“Economic Espionage and Economic Security in an Age of Change”

Paper to be presented at the “Seventh International CISS

Millennium Conference”, Buçaco, Portugal, June 14-16, 2007

By Ioannis L. Konstantopoulos

PhD Candidate, Department of International and European Studies,

Panteion University of Social and Political Sciences, Athens, Greece

1. Introduction

In the mid-1980s Sir Alexander Cadogan, permanent secretary at the British

Foreign Office (1938-1945) described intelligence as “the missing dimension of

international affairs”.1 Bradford H. Westerfield, Political Science Professor at Yale

University, had the opportunity to gain access to secret, classified material of the U.S.

Intelligence Community, on behalf of Yale publications. From first hand experience,

he declares that his involvement with intelligence improved radically his

understanding of international relations: “In my writing and teaching I have always,

more than most scholars, recognized the importance of the covert dimension and have

incorporated what I could find in the public domain”.2 If intelligence is the missing

dimension of international relations, then economic espionage is the missing

dimension of intelligence. Professor Martin Alexander of the University of Wales,

Aberystwyth, puts it eloquently: “Economic and industrial intelligence and spying

I would like to thank my RIEAS (Research Institute for European and American Studies) colleagues Dr John Nomikos and Dr. Andrew Liaropoulos for their insightful comments. 1 Andrew Christopher, Dilks David (eds), The Missing Dimension: Governments and Intelligence Communities in the Twentieth Century (Urbana, IL: University of Illinois Press, 1984). 2 Lara Shohet, “Intelligence, Academia and Industry”, in Edward Cheng, Diane C. Snyder (eds.), The Final Report of the Snyder Commission, Woodrow Wilson School Policy Conference 401a: Intelligence Reform in the Post-Cold War Era, The Woodrow Wilson School of Public and International Affairs, Princeton University, January 1997. Bradford H. Westerfield is Damon Wells Professor Emeritus of International Studies and Political Science at Yale University.

upon friends really does remain another “missing dimension to the missing

dimension””.3

After the end of the Cold War and the collapse of the bipolar international

system, nation-states, the main actors in the current constellation of international

system, are trying to adapt their defense and foreign policy in general and their

security policy in particular, to the challenges of the new post-Cold War era. Their

intelligence agencies worldwide are called to adopt themselves to the new

geographical and security landscape which so suddenly emerged and to confront both

the old and new challenges. One of these challenges is their involvement in economic

espionage.

The goals of this paper are firstly to define economic espionage; secondly, to

present the historical as well as the current background of this state action; and thirdly

to analyze the incentives and disincentives of states when they are called to decide

their engagement in it. The main question which we try to answer is:

What are the reasons for which states engage in economic espionage?

We will try to answer this question by examining and analyzing the case study

of the U.S.A. (United States of America) for three reasons: firstly, this country not

only maintained its importance in international affairs after the end of the Cold War;

but is the only hyper-power in the post-Cold War era; secondly and most importantly,

the U.S.A. is the main target of economic espionage in general, both of their closest

allies and their opponents/competitors, as it has developed by far the largest economy

in the world and it has not lost its place as a pioneer in technological developments,

but it has increased the gap between her and other competitors; thirdly, in the U.S.A. a

great debate is taking place, in the political, academic and intelligence domains,

concerning its engagement in economic espionage.

The main argument of this paper is that economic espionage was, is and, will be a

main tool of governments in order to make economic decisions and participate more

efficiently in the international economic and technological competition between

nation-states, despite some disincentives which this activity comprises.

3 Alexander S. Martin, Introduction: Knowing Your Friend’s, Assessing Your Allies – Perspectives on Intra-Alliance Intelligence, in Alexander S. Martin (ed.), Knowing Your Friends: Intelligence Inside Alliances and Coalitions from 1914 to the Cold War (London, Portland: Frank Cass, 1998), p. 7. By the term “industrial intelligence and spying” Professor Alexander possibly refers to microeconomic espionage.

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2. Definitions

In the specialized literature of economic espionage we observe a definitional

confusion between economic espionage and industrial espionage, because this subject

is under-researched and under-theorized and because different academic fields which

deal with it (for example sociology, criminology, law) use different terminology, as

each focuses on a separate aspect of the phenomenon. A characteristic of this

confusion can be found in the “Espionage Encyclopedia” of Richard Bennett. Bennett

does not include an entry for economic espionage, but he deals with this term in the

entry economic intelligence. Moreover, he refers to economic intelligence,

commercial intelligence, industrial intelligence, and corporate espionage, without

defining them and distinguishing one from another, while he does not even mention

the distinction between macroeconomic and microeconomic espionage.4

According to Samuel D. Porteous, security analyst of the Canadian Security

Intelligence Service, the term “economic espionage” refers to “clandestine or illicit

attempts by foreign interests to assist their economic interests by acquiring economic

intelligence which could be used to sabotage or otherwise interfere with the economic

security of another country”.5 By the term economic intelligence, Porteous means

“policy or commercially-relevant economic information, including technological data,

financial, commercial, and government information, the acquisition of which by

foreign interests could, either directly or indirectly, assist the relative productivity or

competitive position of the economy of the collecting organization’s country”.6 Philip

Zelikow, Professor at the University of Virginia7, gives his definition of economic

intelligence as “information about how those outside of the United States develop,

produce, or manage their material goods, services and resources. 8

4 Bennett M. Richard, Espionage: An Encyclopedia of Spies and Secrets (Virgin Books Ltd, 2002), p. 83.5 Porteous Samuel, “Economic/Commercial Interests and the World’s Intelligence Services: A Canadian Perspective”, International Journal of Intelligence and Counterintelligence, Vol. 8, No. 3, 1995, p. 297. 6 Ibid.7 Philip Zelikow was former Associate Professor of Public Policy at John J. Kennedy School of Government, Harvard University, where he was co-director of Harvard’s Intelligence and Policy Program. 8 Zelikow Philip, “American Economic Intelligence: Past Practice and Future Principles”, in Jeffreys-Jones Rhodri, Andrew Christopher (eds.), Eternal Vigilance? 50 Years of the CIA (Frank Cass & Co. Ltd, 1997, p. 164).

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Randall M. Fort, currently Assistant Secretary of State for Intelligence and

Research, defines economic espionage as the acquisition by secret means of

information concerning the economy, trade and/or intellectual property by a secret

agency/service which uses secret sources and methods.9 For Hedieh Nasheri,

Associate Professor of Justice Studies at Kent State University, economic espionage is

defined “as one nation collecting economic data about another nation”.10 With the

term “economic data” he means “such information as national gross domestic product

and inflation rate figures, which may be obtained from published sources, or more

privileged information such as budgetary allocations for defense and national research

and development expenditures, which are usually acquired through illicit means”.11

What differentiates geopolitical espionage from economic espionage is that

the goal of the former is the early warning for the capabilities and intentions of an

opponent state to conduct warfare, while economic espionage deals with the

collection of economic and technological intelligence. However, there are two factors

that make the distinction between traditional, geopolitical espionage and economic

espionage difficult. First, some materials and high-tech equipment are necessary for a

state’s defense industry as well as for its civilian industry. Secondly, it is common

ground that the political and military strategy of a state –and especially of great

powers – always has an economic parameter.12

Another important difference is that between economic intelligence-espionage

and business intelligence-espionage – the latter refers to the collection and analysis of

information from a company, usually multinational, against another company. If those

companies collect information by using clandestine means, the accepted term is

industrial espionage. While industrial espionage is conducted by an entity of private

9 Fort Randall M., “Economic Espionage”, στο Godson R., May E., Schmitt G., U.S. Intelligence at

the Crossroads (1995), p. 181. 10 Nasheri Hedieh, Economic Espionage and Industrial Spying, (Cambridge University Press, 2005), p. 16. This book is the only academic book published as far as economic espionage is concerned and although it examines economic espionage from a criminological point of view and not from an international relations or strategic studies/intelligence approach, it is extremely valuable because it covers the whole phenomenon.11 Ibid, p. 17. 12 See Kennedy Paul, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (London: Hyman, 1988), Knorr Klaus, Power & Wealth: The Political Economy of International Power (Basic Books, Inc., Publishers, 1973), Earle Edward Mead, “Adam Smith, Alexander Hamilton, Friedrich List: The Economic Foundations of Military Power” in Paret Peter (ed.) Makers of Modern Strategy: From Machiavelli to the Nuclear Age (Princeton University Press, 1994).

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sector, economic espionage is conducted by the government of a state by using its

secret agencies against either governmental entities of another state, or against private

companies, usually multinationals, in order to support its indigenous companies.

Economic espionage has three distinct dimensions:

The first, macroeconomic espionage, refers to the use of secret agencies on behalf of a

state’s government in order to obtain intelligence concerning the world economic

developments and activities with the ulterior purpose the advancement of its strategic

interests.13 In its basic form, macroeconomic espionage assists the political leadership

of a state to conduct its internal and external economic policy with the optimum

results. In 1949, Sherman Kent, the father of U.S. intelligence analytical domain, who

had full knowledge of the value of macroeconomic espionage, asserted that

intelligence services should track the current world economic developments as well as

foreign economic doctrines and theories. Moreover, they should watch the supplying

part of the armed forces, the development of new crops and methods of agriculture,

changes in farm machinery, land use, fertilizers, and reclamation projects. Also they

should pay close attention to the development of new utilities and the extensions of

those already established, as well as to changes in the techniques and implements of

distribution, new transport routes and changes in the inventory of the units of

transportation. But, most importantly, in the atomic age, they must follow new

discoveries as far as natural resources are concerned, especially those used in order to

build nuclear weapons.14

According to the second dimension, microeconomic espionage, the

government of a state via its secret agencies is involved in the collection of

intelligence in order to assist a company (usually a multinational), creating by that

way a collaboration between government and company whose goal is to prevail over

one’s opponents in the international economic arena.15

The third dimension of economic espionage is economic counterintelligence.

Randall M. Fort defines this term as “the identification and neutralization of foreign

intelligence services spying on the U.S. citizens or companies and stealing

13 Johnson K. Loch, Secret Agencies: U.S. Intelligence in a Hostile World (Yale University Press, 1996), p. 148.14 Kent Sherman, Strategic Intelligence for American World Policy (Princeton, NJ: Princeton University Press, 1949), p. 34-5. 15 Johnson K. Loch, (1996), op. cit., p. 147-8.

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information and/or technology for use within their own countries”.16 Samuel Porteous

characterizes counterintelligence as not only a very important function of the secret

services, but also the less controversial. According to his definition of the term, “a

nation’s counter-intelligence service simply seeks to advise government about and

report on the activities of foreign intelligence services or their surrogates engaging in

clandestine activities directed against their state’s economic and commercial

interests.”17

3. Historical Background

Economic espionage is not a new phenomenon and its roots are dated from

biblical times. If we delve into history we can find a lot of examples of

macroeconomic espionage and we can verify the great importance of economic and

technological intelligence through the ages. As the Children of Israel ramble over

Sinai, Moses instructed his spies to “spy out the land”. This early attempt of

espionage is really instructive and it incorporates a case of macroeconomic espionage.

The spies not only gave a concrete description of the city and its defense (“the cities

are walled and very great”) and the power of its inhabitants (“be strong”), but also

offered useful economic intelligence by verifying that Canaan was a land of “milk and

honey” and by giving details about the quality of the land.18

The collection of macroeconomic intelligence was not unknown in Ancient

Greece. According to Professor Andrew Gerolymatos, in 416 B.C. the Athenians sent

a delegation in Eugesta in order to find out the economic capacities of the town so as

to finance a joint offensive military operation. According to Thucydides, the citizens

of Eugesta deceived the delegation’s members by forging their real resources and

Athenians misperceived their economic situation. The deceit was successful as the

members of the delegation with their return to Athens supported vigorously the

Athenian invasion against Sicily.19

16 Fort M. Randall, (1995), op. cit., p. 182. 17 Porteous D. Samuel, “Economic and Commercial Interests and Intelligence Services”, in Potter Evan H. (ed.), Economic Intelligence & National Security (Carleton University Press, 1998), p. 105-6.18 Laqueur Walter, The Uses and Limits of Intelligence (Transaction Publishers, 1993), p. 38, Neilson Keith & McKercher B.J.C. (eds.), Go Spy the Land: Military Intelligence in History, (Praeger Publishers, 1992), Introduction, p. ix. 19 Gerolymatos Andrew, Espionage in Ancient Greece, (Cactus Editions, Athens, 2001, in Greek), p. 30.

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At 6th century A.C. Justinian in order to avoid the taxes in gold imposed by

Persia in the cases where Byzantium imported silk from China, and not to strengthen

the economy of its opponent, reached an agreement with Ethiopians according to

which the latter were going to buy the silk and transport it to Byzantium by a route

bypassing Persia. Unfortunately his plan failed because the Persians, being more

closed to the transport centers of India, succeeded in buying first the silk, so Justinian

had no alternative than to order a group of monks which had a perfect knowledge of

the Far East, to steal silkworms from China. According to Professor H. Papasotiriou,

“this was one of the greatest successes of “economic espionage” in history, by which

Byzantium became independent of silk imports”.20

The U.S. has a long history in collecting macroeconomic intelligence. Its

operations date back to the end of 1776 when the first U.S. intelligence agency called

“Committee of Secret Correspondence of the Continental Congress” sent William

Carmichael to Europe, disguised as a merchant, in order to collect intelligence

concerning economic issues for which the new U.S. government gave great interest.

In November 1776, Carmichael sent a reassuring letter from Amsterdam, reporting

that: “You have been threatened that the Ukraine would supply Europe with tobacco.

It must be long before that time can arrive. I have seen some of its tobacco here, and

the best of it is worse than the worst of our ground leaf”.21

During World War II economic intelligence played a great role for the U.S.

Agents of the OSS (Office of Strategic Services) and other analysts had the task to

“find out not only about enemy military dispositions but also about tungsten and

diamond smuggling, about the production of ball bearings, Swedish iron ore supplies

to Germany, and other such topics.” It was common ground that such topics consisted

strategic issues of great importance for the conduct of war.22 Also, during World War

II, the newly established Board of Economic Warfare had the task to study the

Japanese economy and analyze the role of critical commodities.23 Taking into

consideration this tradition, it is an oxymoron the fact that the U.S. ignored the

scientific-technological intelligence because it misestimated that the U.S. power was

20 Papasotiriou Haralampos, Byzantine Grand Strategy, 6 th -11 th century (Poiotita Publications, Athens 2000, In Greek), p. 103. See also “Economic and Industrial Espionage, http://plaza.powersurf.com/keddy/essays/page3espionage.htm21 Zelikow Philip, op. cit., p. 164.22 Ibid, p 165, Laqueur Walter, op. cit., p. 39.23 Zelikow Philip, op. cit., p. 165.

