MOSCOW -- As Russia's new entrepreneurs learn the fine points of international trade in an emerging free-market economy, they have no need to start from scratch. An unscrupulous model showing how to make fast money and hide it in overseas bank accounts is close at hand: in the foreign trade operations of the former Soviet Communist Party.

According to top secret documents recently declassified by the Russian government, the Kremlin used a network of companies known as "friendly firms" to channel hundreds of millions of dollars to left-wing organizations in Western Europe, Asia and Latin America during the 1970s and 1980s. A "friendly firm" would purchase raw materials in the Soviet Union at deeply discounted prices and then sell them at much higher prices in the West, routing huge profits to the bank accounts of sympathetic political parties.

The Soviet Union has disintegrated and its command economy has collapsed, but the financial schemes pioneered by the Soviet Communist Party remain alive and well. The difference is that rather than being a tightly controlled Communist Party operation with a political aim, the schemes have degenerated into a chaotic financial free-for-all where fast profit is an end in itself.

Russia's lucrative foreign trade market in raw materials has become today the scene of a bitter struggle among competing commercial clans, each with its own political patrons and preferred foreign partners. This unrestrained, often illegal international trade is at the heart of one of post-communist Russia's most serious economic problems: each year, billions of dollars in export earnings that are needed desperately to revitalize the former Soviet economy are instead leaving the country for overseas bank accounts, according to bankers, traders and Russian officials.

The way this illicit trade is actually carried out -- the manipulation of rigged markets to secure huge profits that can be moved abroad -- has changed remarkably little from the days of communism. "What we have in Russia is a pseudo-market, not a real market," said Alexander Rudenko, a leading St. Petersburg businessman. "We have created a class of communist-capitalists. The state still has a monopoly over the export of basic goods. The economic conditions have been created in which people who are well-connected can steal like crazy. You get three or four officials to sign a piece of paper authorizing you to do something, and you have it made."

The resulting outflow of money from Russia is hindering the development of a stable, regulated market economy, both Russian and Western economists say, because it fosters an economy of smugglers rather than producers. The migration of money also limits the West's ability to help Russia get back on its feet because Western bankers are reluctant to pour large amounts of aid into the former Soviet Union if such assistance is merely going to pour back into unregulated Western bank accounts.

The financial activities of post-communist Russia's commercial clans have raised basic questions about President Boris Yeltsin's economic strategy. Many Western analysts contend that the root of the problem lies in the Russian government's failure to move fast enough in opening the economy up to the kind of competition -- and free prices -- that would take much of the profit out of smuggling. But conservative Russian politicians want order to be restored first, even if it requires the more traditional means of an "iron fist."

As this debate drags on, the one-time communists who control the commanding heights of the former Soviet Union's economy are scrambling to profit from their positions. The past two years have witnessed the mass conversion of doctrinaire Marxists into born-again capitalists. Communist apparatchiks have found new careers as managers of commercial banks and directors of trading companies. Former agents of the once feared KGB security police, trained to crack down ruthlessly against any manifestation of free enterprise, now occupy key positions on the commodity exchanges that have sprouted all around Russia.

The twin capitals of Moscow and St. Petersburg have become the playgrounds for wealthy Russians. Representatives of the New Class can be seen waving their gold cards in Western-style grocery stores, dining at hard currency restaurants, and driving around town in Mercedes and BMWs. Companies that rent out cellular phones report a roaring business as rich Russians rush to acquire the latest status symbol.

"I know about 100 people who have 10 million dollars or more. It's their own money," said Mikhail Khodorovsky, chairman of Menatep, Moscow's most successful commercial bank. "There are probably around 1,000 dollar millionaires in Moscow and another 1,000 in the rest of the country."

The fall of communism offered extraordinary opportunities for personal enrichment for people with the right connections and a modicum of business sense. By securing government licenses for the export of cheap raw materials, whose artificially low prices are mandated by the Moscow government, the first post-communist entrepreneurs were able to bank large profits for minimal effort. The huge markups on exported raw materials were frequently shared with opportunistic Western business partners attracted to the rotting corpse of the command economy.

