin paid bribes. Consider Paul Thomas, an American who runs the Ukrainian auditing and assets appraisal company IRE. Thomas has worked with both Maly and Nordin on a DEF project in Kiev, he has been in business in the former Soviet Union for more than eight years, and Maly lists him as one of his character references. Thomas was surprised to hear that, in addition to slamming the DEF as poorly run, Maly had suggested Nordin might have knowingly paid bribes. "Rich Nordin is a Boy Scout!" Thomas exclaimed indignantly. "He makes George Bush Sr. look like a pickpocket! It's incomprehensible that this guy, who fought for God and country in [the 1989 invasion of] Panama, is somehow giving bribes to enrich himself. Matthew [Maly] is really grabbing at straws on that one - it's not good for him and patently unfair to other people." (Nordin actually helped invade Grenada, not Panama, but point taken.) Maly counters that he never pretended knowledge he did not have, and only suggested the State Department examine the matter. And he points out that no action was taken for 13 months after he wrote his letter: Only last August did the Pentagon's Defense Criminal Investigative Service open up a probe. Nordin said the Pentagon is obliged to investigate any such accusation, no matter how well or poorly documented. He and other DEF managers say they expect to be exonerated. "Every so often [the Pentagon investigators] will call and ask for something," said Robert Odle, a lawyer representing the DEF board. "We've prided ourselves on trying to reply instantly." 'A Shitty Job' InvestingIf they firmly reject suggestions they somehow violated U.S. law, the DEF's managers are more willing to concede the fund was not a triumph of management. In fact, Nordin himself in a September 1999 e-mail put it more bluntly and succinctly than Maly ever has: "I think you will be the cause of a report that accomplishes what I assume you set out to do - which is to show that a small number of people did a shitty job of investing a fund and that it did not have to be that way. This being Washington, the impact on me will be predictable," Nordin wrote to Maly, who provided a copy of the e-mail. John Nowell, the DEF's chief executive officer, also declined to argue the point. "As for 'the DEF could have been better managed,' I can't say much," Nowell wrote in an e-mail reply to written questions. "I suppose Winston Churchill could have been a better peacetime prime minister, and maybe Joan of Arc could have been more virtuous. I know I could have done a better job managing the DEF. I apologize." Nowell added that he believed everyone working for the DEF had "done their best in a continuously tough environment." "If you think it didn't work out, then it's my fault," he wrote. "The successes belong to [the DEF's Moscow team]. The failures and shortcomings belong to me." Yet even while offering their mea culpas, the DEF managers say Maly is wrong on details. They insist they did do due diligence, use lawyers and handle money with care. And they explain their fund's poor performance by pointing out that it was in bad shape when they got it, and by arguing that similar investors in the unfriendly environment of late 1990s Russia have done as bad or worse. 'A Very Rough Start'A tendentious early history of the U.S. Defense Enterprise Fund might go like this: The DEF set aside $2.9 million to invest in OrbitSoft, a startup designed to farm out the services of Russian computer programmers. But the DEF decided not to go forward and OrbitSoft was shut down. It put $800,000 into RAIES International, a venture that was going to use the expertise of nuclear labs to zap timber with radiation to sterilize it before export. That too was abandoned. The DEF put $2.5 million into KK Interconnect, a venture with Kazakhstan's National Nuclear Center to make consumer electronic devices - and KKI even came up with the World Connect, a universal modem adapter that made its way into the pages of the swank Sharper Image catalogs for $49.95. But KKI's isolated factory was hundreds of kilometers from the nearest airport, making shipping costs prohibitive. So the World Connect was another bust. "Essentially KKI has had to reinvent itself," says the DEF's 1998 annual report. KKI's process of self-discovery has been an expensive one for U.S. taxpayers: In addition to the $2.5 million it got from the DEF, KKI got another $3.9 million directly from the Pentagon arm that oversees the DEF, the Defense Threat Reduction Agency. What's more, Oleg Gapanovich, a St. Petersburg-based DEF official, described visiting KKI with a colleague, Karen Westergaard, in 1998, and finding that "half of the money [the DEF had invested] was lost" because it had been used to pay a second company's debts. (Westergaard could not be reached.) These days, KKI is, among other things, assembling Samsung televisions for the Kazakh market. The DEF also toyed with going into business with an Alabama company, R&G International, to make vacuum tubes on the site of a St. Petersburg defense