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so great and its technological knowledge so superior that their opponent’s that they

had nothing to learn from them. It is a classic case of underestimating the enemy’s

capabilities.24

4. Economic Espionage and Economic Security in an Age of Change

The concept of security has been characterized by Professor John Baylis as a

“contested concept”.25 Walter Lippmann believes that “a nation is secure to the extent

to which it is not in danger of having to sacrifice core values if it wishes to avoid war,

and is able, if challenged, to maintain them by victory in such a war”. Arnold Wolfers

states that “security, in any objective sense, measures the absence of threats to

acquired values and in a subjective sense, the absence of fear that such values will be

attacked”. Booth and Wheeler give a different definition: “Stable security can only be

achieved by people and groups if they do not deprive others of it; this can be achieved

if security is concerned as a process of emancipation”.26

Although there is an agreement that security means “freedom from threats to

core values” there is a huge disagreement as far as whether the main focus should be

on “individual”, “national”, or “international” security.27 During the Cold War period

the concept of “national security” received disproportionate attention in international

relations bibliography comparing with “individual” and “international security”.

Likewise, a large amount of attention was paid to the dimension of military security

than the other dimensions of security (political, economic, societal, and

environmental) mainly because “military means can dominate outcomes in all the

other sectors”.28

According to Barry Buzan the concept of international security incorporates

five dimensions: 1) Military security has to do with “the two-level interplay of the

armed offensive and defensive capabilities of states, and states’ perceptions of each

other’s intentions”. 2) Economic security is “the access to the resources, finance and

markets necessary to sustain acceptable levels of welfare and state power”. 3)

24 Laqueur Walter, op. cit., p. 39.25 Baylis John, “International Security in the Post-Cold War Era”, in Baylis John, Smith Steve (eds.), The Globalization of World Politics: An Introduction to International Relations, (Oxford University Press, 1997), p. 194. 26 Ibid, p. 195. 27 Ibid.28 Buzan Barry, “Is International Security Possible?” in Booth Ken (ed.), New Thinking About Strategy and International Security (HarperCollins, 1991), p. 35.

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Political security is “the organizational stability of states, systems of government, and

the ideologies that give them legitimacy. 4) Societal security refers to the

“sustainability, within acceptable conditions for evolution, of traditional patterns of

language, culture, and both religious and national identity and custom”. 5)

Environmental security is concerned with “the maintenance of the planetary biosphere

as the essential support system on which all other human enterprises depend”.29

In the Post-Cold War World, economic security has come to the front and

intelligence agencies face the dilemma to get involved (or to continue their

involvement) with economic espionage. In order to plan and implement its economic

policy, a state needs intelligence about the international economic and technological

environment on the one hand and its opponents’ strategies, policies, and capabilities

on the other hand. By providing this vital information to policymakers intelligence

agencies are contributing to the achievement of economic security. Economic

espionage is a tool of the intelligence community which helps policymakers to reach

the right decisions with the best result while it both improves and protects a state’s

economic and technological basis and competitiveness. Sun Tzu’s famous motto

“Know the enemy, know yourself; your victory will never be endangered”,30 is not

only valid for military affairs, but also for economics.

However, there can be no absolute distinction between those two realms.

Traditionally there is a strong relationship between economics and military power.

The relationship between economics and power has two forms: Firstly, economics,

hand in hand with technology, are the foundations of military power.31 Professor

Michael Sheehan, maintains that “economics and national security have always been

sees as being linked to some extent.”32 Professor Mearsheimer referring to “wealth

and power” distinguishes between two kinds of power: latent power and military 29 Ibid, p. 34-5. 30 Sun Tzu, The Art of War, (Translated by Samuel B. Griffith, Oxford University Press, 1971), p. 129 See also: Handel Michael, Masters of War: Classical Strategic Thought, (Frank Cass, third, revised and expanded edition, 2002), p. 215. 31 For the close relationship between economics and military power see: Knorr Klauss, Trager N. Frank (eds.), Economic Issues and National Security, (University Press of Kansas, 1977), Knorr Klauss, Power & Wealth: The Political Economy of International Power, (Basic Books, Inc., Publishers, 1973), Knorr Klauss, The Power of Nations: The Political Economy of International Relations, (Basic Books, Inc., Publishers, 1975), Kennedy Paul, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (London: Hyman, 1988), Knorr Klaus, Power & Wealth: The Political Economy of International Power (Basic Books, Inc., Publishers, 1973), Earle Edward Mead, “Adam Smith, Alexander Hamilton, Friedrich List: The Economic Foundations of Military Power” in Paret Peter (ed.) Makers of Modern Strategy: From Machiavelli to the Nuclear Age (Princeton University Press, 1994). For the relationship between military power/war and technology see: Creveld Martin, Technology and War: From 2000 B.C. to the Present, (The Free Press, 1989).

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power. Latent power has to do with “the socio-economic ingredients that go into

building military power; it is largely based on a state’s wealth and the overall size of

its population”. Military power is based largely “on the size and strength of a state’s

army and its supporting air and naval forces”33. He argues that “these two forms of

power are closely related”.34

Secondly, economic capabilities can on their own right be used as a force.35

After the end of the Cold War many realists argued that in the absence of military

confrontation, economic competition takes its place and talk about a war fought with

economic tools.36 Professor Samuel Huntington argued in 1993 that “in a world in

which military conflict between major states is unlikely, economic power will be

increasingly important in determining the primacy or subordination of states”.37 The

well-known strategist Edward Luttwak makes reference to Geo-Economics, a kind of

“warfare by other means” and maintains that “… when it comes to the central arena of

world politics where Americans, Europeans, and Japanese collaborate and contend, it

is chiefly by economic means that adversarial attitudes can now be expressed”.38

Intelligence agencies should function in an age of Globalization and of

Information. According to Jan Aart Scholte, globalization “refers to processes

whereby social relations acquire relatively distanceless and borderless qualities, so

that human lives are increasingly played out in the world as a single place”.39 Anthony

Giddens defines globalization as “the intensification of worldwide social relations

which link distant localities in such a way that local happenings are shaped by events

occurring many miles away and vice versa”.40 David Held, Anthony McGrew, David

Goldblatt and Jonathan Perraton, give a more precise definition: globalization is “a

process (or set of processes) which embodies a transformation in the spatial

organization of social relations and transactions – assessed in terms of their extensity,

32 Sheehan Michael, International Security: An Analytical Survey, (Lynne Rienner Publishers, 2005), p. 65.33 Mearsheimer John, The Tragedy of Great Power Politics, (W.W. Norton & Company, 2001), p. 55-6. 34 Ibid, p. 55. 35 Sheehan Michael, op. cit., p. 72. 36 Ibid. 37 Quoted in Sheehan Michael, op. cit., p. 72.38 Luttwak Edward, Turbo Capitalism: Winners and Losers in the Global Economy, (Weidenfeld & Nicolson, 1999), p. 128. For the role of economics as a tool of foreign policy see Baldwin A. David, Economic Statecraft, (Princeton University Press, 1985). 39 Scholte Aart Jan, “The Globalization of World Politics”, in Baylis John, Smith Steve (eds.), The Globalization of World Politics: An Introduction to International Relations, (Oxford University Press, 1997). 40 Giddens Anthony, The Consequences of Modernity: Self and Society in the Late Modern Age, (Cambridge: Polity Press, and Stanford: Stanford University Press, 1990).

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intensity, velocity and impact – generating transcontinental or inter-regional flows

and networks of activity, interaction, and the exercise of power”.41 Globalization has

increased radically the flow of information across borders and has constructed many

new information channels.

Taking into consideration that intelligence agencies deal with a special kind of

information, it is certain that they will be affected by the Information Age. Although

this concept is ambiguous, it is of great importance. The driving factor in the

Information Age is the tremendous technological progress in the domains of

processing and communication of information. However, according to Abram N.

Shulsky, more important than technological change are “the behavioral and

institutional changes that result from the focus on information as the key to

organizational activity”.42 Bruce Berkowitz and Allan Goodman argue that the basic

technological characteristics behind the Information Age are: growing capabilities,

falling costs, and greater connectivity.43

In the Information Age the intelligence community has to compete with other

governmental and non-governmental organizations which are specialized in collecting

and analyzing information. After examining the main dimensions of economic

espionage committed by the Soviet Union/Russia, France, Japan and the U.S.A.

during the Cold War and beyond, we will analyze the incentives, as well as the

disincentives of the intelligence community in order to get involved in such an

activity.

5. Macroeconomic Espionage5.1 The Policy of the former Soviet Union – Russia

A great part of the literature concerning the former Soviet Union refers to

many cases of macroeconomic espionage. Since the 1920s the former Soviet Union

was trying to obtain high-tech industrial technology from the U.S. and Western

41 Held David, McGrew Anthony, Goldblatt David and Perraton Jonathan, “The Globalization Debate”, in Williams Phil, Goldstein M. Donald, Shafritz M. Jay(eds.), Classic Readings and Contemporary Debates in International Relations, (Thomson, Wadsworth, 2006), p. 563-4. 42 Shulsky N. Abram and Schmitt J. Gary, Silent Warfare: Understanding the World of Intelligence, (Brassey’s, Inc., 2002), p. 7. 43 Berkowitz D. Bruce, Goodman E. Allan, Intelligence in the Information Age, (Yale University Press, 2000), p. 13.

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Europe via espionage.44 The value of foreign technology was firstly recognized as a

target of Soviet intelligence agencies by Feliks Dzerzhinsky, head of the Cheka,

forerunner of the KGB (Chrezuvychainaya Komissiya po Borbe s Kontrrevolutisnei I

Sabottazhem – The Extraordinary Commission for the Struggle Against Counter-

Revolution and Sabotage).45 The two organizations engaged in the collection of U.S.

technology were the famous KGB (Komitet Gosudarstvennoy Bezopasnosti /

Committee for State Security) and GRU (Glavnoye Razvedyvatelnoye Upravleniye /

Chief Intelligence Directorate of the General Staff, Ministry of Defense). They both

implemented the orders of VPK (Military Industrial Commission), of GKNT (State

Committee for Science and Technology), of the Ministry of Foreign Economic

Relations and of the Politburo.46 The coordination of the whole effort of collecting

scientific and technological intelligence, as far as the defense sector is concerned, was

the duty of the Military Industrial Commission (VPK) which was later upgraded by

Gorbachev in State Commission for the Military-Industrial Complex. VPK was

headed by the deputy prime minister and it included 5 intelligence agencies: GRU,

Directorate T of FCD (First Chief Directorate - KGB), the GKNT, a secret unit of

Academy of Sciences, and the State Committee for External Economic Relations

(GKES).47 One of the four directions (Lines) of KGB was “Line X – Directorate T”

and dealt with the acquisition of American technology.48

In the early 1970s, the Soviets negotiated favorable agreements to buy grains

from the U.S. due to their interceptions of the communications between members of

the U.S. economic and financial departments. Harry Rositzke, former CIA (Central

Intelligence Agency) analyst, asserts that in 1972 the Soviets got the deal with the

44 Corson W.R., Crowley R.T., The New KGB: Engine of Soviet Power (Brighton: The Harvester Press Ltd., 1985), p. 339-40.45Andrew Christopher and Mitrokhin Vasili, The Mitrokhin Archive: The KGB in Europe and the West (Allen Lane The Penguin Press, 1999), p. 723. Bennett M. Richard, op., cit. p. 43.46 Metcalfe Shotwell Robyn, The New Wizard War: How the Soviets Steal U.S. High Technology – And How We Give It Away, (Tempus Books of Microsoft Press, 1988), p. 109.47 Andrew Christopher, Gordievsky Oleg, KGB: The Inside Story of its Foreign Operations Lenin to Gorbachev (London: Hodder and Stoughton, 1991), p. 622.48 Metcalfe Shotwell Robyn, op. cit., p. 109. The KGB operations were organized in four directions (Lines): the first (Line PR) deals with the collection of political intelligence, the second (Line KR) with counterintelligence, the third (Line N) with the support of agents working illegally overseas and the fourth (Line X –Directorate T) with the acquisition of American technology.

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U.S. by eavesdropping the telephone calls between the members of the U.S. trade

representatives in the U.S. Department of Agriculture.49

In 1980 the operations of Directorate T in France were disclosed by a French

agent called Vladimir Ippolitovitch Vetrov (codename Farewell) who had a high place

in Directorate T. Vetrov’s documents revealed to western intelligence services

important information about the Soviet operations concerning the theft of scientific

and technological intelligence. In July 1981 the French President Francois Mitterand

personally informed President Ronald Reagan about Farewell’s documents.50

According to Farewell, the KGB only in 1980 obtained 5456 technological samples.

In December 15, 1984, during a private meeting in the Soviet embassy in

London, Gorbachev spoke in flattering terms of the effectiveness and the successes of

FCD Directorate and the officers of Line X working overseas.51 For Gorbachev the

acquisition by using secret methods of Western technology was crucial for the

economic part of perestroika.

In 1985, a CIA report, concerning the practices used by the Soviets in order to

acquire high-tech technology, claims that the GRU and the KGB are involved in such

operations and the former has exceptional results in acquiring hardware, especially

connected with military technologies. According to the KGB estimate for 1985, its

effort resulted in the saving of an important amount of money in foreign currency.

The report of 1986 estimated the benefit to 550 million rubles approximately, while

the reports of 1988 and 1989 to 1 billion rubles. But, there was no reference to any

cost.52 Corson and Crowley estimate that the U.S.S.R. saved 12 billion dollars and

earned 5 to 7 years in R&D (Research and Development).53 The target of the Soviet

intelligence services was the American technology, including high-performance

microchips and supercomputers, and integrated circuits and mini-computers, in order

to upgrade their weaponry. 54 According to the estimations of British and American

intelligence services, during the Presidency of Gorbachev the efforts concerning the

49 Fialka J. John, War by Other Means: Economic Espionage in America (W.W. Norton & Company, Inc., 1997), p. 119.50 Andrew Christopher and Mitrokhin Vasili, op. cit., p. 619-20.51 Andrew Christopher, Gordievsky Oleg, op. cit., p. 621. Disclosed probably by Oleg Gordievsky, the double agent of Britain and U.S. who was present in that meeting.52 Garthoff L. Raymond, “The KGB Reports to Gorbachev”, Intelligence and National Security, Vol. 11, No. 2 (April 1996), p. 229. 53 Corson W.R., Crowley R.T., op.cit., p. 11. 54 Warner W.T., “International Technology Transfer and Economic Espionage”, International Journal of Intelligence and Counterintelligence, Vol. 7, No. 2 1994, p. 147.