The key to understanding how biznes is conducted in the new Russia frequently lies in knowing who was pal with whom in the now defunct party and KGB. The Soviet-era "old comrade network" lives on in an intricate web of personal relationships that stretches from the resource-rich fiefdoms of Siberia and the Urals to the Moscow ministries that issue export licenses to the Westerners who buy raw materials and ship them abroad.

The Born-Again Capitalist

Typical of the new breed of international "communist-capitalist" is Leonid Veselovsky, named publicly by Russian prosecutors as a prominent figure in their ongoing investigation of Communist Party finances. Veselovsky's metamorphosis from KGB spook to capitalist entrepreneur reflects the deathbed conversion of the old Soviet nomenklatura: the realization that the emerging system of chaotic capitalism offered greater opportunities for personal advancement than the dying communist dictatorship.

A squat, powerfully built man with fists as big as grapefruits, Veselovsky has been depicted by Russian newspapers as the "Godfather" of a network of businesses and fledgling joint ventures set up by the Communist Party in the final months of its existence. But Veselovsky presents himself as a formerly insignificant, mid-level KGB bureaucrat whose attempts to earn an honest living are being thwarted by an excess of publicity.

"The only thing I want to do now is to sign some contracts and make some money," said Veselovsky in an interview on a recent visit to Moscow, during a break from jetting around Western Europe as the Switzerland-based representative for several well-connected Russian companies.

Veselovsky's early career included a tour as a KGB field officer in Portugal in the late 1970s and early '80s. He declined to discuss the details of his work there. But the post would have positioned Veselovsky well to learn about some of the arts of doing business, Soviet-style. One of the main responsibilities of the First Chief Directorate -- the foreign intelligence arm of the KGB, for which Veselovsky worked -- was the clandestine funding of Communist parties in the West through the network of "friendly firms."

Declassified Communist Party documents show that the most common financial practice in this system was to generate funds by exporting artificially cheap Soviet resources and products. For example, left-wing publishing houses in Western Europe received tens of thousands of tons of free or subsidized newsprint every year. Some of the newsprint would be resold at market prices and the money paid into party coffers.

Exactly what the Kremlin achieved with its hundreds of millions of dollars in hidden subsidies to left-wing organizations is open to debate. What is clear, however, is that these officially approved foreign trade deals became the standard method for sending money out of the country and realizing a quick hard currency profit. The party and the KGB pioneered the money-making trail subsequently followed by many of the most celebrated entrepreneurs of the new Russia.

After Mikhail Gorbachev took over as general secretary in 1985, the Soviet Communist Party began thinking about how to develop its commercial activity, according to former communist officials. The basic idea, they said, was to exchange power for property. The party would surrender its monopoly of political decision-making in return for long-term economic privileges.

By 1990, a serious financial crisis threatened the Communist Party, putting pressure on the leadership to act quickly, according to former officials. A new democratic government led by Boris Yeltsin had come to power in the Russian Republic, the largest part of the deceased Soviet Union, and was proposing to levy taxes on the party and its vast property holdings. In a secret memorandum in August 1990, Gorbachev's deputy general secretary, Vladimir Ivashko, proposed greatly expanding the party's network of Russian and international joint ventures to hide the party's assets.

At about this time, KGB colonel Leonid Veselovsky was looking for a job. There was an opening at the Central Committee, the political nerve center of the former Soviet Union. Veselovsky says he wrote a memo to his prospective bosses describing a mechanism for shifting Communist Party funds to the West by starting joint stock companies in countries "with a mild taxation system," such as Switzerland. The head of the administration department of the Central Committee, Nikolai Kruchina, was apparently sufficiently impressed to hire the KGB colonel to put his ideas into effect.