plant. R&G executives, however, complained about the legal and consulting fees the DEF was racking up on that project - a whopping $524,000, including $150,000 to Ernst & Young accountants and more than $250,000 to Steptoe & Johnson, a Washington law firm with one of its partners on the DEF's board of directors. The DEF board killed its $3 million investment into the vacuum tube project. R&G sued, claiming the DEF wanted to punish it for pointing out the large legal and consultancy fees. The DEF's then-CEO, Kevin McDonald, agreed. He resigned, and wrote to the DEF board: "I believe that a decision to stop funding this deal would indeed be a form of punishment against our U.S. partners [R&G] for their 'whistleblower' activities." This was the picture at the halfway point in the DEF's life span. Three years into its six-year existence, the most remarkable things the fund had to show was its eyebrow-raising legal and consultancy fees. A USAID analysis in 1997 found them larger than all but one of the other 10 Enterprise Funds - even though the DEF itself was one of the smallest of those funds. In 1995 and 1996, for example, the DEF paid Steptoe & Johnson $739,000 for legal services. Some of the above was covered in the Chicago Tribune, which took a long look at the DEF a few months after Congress held hearings on Enterprise Funds in 1997. That Tribune article, however, also held out the hope of a brighter future: Nowell and Nordin had just been brought in as the new brooms. Nowell conceded the DEF had had "a very rough start" and promised change. "Under Nowell," the Tribune reported, "the fund has moved into telecommunications and scrap metal deals that he says" will turn matters around. As promised, the DEF did indeed move into telecoms and scrap metals. But among such projects were two of its more egregious missteps. It was a $9.65 million telecommunications venture called MPS-Telekom that dragged the DEF - and the U.S. departments of State, Commerce and Defense, and the Russian prime minister - into an agonizingly extended feud. And it was an ill-considered scrap metals deal called MZA that saw the DEF lose $5 million by loaning it to a dying French company. $3 Million to a Restaurant?More about MPS-Telekom and MZA in a moment; first, consider another up-and-coming project Nowell talked of once upon a time to the Chicago Tribune: RAMEC, a St. Petersburg-based computer manufacturer the DEF has put $6 million into. More accurately, the DEF put in $3 million for 40 percent of the company - but the money evaporated. So the DEF put in a panicky second transfusion of $3 million, this time as a loan, accompanied by a stern finger-wagging. In an interview, Nordin characterized the RAMEC project as "a success, but a very expensive one." The Pentagon's August 2000 report estimated RAMEC's value at a mere $1 million, and stated not enough had been done to figure out what had happened to the other $5 million. Maly alleged in his letter to the State Department that RAMEC had "reportedly" diverted the first $3 million to build a restaurant in St. Petersburg. Gapanovich, a former member of the Russian parliament who oversaw DEF operations in St. Petersburg, agreed the fate of the first $3 million was a mystery. "I can't say whether it was diverted to a restaurant, but I can say that from the very beginning the transfers of money were unprofessionally and poorly documented," Gapanovich said in an interview. Nordin said he knew nothing of any restaurants, but he did volunteer, "We're convinced [the money] wasn't used the way it was supposed to be." "[The RAMEC managers] are involved in lots of businesses, and they've had a hard time distinguishing between our money and their money," Nordin said in an interview a few months ago. Since then, the DEF and RAMEC have come to an agreement under which RAMEC will pay back the second $3 million loan with a mix of company shares and cash. The Philosophers' StoneSo perhaps RAMEC is salvageable. The DEF has not always been so lucky. Electronic equipment includes miniscule amounts of precious metals like gold, palladium, silver and copper. In 1997, the DEF set aside $7.7 million to build a plant south of Moscow in Kaluga capable of extracting those precious metals from tons of electronic scrap each year. The plant - dubbed Metallurgichesky Zavod Ametist - was to be built by Valme Industries, an ailing French company in the European scrap-sifting business. Nordin said the DEF had hired the KPMG consulting firm to evaluate Valme as a partner. KPMG reported that Valme was fading fast. It had built a business in the 1960s recovering gold and such from electronic circuitry - back when such circuitry was cruder. As Europe grew more high-tech, Valme began to look East, to the Soviet bloc, where engineers still packed gobs of precious metals into electronics. "We knew Valme was in trouble," Nordin said. "KPMG told us: Without [the DEF's MZA project] they were dead, with it they were fine." Armed with that urgent knowledge - and also with hope that the European Bank of