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theft of Western scientific secrets on behalf of the Soviet secret services were

escalated.55

The goal of the U.S.S.R. was not to acquire western technology only for

military reasons, but also in order to support their waning domestic economy.56 In the

short term and in the long term, the economic espionage operations allowed the

U.S.S.R. to take part in the arms race. However, the reality is less impressive than

statistics. Professor Andrew in estimating the effectiveness of Directorate T concludes

that: “The most plentiful S&T (Scientific and Technical intelligence) in intelligence

history has failed to prevent the growing gap between Soviet and Western technology,

particularly outside the defense field.”57

According to Andrew and Mitrokhin, the tactical victories of FCD against the

U.S. –the main enemy – impressed Gorbachev, but failed to avoid strategic defeat.58

In the long run, the economic espionage operations of U.S.S.R. failed to bridge the

gap between the Soviet Union and the West and to prevent the former from collapse.

The real economic and technological benefits of western technology, even of high

economic value in billions of dollars, were radically curtailed because of the structural

weaknesses of the Soviet economic system. The ideological blinkers of the Soviet

system combined with economic rigidity and the resistance to innovation neutralized

the benefits of economic espionage.

The end of the Cold War and the collapse of the Soviet Union did not finalize

the operations of macroeconomic espionage committed by Russia, the successor of

the U.S.S.R. New opportunities have arisen for Line X via the scientific exchanges

between East and West, as well as the business joint ventures.

SVR (Sluzhba Vneshney Razvedki Rossii / Russian Foreign Intelligence

Service), the successor of the KGB, looked for new roles in order to justify its

presence as an organization, and to maintain its status in the Russian society, and it is

sure that one such role is economic espionage. From the spring of 1992 it was clear

that the successors of KGB made a shift towards the collection and analysis of

economic intelligence instead of military intelligence.59 The head of the Chief

Intelligence Directorate of the Russian Army’s General Staff-GRU declared in 1992

55 Adams James, The New Spies: Exploring the Frontiers of Espionage (Pimlico, 1995), p. 129.56 Warner W.T., op. cit., p. 147.57 Andrew Christopher, Gordievsky Oleg, op. cit., p. 623.58 Andrew Christopher and Mitrokhin Vasili, op. cit., p. 618.59 Sherr James, “Cultures of Spying”, The National Interest, Winter, 1994/95, p. 60.

14

that economic espionage is one of the means which support military activities.60

President Yeltsin had characteristically declared that the securing of access in other

countries’ markets is a responsibility not only of the Ministry of Finance and of the

Ministry of Foreign Affairs, but also of the intelligence services (Foreign

Intelligence).61

According to Andrew and Gordievsky, the difficult economic situation of

Russia increased the need of high-tech intelligence. The most pressing need is to

instill the new technology acquired by economic espionage to the domains were the

Russian industry cannot invest in R&D.62 In his first press conference as head of the

Russian secret services, Yevgeniy Primakov noted that the intelligence services

“should provide favorable conditions for the development of the economy and of the

scientific and technological progress of the country”.63 In April 1992 Robert Gates,

the then DCI (Director of Central Intelligence), testified in a Congress Committee that

Russian intelligence services under the leadership of Primakov continue the economic

espionage operations.64 Zagorin, a writer of Times, in an article noted that in 1992 a

Belgian “journalist” was arrested and convicted because while he was authorized to

cover the launching of satellites, he was committed – as he admitted – economic

espionage on behalf of the SVR.65

The collection of scientific and technological intelligence played a vital role in

the decision of Russian government in 1993 to increase substantially its economic aid

towards Cuba. In exchange the Russians maintained their SIGINT center in Lourdes,

which has been upgraded in 1990.66 In February of 1996, Boris Yeltsin during a

conference with the members of his security council in Kremlin, he order the Russian

intelligence services to focus their attention to the “technological re-armament”, by

collecting new ideas from the West and implement them in Russia. He remarked

60 Ibid, p. 61.61 Ibid.62 Warner W.T., op. cit., p. 148.63 Richelson T. Jeffrey, A Century of Spies: Intelligence in the Twentieth Century, Oxford University Press, 1995), p. 428. 64 Ibid. 65 Warner W.T., op.cit., p. 148. See also: Zagorin Adam, “Still Spying After All These Years”, Time, 29 June 1992, pp. 58-9. 66 Ibid.

15

characteristically: “It is better to have a pioneer technology, than a pioneer

ideology”.67

At the same year with the nomination of Primakov as Foreign Minister and

Vyacheslav Trubnikov as head of SVR, Yeltsin signed a new law concerning the

status and the functions of the Russin intelligence service, which has been voted by

Duma in December 1995. The deputy director of SVR described its goals as far as

economic intelligence is concerned as the following: the estimation of foreign

influence in Russian economy, the facilitation of integration in the interior of the

former Soviet Union, the confrontation of foreign threats against the economic

security of Russia, the provision of aid in Russian government in order to attract new

foreign investments and the impediment of the money-laundering of foreign and

domestic criminal organizations.68 In June 1996, in a report in Moscow State

Institution of International Relations, Primakov described Russian foreign policy and

implied that SVR should give greater emphasis to economic espionage in order to

heal Russian economy.69

For the Russian government, the success in the international market of weapon

systems is crucial in order to solve its economic problems. U.S. and Western

technology is a key asset for the Russian defense industry in order to compete

successfully in the international economic arena.

5.2 The Policy of Japan

Japan has the most integrated and complex intelligence system in comparison

to other U.S. allies. In the last four decades Japanese governments facilitated the

creation of a decentralized national framework for collecting economic intelligence.

Japan is the only country whose intelligence services were established with main goal

the fulfilment of high levels of prosperity and the improvement of the standards of

living of its citizens.70 Taking into consideration the traditional tend of Japanese to

67 Pringle W. Robert, “The Heritage and Future of Russian Intelligence”, International Journal of Intelligence and Counterintelligence, Vol. 11, No. 2, Summer 1998. 68 Albini L. Joseph, Julie Anderson, “Whatever Happened to the KGB?”, International Journal of Intelligence and Counterintelligence, Vol. 11, No. 1, Spring 1998, p. 46.69 Ibid, p. 44-6.70 Deacon Richard, Kempei Tai: A History of the Japanese Secret Service (Beaufort Books Inc., 1983), p. 254.

16

seek and collect useful intelligence from abroad, improve them, and implement them

in their domestic society, we reach the conclusion that this is not a new policy, but the

establishment of the Japanese secret services according to its tradition.71 The

difference between the Japanese secret services and the services of other countries is

that the espionage operations of Japan are based less on the formal secret services and

more on a broad net of institutions of the Japanese society.72

From the late 1950s the Japanese government established 2 main organizations

with the duty to collect and analyze economic intelligence. Firstly, the Scientific

Information Centre – SIC) with the goal the dissemination of technological

intelligence obtained from the West to the Japanese private sector. Secondly, the

Ministry of International Trade and Industry which is the backbone of the economic

intelligence net of Japan. MITI charged the Japanese External Trade Organization

(JETRO) with the collection of economic intelligence.73 The fact that Japan has

established in 1962 a special educational centre for economic espionage under the

“innocent” title “Institute for Industrial Protection”– attended even by businessmen –,

proves the importance that it gives to economic espionage.74 From the early 1960s the

majority of Japanese businesses had created their own intelligence units. A great part

of the Japanese network consists of well-known multinationals like Mitsubishi,

Hitachi and Matsushita which have at their disposal important resources and

equipment. Also, a small part of the office of the Japanese Prime Minister is involved

in the supervising of the net’s operations.75 Another important organization is the

Japanese SIGINT (Signal Intelligence) organization called “Chobetsu”, the equivalent

of the American NSA (National Security Agency). The Japanese network of

economic intelligence is supplemented by some think-tanks like Nomura Institute and

Mitsubishi Research Institute.76

The consultant and ex-CIA official John F. Quinn has characterized the efforts

of the Japanese government in collecting economic intelligence as “of great scale,

71 Deacon Richard, op. cit, p. 254. See also Kennedy Paul, op. cit., p. 416-7. .72 Schweizer Peter, Friendly Spies: How America’s Allies Are Using Economic Espionage To Steal Our Secrets, (New York: Atlantic Monthly Press, 1993), p. 73.73 Herring J.P., “The Government Role in Japanese Competitive Intelligence”, Competitive Intelligence Review, Vol. 3 (1989), p. 14-5.74 Schweizer Peter, op. cit., p. 18.75 Ibid.76 Deacon Richard, op. cit., p. 260-1.

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intensive and continuous”.77 The macroeconomic espionage operations of Japan

include the use of Japanese students of American universities in order to collect

information concerning the scientific and technological research taking place in those

institutions. Professor Johnson of University of California, Berkley, declared that the

Japanese students of the University told him that officials of the Japanese consulate in

San Francisco asked them to deliver them reports concerning research in

biotechnology, since this University is one of the pioneers in this domain. In fall of

1990 a researcher of the Massachusetts Institute of Technology (MIT) claimed that

some Japanese students received orders from Tokyo to infiltrate to research teams of

the university’s laboratories.78 Also Japanese multinationals succeeded in obtaining

access to CIA’s top secret documents and even acquired top secret technological

intelligence concerning the Strategic Defense Initiative (SDI).79

In the late 1980s, Japan had at its disposal a high-level source in the U.S. State

Department which supplied Tokyo with detailed intelligence concerning the U.S.

negotiating positions, even before the rest of the U.S. agencies.80

5.3 The Policy of France

One of the main players of macroeconomic espionage in the world espionage

chess table is France which has at its disposal a well-organized intelligence service,

characterized by experts as “one of the most aggressive collectors of economic

intelligence in the world”.81

In 1964 during the Kennedy Round of GATT’s negotiations in Cannes, a

French countess recruited by the French intelligence services infiltrated in the suite of

the American Under-Secretary of State, George Ball and stole documents which

included the last orders from Washington. According to Colonel Le Roy who was

participated in the operation, the whole idea belonged to the French Prime Minister

Valery Giscard d’ Estaing.82

77 Evans J.C., “U.S. Business Competitiveness and the Intelligence Community”, International Journal of Intelligence and Counterintelligence, Vol. 7, No. 3 (1995), p. 355. 78 Schweizer Peter, op. cit., p. 92.79 Ibid, p. 19.80 Porteous Samuel, (1998), op. cit., p. 109.81 Schweizer Peter, “The Growth of Economic Espionage: America Is Target Number One”, Foreign Affairs, Vol. 75, No.1 (Jan. / Feb. 1996), p. 11.

18

In 1969, during the fist formal visit of U.S. President Richard Nixon in Paris,

agents of the French secret services managed to put a microphone in the lining of his

aid’s (H.R.Haldeman) jacket. As a result of this operation the French secret services

eavesdropped the content of the private conversations of White House officials

concerning issues of great importance for the French government.83 Count de

Marenches, the head of the French secret services during the Presidency of Pompidou,

disclosed in his memoirs in 1992 that in 1971 French agents intercepted, in time,

valuable information concerning the day as well as the level of the planned

devaluation of dollar by Nixon. De Marenches passed this information to President

Pompidou who as a former banker and as a politician, understood the laws of secrecy,

handled the issue with the Bank of France in a need-to-know basis. As a result, France

obtained important profits from its speculation on the U.S. dollar.84

In 1982 U.S. President Reagan made a formal visit to Paris in order to discuss

the bilateral relations of the two countries with President Francois Mitterand. The

American delegation had rented two floors in a luxury hotel in Paris and every day

U.S. secret service were checking minutely the suites in order to guarantee that there

were no surveillance devices. But they did not discover something out of the ordinary.

Unfortunately for them and the U.S. delegation, they were wrong, because agents of

the DST were intercepting the conversations of the members of the delegation by

using a laser placed in the street outside the hotel, which recorded the vibrations made

by the conversations, while a computer were “translating” them in words.85

In the same year, the Indian government was negotiating with the U.S.A., the

Soviet Union and France the purchase of a new fighter and had decided to spend $2

billion for that. In the middle of 1981 the head of the station of French secret services

in New Delhi recruited a political employee of the Indian Prime Minister’s office in

order to obtain intelligence concerning the political situation inside the Indian

government. When the negotiations for the purchase were reaching the end, DGSE

ordered the French military attaché in New Delhi to use the above mentioned source

82 Schweizer Peter, op. cit., p. 96-7. After photocopying the documents in the hotel director’s office, the countess returned them back to their place and left undetected. Also, before the intrusion, officers of the French secret services lubricated the door of the Under-Secretary’s room.83 Ibid, p. 97-8.84 Chattergee Pratap, “Spying for Uncle $am: Economic Intelligence”, Covert Action Quarterly, Winter 1996, http://www.mediafilter.org/caq55EconIntel.html, Count de Marenches, Andelman A. David, The Fourth World War: Diplomacy and Espionage in the Age of Terrorism (William Morrow and Company, Inc, 1992), p. 114-115.85 Schweizer, (1993), op. cit., p. 98.

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in order to find out the American offer. For one more time the source was credible

and France earned the contract with the Indian government.86

In the mid 1990s a shift was made in the French policy concerning economic

espionage. The French Prime Minister Edouard Balladur, influenced by a new school

of though, reached the conclusion that it was impossible for France to win the

economic war which was under way, via economic espionage and decided to establish

the Japanese way which gives emphasis in open sources.87

5.4 The Policy of the U.S.A.

The U.S. Intelligence Community –which owes its establishment as a

bureaucratic mechanism to the surprise attack of Pearl Harbor in 1941– continued the

tradition of collecting and analyzing macroeconomic intelligence during the first years

of the Cold War.

The analysis of the economic conditions of labor unions in Italy, France and

other Western countries –during the Cold War era, but especially during the first

years– was one of the highest priorities of the U.S. government. Moreover, U.S.

intelligence services focused their attention to the analysis of economic trends of

U.S.S.R. and especially the closed surveillance of its armament program.88

In two priority lists concerning intelligence collection published by the CIA in

1975 and 1986 respectively, the presence of macroeconomic targets was evident. It

included the following: the surveillance of the OPEC (Organization of Petroleum

Exporting Countries) strategies concerning their price policy, the size of the annual

crop of the Soviet Union, the quality of its computers, the financing of the developing

countries’ debt, the lack of energy in the international level, the food supplying all

over the world and the scientific and technological progress.89 It is alleged that in the

early 1980s U.S. intelligence services put “bagged software” in the computers of the

World Bank and other international financial institutions in order to provide to

86 Ibid, p. 111-2. Pierre Marion commented about this successful operation, the following: “We had an informer inside the Indian chancellery which was making the decision. And we were able to get some intelligence about the proposals by the competitors”. 87 Fialka J. John, op. cit., p. 97-8.88 Johnson K. Loch, (1996), op. cit., p. 163. 89 Zelikow Philip, Ibid, p. 168.

