Uprising in Albania
by Lynn Walsh
The rise and fall of the pyramids
The rise and sudden collapse of the pyramid finance schemes was not an isolated phenomena, merely the work of a handful of enterprising crooks. The pyramids were the natural product of a gangster-dominated economy, which provided a growth medium for a gigantic swindle that exploited the desperation of millions of impoverished Albanians. Nor was the DP government unaware of what was going on. Berisha’s ministers publicly encouraged the schemes, and siphoned off a share of the profits to finance their fraudulent election campaigns. Berisha hailed the pyramids as "swallows of capitalism". Now he insists that "the main responsibility lies with those who invested money in the schemes." (Wall Street Journal, 4 April)
Until 1996, Albania was regarded as the IMF’s "model pupil". Berisha was credited with bringing inflation down from over 400 per cent to only six per cent, and achieving an annual growth rate of around ten per cent. "The state of contemporary Albania," commented the Financial Times (21 July 1994), "is a far cry from the desperate days of 1990..." They painted a picture of "well-stocked markets, busy fields, bustling streets, and new cafes" which backed up "the president’s claim of sharply rising living standards after decades of hunger and poverty." Berisha showed no modesty in claiming the credit: "Shock therapy is a bitter pill, but it is a brilliant invention. We have been prepared to sacrifice popularity by pressing ahead with reforms."
According to Emma Bonino, the EU Commissioner for Humanitarian Aid, "European investment in Albania since 1992 totalled about $600 million [£365 million], the most aid per capita given to any country. Less than a third went towards promoting civic institutions." (The Guardian, 2 April) The rest went towards bolstering up the regime’s police apparatus and into the flourishing businesses of Berisha’s cronies.
It was only in 1996 that the IMF and the United States government changed its line on Berisha’s policies. Alarmed by the spiralling growth of the pyramid schemes, the IMF suspended its credit lines to Albania and the US government refused to recognise the parliament which emerged from the rigged elections of May-June 1996. The US began to criticise Berisha for "slipping off the democratic road," particularly complaining about the involvement of government ministers in the country’s thriving international drugs trade.
Yet several European governments, particularly Italy and Germany, were still actively pushing for EU financial support for Berisha’s regime. The German government has been a key diplomatic and military supporter of Berisha, aiming to build up Albania against Serbia. "German advisers from the Conrad Adenauer Institute in Bonn were key architects of the Berisha re-election strategy last year, and the German metal giant Preussag has bought up Albania’s chromium mines, its key industrial asset." (The Times, 6 March 1997) Germany also provided training for Albanian army officers.
The gangster state
There is not a shadow of a doubt that West European governments were fully informed of what was going on in Albania. Once the crisis broke, the London daily, The Independent, published reports based on "frustrated intelligence sources, who have been vainly warning about what is in effect a gangster state..." (14 February 1997) "Classified documents have circulated in Western capitals for the last two years citing evidence of collusion and active participation by members of the ruling Democratic Party in drugs trafficking, illegal arms trading, and, until the end of the war in Bosnia, large-scale sanctions-busting via oil sales to Serbia and Montenegro."
"Albania has turned into a repressive one-party state, where corruption is rife at all levels and a largely gangster-based economy is under the strict clientelistic control of the ruling party. Drugs barons from Kosovo... operate in Albania with impunity, and much of the transportation of heroin and other drugs across Albania, from Macedonia and Greece, en route to Italy, is believed to be organised by the Shik, the state security police..." The Independent gave evidence of the key role played by Shqlponja, a company openly linked with ruling Democratic Party and involved in running arms, drugs, and other contraband. Berisha’s former Interior Minister, Agron Musaraj, was forced out of his position just before the May 1996 general elections, following pressure from the US government over his involvement in the drugs trade. The Defence Minister, Safet Zhulali, was involved in smuggling arms and other contraband. Western intelligence agencies also reported on the major smuggling activity of Albania’s largest company, Vefa Holdings, the biggest company involved in the pyramid schemes. Vefa Holdings has always been closely linked with Berisha’s government, lavishly funding the DP’s election campaigns. Its chairman, Vehbi Alinuchj, was publicly backed by Berisha’s former Prime Minister, Meksi. Vefa is widely believed to be involved in arms and drugs smuggling and is under investigation in Italy for its suspected links with mafia organisations in Sicily, Calabria and Puglia. One of Italy’s chief anti-mafia prosecutors, Luigi Vigna, has confirmed the involvement of Italian organised crime syndicates in Albanian pyramid schemes.