Reconstruction and Development, a veteran of high-risk Russia investing, was on board - the project moved forward. "The [MZA] project is funded in part by the EBRD, which is providing more than $14 million of the $23 million," announced the DEF's 1997 annual report. The description of MZA was accompanied by a photograph of gleaming bars of pressed gold and a quote from Yury Guzhavin, the Russian partner in the affair, to the effect that the DEF would bring to MZA "the business experience that we need." MZA was to employ 100 people who used to work in the military-industrial complex. Spending $23 million in public money to establish 100 new jobs works out to $230,000 per job. Had MZA turned out as billed, U.S. foreign aid critics might be now skeptically crunching those numbers - perhaps as part of President George W. Bush's review, announced last week, of U.S. military conversion programs in Russia - and then dubbing MZA one of the more expensive job-creation programs in history. But things never got so far. The DEF put $5 million into Valme's hands so it could build the plant - but Valme expired and those millions went right back out the door to its creditors. The EBRD put in nothing and watched from afar. What had happened? The DEF defensively picked up the story in the following year's annual report. (The DEF has not published annual reports for 1999 or 2000. Publishing such a report is required by the U.S. law establishing the DEF's original grant.) MZA, the DEF's report explained, was killed off by a tag-team of villains: the ruble devaluation and the EBRD. "The [MZA] project was brought to the DEF and sponsored by the EBRD," the report says. But then, the EBRD began playing dumb. The report complained of "the [EBRD's] delaying tactic of repeatedly requesting additional information" about MZA, and blamed such stalling for, among other things, Valme's business problems. Eventually the ruble crashed, the report says, making MZA "uneconomical to continue." The report says the DEF has sent EBRD a $500,000 bill representing money spent "on due diligence matters and project start-up on the recommendation of the EBRD." There are problems with the DEF's official explanation of how it lost millions in MZA. For starters, the devaluation of the ruble could only have made a raw materials extraction project like MZA more economical, not less. The ruble devaluation would have reduced all ruble costs associated with building and running the gold-sifting plant - while it would not have affected the dollar-pegged revenues to be earned from selling that gold. If MZA had been a winner before the 1998 ruble crash, it should have been far sexier afterward. 'If You're So Smart, Why Are You Broke?'The real problem with MZA is that it was a loser all along. E-mail traffic in and out of the DEF's offices in the summer of 1998 - copies of the e-mails were provided by Maly - sounds dispiritedly certain on this point. Consider this from investment officer Mike Rhodes of the DEF, here berating the French partners Valme for making lazy and unrealistic predictions about MZA: "My (your) problem is that you have not been able to do ANYTHING to prove to us or EBRD that the supply is there, that you know the suppliers, that you are capable of bringing in the supply, that you understand the Russian scrap market," Rhodes wrote to a Valme official in a June 19 e-mail, a copy of which Maly supplied. "If we had real supporting documentation for the numbers in our [business] plan, as we do for EVERY OTHER PROJECT that the DEF invests in, we would not be in this mess right now." This Valme official had just assured Rhodes that "Valme knows its trade better than many others." Rhodes replied witheringly, "If you know your trade so well, why are you bankrupt?" Rhodes went on to challenge Valme's assertion that it can truck 1,500 tons of scrap from across Russia to the Kaluga recovery plant with just two trucks. His back-of-the-envelop math suggests a need for at least six trucks. Even then, Rhodes writes, he doesn't really see where the scrap is coming from. "Our lack of a clear supply plan is a really poor situation," Rhodes wrote. "If I were considering this project all over again right now, for this reason alone, I would walk away." 'Well-Meaning, but Naive'So there's no clear supply of scrap, and even if there was, the e-mails show sharp disagreements over how much gold or palladium one could squeeze out of it. Valme is going bust back home. And on top of all this, world gold prices are sinking: Nordin says now that the DEF was banking on the idea that gold, already at record lows in 1996, would not go lower. But it did so steadily throughout MZA's brief life span - from an average of $387.87 per ounce in 1996 to just $292.90 in 1998. Never mind. A week after taunting the Valme team as bankrupt and stating that his preference would be to just "walk away," Rhodes put on a brave face. He e-mailed EBRD senior banker Susan Goerans that the DEF "has decided no longer to fight with" a consultant it had hired "to provide us a