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American policymakers an early warning as far as the crisis of Latin America banks is

concerned.90

One of the great criticisms for the U.S. intelligence Community in general and

the CIA in particular came from their failure to predict the collapse of the former

Soviet Union. The leader of those attacks towards the U.S. Intelligence Community

was Senator Daniel Patrick Moynihan who even asked the abolishment of the

CIA.The then DCI Robert Gates, in order to defend the agency ordered to declassify a

series of documents proving that the agency reported with full details the collapse of

the Soviet economy during the 1980s, without foreseeing its ultimate collapse. Gates’

argument was that no government agency anticipated such a sudden collapse of

communism in U.S.S.R. Another high-rank U.S. intelligence officer declared that for

the CIA the forecast of the fall of the Soviet Union was not such an important

mission, its key mission was the knowledge of its military capabilities and intentions,

and it was met with success.91

In the post-Cold War period U.S. officials with a critical role in the planning

of the U.S. foreign and intelligence policy noted the importance of economic

intelligence and macroeconomic espionage in particular. Joseph S. Nye, head of the

National Intelligence Council (NIC) in 1993-4 claimed that the role of intelligence

services in NAFTA (North American Free Trade Agreement) is to facilitate the

policymakers which are going to reach a decision to think further than their

competitors.92

In January 26 1995 the French Minister of Finance, Charles Pasqua, invited

the U.S. Ambassador Pamela Harriman in his office and informed her that some

officials of her embassy are engaged in macroeconomic espionage and should quit the

country.93

In February 1995, the French publicly accused the American intelligence

services that they tried to bribe French government officials in order to obtain detailed

90 Porteous S., (1998), op. cit., p. 110.91 Laqueur Walter, op. cit., viii-xix. See also “At Cold War’s End: U.S. Intelligence on the Soviet Union and Eastern Europe, 1989-1991”, History Staff, Center for the Study of Intelligence, Central Intelligence Agency, 1999, http://www.odci.gov/csi/books/19335/art-1.html 92 Johnson K. Loch, op. cit., p. 157.93 When the meeting leaked to the French press, U.S. officials protested that Pasqua used the scandal in order to bolster up the campaign for the Presidential elections of Edouard Balladur. Although both governments acted quickly in order to close the issue, for a period of time there was tension in their relationship. Kober Stanley, (1992).

21

intelligence about its negotiating positions in GATT negotiations about audio-visual

portion.94

In October 15 1995, according to New York Times the U.S. intelligence

agencies helped their government officials in their negotiations with Japan concerning

the import of cars by eavesdropping on Japan’s officials conversations. The U.S. trade

representative Mickey Kantor and its staff benefited from the daily briefing from the

CIA which contained intelligence collected by CIA station in Tokyo as well as NSA.

The agreement was a clear victory for the U.S.95

6. Microeconomic Espionage6.1 The Policy of the former Soviet Union – Russia

During the Cold War the intelligence services of the former Soviet Union were

conducting microeconomic espionage since the New Economic Policy of the

early1920s.96 Cheka, the predecessor of the KGB participated in the collection and

analysis of economic intelligence in 1920.97 The former Soviet Union fulfilled its goal

of collecting microeconomic espionage both via its own secret agencies and via its

satellites’ secret services (e.g. Bulgaria, Romania, Czechoslovakia, East Germany). It

has been estimated that during the 1980s at least 1,000 of the 2,800 diplomats for the

Eastern Bloc were actually intelligence agents with official cover, and the majority of

them were dealing with science and technology.98 In late 1991, the then Bulgarian

Defense Minister Dimitar Loudjev, a history professor, discovered a large net of

Bulgarian companies doing businesses abroad, established by the KGB in the late

1980s with the aim to steal Western technology.99

From 1986 to 1989 an incident of microeconomic espionage by using

computer technology took place. The former KGB used a group of contract hackers in 94 Porteous S., (1998), op. cit., p. 110.95 Fialka J. John, op. cit., p. 113. When Ichiro Fujisaki, the political director of the Japanese Embassy in Washington read the article, he contacted U.S. high-level officials of the State Department and warned them that if the article is true it would be a blow to mutual friendship and trust between U.S.A. and Japan. U.S. trade representatives declared that Japanese commit macroeconomic espionage against U.S. trade delegations at least for the last 15 years and claim that the Japanese reaction to this incident is simple hypocrisy. Clyde V. Prestowitz, Jr. former trade negotiator characterized the whole issue as a theatre called diplomacy and said that Fujisaki was not shocked but he simply lied. Ibid. 96 Smith Michael, The Spying Game: The Secret History of British Espionage, (Politico’s Publishing, 2004), p. 426. 97 Ibid. 98 Fialka J. John, op. cit., p. 70. 99 Ibid, p. 86.

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order to gain access to many computer systems and networks from terminals outside

the U.S.A. The hackers based in West Germany, while their KGB case officer in East

Berlin. Their objective was to get penetrate sensitive computer systems and networks

worldwide. In exchange for the information they obtained from U.S. military, from

scientific R&D organizations, as well as from universities, the hackers got from their

KGB handler’s cash and drugs. The hackers after penetrating the computer system of

the Lawrence Berkley Laboratory, used it as their base in order to get access to the

Advanced Research Projects Agency Network/Military Network, which gave them

the opportunity to penetrate 450 other computers.100

Even the famous Russian Academy of Sciences was engaged in this game.

Alexei Brudno, mathematician and computer software specialist, characterized the

system very effective. Usually, only scientists who accepted to participate in

microeconomic espionage missions were granted permission to travel abroad to

participate in international conferences and to do research in foreign, especially U.S.

universities.101 In 1983 the Americans were aware of the problem and when a

delegation of Soviet scientists visited Grummar aircraft plant on Long Island that

year, cameras and every other mean used to keep records were forbidden. In spite of

these precautionary measures the Soviet scientists fulfilled their mission. By putting

adhesive tape on their shoes they managed to steal pieces of metal alloys, used for

manufacturing U.S. fighter planes.102

The most important Russian collection agency, as far as microeconomic

espionage is concerned, was KGB’s “Line X”. The “shopping list” of Line X included

equipment from General Electric, Boeing, Lockheed, Rockwell International, and

McDonell Douglas.103 Vetrov, a Russian double-agent working for the Western

intelligence services described eloquently how the KGB was conducting

microeconomic espionage against the West, especially how its officers were bribing

sources in U.S. corporations, collected information concerning weapons secrets from

100 Fraumann Edwin, “Economic Espionage: Security Missions Redefined”, Public Administration Review, Vol. 57, No. 4, July/August 1997, p. 306, Madsen Wayne, “Intelligence Agency Threats to Computer Security”, International Journal of Intelligence and Counterintelligence, Vol. 6, Winter 1993, p. 413-445.101 Ibid, p. 68.102 Ibid. 103 Fialka J. John, op. cit., p. 70. For the structure of economic espionage operations of the former Soviet Union see also: Metcalfe Shotwell Robyn, The New Wizard War: How the Soviets Steal U.S. High Technology – And How We Give It Away (Tempus Books of Microsoft Press, 1988), Andrew Christopher, Gordievsky Oleg, KGB: The Inside Story of its Foreign Operations Lenin to Gorbachev (London: Hodder and Stoughton, 1991),

23

open files in agencies like NASA, and developed contacts in the most famous U.S.

universities like MIT (Massachusetts Institute of Technology) and Princeton.104

In February 1996, Boris Yeltsin during a meeting of his security council in the

Kremlin gave specific instructions to his secret services to focus on “technological

rearmament” by collecting new ideas from the West and apply them quicker in

Russia. According to Yeltsin “It’s better to have a leading technology than a leading

ideology”.105

Yevgeny Primakov in his first interview concerning the post-Cold War

challenges for Russian intelligence services as the head of the SVR – successor of the

famous KGB – expressed the view that SVR should not disseminate economic

intelligence to businesses, but should disseminate them only to the Russian

government. He states characteristically: “I am categorically against allowing

intelligence to work for, say, the Raw Materials Commodity Exchange or any other

private concern. We are a budget organization, budgeted from public money and

therefore we must only work for the government.”106

However, the situation in Russia is more complicated than Mr. Primakov

describes. It is more plausible that Russia will adopt a semi-corporatist view than the

American model of laissez-faire. The transformation from communism to capitalism

means that the successors of the famous KGB will place greater emphasis on

economic/financial/business issues. According to Professor Sherr James of Oxford

University, the officials of the Russian intelligence services do not make a distinction

between governmental policy and private interests. The newly established “Federal

Agency for Government Communications and Information” testifies this trend. This

new organization incorporates the communications capabilities of the old KGB and

constitutes both a top secret organization as well as a corporation which has the right

to conclude contracts with foreign investors, to invest in foreign corporations and

establish businesses abroad.107 The view of an official of the Russian intelligence

services is characteristic: “Both corporations and intelligence services are doing well.

Those two professions are always side-by-side. Today they are coming much closer.

104Fialka J. John, op. cit., p. 68, 70. See also Andrew Christopher, (1991), op. cit., p. 619-20. 105 Fialka J. John, op. cit., p. 86. 106 Adams James, op. cit., p. 73. 107 Sherr James, op. cit., p. 62.

24

The expected benefits from economic espionage are biggest than those expected from

scientific research institutes”.108

In March 1999, Sunday Times revealed that according to an ex-agent of MI6,

SVR succeeded in infiltrating into important economic centers of London. MI6

uncovered at least one agent of SVR who worked in London market, while another

Russian agent arrested by the British agency revealed that in 1995 SVR had placed

one of its agents in the offices of Barclays Bank in Moscow. The targets of SVR

included Bakn of England, the European Bank for Reconstruction and Development

(EBRD) and other institutions based in London. 109

Winn Schwartau after describing the economic situation in Russia in the post-

Cold War era (withering economy, lack of a distribution system, no stable political

structure) and referring to “a couple of hundred thousand former spies, asks the

question: “What is their best chance for moving into the world economy?”.110 From

the viewpoint of William Sessions, former director of the FBI, the situation in Russia

is described like this: “Russians do not have the currency to pay for advanced systems

and designs, so they will steal them or obtain them through other illegitimate

means”.111

6.2 The Policy of Japan

The case of Japan, as far as microeconomic espionage is concerned, is very

special. Japan’s constitutional limitations concerning its defense budget and the size

of its military forces, as well as the defense and intelligence umbrella provided by the

U.S.A., decrease the need for orthodox forms of intelligence gathering.112 Although

Japan has regional interest in political and military issues, she has broader, worldwide

interests in economics and technology.113

In Japan, the collection and analysis of microeconomic intelligence for the

benefit of private corporations (usually multinational corporations based in Japan)

108 Waller J.M., Soviet Empire: The KGB in Russia Today (Oxford: Westview Press, 1994), p. 145-46. 109 Waller J. Michael, “Iraq’s Russian Arms Buyer Headed Germ Warfare Program: Russian Spies Unmasked in London Financial System”, Russia Reform Monitor, No. 597, American Foreign Policy Council, Washington D.C., March 3, 1999, http://www.afpc.org/rrm/rrm597.htm110 Schwartau, Winn, op. cit., p. 272.111 Schwartau, Winn, op. cit., p. 272. 112 Schweizer Peter, (1993), op. cit., p. 73.113 Ibid.

25

consists a sine qua non for their success in the international economic, financial and

technological arena. Peter Schweizer characterizes the Japanese intelligence system as

“perhaps the most comprehensive and complex of the friendly spy networks being

used against the United States”.114 Japan lacks a secret service with the form and the

mandate of its western counterparts. Actually, its secret service is small, like its

military intelligence bureaucracy.115 According to John J. Fialka, although Japan does

not have at its disposal a formal intelligence service, she succeeds in collecting

economic, and especially, microeconomic intelligence, to the point that she

“collectively resembles one”.116 In spite of this fact, Japan not only takes part in the

world microeconomic espionage game, but also excels in it. Fialka characterizes the

result of Japanese economic espionage spy network as “exceptionally efficient” and

states that the United States has not fully understood its function.117 He states that the

Japanese are committing a “strategic ‘beggar my neighbor’ assault” targeting high-

tech U.S. industries. Furthermore, he concludes that the U.S.A. is loosing in a game of

economic jiu-jitsu in which Japan not only hinders U.S. access to its markets, but also

steals the latter’s economic and high-tech crown jewels, by exploiting U.S.’s more

important vulnerability: the openness of its society. The importance of economic

espionage committed by Japan is illustrated by the same author: “While the fabled

and fictitious “missile gap” was used politically to galvanize U.S. concerns in the

sixties about the Soviet Union, the patently real “intelligence gap” posed by the

Japanese has caused no outcry”.118

In Japan there is almost totally unanimity, as far as the conduct of

microeconomic espionage is concerned. This is realized by the effective collaboration

of the Japanese government with the Japanese private sector. Actually, the Japanese

multinationals play the role of intelligence services, as far as microeconomic

espionage is concerned.

From the part of the Japanese state, both the Japanese Ministry of International

Trade and Industry (MITI) and the quasi-official Japanese External Trade

114 Ibid, p. 18.115 Ibid.116 Fialka J. John, op. cit., p. 5. 117 Ibid.118 Ibid, p. 11.

26

Organization (JETRO) – characterized as an “elite bureaucracy”119 – have undertaken

the organization and coordination of microeconomic espionage.120

In October 1962 the Japanese collection efforts were radically improved by

the establishment of the Institute for Industrial Protection, financed by MITI. Its

purpose was to train industrial spies for Japanese corporations. It was actually a spy

school established and financed by the Japanese state.121

Apart from MITI and JETRO, the Japanese government has at its disposal a

small intelligence organization named “Naicho”, which is under the control of the

Japanese prime minister and its duty is not only to provide Japan’s policymakers with

“detailed knowledge of foreign intelligence on international affairs”, but also to

acquire technological intelligence concerning the U.S.A. Actually, Naicho plays the

role of a clearinghouse for Japanese political and economic intelligence operations

against the U.S.A.122 Another government military organization engaged in

microeconomic espionage is the Japanese Defense Agency. The Annex Chamber,

Second Section, of the Investigation Division of the Ground Self-defense Forces

(Chobestu), is in charge for the coordination of electronic eavesdropping on both

foreign and domestic targets. Chobetsu eavesdroppes on U.S. companies’

communications inside and outside Japan, and its operations are so secretive that even

members of the Japanese Diet are forbidden to enter its headquarters.123 Electronic

stations on Rebun Island and in the Ryukus at Kikaiga-shima Island, as well as

facilities at Higashi Chitose, on the Island of Hokkaido are used for high-tech

microeconomic espionage.124 The FBI has repeatedly warned U.S. businessmen

traveling to Tokyo that they should take for granted that they are spied on. Noel

Matchett, a former senior official of the NSA and a specialist in corporate

communications, advises corporate executives that “it’s more likely to be happening

there more frequently than you might think.”125 Another government mechanism

taking part in microeconomic espionage operations is the Nippon Telephone

Company which has an agreement with the Japanese Defense Agency to eavesdrop on

119 Fialka J. John, op. cit., p. 44. 120 Schwartau, Winn, op. cit., p. 275, Deacon Richard, Kempei Tai: A History of the Japanese Secret Service, (Beaufort Books, Inc, 1983), p. 258.121 Schweizer Peter, (1993), op. cit. p. 75. 122 Ibid. 123 Ibid. 124 Ibid, p. 84.125 Ibid.