Veselovsky now says most of his ideas for laundering party assets never got beyond the planning stage. Russian prosecutors are not sure whether that account is accurate. They say they have succeeded in tracing some 7 billion rubles (about $1 billion at the officially inflated rate of exchange then in effect) of Communist Party funds that were moved into Russian companies and joint ventures. After the party was outlawed by Yeltsin in August 1991, these investments were effectively transformed into interest-free loans to Communist-funded businesses in Russia. According to Russian banking sources, none of these loans have yet been repaid.

Communist Party records inspected by The Washington Post show that recipients of the party's largesse included several well-known Russian banks and holding companies. One of the major beneficiaries was a loan brokerage company named Galaktik, which received 250 million rubles. Veselovsky acknowledges that he had a hand in setting up Galaktik, which was run by a former KGB colleague, but he says it was one of the very few such ventures that got off the ground while he was at the Central Committee.

Russian prosecutors have been trying for a year to accumulate sufficient evidence of the illegal laundering of Communist Party funds to put together a convincing court case. The Russian government hired an international detective agency, Kroll Associates, to track down the party's "missing millions." But despite a welter of accusations and counter-accusations about high-level embezzlement, the investigation appears to have reached a dead end.

Competing theories have been offered to explain the failure of the prosecutors to make more impressive headway in the search for Communist Party money in Russia and abroad. Some people close to the case contend the investigation has been effectively blocked for fear of embarrassing leading Russian politicians. Others argue that there never was much of a conspiracy involving party money in the first place. During the twilight days of the Communist Party, this argument goes, most apparatchiks were primarily concerned about themselves, not their party.

That, certainly, is how Veselovsky describes his own career. He says the turning point came when he met a flamboyant Canadian entrepreneur named Boris Birshtein. A Soviet emigre who established himself in Canada in the mid-1980s, Birshtein has demonstrated through his business activities a firm grasp of the Russian system of personal connections. With his fleet of private jets, his sable-lined coat and diamond-studded brooch, he personifies the average Russian's idea of a successful capitalist.

As Veselovsky tells the story, he first met Birshtein in early 1991 while negotiating with the Canadian on behalf of the Central Committee. Birshtein wanted to rent a luxurious, party-owned mansion on Lenin Hills previously reserved for visiting foreign dignitaries, such as Fidel Castro and Henry Kissinger, and controlled by the Central Committee's administrative department. After the rental negotiations concluded successfully, Birshtein offered Veselovsky a contract as a "consultant."

Prosecutors say they have documents showing that while he was still at the Central Committee, the former KGB colonel began to lobby his superiors to do business with Birshtein's Zurich-based company, Seabeco AG. Veselovsky disputes the authenticity of these documents and denies doing anything improper. He says his one-year contract with Seabeco came into effect at the beginning of August 1991, only when he formally resigned from the Central Committee.

Veselovsky says Birshtein arranged for him to live at a lakeside villa in Zurich and gave him the use of a silver Mercedes owned by Seabeco. After the Russian press publicly revealed his KGB past, Seabeco refused to renew his contract. Hounded by journalists investigating the disappearance of party money, Veselovsky moved his family to a quiet village in central Switzerland, where he is trying to establish himself as an independent businessman. He says that life is not easy, even if his circumstances appear luxurious.

"Business is very difficult," he said in the interview last week. "I feel like somebody from the Klondike times, trying to recover gold by sifting vast amounts of land. Occasionally, you find a small nugget of gold, and you feel very lucky."

High-Level Connections

If Veselovsky is an example of a Communist official who took advantage of his position to launch himself into business, Seabeco is a case study in a Western company that has used high-level connections to win lucrative contracts. With its profit-oriented emphasis on exports of raw materials, and its network of relationships with former communists, the company is in some ways the modern-day equivalent of the "friendly firm." Seabeco's spokesmen deny that the company engaged in any improper activity.

Contemporary Russian press reports show that Boris Birshtein began a vigorous courtship of Soviet officialdom in the late 1980s. Seabeco launched splash projects, some of which never got off the ground. Among these was a 30-story luxury hotel, complete with theater complex and gymnasium. In the process, however, Birshtein made useful contacts. Seabeco's list of "consultants" included Georgi Arbatov, the Kremlin's leading expert on North America, according to a December 1988 report in Newsweek.

