<nettime> Pyramid Schemes: Albania 1996-1998

[Genc Greva <gegreva@new-europe.com>]

[Even more than a year after the main events, the Albanian pyramid schemes
are still particularly interesting. Due to the specific historical
conditions the connection between speculative capitalism, the criminal
economy and authoritarian political regimes appear in unusual radicality
and transparency. While the specifics are singular and unusual, similar
dynamics, albeit more behind closed doors, have lead to collapse of the
Russian financial system, and fuel the ups and downs of the financial
markets every day.]

>Pyramid schemes all over.

The Albanian Experience.

Following the elections of May 26, 1996 -- widely denounced as irregular by
the international community and the national independent media -- the
situation in Albania deteriorated very quickly. Seeking political benefit,
the government of the Democratic Party (the 'DP', which illegitimately won
about 90% of the seats in the Parliament) allowed the rise of strange
structures called "charity foundations". These structures were pyramid
schemes, initially little more than money laundering. The political
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 $1.5 billion had been
invested in more than ten schemes offering interest rates ranging from 10
to 25 per cent per month. The average monthly income is only some $80.
About 500,000 of Albania's 3.2 million population invested in the schemes.
People sold their houses, property or land to invest the proceeds in the
pyramids, while economic emigrants working in neighbouring countries --
Greece and Italy -- withdrew money from their bank accounts to transfer it
to the schemes in Albania. A large numbers of Albanians invested their
life-savings and more.

Trying to maximize their benefit, the DP avoided any information about the
functioning of such structures -- in the beginning they ignored, and later
forced the governor of the Albanian National Bank to stop warning about the
dangers of such structures. Of course the danger was eminent. The schemes
paid interest to early investors with the capital of later investors, a
system which 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 opposed to the entire
nation. In October 1996, when the International Monetary Fund (IMF) warned
of the danger, even the opposition parties preferred to say nothing. They
only condemned the ruling party for using pyramid profits in last year's
election campaign. In some elections posters in southern Albania, the names
of powerful sponsors - pyramid bosses - appeared beside the names of
Democratic Party candidates. "The people's money was spent on buying
votes," says the opposition Social Democratic Party's leader, Skender
Gjinushi.

The schemes started wobbling in autumn 1996, when some began cutting their
interest rates and placing restrictions on their investors, for example
allowing withdrawal of interest but not capital. The continued operation of
the schemes was dependent largely on confidence; once this was shaken, new
investment 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 in advance by the
government and the President about the legitimacy of the schemes, people's
anger towards the government and the DP started to rise. With the fall of
one of the important schemes involving the south of Albania, the revolt
burst out and sparked the political and social crisis.

On January 7, the Democratic Alliance Party (DAP) accused Berisha's
Democratic Party of misusing investment funds to finance its 1996 election
campaigns, and declared that 'the collapse of the schemes has started.'
This may have proved, in part at least, a self-fulfilling prophecy. Two
days later, the major Malvasia scheme in Kucova declared itself bankrupt.
On the afternoon of January 15, 1997 battle erupted in Albania. The first
stones were thrown by angry people who had put their money into failed
investment scheme. Traget was first the private residence of a woman called
Suda, a promoter of one of the schemes.

The government's initial response, on January 14, was to issue 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 by 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 also 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 proclaimed their
independence. Today, Vlora is known as the capital of the pyramid schemes,
because most of them originated there. It was Albania's 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 is that the assets the government
has seized from schemes is thought to total an estimated $300,000, while
losses are around $1 billion, about four times the amount of the country's
foreign currency reserves at the time. The Albanian currency, the lek,
meanwhile 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 30-50 percent of the amount they invested, and most of that could be
in government bonds rather than in cash. Even then the cash would be in the
fast-fading lek rather than the US dollars that many of the schemes had
demanded from investors.

As the situation worsened the DP, instead of calling for new elections,
declared the state of emergency. With this, they completely isolated
Albania from the rest of the world. They decided to ban the frequencies of
the radio-stations, close all newspapers and take over all the previously
mentioned local TV stations. Fortunately, the closure of the satellite
frequencies lasted only 48 hours. People started to look for radios 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 fundation --
was burned down by the secret police. During this time, e-mail 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 AOL account, which was very expensive
as they had to make an international call to Switzerland. It is believed
that outgoing e-mail from the UNDP server was monitored.


In the meantime, the West appeared more concerned with the danger of a mass
exodus and that Albania could become the drugs capital of Europe, than with
the absence of political freedom in the country. The Albanian government
reacted more strongly to accusations of its ministers' involvement in
arms-smuggling and drug-trafficking, than to criticism from human rights
organisations about the beating or intimidation of opposition leaders and
journalists. The Organization on Security and Cooperation in Europe (OSCE)
had sent envoy Franz Vranitzky, former prime minister of Austria, to
mediate an agreement between President Sali Berisha and the opposition.
Both sides agreed to a government of national reconciliation under
Socialist Prime Minister Bashkim Fino and to early elections. The Albanian
authorities asked the international community to send in a multinational
stabilization force, but the West European Union and NATO declined to take
full responsibility. Instead, it was left to Italy, fearing mass
immigration, to assemble a force for Operation Alba after receiving a UN
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, even though the Albanian government, assisted by
the OSCE, had hardly two months to prepare for them. 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.

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 & Touche found that the VEFA investment company had only $7
million in assets after having received more than $300 million in  from
some 90,000 investors. If and how VEFA owner Vehbi Alimucaj has laundered
$40 million into his private bank accounts in Greece is still being
investigated.

During all of that, most Albanians 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.

Genc Greva
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