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telephone conversations.126 According to John Quinn, a former CIA official, “I know

that Nippon Telephone and Telegraph, Japan’s major telephone corporation over here,

cooperates with the Japanese government, and their technical capability is very

advanced, so they can very easily tap into a phone line. They do not enter the

buildings to do so: they can do it from several blocks away; they can do it from a

switching station. So tapping a phone is not difficult.”127

Last but not least, the Public Security Investigation Agency (PSIA) has

conducted bag operations against U.S. corporate executives traveling in Japan.

Although this counterintelligence agency is responsible for dealing with subversive

groups and neutralizing the actions of hostile intelligence services, its mandate was

extended to include microeconomic espionage operations.

Those government mechanisms supplement the well-developed and well-

organized intelligence network of Japanese corporations. This network is so effective

that can be compared with intelligence services of medium range states.128 John

Quinn, an ex-CIA official, thinks that Japanese multinationals are “vigorous”

collectors of microeconomic intelligence and expresses the view that “Japan does

have a very widespread commercial intelligence network”. Pierre Marion agrees with

him: “All the corporations of Japan are very strongly organized in that direction.

There are members of Japanese corporations who travel abroad, and they have

responsibility for gathering intelligence, by any means”. More concretely, in Japan the

business sphere is controlled by few large corporations named “keiretsu” which in

close cooperation with MITI run the Japanese industrial sector.129

Peter Schweizer distinguishes the importance of the Japanese multinationals as

far as economic espionage is concerned and believes that they compose the most

important part of the Japanese intelligence system. He even states that these

corporations “are the most extensive and comprehensive intelligence and espionage

organizations in Japan”. Dr. Angel, a Professor at the University of South Carolina

and a specialist in Japan, thinks that these companies “spend a lot of money on

spying”. As far as their targets he states that “They do it to each other, but the

Japanese assume that foreigners are more vulnerable to spying; therefore, the vast

majority of their efforts are directed at their chief competitor, the United States”.

126 Schwartau, Winn, op. cit., p. 41, 275.127 Schweizer Peter, (1993), op. cit., p. 84.128 Schweizer Peter, (1996), op. cit., p.11.129 Schwartau, Winn, op. cit., p. 41, 275.

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According to John Fialka, “Japanese corporations sometimes function as one large

national spy agency”.130

Among the methods used by the Japanese were the following: creating dummy

corporations, making special “consulting arrangements” with employees of U.S.

computer firms, plating moles in U.S. corporations – especially those based in Silicon

Valley –, bribing in order to obtain high-value blueprints and plans, recruiting

Japanese students in the U.S.A. to collect scientific and technological intelligence, as

well as using special eavesdropping equipment.131

According to a CIA classified report of 1987, among the priorities of Japanese

intelligence were: a) intelligence concerning access to foreign sources of raw

materials (mainly, oil and food), b) intelligence regarding technological and scientific

developments in the U.S.A. and Western Europe, and c) intelligence related to

political decision-making in the U.S.A. and Western Europe, as well as intelligence

about trade, monetary, and military policy in Asia and the Pacific.132 An important

conclusion of this report was that the Japanese government spent 80% of its

intelligence assets towards the acquisition of technological secrets of the U.S.A. and

Western Europe.133

In the 1990s, some U.S. officials expressed the view that the Japanese policies

and corporate moves as far as international telecommunications are concerned,

facilitates tremendously the conduct of economic espionage. Robert G. Harris,

President of EconomIncorporated, in the early 1980s warned the U.S. business

community that for Japan the key strategic industry for the future was

telecommunications. George Keyworth II, the former science adviser to President

Reagan, expressed the same concerns.134 The National Security Agency in May 1990

shared their worry. The U.S. SIGINT organization reached the conclusion that if two

or more U.S. companies communicate via a Japanese-developed or Japanese-owned

telecommunications network, this system can be monitored by the manufacturer and

the perpetrators not be detected by the victims.135 According to Peter Schweizer, the

ability of the Japanese to intrude into the business, economic, and industrial “crown

jewels” of their competitors and steal them is a “marvel to intelligence chiefs around

130 Schweizer Peter, (1993), op. cit., p. 87, Fialka J. John, op. cit., p. 44. 131 Ibid, p. 18-9,79132 Schweizer Peter, (1993), op. cit., p.71. 133 Ibid. 134 Schweizer Peter, (1993), op. cit., p.93-4.135 Ibid, p. 94.

29

the world”. He believes that this is a critical factor for Japan’s future and that it is a

very promising field which undoubtedly will become more effectively and

widespread. Some U.S. observers of the Japanese intelligence policy are very

skeptical and they see Japan as the future major espionage threat for the U.S.A.136

One of those experts, Clyde V. Prestowitz, Jr., a former Commerce

Department lawyer and one of the few U.S. trade specialists fluent in Japanese, wrote

a book entitled “Trading Places: How We Are Giving Our Future to Japan and How

to Reclaim It”. He concludes that in Japan “Business is frequently portrayed in terms

of war with foreigners”.137 Actually, he repeats an old Japanese motto which describes

the Japanese attitude towards economics, according to which “Business is War”.138

In 1994, the Japanese Embassy in Washington asked Robert D. Deutsch, an

American clinical psychologist to conduct a survey concerning the perception of U.S.

citizens as far as Japan is concerned. His findings are very interesting and are

included in the following paragraph: “People start out by saying the Japanese are only

concerned with business. They [the Japanese] are always concerned about the future.

They’re capable of anything. They always have a hidden agenda. We’d better watch

out. That’s the mindset that colors everything”.139 According to Edith Cresson, “Japan

is an adversary that doesn’t play by the rules and has an absolute desire to conquer the

world. You have to be naïve or blind not to recognize that”.140

6.3 The Policy of France

Undoubtedly France deserves the first-place award in the field of microeconomic

espionage. The performance of its secret services is really exceptional.

Count de Marenches, the Director of the French secret services from 1970 to

1980, on his memoirs declared that “Economic espionage has become a key element

of our war-fighting capability”, and that “Spying in the proper sense is becoming

increasingly focused on business and the economy, science, and industry”. Moreover,

he admitted that a special department, the “Economic Intelligence Service”, dealt not

only with financial and economic intelligence but also with microeconomic espionage

136 Ibid, p. 95. 137 Fialka J. John, op. cit., p. 60-1. 138 Schwartau, Winn, op. cit., p. 41. 139 Fialka J. John, op. cit., p. 61. 140 Quoted in Schwartau, Winn, op. cit., p. 42.

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(De Marenche uses the term “industrial espionage” instead of the correct term

microeconomic espionage).141

His colleague, Pierre Marion – an Air France executive and longtime honorary

correspondent142 – very honestly admitted to Peter Schweizer that “In economics, we

are competitors, not allies. America has the most technical information of relevance.

It is easily accessible. So naturally your country will receive the most attention from

the intelligence services.”143

Another head of the DGSE, Claude Silberzahn, described in detail the

philosophical-cultural difference between France and the U.S.A. as far as

microeconomic espionage is concerned: “A major difference between the Americans

and the French was (and may still be) that if the Americans had done as the French

were doing, they would have betrayed their belief in a separation between public and

private sectors. They would have been tinkering with their view of a market economy.

This is the difference between purely liberal American society and the mixture of

economic means to an end at work in France.”144

Its performance in the 1970s and 1980s was so successful that it provoked

diplomatic tension between Paris and Washington. French agents succeeded in

infiltrating in U.S. subsidiaries in France, as engineers. Their target was two computer

companies – IBM, Texas Instrument – and one glass-making company called Corning

Glass. Corporations which dealt with aeronautics were also victims of the French

secret agencies. Among them are the famous Boeing and the Bell Helicopter Textron

which was working upon the creation of a hybrid plane-helicopter codenamed V-22.

Moreover, the French infiltrated Northrop which became famous because of the

research and development of “stealth” technology, used in its fighter planes like F-

117, B-2. The French spies – coined “moles” in the intelligence literature – got higher

in the hierarchy of those U.S. companies and as a result had access to classified

information. The company which benefited the most was an electronic company

called Bull.

In another episode in 1985, the French government obtained by using its secret

assets the detailed offer of a U.S. company concerning the procurement of French

141 Count de Marenches, Andelman A. David, op. cit., p. 114-15. Schweizer Peter, (1996), op. cit., p. 11. See also: Smith Michael, op. cit., p. 422.142 Fialka J. John, op. cit., p. 91. 143 Schweizer Peter, (1996), op. cit., p.11. 144 Guisnel Jean, CYBERWARS: Espionage on the Internet (New York: Plenum Press, 1997), p. 219.

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Mirage fighter planes on behalf of the Indian government. The French government

provided a French company with that information and the latter gain the contract.145

Pierre Marion was really proud that during his tenure as head of the French secret

services, France earned this contract of $2 billion.146

In 1988, the French SIGINT intelligence service intercepted valuable

intelligence regarding the new generation Boeing’s plane 747-400. The method they

used was very simple. With intercepting communications devices they collected the

test flight data. The whole operation was facilitated by the fact that the data, which

were transmitted by radio, were not encrypted. The necessary equipment for the

operation was only a portable dish, a receiver and two computers.147

In the early hours of 18 February 1991 a curious incident took place in a

suburb of Houston, Texas. Before we describe the whole incident, we have to note

that during this period U.S.A. and France, two closed allies within NATO, were

preparing for the ground offensive against Saddam Hussein’s Iraq in the Persian Gulf.

The incident happened outside of the mansion of a senior official of “Texas

Instruments” – a large U.S. defense contractor – noticed the movement of two well-

tailored men putting plastic bags of garbage into their van. The van sped away but an

off-duty policeman noticed the number in its license plates. The van belonged to

Bernard Guillet, then the French consul general in Houston. When Mr. Guillet was

confronted by the FBI, his first reaction was: “Spy on people’s garbage? That’s

ridiculous”.148 Then he found very easily an excuse. He and his assistant were

searching for grass clippings in order to cover a hole dug for a swimming pool at his

house. Coincidentally, the French word for swimming pool is “La Piscine”, which is

also the nickname of the Direction General de la Securite Exterieure (DGSE).149

In 1992 American businessmen were warned by U.S. intelligence agencies not

to fly with Air France after the revelation that the French secret agencies bugged the

first-class seats and that French agents were disguised as clients or stewards.150 There

are also proofs that the French are copying documents of foreign businessmen,

145 Porteous D. Samuel, “Economic Espionage: Issues Arising from Increased Government Involvement with the Private Sector”, Intelligence and National Security, Vol. 9, no. 4 (October 1994), p. 740. See also: Smith Michael, op. cit., p. 423.146 Schweizer Peter, op. cit., (1996), p. 12. 147 Schwartau, Winn, op. cit, p. 276.148 Smith Michael, op. cit., p. 424. 149 Fialka J. John, op. cit., p. 87, Smith Michael, op. cit., p. 424. 150 Porteous D. Samuel, (1998), op. cit., p. 92, Fialka J. John, op. cit., p. 92-3, Smith Michael, op. cit., p. 423, Nasheri Hedieh, op. cit., p. 17, Schwartau, Winn, op. cit., p. 277.

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eavesdrop their conversations and do their best in order to obtain sensitive, high-

quality information concerning international deals and contracts.151

In early 1990s agents of DGSE eavesdropped the telemetry of a test flight of

Boeing 747-400 in order to pass the information to European Airbus.152

In April 1993, the board of Hughes Aircraft, a U.S. company, decided not to

participate in the Bourget Air Show in France after the CIA warnings that the

company was victim of the French secret services. The President of the corporation

was informed that the name of his company was included in a list of 49 U.S.

companies-targets of the French secret services.153 The then German Chancellor

Helmut Kohl when he was asked by reporters about this incident he declared

“philosophically that what surprised him was not that some countries did engage in

such intelligence, but that some others supposedly did not”.154

During the same period, the CIA got a 21-pages list of the French secret

services, entitled “Defense Confidentiale” containing detailed information concerning

the government’s needs for the years 1989-1991. Included in the list were 49

corporations and 24 economic organizations, as well as the details and technical

characteristics of the European Fighter Aircraft, a competitor of the French fighter

Rafale.155 CIA analysts concluded that this document was published by the French

Ministry of Trade, Science and, Technology which often functions as a collection

department for DGSE.

In 1995, the French government established a new institution coined “the

Committee of Economic Competitiveness and Security, with the duty to “research,

analyze, process and distribute information in order to help industrialists and to carry

out prospective and strategic research for the government”.156

6.4 The Policy of the U.S.A.

In the post-Cold War era, a great debate is taking place concerning the role of

the U.S. Intelligence Community regarding microeconomic espionage. The

151 Adams James, op. cit., p. 125, Nasheri Hedieh, op. cit., p. 16. .152 Porteous D. Samuel, (1995), op. cit., p. 277.153 Porteous D. Samuel, (1998), op. cit., p. 91, Smith Michael, op. cit., p. 424, Nasheri Hedieh, op. cit., p. 16.154 Porteous D. Samuel, (1998), op. cit., p. 112. 155 Smith Michael, op. cit., p. 424.156 Ibid, p. 425.

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participants in this debate are not only intelligence officers, but also, policymakers, as

well as academics and intelligence experts. Two schools of thought have emerged.

The first supports the engagement of the U.S. intelligence services in microeconomic

espionage with every available means, following the Machiavellian motto “the end

justifies the means”. And the end in this case is the maintaining and enhancement of

the U.S. economic and technological status in the world chessboard. The second

school of thought argues that there must be a distinction between the state and the

private sector, so the U.S. intelligence agencies should abstain from helping private

corporations. Each of these schools presents their own arguments in order to justify

their positions.

The official position of the U.S. administrations, especially during the post-

Cold War era, when the issue of economic espionage in all its dimensions emerged, is

that the U.S.A. is not engaged in microeconomic espionage. The previous DCI

George Tenet announced the continuation of the official U.S. policy by saying that

while microeconomic espionage is a usual practice for some countries, this is not the

policy or practice of the United States.157 He refused categorically the conduct of

offensive economic espionage by U.S. the intelligence by saying that “We are play

defense, never offense”.158

If we delve into the real shadow world of U.S. intelligence operations, the

declaratory official policy of the United States on microeconomic espionage is

questioned at best, and falsified at worst. Loch K. Johnson, a Political Science

Professor at the University of Georgia, has concluded that “… even the United States

has been less pure with respect to intelligence gathering against foreign business firms

than its public pronouncements would suggest.”159

During the Cold War era, the National Security Agency (NSA) – America’s

equivalent of the British GCHQ – was conducting microeconomic espionage. A U.S.