written [due diligence] report on the MZA project." Rhodes wrote that the consultancy firm DEF had hired, Simplified Solutions, "is currently focused on other engagements," and so was only offering verbal comments about whether MZA was viable. Rhodes admitted that this was "an unacceptable situation," but insisted the MZA project was still a go. He said the DEF had done its own additional research, had incorporated its reluctant consultant's verbal comments and was ready to write its own due diligence report. Two weeks later, Elizabeth Ames, another DEF investment officer, was in London for a July 6 meeting with Goerans. Her mission: to get the EBRD to put in that $14 million. It did not go well. E-mails Ames wrote afterward suggest the EBRD was getting skittish. "What does it mean when your own consultant won't commit their findings to paper?" Ames quoted Goerans as having asked. In parentheses, Ames offered her own answer: "It means you're doing business in Russia, where there's a different import to words on paper, and that the consultant doesn't get paid." When Goerans persisted, Ames wrote that she had replied, "I'd be happy to give her our consultant's phone #, in no way are we blocking access to his expertise." Goerans declined to be interviewed, and neither Ames nor Rhodes could be located for this article. EBRD spokesman Richard Wallis said the EBRD's team walked away from MZA convinced DEF managers had been "well-meaning but naive." Whatever the DEF managers wrote in their annual report about grand $23 million partnerships with the EBRD, Wallis added, "I certainly don't think we ever gave any commitments in writing - the sort that would be required to make such an investment, and that the DEF should have required before moving forward [to invest its own $5 million]." A representative of the EBRD who did not wish to be named added that in handling MZA, "the DEF was trying hard to save costs, to do everything themselves, and did not hire outside [legal] counsel" to advise them. That echoes Maly's letter to the State Department's Taylor: Among his many criticisms, Maly complained that "Nordin, who has a graduate degree in Russian studies and is a CFA [certified financial accountant] : largely thought himself capable of doing without a lawyer." (Pity the DEF: In 1995 and 1996 it's being berated for spending too much on lawyers; a few years later it's accused of spending too little.) Nordin said in interviews that he always sought appropriate legal advice. He said this had been documented by investigations into the DEF's work. Otherwise, he said, the DEF board would not have allowed Nordin to remain in charge to this day of handling the investment portfolio. 'Unwinding' MZAHaving sunk $5 million into the quest for the Philosophers' Stone, the DEF's alchemists now busied themselves trying to get it back. But it was not meant to be. Almost all of the DEF's $5 million for MZA represented loans to Valme Industries. Some of them were backed by guarantees from a British insurance company called LIM. Nordin said the DEF had also hired KPMG to check out LIM, and KPMG gave it a clean bill of health - but that the Russian financial crash nevertheless brought down LIM, too. That meant trying to scrape back some of the lost $5 million from the bankruptcy sell-off of Valme. Ultimately, the DEF got nothing. There is a final $15,000 footnote. That is the amount Nordin says the DEF loaned to the Russian face of MZA, Guzhavin - the man who had so enthused about "the business experience" the Americans brought to the table. "Mr. Guzhavin got sick. He needed a heart operation. We gave him an advance," Nordin said. "Then the [MZA] deal fell apart. He couldn't repay the loan. We had to get out of this bad deal, and he helped us unwind it. So he worked off his loan doing that." The DEF Goes Big-TimeBut forget all of that. Nowell, in that Chicago Tribune look forward, also spoke of telecoms. And it was a telecom joint venture with the Railways Ministry that was the DEF's most ambitious endeavor - and most spectacular failure. All of the utility monopolies in Russia are racing to get into the telecommunications business. The argument is that if you have rights-of-way along railway tracks, or natural gas pipelines, or the wires of the electric power grid, you can cheaply lay fiber-optic line - and get a whole second business. It's the great telecommunications land rush. The Railways Ministry has entertained a half-dozen such projects, and the flavor of the day is Trans-Telekom, a ministry-owned company that will lay the cables with Russian government money. But early on, there was a drive to get Western investors to pay for it. In 1996 the Railways Ministry struck a $420 million deal with AT&T and New York-based Communications Development Corp. Via a 50-50 joint venture called MPS-Telekom, the Americans and Russians would wire up the nation. The DEF was a junior partner in this, putting in a few million dollars in return for a little equity. Then AT&T got distracted by the spin-off of its Lucent Technologies, and