The pyramid fraud
The pyramid finance schemes provided an ideal vehicle for laundering dirty drugs money. In the absence of savings banks, the pyramid schemes found it easy to attract savings from many thousands of poor Albanians by offering irresistible interest rates ranging from 10 to 25 per cent a month. People sold their houses, their livestock and their possessions to invest in the schemes. Economic immigrants working in Greece and Italy also withdrew money from their bank accounts to transfer to the pyramid schemes. The economy of the poorest country in Europe became a gigantic lottery, with a huge proportion of the population living off their dreams of unbelievable profits and interest rates. It is estimated that at least $1.5 billion was invested in more than ten schemes, perhaps $2 billion. About $800 million has been invested in various Vefa subsidiaries.
There were ten major pyramid schemes, six of which have crashed or been closed down, with four others on the brink of bankruptcy. The first pyramids were started in 1994, and were aimed mainly at quickly attracting capital to a number of rapidly growing capitalist firms which were exploiting the retail market, especially the trade in electrical home appliances. They promised interest rates of between 80-120 per cent annually, which they claimed could be paid out of the huge profits they were making at that time. In 1995, however, the reduction of aid from the West cut the consumer market, and at the same time the introduction of new taxes on private enterprises squeezed the profits of the companies. On the verge of bankruptcy in late 1995, the pyramid schemes launched big advertising campaigns to draw in more investers. Competition developed between the hybrid pyramids (half-pyramid, half-business) and the pure pyramid schemes, with dubious ‘charitable’ foundations offering depositors no less than a 300 per cent interest rate. This was clearly unsustainable.
The viability of pyramid schemes - unless they have other sources of funds - depends on a continuously growing number of investors. "All the (pyramid) scheme does," commented John Kay (Financial Times, 14 February 1997), "is to redistribute money from those who join the club late to those who joined early, and nothing is produced, except rich pickings for those who organise it." The whole structure depends on attracting new investors fast enough to pay out the high rates of interest. Financially, several of the pyramids were bankrupt by the summer of 1996. But they continued to defy the laws of economic gravity because of support from Berisha’s regime. Claiming credit for the illusory prosperity created by the schemes, the Democratic Party fought the May 1996 elections under the slogan "With us, everybody wins."
The collapse
By January 1997, however, the day of reckoning could no longer be postponed. On 15 January the first pyramid collapsed, provoking a riot. This was the first domino to fall, and within a week or so, two or three other schemes collapsed. The bubble had burst. Tirana, Lushnja, Berat, Vlore and other cities were turned into bloody battlegrounds as demonstrators clashed with riot police. Government buildings were burned or ransacked. One of the main centres of protest was Vlore, the "pyramid capital", where most of the schemes originated.
The government attempted to head off a popular revolt by closing down some of the investment companies and freezing their capital. Some of their bosses were arrested, and about $300 million was handed back to investors. But this was a tiny fraction of what people had lost. The storm of fury was only just beginning. The Vefa conglomerate reduced its interest rates from eight per cent to five per cent a month, and then to only three per cent, in order to protect its capital - a disastrous cut in income for thousands of poor investors in its schemes. The popular mood immediately blamed the government, which had encouraged the schemes and taken a share of the profits to buy votes in the general election.
There was clearly no way in which the government could meet the main demand of the people: repayment of their savings, which were the equivalent of about half the country’s GDP. Most of the cash invested in the schemes had already disappeared, siphoned off to foreign bank accounts, or squandered on yachts, helicopters, and other millionaire luxuries. One pyramid company, Gjallica, blew a million dollars on a Miss Europa contest in Tirana. Vefa Holdings spent $450,000 for an advert on the Eurosport TV channel, and Zhaferi spent $400,000 for an Argentinean football star to run the local Lushnja team.
A political explosion
The financial crisis unavoidably became a political crisis. Lacking any political answers, however, Berisha responded with a military solution. He obtained from the DP-dominated parliament exceptional powers to use military force to protect state buildings and secure communications. In reality, this was a de facto declaration of a state of emergency. Prime Minister Meksi denounced the "red gang" allegedly responsible for the violent protests. The opposition Forum for Democracy, a broad grouping of ten parties, including the Socialist Party, called for the government’s resignation, a caretaker administration, and new parliamentary elections. From prison, the Socialist Party leader, Fatos Nano, issued a message: "The so-called investor’s crisis is just the other side of the coin of the great election fraud of May 26". The leader of the Social Democratic Party, Skender Gjinushi, said: "The peoples’ money was spent on buying votes." None of the opposition parties, however, had a clear policy on the pyramid schemes. They denounced the government, but could offer no solution to thousands demanding their money back. These small, ineffective parliamentary groupings were completely by-passed by the flood tide of mass protest.