Air Force signals intelligence specialist working at a U.S. base in the U.K. during the

1960s, states maintains that among his targets were printouts of commercial telexes,

especially those concerning specific corporations or commodities. His testimony is

very clear: “I was provided with a list of about a hundred words I had to look out for.

157 Ensor David, “High-tech spy satellites not targeting Americans, CIA, NSA directors say”, April 12, 2000, www.cnn.com/2000/US/ 158 Haddouti Christiane, “CIA and NSA on ECHELON”, Telepolis, April 28, 2000, http://cryptome.org/echelon-cinsa.htm 159 Johnson K. Loch, (1996), op. cit., p. 152.

34

I had to keep a watch for commercial traffic, details of commodities that big

companies were selling like iron and steel and gas. Some weeks the list of words to

watch for contained dozens of names of big companies.”160

During the 1970s and 1980s, both NSA and CIA increased their

microeconomic espionage operations. The CIA gave to one of its eleven national

intelligence officers the duty to collect economic intelligence. NSA from its part used

its powerful computers in order to scan international corporations’ telexes with the

aim to extract microeconomic intelligence. The Director of the CIA during this

period, Admiral Stansfield Turner, established a secret program in order to

disseminate to U.S. companies industrial and economic intelligence concerning

foreign countries and corporations. In exchange for that intelligence, U.S. executives

not only worked as “amateur spies” by providing the CIA with valuable intelligence

concerning the countries they visited for business, but also provided cover for CIA’s

agents. Another secret program run by the Commerce Department had the purpose to

provide American companies with declassified economic intelligence.

The testimony of another former CIA high-rank officer is also illustrative not

only for the conduct of microeconomic espionage by the U.S.A. in general, but in

particular, against its closest ally, Britain. Howard Teicher, the Director of the

National Security Council’s Middle East Section during the mid-1980s, disclosed that

the NSA tracked every detail of the al-Yamamah deal via its special, high-tech

eavesdropping equipment of its base at Menwith Hill in Yorkshire, U.K. According to

the agreement, Saudi Arabia was going to buy from the U.K. military material worth

of £20 billion, including the Tornado fighter. Among the words that the computers of

NSA charged with monitoring U.K.-Saudi Arabia communications were searching for

were included “Tornado” and “Panavia”, the name of the British corporation. Teicher

declared that “Information related to the specific aircraft would have been priority

targets. We were certainly aware that by preventing a foreign government from

selling something that we hoped an American entity would be able to sell, it would

contribute to our commercial interest.”161

In 1990 two corporations, the Japanese NEC and the American AT&T were

trying to gain a $100 million contract from the Indonesian government concerning

telecommunications. The U.S. SIGINT services eavesdropped on communications of

160 Smith Michael, op. cit., p. 428. 161 Smith Michael, op.cit., p. 428.

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Indonesian government officials and concluded that the Indonesian government

would award the contract to NEC. They informed President Bush who intervened to

the Indonesian government which finally split the deal between the two companies.162

Also, in the 1990s, NSA intercepted e-mails between the central offices of

Banque National de Paris and its offices in New Delhi concerning a lone for the

construction of an atomic energy plant in Madras (India).163

In early 1995 another incident of microeconomic espionage by U.S.

intelligence agencies occurred. In 1994 the Brazilian government announced an

international competition worth of $1.5 billion in order to reorganize the air

surveillance of Amazon. The corporations participating in the competition were the

American Raytheon, specialized in defense industry, and two European firms, the

French Thomson-CSF and Alcatel. In the summer of 1994, it seemed that the

Brazilian government would award the contract to Thomson. The U.S. government in

order to help Raytheon win the contract acted twofold. Firstly, NSA intercepted the

communications between the French corporation Thomson-CSF and the Brazilian

government officials. Secondly, the U.S. government organized a public relations

campaign against the French. Its main argument was that the French company got the

contract by bribing Brazilian officials. Finally, Raytheon prevailed and got the

contract. The then U.S. Secretary of Commerce Ron Brown declared that this

agreement “once again, [it] demonstrates the seriousness of purpose we have in

standing shoulder to shoulder with American business and protecting the commercial

interests of the United States”.164 Unfortunately for the United States, the bribe from

the French part was never corroborated. What made things worst was the fact that in

November 1995, Raytheon was accused of bribing Brazilian officials in order to gain

the big deal. The Argentinian press published wiretap transcripts which incriminated

Gomez dos Santos, the head of protocol for President Fernando Henrique Cardoso, as

well as M. Assumpcao, Raytheon’s Brazilian representative. The allegation was that

the latter had bribed Gilberto Miranda, the liaison to the agreement for the Brazilian

Senate. Political crisis was caused in Brazil as a result of those accusations. 165 Jean

162 Porteous D. Samuel, (1998), op. cit., p. 114, Wright W. Jeffrey, “Intelligence and Economic Security”, International Journal of Intelligence and Counterintelligence, Vol. 5, No. 2 (1991), p. 210. 163 Campbell Duncan and Lashmar Paul, “USA: Spying for Free Trade”, The Independent, July 2, 2000, www.corpwatch.org/headlines/2000/164 Guisnel Jean, op. cit., p. 216.165 Guisnel Jean, op. cit., p. 216-7, Johnson K. Loch, op, cit., p. 154.

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Guisnel is sure that the U.S. intelligence community helped Raytheon. He concludes

that “the U.S. government’s information services were of direct assistance to

Raytheon, and the company wasn’t hurt by Commerce Secretary Ron Brown’s official

visit to Brazil.”166

In January 1998 a report of the European Parliament entitled “An Appraisal of

Technologies of Political Control” concluded that “in Europe all the communications

via e-mail, telephone and fax are intercepted by the American NSA which transfers all

the information from the Continental Europe to Fort Meade of Maryland”.167 The

European Parliament charged Duncan Campbell with writing a new report upon

Echelon. The conclusion of this report states that Echelon has the capacity to violate

the personal life of millions European citizens and is used for the conduct of

economic and industrial espionage for the benefit of U.S. corporations.168

U.S. officials deny the accusations of the Europeans and express the view that

Echelon is used only for national security reasons. Their main argument was that the

tremendous volume of intercepted voice and data communications consist

microeconomic espionage impossible.

According to the SIGINT specialist James Bamford, “the agency [NSA] is not

currently” engaged in microeconomic espionage. However he is very careful in his

judgment and he states that “… there is no law preventing the agency from doing so,

and because its customers, including the White House and the CIA, dictate NSA’s

targets, it could conceivably engage in such espionage in the future.”169 So, only a

political decision is needed for NSA in order to be involved in microeconomic

espionage. In other words, NSA has the capability, but not the intention – or the

Presidential order.

From the previous analysis of the U.S. policy we conclude that the U.S.

intelligence community is engaged in a “selective” economic espionage game. In

other words, it commits selective economic espionage operations, which tries to

disguise them as counterintelligence operations. Even if the U.S. does not accept that

166 Ibid, p. 218.167 Richelson T. Jeffrey, “Desperately Seeking SIGNALS”, The Bulletin of the Atomic Scientists, Vol. 56, No.2, March/April 2000, www.thebullatomsci.org/issues/2000/ 168 Richelson T. Jeffrey, “Desperately Seeking SIGNALS”, The Bulletin of the Atomic Scientists, Vol. 56, No.2, March/April 2000, www.thebullatomsci.org/issues/2000/, Trueheart Charles, “Europeans Decry U.S. Electronic Intercepts”, Washington Post, February 24, 2000, Page A13, www.washingtonpost.com/ 169 Bamford James, Body of Secrets: Anatomy of the Ultra-Secret National Security Agency, (Anchor Books, 2002), p. 423.

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it has entered into the microeconomic espionage game, the reality illustrates an

opposite trend. Edward Luttwak, the famous strategist believes that “The reality is

that the CIA will get into this is a pragmatic, organic kind of way”.170

7. Economic Espionage: Incentives and Disincentives.

Decision-makers decide to assign to their intelligence services the collection

and analysis of economic intelligence for some specific reasons. Also, they might

abstain from this activity for some other clear reasons. In this part of the paper we will

explore and analyze the dilemmas that a policymaker is facing regarding the practice

of economic espionage.

7.1 Macroeconomic Espionage: Incentives and disincentives

7.1.1 Incentives

Policymakers who order their intelligence agencies to conduct macroeconomic

espionage operations have some motives:

Economic – Technological Incentives

Intelligence services conduct macroeconomic espionage in order to achieve the

most effective observance of international economic and technological developments

in the world. According to Randall M. Fort there is a historical, traditional and

legitimized role for the intelligence community: the support of the governmental

policy as far as economic issues is concerned. He asserts that the U.S. Intelligence

Community provides the suitable help to governmental officials in order to configure

its economic policy. Also, it observes the world technological trends which can

influence/effect the U.S. national security.171 Loch Johnson supports the view that the

U.S. intelligence services contribute to the effective participation of the U.S. in

international economic conference and that they play the same role with the Arms

Control Staff which is at the disposal of the DCI. Also, their aim is to provide special

intelligence concerning concrete countries (e.g. the estimation of the effectiveness of

170 Johnson K. Loch, (1996), op. cit, p. 171.171 Fort Randall M., op. cit., p. 182. Specifically, the following are of great concern: the analysis of bilateral or multilateral negotiations, the recognition of economic trends and the understanding of the intentions of economic competitors, the unification of a large quantity of interspersed data in order to present a holistic picture of the economic and political factors which influence international stability, and the assistance to the policymakers to better understand the “rules of the economic game”.

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sanctions against Iraq).172 In some cases macroeconomic analyses of the U.S.

intelligence services are the basis of U.S. diplomatic initiatives. Also they are used in

order to estimate the effectiveness of the U.S. policy towards concrete countries – in

order to decide if they will decrease or even cut the economic aid or if economic

sanctions should be imposed or when the existing sanctions should be finalized.173

According to another commentator, macroeconomic espionage covers the special

needs of the policymakers so they can keep pace with the latest developments in the

economic and technological fields.174 Representative Dave McCurdy asserts that

economic intelligence are important for the country risk assessment as far as a

specific country is concerned, as well as the analyses of their military capabilities and

contribute to the avoidance of another –technological – Pearl Harbor in which the

basic competitors of the U.S. will accomplish a sudden progress in their economic

practices and policies.175

The economic result of a cost-benefit analysis of macroeconomic espionage

operations is positive. Few well-organized operations can yield important economic

benefits especially for states which counter financial/economic difficulties, while the

operations’ cost is minimal.176 It is always cheaper to steal economic, scientific, and

technological than to pay the whole expenses for R&D. The disclosure of the

operation of the French secret services in 1971 concerning the speculation due to the

dollar’s devaluation is an example of this case. Moreover, this incentive is very

important for the states of the former Eastern bloc which are trying to rebuild their

economy and to adapt to the rules of the world capitalist economic system (open

market system), as well as for the developing countries which are trying to catch the

train of development.

Incentives Related to the Intelligence Community

172 Johnson K. Loch, op. cit., p. 162.173 DeConcini Dennis, “The Role of U.S. Intelligence in Promoting Economic Interests”, Journal of International Affairs, Vol. 48, No. 1 (Summer 1994), p. 41174 Galvan N. Robert, “The Role of American Intelligence in The Global Economy: Business and Industrial Spying I”, International Journal of Intelligence and Counterintelligence, Vol. 8, No. 3 (1995), p. 355. 175 McCurdy Dave, “Glasnost for the CIA”, Foreign Affairs, Vol. 73, No. 1 (January/February 1994), p. 131. Representative McCurdy (D) from Oklahoma was for a decade the Chairman of the House Intelligence Committee. 176 Porteous D. Samuel, “Economic Espionage: Issues Arising from Increased Government Involvement with the Private Sector”, Intelligence and National Security, Vol. 9, No. 4 (October 1994), p. 746, Porteous Samuel, (1998), p. 102-3.

39

Intelligence services have a structural advantage comparing with other

governmental agencies. When they collect and analyze economic intelligence, secret

services play a role which can not be undertaken by either Economic or Trade

Ministries. They have access to special clandestine sources and methods which are

unavailable to other governmental –as well as non-governmental– agencies.177

7.1.2 Disincentives

The disincentives which deter states from engaging in macroeconomic

espionage are the following:

Political – Diplomatic Disincentives

Macroeconomic espionage causes problems to the creation of an effective bilateral

as well as multilateral diplomacy from the state-actor. More concretely,

macroeconomic espionage alienates allies and creates problems to existing trade

coalitions. As we have noticed in the previous section, a macroeconomic espionage

operation created diplomatic problems between the U.S.A. and France. If we try to

predict the international economic environment there is a great possibility that distinct

economic blocks will be, if they have not already been, created – NAFTA (North

American Free Trade Agreement), E.U. (European Union), China, Russia178, and

Japan. The argument is that new and strengthened alliances driven by economic

interests will test the viability and durability of existent, traditional political and

military alliances, like NATO (North Atlantic Treaty Organization), as well as some

intelligence SIGINT agreement, like that between Canada, Great Britain, U.S.A. and

Australia. A French global military review admitted the increasing link between

economic and security interests with trade blocks. This review, which aims to

influence the agenda of European security within the E.U., claims that security is

defined less with territorial terms and more with economic/industrial terms. In this

environment, the interests of France are hardly separated from those of the other E.U.

members. This review calls for the development of common intelligence structures

and the decrease of the dependency from U.S. intelligence.179 It is very difficult for

the existing military and political alliances not to be weakened, if their member-states

177 Zelikow Philip, op.cit., p. 174.178 Russia has overcome its economic problems and has become a key player as far as energy issues are concerned. 179 Porteous Samuel, (1998), p. 90. The formal position of British on this issue is the expected: “it is absurd to weaken the Anglo-U.S. intelligence link even at the risk of being accused by Britain’s EU partners of being a Trojan horse”.

40

belong to another competing/rival economic block and to different intelligence-

sharing networks.180

Disincentives Related to the Intelligence Community

Some analysts and politicians support the view that the role of intelligence

services is not to study the international economy and to steal trade secrets, but to

guarantee the U.S. national security. According to Stanley Cober, researcher of

CATO Institute, the U.S. intelligence agencies should devote their sources and

expertise in more important threats for the U.S. security, especially in countering

terrorism.181 Michael Herman expresses a similar opinion by saying that “the

intelligence services were developed mainly in the area of national security and they

must be limited to their task”.182

According to some analysts the intelligence collected by macroeconomic

espionage is useless in tactical level because their personnel have not the available

economic knowledge to exploit them.183 Samuel Porteous expresses the counter-

argument that during the Cold War U.S. intelligence services spent both money and

time in order to acquire complex military technologies for which they had not specific

knowledge and they succeeded in their mission. The same methods can be used in the

case of the collection of macroeconomic intelligence without any difficulty.184

The intelligence services can not compete with the quality of analysis of

governmental and academic institution which deals with the study of economic

issues.185 Lawrence Summers, official of the U.S. Treasury Department declared that

he can not understand how the U.S. Intelligence Community can add something

valuable to the reports concerning the economic situation of European countries,

produced by specialized economic analysts of the U.S. government or Wall Street

Journal’s analysts. Moreover, international economic organizations like the

International Monetary Fund (IMF) and the World Bank are collecting and analyzing

180 Porteous Samuel, (1998), p. 89-90. 181 Kober Stanley, (1996).182 Herman Michael, “Intelligence and Policy: A Comment”, Intelligence and National Security, Vol. 6, No. 1, 1991, p. 238.183 Porteous D. Samuel, “Economic Espionage II”, Commentary No. 46, Canadian Security Intelligence Service, http://www.csis-scrs.gc.ca/eng/, 1994.184 Ibid.185 Chattergee Pratap, op. cit.

