Genc Greva Pyramid Schemes Albania 1996-98 The events surrounding the Albanian pyramid schemes were more than just oddities in a poor country that had been isolated for decades. As a result of specific historical conditions, the connection between speculative capitalism, the criminal economy, and authoritarian political regimes suddenly appeared with unusual clarity. The dynamics that are normally hidden in the sophisticated and opaque language of financial markets became transparent in the simple and unglamorous Albanian context. While the specifics of the Albanian situation were unique, similar dynamics, albeit more behind closed doors, have led to collapse of the Russian financial system and fueled the ups and downs of the financial markets every day. As the most extreme case of speculative capitalism gone crazy, they are worth chronicling once again, at a time when lights are going off in the global casinos in New York, London, Tokyo, and Zurich. Pyramid schemes all over. THE ALBANIAN EXPERIENCE Following the irregular elections of May 26, 1996, the situation in Albania deteriorated very quickly. Seeking political benefit, the government of the Democratic Party (DP), which illegitimately won about 90 percent of the seats in the Parliament, had allowed the rise of strange structures called “charity foundations.” These structures were pyramid schemes, initially little more than money-laundering operations, offering interest rates ranging from ten to 25 percent per month. The first investors received the promised interest, paid with the money of the later investors. With the apparent success of the “foundations,” the euphoria spread very quickly to all levels of Albanian society, and in a few months’ time almost everybody was putting money into these get-rich-quick schemes. It is estimated that close to US$1.5 billion was invested in more than ten schemes. This in a country where the average monthly income was only some US$80. People sold their houses, property, and land to invest the proceeds in the pyramids, while economic emigrants working in neighboring countries—Greece and Italy—withdrew money from their bank accounts to transfer it to the schemes in Albania. A large number of Albanians invested their life savings and more. The DP avoided any information about the functioning of such structures—in the beginning they simply ignored the dangers, and later they forced the governor of the Albanian National Bank to stop warning people about them. But, of course, the danger was unavoidable; the system of paying interest to early investors with the capital of later investors could only last as long as increasing numbers of people continued to invest. However, the schemes became so massively popular that anyone who said a word against them would appear to be opposed to the entire nation. In October 1996, when the International Monetary Fund (IMF) warned of the risks, even the opposition parties preferred to say nothing. The connections between the leaders of the criminal economy and the leaders of the authoritarian party, the DP, were close. In some election posters in southern Albania, the names of powerful sponsors—pyramid bosses—appeared beside the names of Democratic Party candidates. Feeding back some of the money, the DP in effect bought the people’s votes with the people’s own money, extracted from them with the party’s help through the pyramid schemes. As the opposition Social Democratic Party’s leader, Skender Gjinushi, said, “The people’s money was spent on buying votes.” The schemes started wobbling in autumn 1996. The continued operation of the schemes was dependent largely on confidence; once this was shaken, new investments dried up. By mid-December two of the smaller schemes had collapsed, and questions were being asked about the major schemes, in which tens of millions had been invested. Having been assured of the legitimacy of the schemes in advance by the government and the president, people’s anger toward the government and the DP started to rise.With the fall of one of the important schemes based in the south of Albania, the revolt burst out and sparked the political and social crisis. On the afternoon of January 15, 1997, a battle erupted in Tirana. The first stones were thrown by angry people who had put their money into failed investment schemes. Their target was the private residence of a promoter of one of the schemes. The government’s initial response, on January 14, was a decree limiting the amount any single investor could withdraw from the schemes to $300,000 per day. This was clearly intended to prevent a run on the schemes. But its effect was to hit confidence further and to focus anger onto the government. This anger was expressed at a major demonstration in Tirana on January 19, organized by the Socialist Party and other opposition groups. The government tried to suppress it with police brutality, thus heightening tension. As the protests spread across the country, the government blamed the opposition and cracked down hard, arresting protesters and imposing severe jail sentences and fines on them. But it was also clear that the government had to be seen to be acting against the schemes. On January 21, it announced a commission to investigate them, and seized the assets of some. Two days later, it banned pyramid schemes altogether and arrested the leaders of some major ones. At the same time, it arrested the leaders of various opposition groups, whom it blamed for inciting the trouble. The trouble worsened thereafter, with major demonstrations on the weekend of January 25–26. Fighting was reported between protesters and police in Tirana. The cities became a battleground for demonstrators and riot police, and dozens of government buildings were burned or destroyed. The most dramatic and violent scenes were in the towns of Lushnja, Berat, and Vlora, and in the capital, Tirana, where riot police attacked opposition leaders, journalists, and protesters. But the epicenter of protest became the square in Vlora where, at the turn of the century, Albanians had proclaimed their independence. Today, Vlora is known as the capital of the pyramid schemes, because most of them originated there. Albania was now facing its most serious crisis since the fall of communism in 1991. The military was deployed in order to guard public buildings and keep the peace, despite doubts as to whose side they might take. It was after these protests that the government was forced to promise investors that they would get their money back. The problem was that the assets the government has seized from schemes were thought to total an estimated $300,000, while losses were around one billion dollars, about four times the amount of the country’s foreign currency reserves at the time. Meanwhile, the Albanian currency, the lek, lost some 35 percent of its value on the currency black market. It quickly became clear that, even then, most investors would receive only about thirty to fifty percent of the amount they had invested, and that most of that might be in government bonds rather than cash. Worse yet, the cash would be in the fast- fading lek rather than the U.S. dollars that many of the schemes had demanded from investors. As the situation worsened the DP declared a state of emergency. With this, they completely isolated Albania from the rest of the world. They decided to ban radio stations, close newspapers, and take over all local TV stations. Fortunately, the closure of the satellite frequencies lasted only forty-eight hours. People started to look for radio stations on the shortwave frequencies, which couldn’t be banned. But the newspapers remained closed for more than one month and the office of the biggest independent newspaper, Koha Jone—supported by the Soros Foundation—was burned down by the secret police. During this time, email remained one of the most important sources of information, unfortunately with very little access. There was only one server in the country, UNDP, which was part of an experimental program meant to give NGOs and universities access. Few institutions could make use of an available AOL account, which was very expensive since it required making an international call to Switzerland. It was also believed that outgoing email from the UNDP server was being monitored. In the meantime, the West was most concerned that the Albanian trouble would spread. Since the country was not connected to international capital flows, the threat was not seen as an economic one, but as the danger of mass exodus: people following their capital into the West. The Organization on Security and Cooperation in Europe (OSCE) sent an envoy, and early elections were arranged. Italy, target of a possible mass immigration, assembled a force for Operation Alba after receiving a U.N. mandate. Various other European countries—including France, Greece, Turkey, Spain, Romania, Austria, and Denmark—participated in the contingent, which arrived in Albania in mid-April. The parliamentary elections in late June and early July 1997 proceeded without major incident. Despite fears to the contrary, the elections were a success and ultimately led to the restoration of at least a modicum of law and order. Now, in 1998, the slow recovery process is still underway and the last schemes are being dismantled. Earlier in the year, the French auditing company Deloitte and Touche found that the VEFA investment company had only seven million dollars in assets after having received more than three hundred million dollars from some 90,000 investors. If and how VEFA owner Vehbi Alimucaj laundered $40 million into his private bank accounts in Greece is still being investigated. During all of this, most Albanians have waited in vain for the return of their savings. All they are left with are memories of the grand gestures paid for with their money: of how the pyramid company Gjallica blew a million dollars on a Miss Europa contest in Tirana; how VEFA paid $450,000 for an advertisement on Eurosport; how Xhaferi paid $400,000 for an Argentinian football star to run the local team in Lushnja.