dropped out of the deal. CDC followed it out the door soon after - and the DEF purchased the American half of MPS-Telekom, for about $6.3 million. The DEF had just bought itself into a punishing investment schedule. Documents provided by the Railways Ministry show that the DEF was on the hook to come up with $420 million over a five-year period: $56.5 million in 1996, $116.5 million in 1997, $159.5 million in 1998, $67.5 million in 1999 and $20 million in 2000. The DEF had nowhere near that kind of cash. But Nordin said he had an understanding with the Railways Ministry that the deal would be rejiggered - that his team would be given time to rework the plan and shop it around among the AT&Ts of the world. In the meantime, the DEF put in another $3.3 million, and MPS-Telekom began pilot projects hanging hundreds of kilometers of fiber-optic cable. Nordin said his team came up with a viable plan and even had the World Bank's investment arm, the International Finance Corp., interested. But when the DEF submitted the plan to the Russians, they got a clipped letter in return - informing the DEF it was far behind its investment schedule, so all bets were off. Going for a Double PlayThe ensuing spat, which has never been reported, played out at the highest levels of the American and Russian governments. The DEF managed to mobilize the U.S. Commerce, Defense and State departments, and then-Secretary of State Madeleine Albright was prevailed upon to raise MPS-Telekom in a discussion with then-Prime Minister Yevgeny Primakov. Nordin said the DEF was asking for either a green light to go forward, or its money back. U.S. Ambassador James Collins is among those who tried to broker a deal between the DEF and the Railways Ministry. Asked a few months ago about MPS-Telekom, Collins said the dispute was mostly resolved and the Russians "were trying to do the right thing." But he also put MPS-Telekom in a list of a handful of investments by Americans - a salmon fishing camp near Murmansk, the Subway sandwich shop in St. Petersburg - that are notorious among expatriates as cases of blatant expropriation. It certainly sounds like a case of expropriation in the DEF's 1998 annual report: "Because of the enormous potential value of the MPS-Telekom venture, the Russian partner : has executed a series of delaying actions designed to force [the DEF] out." Sorting out MPS-Telekom also involved hiring Valery Serov, the former deputy prime minister Maly says was paid in brown envelops, as a lobbyist. Railways Ministry officials shared letters Serov wrote to then-Deputy Prime Minister Alexei Bulgakov, lobbying him to put the Communications and Property ministries, and not the Railways Ministry, in charge of MPS-Telekom. "[Nordin was trying to] get rid of a structure [the Railways Ministry] he couldn't agree with," said Sergei Pryanikov, an adviser to Railways Minister Nikolai Aksyonenko. Pryanikov suggested Nordin thought he had "better contacts" at the Communications and Property ministries. Serov declined to comment on his chosen tactics, but Nordin offered a possible explanation: He said Serov had already suggested the railways and gas monopolies were wrong to assume they had rights-of-way along their pipes and tracks. Nordin said Serov was probably going for a double play - getting MPS-Telekom sorted out and getting ownership of the rights-of-way defined. 'He's a Spy, It's on the Internet'Railways Ministry officials tell a very different story. Pryanikov says the DEF fell behind on its investments, and then began demanding a new deal and stirring up a scandal. Pryanikov has never met Nordin, and only came to the MPS-Telekom problem late in the day. But he and his colleagues say they are now convinced the DEF was really a U.S. government covert operation working against Russia. Asked what kind of covert operation, Pryanikov was hazy. But he insisted, "I'm convinced [Nordin is a spy]. I've seen some data and looked into this." Pressed about that data, Pryanikov and Vyacheslav Smirnov - another adviser to the minister and a vice president of Trans-Telekom - divulged their source as "the Internet," where Nordin's resume is posted. "It's confirmed, he is an espionage agent, but retired," said Smirnov, adding, "But you know they say you only leave the espionage business feet-first." Nordin and Nowell are both former U.S. Army Rangers who studied Russian affairs together at Harvard. They have been good friends since they were occasional roommates in graduate school, and Nowell remembers helping to paint Nordin's grandmother's house. In fact, Nowell said one reason he took the post as DEF CEO was so that he could hire Nordin and work with him again. Nordin also studied the Russian military and Russian financial markets at the Rand Corp., where he worked on a doctorate in public policy analysis. Rand is a California-based think tank that does a lot of work for the U.S. intelligence community. Nordin's dissertation at Rand was: "Liar's Poker, Russian Style - Regulatory Issues in Russia's Public Equity Markets." To