41

information about international economic developments.186 Bruce Berkowitz, a senior

consultant of RAND, and Alan Goodman, President and Chief Executive Officer of

the Institute of International Education, agree with Summers and claim that in our era

a lot of governmental and private organizations collect and analyze economic

information worldwide, for example Dow Jones, McGraw-Hill, Dun & Bradstreet.187

As a result, policymakers have at their disposal a huge amount of economic

information.

The collection of the majority of macroeconomic intelligence is done via open

sources.188 According to the “Commission on the Roles and Capabilities of the United

States Intelligence Community” report approximately the 95% of the analysis of

economic issues comes from open sources.189 Philip Zelikow thinks that all the

agencies which collect and analyze economic intelligence/information should

understand that the function of the world economy is based on open sources.190 The

counterargument of the proponents of macroeconomic espionage is indeed very

persuasive: even in the era of CNN and Internet secrets are, and for a long time will

be, with us. Also, the comparative advantage of the intelligence services is their

clandestine methods and sources and their special ways to disseminate intelligence to

policymakers.191 Professor Johnson maintains that open sources are not a panacea and

make a reference to a CIA study according to which only the 1% of the information

provided by Internet is important for intelligence services.192

7.2 Microeconomic Espionage: Incentives and disincentives

Decision-makers decide to assign to their intelligence services the collection

and analysis of microeconomic intelligence for some specific reasons. Also, they

might abstain from this activity for some other clear reasons. In this part of the paper

186 Ibid. 187 Berkowitz D. Bruce, Goodman E. Allan, op. cit., p. 109. Alan Goodman was Professor of International Affairs at Georgetown University’s School of Foreign Service. 188 Johnson K. Loch, “Spies”, Foreign Policy (September/October 2000), p. 22. For the role of open sources see: Steele David Robert, On Intelligence: Spies and Secrecy in an Open World (AFCEA International Press (AIP), 2000).189 Johnson K. Loch, (2000), op. cit., p. 22. 190 Zelikow Philip, op. cit., p. 171.191 Porteous Samuel, (1998), op. cit., p. 81. 192 Johnson K. Loch, (2000), op. cit., p. 24.

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we will explore and analyze the dilemmas that a policymaker is facing regarding the

practice of microeconomic espionage.

7.2.1 Incentives

Policymakers who order their intelligence agencies to commit microeconomic

espionage are not irrational but have some logical incentives. For analytical reasons,

the incentives can be categorized in 2 broad categories:

Economic Incentives

The first and most important category deals with the economic logic behind the

phenomenon of microeconomic espionage. Adherents of this intelligence activity

invoke the Strategic Trade Policy Argument in order to justify their position.

Professor Robert Gilpin defines Strategic Trade Policy (STP) as “an effort by a

nation-state to change its international strategic environment in such a way as to

provide specific benefits to indigenous corporations”.193 The central argument of STP

is that state intervention to alter the strategic interaction between oligopolistic firms

can itself be an important basis for trade policy. Microeconomic espionage is a type of

governmental interference and affects strategic interactions between oligopolistic

rivals.194 Actually, the state by providing corporations with microeconomic

intelligence, give them the opportunity to increase their gains. The supporters of

microeconomic espionage claim that a multinational, even if it has not “nationality”,

deserves the help of the state where it is based, because the company creates jobs, and

adds value to the whole state economy. From its part, the state protects its economic

and financial climate.195 SPT proponents believe that those states which are going to

be adopted to the future economic challenges will gain a strategic advantage towards

the rest. They argue that a well-funded high-quality microeconomic espionage

193 Gilpin Robert, The Political Economy of International Relations, (Gutenberg, Athens, 1995, in Greek), p. 262. 194 Brander A. James, “The Economics of Economic Intelligence”, in Potter H. Evan, Economic Intelligence & National Security (Carleton University Press, 1998), p. 201. 195 Porteous Samuel, (1998), op. cit., p. 98.

43

program in order to augment a state’s economic competitiveness would be the most

important development as far as national security is concerned.196

Another basic argument of the supporters of microeconomic espionage has to do

with applied economics. They claim that the economic result of a cost-benefit analysis

of macroeconomic espionage operations is positive. Few well-organized operations

conducted by intelligence services can yield important economic benefits especially

for companies which counter financial/economic difficulties, while the operations’

cost is minimal.197 It is always cheaper to steal economic, scientific, and technological

than to pay the whole expenses for R&D.

In 1999, Professor James D. Gasford and Dr. Merrill E. Whitney, of the

Department of Economics, at the University of Calgary, by using mathematic types

concluded that under specific circumstances (oligopolistic industries) microeconomic

espionage is beneficial both for states and for corporations. They argue that in

oligopolistic industries where “there are potential and strategic benefits from the

development of new processes”, intelligence services have a role to play in

“protecting current and future profits”. In spite of the disincentives of microeconomic

espionage, this activity has the potential to yield desirable strategic or profit-shifting

effects as well as cost savings for indigenous corporations. Even if other countries use

counterintelligence-counterespionage methods in order to counter microeconomic

espionage, the aggressive country will still gain from espionage. Moreover, they

proved that microeconomic espionage is also beneficial for the consumers because

“typically the expected world output rises, the expected price falls and the expected

consumer surplus is enlarged”. Generally they reach the conclusion that “economic

espionage can be in the national interest”.198

Incentives Related to the Intelligence Community

Intelligence services have a natural, structural advantage comparing with other

governmental agencies. When they collect and analyze economic intelligence, secret

services play a role which can not be undertaken by either Economic or Trade

Ministries because of their unique access to special clandestine sources and methods

196 Ibid, p. 200-206. 197 Porteous D. Samuel, (1994), op. cit., p. 746, Porteous Samuel, (1998), op. cit, p. 102-3.198 Merrill E. Whitney, James D. Gaisford, “Why Spy? An Inquiry into the Rationale for Economic Espionage”, International Economic Journal, Vol. 13, No. 2, Summer 1999.

44

(e.g. SIGINT collection capabilities) which are unavailable to other governmental –as

well as non-governmental– agencies.199

Moreover, intelligence agencies themselves make profits from the

microeconomic espionage operations. Count de Marenches, the former head of the

French secret services has written in his memoirs that “In any intelligence service

worthy of the name you would easily come across cases where the whole year’s

budget has been paid for in full by a single operation”.200

7.2.2 Disincentives

The disincentives which deter states from engaging in macroeconomic

espionage fall into 6 broad categories:

Political – Diplomatic Disincentives

Critics of microeconomic espionage argue that states which conduct

microeconomic espionage operations endanger their relations with their allies. A

microeconomic espionage program would cause problems to the conduct of an

effective U.S. foreign policy. If the U.S. intelligence community spies against its

allies’ companies their relations would be weakened and it would be difficult to form

a military coalition against a rogue state (e.g. Iraq) or against the worldwide terrorist

threat.201

Some analysts and politicians support the view that the role of intelligence

services is not to steal trade secrets, but to guarantee the U.S. national security. For

them, microeconomic espionage is a waste of time and resources in a world full of

direct threats against American security. The proliferation of weapons of mass

destruction, terrorism (a combination of both is a nightmare for the U.S. intelligence

policy), the existence of drug cartels, the stability in Russia and China, policies of

rogue states like Iran, Iraq and North Korea, consist more imminent threats than the

threat stemmed from microeconomic espionage.202

According to Stanley Cober, researcher of CATO Institute, the U.S.

intelligence agencies should devote their sources and expertise in more important

199 Zelikow Philip, op. cit., p. 174. 200 Schweizer Peter, op. cit., p. 12. 201 Porteous Samuel, (1998), op. cit., p. 101.202 Valero Larry, “The Role of American Intelligence in The Global Economy: Business and Industrial Spying II”, International Journal of Intelligence and Counterintelligence, Vol. 8, No. 3 (1995), p. 359-362.

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threats for the U.S. security, especially in countering terrorism.203 Michael Herman

expresses a similar opinion by saying that “the intelligence services were developed

mainly in the area of national security and they must be limited to their task”.204

Randall Fort expresses the fear that microeconomic espionage might lead the U.S.A.

in a new economic version of the Cold War. If microeconomic espionage against

allies’ corporations will include the conduct of covert economic operations, the result

might be the declaration of an “economic-trade war” in the best case, and of a real

war, in the worst case.205

The counterargument of the proponents of a microeconomic espionage

program is that all those threats have also economic connotations and that the

economy is closely linked with national security, which has also an economic

dimension. According to Professor Ken Booth, “security should be a broader concept

than merely military strategy”206 Professor Barry Buzan distinguishes five dimensions

of security: military, political, economic, societal, and environmental.207 He maintains

characteristically that, if we select the statist level of analysis, then economic security

is part of the national security agenda. He defines economic security as the “access to

the resources, finance and markets necessary to sustain acceptable levels of welfare

and state power” and he equates security “with the economic conditions necessary for

survival”.208

Economic Disincentives

203 Kober Stanley, op. cit., (1996).204 Herman Michael, “Intelligence and Policy: A Comment”, Intelligence and National Security, Vol. 6, No. 1, 1991, p. 238. Sixteen years later, Mr. Herman still holds the same opinion. In a discussion with the author he admitted it and he argued that in an era of globalization it is very difficult to recognize a U.S. company. (Conference “Choices for Western Intelligence: The Security Challenges of the Twenty-first Century”, University of Wales, Aberystwyth, Gregynog, 28-30 April 2007).205 Johnson K. Loch, (1996), op. cit., p. 171.206 Booth Ken, “War, Security and Strategy: Towards a Doctrine For Stable Peace” in Booth Ken (ed.), New Thinking About Strategy and International Security (HarperCollins, 1991), p. 342.207 Buzan Barry, “Is International Security Possible?” in Booth Ken (ed.), New Thinking About Strategy and International Security (HarperCollins, 1991), p. 34. Buzan’s definitions of the rest dimensions of security are the following: Military security has to do with “the two-level interplay of the armed offensive and defensive capabilities of states, and states’ perceptions of each other’s intentions”. Political security is “the organizational stability of states, systems of government, and the ideologies that give them legitimacy. Societal security refers to the “sustainability, within acceptable conditions for evolution, of traditional patterns of language, culture, and both religious and national identity and custom”. Environmental security is concerned with “the maintenance of the planetary biosphere as the essential support system on which all other human enterprises depend”. Ibid, p. 34-5. 208 Buzan Barry, People, States & Fear: An Agenda for International Security Studies in the Post-Cold War Era (Harvester Wheatsheaf, 1991), p. 241.

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One of the main arguments of the opponents of microeconomic espionage is

that if several countries enter into the “game” they all end up worst off. In this case it

is for the interest of all states to reach an international agreement not to follow

microeconomic espionage policies. Moreover, they argue that microeconomic

espionage operations work like subsidies. States, who conduct this kind of espionage

via their intelligence agencies, create market imperfections - instead of countering

them-, weakens international trade, awards stealing instead of innovation, protect

ineffective producers and not the consumers, and perceive wrongly the international

economic competition as a threat to national security rather than as a positive

component of economic development. In the long run the results for the state

economy would be negative. Actually, this activity is both a waste of time and

resources. Scarce resources would be managed counterproductively and non-

competitive industries would depend more than ever on state protection. Moreover,

isolated trade, economic and technological secrets are not so important for a state’s

whole economy. Especially for the U.S.A. a microeconomic espionage program is not

compatible with the existent U.S. policy of “national treatment” of foreign

investments. As a result of microeconomic espionage, a foreign company may decide

to withdraw its investment from the territory of a state that is engaged in such an

activity. Randal Fort and Loch Johnson support the view that the American

government instead of following the path of microeconomic espionage has more

healthy options to follow in order to improve its international competitiveness, like

the strengthening of its old industries and the improvement of the capabilities of its

working force. Professor Johnson adds that the U.S.A. would earn more from

businessmen who are fluent in Japanese and who can understand the Japanese culture,

than from spies seeking for economic intelligence.209

However, there are strong counterarguments. Firstly, as we have seen in

analyzing microeconomic incentives, this activity is actually profitable both for the

state and for corporations. Secondly, according to the realist theory of International

Relations, in an anarchic international system it is very difficult (although not

impossible) to achieve cooperation between nations because of the problems of trust,

cheating, and of the relative gains.210 So it is very difficult to reach an international

treaty banning microeconomic espionage. The main questions are which organization 209 Fort M. Randall, “Economic Espionage”, in George Z. Roger, Kline D. Robert (eds.), Intelligence and the National Security Strategist, (Rowman & Littlefield Publishers, Inc., 2006, p. 248, Johnson K. Lock, (1996), op. cit, p. 173.

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will undertake this duty and how efficient it will be? Thirdly, another

counterargument has to do with the quality and quantity of economic intelligence. In

our era the U.S.A. is the world leader both in economic and in technological domains.

As a result this country has much more to lose from economic espionage in general

and microeconomic espionage in particular than the rest of the world. Surely, the

Europeans or the Japanese have also trade, economic and technological secrets, but

not so many than the U.S.A. In other words, states who commit microeconomic

espionage gain a clear comparative advantage vis-à-vis their great competitor, the

U.S.A.