"You shouldn't think that people like Birshtein and Veselovsky are financial geniuses," said Sergei Sokolov, a journalist for Komsomolakya who has studied Seabeco. "It's not necessary to be a genius to make money in this country. What mattered in the old days -- and what matters now -- is personal connections."

In early 1991 -- about the time he met Veselovsky -- Birshtein's own fortunes began improving sharply. A confidential report commissioned by the Russian government shows that the Seabeco Group spawned a half-dozen extremely profitable joint ventures with Russian companies in 1991 and 1992. At the same time, the company wound down its Canadian operations, cutting its Toronto headquarters staff from 115 to fewer than 10. Seabeco vice president Steve Shnaider said in an interview that this was to move employees "closer to Russia."

According to the report prepared for Russian authorities, Seabeco was struggling with creditors and disgruntled former employees in Canada in 1989. Today, by contrast, sources close to the company claim a healthy annual turnover of around $500 million. According to the company, the bulk of this income comes from trading activities in Russia and other former Soviet republics, such as Moldova and Kirgizstan.

Russian offshoots of Seabeco include a joint venture with the former head of the Moscow police force, a joint venture with labor unions, a trading company and a private bank. The Seabeco villa in a secluded quarter of the Lenin Hills is guarded by uniformed policemen and plainclothes agents flashing red KGB or Interior Ministry identity cards. On a recent visit, a half-dozen dark blue Volvos, a Mercedes and a Chaika, the luxury vehicle once reserved for senior party officials, lined the villa's driveway. Birshtein travels around the city in a motorcade escorted by a police car with flashing lights.

"We have prestigious offices because we are a prestigious company," said vice president Shnaider, interviewed in the villa's ornate drawing room. Shnaider, like Birshtein a Russian emigre to Canada, declined to give details about Seabeco's activities. Birshtein sent word that he was "too busy" to be interviewed.

The respect accorded to Birshtein in Russia pales beside the treatment he gets when he travels to Kirgizstan, the isolated, economically backward but mineral-rich Central Asian republic that has emerged as a new nation after the breakup of the Soviet Union.

Seabeco has been granted extraordinary privileges in Kirgizstan. Kirgizstan's president, Askar Akayev, appointed Birshtein president of the country's committee for reconstruction and development in October 1991. Shortly afterward, the Kirgiz government freed the local branch of Seabeco from taxes and empowered Birshtein to act as its trade representative abroad. Birshtein has flown Kirgiz government ministers to Western Europe on his private jet and helped arrange a February 1992 visit to Canada by Akayev.

Exactly what Seabeco gets out of its Kirgiz connection is not clear. Shnaider refused to discuss the company's activities there. The republic has little of value to export other than gold.

Akayev has told the Kirgiz parliament that 2 tons of gold -- which would have a market value in the West of around $23 million -- has been sent to Switzerland for safekeeping. He did not say whether Seabeco was involved in the movement of that gold.

Rudolf Studhalter, a Swiss chartered accountant who has worked with Veselovsky, Seabeco and other Russians aspiring to international trade, noted that "a lot of Russians are coming {to Switzerland}, saying we have millions -- and at the end, it's nothing." But a man like Veselovsky, he added, "seems to be for real -- he comes with money with a government stamp."

Staff writer R. Jeffrey Smith contributed to this report from Washington. NEXT: Smuggling Russia's resources

An investigation suggests that there is no single Communist "Godfather" -- instead, there are hundreds of former officials who have succeeded in transforming themselves into capitalists. The "old comrade network" has mutated into an intricate maze of business relationships, as the case of a Zurich-based firm, Seabeco AG, illustrates.

The former KGB colonel and party functionary developed business links with Seabeco, whose chairman hired him as a "consultant," set him up in a lakeside villa in Zurich and gave him use of a Mercedes.

A Soviet emigre to Canada, Seabeco's flamboyant chairman knows how to operate Russia's system of personal connections and personifies the country's idea of the successful capitalist.