Pryanikov and Smirnov, this adds up to a pair of CIA agents, even if they did help each other paint Nordin's grandmother's house. At one point in the spat over MPS-Telekom, Pryanikov said, a group of deputy ministers even discussed "kicking back" against Nordin's full-court press - "by letting a paper like MK [Moskovsky Komsomolets] or Kommersant have the story: An American spy, retired, tries to seize control of [Russian] infrastructure, he doesn't pay, he brings pressure to bear." Asked if they were spies, Nordin and Nowell offer both flippant and thoughtful answers. Nowell jokes about Nordin's "secret decoder ring," and Nordin about secret agents who post their resumes on the World Wide Web. But both also say they knew the work of conversion was politically sensitive, and that they did everything they could not to provoke suspicions or bad feelings. In the end, this was also the instinct of the Russians. Pryanikov said the deputy ministers decided not to bother calling MK, and instead to try to get the DEF back its money. A turning point was apparently a lunch between Nordin and a Trans-Telekom vice president at the Harvard Faculty Club in 1999, during the annual U.S.-Russia Investment Conference. Trans-Telekom eventually bought up more than 600 kilometers of fiber-optic cable the DEF had already laid down, plus supporting technical documentation, for $8.6 million. Nordin and the Railways Ministry are still quibbling over some of that documentation, but mostly the matter is resolved. The DEF got away with a loss of about $1 million. 'If Only I Spoke English'Oleg Gapanovich, the DEF's man in St. Petersburg, was arguably the fund's most highly qualified expert on "konversia" - conversion of military industry to civilian use. As a delegate to the Congress of People's Deputies in 1990, he headed parliament's commission on the military-industrial complex and conversion. And in an earlier incarnation, during the Cuban Missile Crisis, Gapanovich headed a team of Soviet military officers responsible for four nuclear warheads. His job would have been to arm the warheads before a potential launch. Thankfully, the launch orders never came, and Gapanovich went on to a successful military and engineering career as a ship designer. But ever since he has been fervently convinced of the need for cordial U.S.-Russian relations and for at least some level of demobilization. The job at the DEF, then, suited him well. But like Maly, Gapanovich came away disappointed. "As to bad management, I'd agree," he said in an interview. Gapanovich even wrote to a member of the DEF's board of directors to lay out his concerns. But Gapanovich is at great pains not to have his letter associated with Maly's. He worries Maly's crusade has gone too far, and he spoke with distaste of Maly and the DEF management collecting dossiers against each other built upon donosy - the word used to describe tattletale reports filed with the old KGB. Moreover, Gapanovich prefers to defend Nordin, while Maly attacks him. "Richard [Nordin] didn't have any assistance in technical matters, in economics. And he had to carry the burden for all. They all, every time, waited for Rich," Gapanovich said. At times, Gapanovich blames himself for not being more help. "If only I spoke English," he sighed. (Nordin, by the way, speaks fine Russian.) Gapanovich remembers Nordin and Nowell as very excited about MPS-Telekom. "They thought MPS-Telekom would be very profitable. They made video presentations about it, and went to [investment] conferences in America and England," he said. The idea as Gapanovich remembers it was that a sexy telecom project was just what the DEF needed to sell its private fund. "We needed some loud project to show - and MPS-Telekom was that thing, it was huge, it would make people say 'Whoa! I get it!'" So they signed a contract, but quickly fell behind schedule with investments. Gapanovich said he believed the contract was "designed to have such hooks," and bemoaned that "Richard had no one to read or study the contract. There were lawyers, but you have to look at the contract from the point of view of seeing ways you could get caught." Saddest of all to Gapanovich is that good, solid defense conversion projects have gone unrealized - first the fund was too slow off the ground, then too busy getting into and out of messes with RAMEC and MZA, then too excited about its monster telecom project, and now it is basically dormant. That leaves a widow Gapanovich's (and also Nowell's) favorite project: Vektor, a Novosibirsk biological agent factory the DEF team only got access to in mid-1998. Vektor has historically produced, among other things, anthrax. Now it has a business making children's yogurt drinks, and was hoping the DEF would help it move into pharmaceuticals production. Gapanovich says the DEF was all set to help - right up until the fund slipped into hibernation. Original article on The Moscow Times site: http://www.moscowtimes.ru/stories/2001/04/04/014.html 
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