Practical Disincentives

There are also some practical problems. Firstly, which corporations and which

sectors of the economy would be the beneficiaries of a microeconomic espionage

program? Does the list with the beneficiaries include all the companies of a specific

sector or some of them? Who will take this decision and with what criteria? What

would be more important, the size of the market, profits, or share of the market? If

there is not a fair and equal distribution of the collected economic intelligence, would

the taxpayers contribute to the subsidizing of specific corporations? If the government

distributes the intelligence product to specific corporations, is it going to be accused

of offering preferential treatment to them?211

The proponents of microeconomic espionage on the contrary believe that the

intelligence services can play the role of a clearinghouse and can distribute the

intelligence collected to all the U.S. companies.212

Secondly, in the era of globalization what criterion constitutes a company an

“American company”? The location of its headquarters? The nationality of its main

stockholders or of its employees? Some foreign companies have their basis in the

210 For a realist approach as far as the achievement of cooperation is concerned see: Grieco M. Joseph, Cooperation among Nations: Europe, America, and Non-Taiff Barriers to Trade, (Cornell University Press, 1990), Baldwin A. David, (ed.), Neorealism and Neoliberalism: The Contemporary Debate, (Columbia University Press, 1993), Kegley W. Charles, Jr., (ed.), Controversies in International Relations Theory: Realism and the Neoliberal Challenge, (St. Martin’s Press, 1995), Burchill Scott, “Realism and Neo-realism”, in Burchill Scott, Devetak Richard, Linklater Andrew, Paterson Matthew, Reus-Smit Christian and True Jacqui, Theories of International Relations, (Palgrave, 1996), Baylis John, Smith Steve (eds.), The Globalization of World Politics: An Introduction to International Relations (Oxford University Press, 1997), Williams Phil, Goldstein M. Donald, Shafritz M. Jay (eds.), Classic Readings and Contemporary Debates in International Relations (Thomson Wadsworth, 2006), Mearsheimer J. John, The Tragedy of Great Power Politics, (W.W. Norton & Company, 2001), Arthur A. Stein, Why Nations Cooperate: Circumstance and Choice in International Relations, (Cornell University Press, 1990). 211 Fort Randall, (1995), op. cit., p. 186.212 DeConcini Dennis, op. cit., p. 47, 49.

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U.S.A. Should the U.S. intelligence community spy against them too? What about the

U.S. affiliated companies which operate overseas? Are going to have access to those

privileged microeconomic intelligence collected by U.S. secret agencies? And what if

this affiliated U.S. corporation is competing with a foreign company based in the

U.S.A.? Should U.S. intelligence services support all the foreign multinationals based

in the U.S.A. – even the Japanese? If the U.S. intelligence community will support the

American Boeing in its competition with the European Airbus, she will endanger the

interests of another U.S. corporation General Electric which constructs plane engines

for Airbus. Moreover, corporations which have strong ties with U.S. politicians and

have great influence because of their economic power can be the most privileged.213

The supporters of microeconomic espionage claim that these difficulties are

not insurmountable and that this argument has a great dose of exaggeration. Firstly, a

lot of joint ventures, especially in high-technology sector, which are supported by one

government in order to cooperate with other companies, put as a prerequisite that

those companies should be indigenous. Moreover, the public organizations which are

responsible for taxation in every country, know exactly the techniques according to

which they can determine the nationality of a corporation. Probably it is difficult to

define the nationality of a multinational, but it is not impossible. Secondly, the

intelligence could be disseminated to companies via joint ventures, so the obstacles

posed by the nationality issue can be overcome.214

Legal Disincentives

On the one hand, according to William T. Warner, Law Professor at the

University of Kentucky, microeconomic espionage can create a “legal nightmare”.215

Some multinational corporations are controlled by American citizens, or they employ

American citizens. If the U.S. intelligence community acts against them, it will violate

The National Security Act of 1947 which does not allow the conduct of espionage

operations against U.S. citizens. Moreover, microeconomic espionage operations

violate both the Intellectual Property Law, and international economic agreements

like GATT (General Agreement on Rates and Tariffs), and the rules established by its

successor, the World Trade Organization.216 According to Randall Fort, there is a

great possibility of extensive civil litigation against the American government in both

213 Fort Randall, (2006), op. cit., p. 241-42.214 Porteous D. Samuel, (1998), op. cit., p. 102. 215 Valero Barry, op. cit., p. 360. 216 Porteous D. Samuel, (1994), op. cit., p. 742-3.

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American and foreign courts. The victims of microeconomic espionage (foreign and

U.S. companies, as well as consumers) could sue.217

On the other hand, the adherents of microeconomic espionage believe that the

CIA has actually the express or inherent power to conduct such an activity. They base

their argument on two legal documents:

Firstly, The National Security Act of 1947, and secondly on the Executive

Order 12,333. The National Security Act, although does not refer explicitly to

economic espionage, it does not clearly mention the types of intelligence collected

and analyzed by the U.S. Intelligence Community, as well as which of them have

direct relation with national security. This silence supports the theory that the

President can use the Agency to conduct economic espionage. Economic espionage

could be legally covered, especially by Section 403-3(d)(5), according to which the

CIA can “perform such other functions and duties related to intelligence affecting the

national security as the President or the National Security Council may direct”.218

Secondly, the Executive Order 12,333, in its entirety, treats economic issues as

a critical component of national security. For example Part 1.1 of the Order states:

“The United States intelligence effort shall provide the President and the National

Security Council with the necessary information on which to base decisions

concerning the conduct and development of foreign, defense and economic policy,

and the protection of United States national interests from foreign security threats”.219

As far as the violation of international economic treaties is concerned, they support

the view that the fact that both U.S. opponents and allies conduct economic espionage

(in all its dimensions) against the U.S.A. decreases their efficiency.

Disincentives Related to the Intelligence Community

Critics of microeconomic espionage present the following arguments

concerning the function of intelligence services: Firstly, the U.S. Intelligence

Community does not support the conduct of microeconomic espionage. The duty of

the U.S. intelligence officers is the protection of the U.S. security and not the

protection of specific companies. The former DCI Robert Gates referred to an

217 Fort M. Randall, (2006), op. cit., p. 245. 218 Moreover, Section 403-3(d)(4) could be also used to justify economic espionage operations by the CIA. Section 403-3(d)(4) states that the CIA shall “perform such additional services as are of common concern to the elements of the intelligence community, which services the Director of Central Intelligence determines can be more efficiently accomplished centrally”. Sather Kyle, “The Role of the CIA in Economic Espionage”, http://faculty.lls.edu/~manheimk/ns/sather2.htm 219 Ibid.

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incident where a CIA agent told him “I am ready to sacrifice my life for my country,

but not for a corporation”.220 Furthermore, there is the danger of corruption less for

some intelligence officials, and more for the intelligence services themselves.

Corporations would exert pressure on the intelligence community to take favorable

decisions regarding the distribution of microeconomic intelligence.221

Secondly, the intelligence collected by microeconomic espionage is useless in

tactical level because their personnel have not the available economic knowledge to

exploit them.222

Samuel Porteous expresses the counter-argument that during the Cold War

U.S. intelligence services spent both money and time in order to acquire complex

military technologies for which they had not specific knowledge and they succeeded

in their mission. The same methods can be used in the case of the collection of

macroeconomic intelligence without any difficulty.223 Furthermore, the U.S.

Intelligence Community has at its disposal an efficient economic staff. Professor

Philip Zelikow states that “The greatest concentration of analytical experts on

international economic issues in the federal government resides not in any of the

executive departments but in the CIA. It is even possible that the ranks of CIA

analysis contain about as much economic expertise on international problems as can

be found in all the executive departments of the government together.”224

And if it is necessary it could recruit more efficient and clever economists by giving

them the suitable incentives.

Thirdly, the collection of the majority of microeconomic intelligence is done

via open sources.225 According to the “Commission on the Roles and Capabilities of

the United States Intelligence Community” report approximately the 95% of the

analysis of economic issues comes from open sources.226 Philip Zelikow thinks that all

the agencies which collect and analyze economic intelligence/information should 220 Porteous D. Samuel, “Economic/Commercial Interests And Intelligence Services”, Commentary, No. 59, Canadian Security Intelligence Service, www.csis-scrs.gc.ca/eng/, 1995. 221 Schweizer Peter, (1996), op. cit., p. 14. 222 Porteous D. Samuel, “Economic Espionage II”, Commentary No. 46, Canadian Security Intelligence Service, http://www.csis-scrs.gc.ca/eng/, 1994.223 Ibid.224 Sean Gregory, “Economic Intelligence in the Post-Cold War Era: Issues for Reform”, in Edward Cheng, Diane C. Snyder (eds.), The Final Report of the Snyder Commission, Woodrow Wilson School Policy Conference 401a: Intelligence Reform in the Post-Cold War Era, The Woodrow Wilson School of Public and International Affairs, Princeton University, January 1997. 225 Johnson K. Loch, (2000), op. cit., p. 22. For the role of open sources see: Steele David Robert, On Intelligence: Spies and Secrecy in an Open World (AFCEA International Press (AIP), 2000).226 Johnson K. Loch, (2000), op. cit., p. 22.

51

understand that the function of the world economy is based on open sources.227 Robert

Steele one of the pioneers of the open source collection and founder of the Open

Sources Solutions supports the view that all the intelligence collection problems

would be solved via the “open intelligence collection” and the restructuring of the

whole U.S. intelligence mechanism in the basis of the concept of “Open Sources

Intelligence” (OSCINT).228

The counterargument of the proponents of macroeconomic espionage is

indeed very persuasive: even in the era of CNN and Internet secrets are, and for a long

time will be, with us. Also, the comparative advantage of the intelligence services is

their clandestine methods and sources and their special ways to disseminate

intelligence to policymakers.229 Professor Johnson maintains that open sources are not

a panacea and make a reference to a CIA study according to which only the 1% of the

information provided by Internet is important for intelligence services.230

Disincentives Related to the Business Community

The business community in the U.S.A. does not support a microeconomic

policy. Some of them have at their disposal their own intelligence professionals

(mostly ex-CIA agents) and conduct industrial espionage themselves. Moreover,

others are worried about the price they have to pay to the U.S. intelligence agencies in

exchange of her help (probably the provision of non official cover to U.S. agents).231

Several business executives have expressed their fear that the U.S. intelligence

services would launch an economic CHAOS operation.232

The supporters of microeconomic espionage operations argue that traditionally

there is a close relationship between industry on the one hand, and the intelligence

and defense community on the other hand. A lot of large private corporations gain

contracts from the U.S. Department of Defense and from the U.S. Intelligence

Community. The U-2 program which was funded by the CIA and was undertaken by

Lockheed is an illustrative example.233 Moreover, the U.S. Intelligence Community 227 Zelikow Philip, op. cit., p. 171.228 Guisnel Jean, op. cit., p. 227, 229-30. See also Steele David Robert, op. cit.229 Porteous Samuel, (1998), op. cit., p. 81. 230 Johnson K. Loch, (2000), op. cit., p. 24. 231 Johnson K. Loch, (1996), op. cit., p. 150-1. 232 Ibid, p. 172. 233 For the U-2 project see: Tenet J. George, “An Intelligence Success Story: The U-2 Program: The DCI’s Perspective”, Studies in Intelligence, Vol. 42, No. 2, Winter 1998-1999, Orlov Alexander, “A “Hot” Front in the Cold War: The U-2 Program: A Russian Officer Remembers”, Studies in Intelligence, Vol. 42, No. 2, Winter 1998-1999, Richelson T. Jeffrey, The Wizards of Langley: Inside the CIA’s Directorate of Science and Technology, (Westview Press, 2001), p. 29, 39-40, 63, Stephen Ambrose, Ike’s Spies: Eisenhower and the Espionage Establishment, University Press of Mississippi,

52

has certain unofficial agreements with some corporations according to which the latter

should provide non-official cover to intelligence officers. As an exchange the

intelligence agencies may provide economic intelligence to those companies.

8. Conclusions

In spite of the above-mentioned disincentives, the study of the economic

espionage policies of the former Soviet Union/Russia, France, Japan, and U.S.A.

prove that states have not abandoned –and possibly will not abandon in the future –

their traditional involvement in that secret activity, which tends to become a systemic

characteristic of the intelligence apparatus of nations-states and a main mission of

their intelligence services. The overarching motive in our opinion is deeper than the

earning of money or the acquisition of a new technology. Taking into consideration

both the close relationship between the Defense and Intelligence Community and

industry, and the fact that the development and constant improvement of economic

and technological power consists a sine qua non for military power, the activity of

economic espionage is directly connected with the balance of power between nations.

In a world characterized by rapid economic and technological advancement it

is vital for the security of a state to conduct economic espionage in order not to fall

behind economically and technologically, something which will affect negatively its

power. In conclusion, the argument of Thucydides about the role of “uneven

development” in international politics is once more vindicated. The aim of states

which conduct economic espionage is to avoid a situation of “uneven development”

beneficial to their competitors but against themselves. They act like Sparta in the

Peloponnesian War which started a preventive war in order to stop the Athenian

development and avoid being the victim of the law of uneven development in the long

1999, p. 269, Pocock Christopher, The U-2 Spyplane: Toward the Unknown, A New History of the Early Years, Reviewed by Haines K. Gerald, Studies in Intelligence, Vol. 46, No. 2, 2002, Taubman Phillip, Secret Empire: Eisenhower, the CIA and the Hidden Story of America’s Space Espionage, (Simon and Schuster, 2003), Pedlow W. Gregory, Welzenbach E. Donald, The CIA and the U-2 Program, 1954-1974, (Washington D.C.: History Staff, Center for the Study of Intelligence, 1998, Pocock Chris, 50 Years of the U-2: The Complete Illustrated History of the “Dragon Lady”, (Atlen, PA: Schiffer Military History, 2005).

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run.234 But in this time they use a mix of economic and intelligence means (economic

espionage) and not military means, which are means of the last resort.

About the Author

Ioannis L. Konstantopoulos is a PhD Candidate in the Department of International and European Studies, Panteion University of Social and Political Sciences, Athens, Greece. He received “Heraclitus” Scholarship from the E.U. and the Hellenic Ministry of Education in order to fulfil his PhD which is entitled “Economic Espionage and International Relations” and his main goal is to bridge the gap between Intelligence Studies and International Relations Theory by examining the case study of economic espionage.

234 Thucydides, History of the Peloponnesian War, (A 23, A 88) (in Greek). For the role of Thucydides in the discipline of International Relations and especially in the sub-field of Strategic Studies see: Connor, W.R., “Polarization in Thucydides”, in Lebow Ned Richard (ed.), Hegemonic Rivalry from Thucydides to the Nuclear Age, (Boulder: Westview, 1991), Fuller, J.F.C., A Military History of the Western World, Vol. 1: From the Earliest Times to the Battle of Lepanto, (Da Capo Press, 1954), Garst, David, “Thucydides and Neorealism”, International Studies Quarterly, Vol. 33, No. 1, (1989), Johnson, Bagby, Laurie M., “Thucydidean Realism: Between Athens and Melos”, Security Studies, Vol. 5, No. 2, Winter 1995/6, Kagan Donald, “Athenian Strategy in the Peloponnesian War” in, Murray Williamson , Knox MacGregor, and Bernstein Alvin (eds.), The Making of Strategy: Rulers, States, and War, (Cambridge University Press, 1994), Millett Paul, Warfare, Economy and Democracy in Classical Athens”, in Rich John, Shipley Graham (eds.), War and Society in the Greek World, (Routledge, 1993), and Platias Athanassios, International Relations and Strategy in Thucydides, (ESTIA Publishers, Athens 1999, in Greek).

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