IN JANUARY 1997, I made a memorable nighttime visit to a crumbling apartment block in Tirana, the capital of Albania. A prominent dissident was recovering from a beating he’d received from government security goons, and many of the country’s leading intellectuals and political thinkers were there to pay their respects and plot their next move. The atmosphere was pure Balkans noir: edgy, sleepless, fueled by coffee, cigarettes, and brandy shots. The electricity was out, and wild dogs were howling in the garbage-strewn streets.

I was a young reporter seeking to make sense of Europe’s most obscure and least understood country, at a moment when nothing made sense at all. The Albanian economy, in which the World Bank and others had seen tremendous promise, was cratering: the country was in hock to a string of failing pyramid investment schemes that had supplanted the conventional banks. Sali Berisha, Albania’s postcommunist president who enjoyed near-universal support from the Western powers, was growing increasingly autocratic and paranoid. The opposition leader was in prison; many other political luminaries had been purged or exiled. A rage was building and would soon erupt from one end of the country to the other.

The dissident was Edi Rama, a painter and intellectual with the build of a basketball player who’d been attacked with iron bars and knuckle-dusters. His injuries kept him bedbound, but they didn’t stop him spinning elaborate theories about the real story behind the collapse of Tirana’s biggest pyramid scheme, named Sude. The official version, that it was a Robin Hood–style operation run by a gypsy shoe factory worker, was a fairy story. Sude, Rama said, had been set up to launder the profits of illegal oil sales from Iraq, then subject to strict UN sanctions. Sometimes the oil itself arrived, on board a Liberian-registered tanker, en route to Serbia and Montenegro where an international oil embargo had been in force until very recently. Sometimes Sude received just the Iraqi money, which was recycled through Albania’s state banks.

Another of Rama’s visitors, a dapper lawyer who had spent years as a political prisoner under the Albanian communist dictator Enver Hoxha, was itching to tell me more — or at least tease me into believing I had heard only a fraction of the truth. “I can’t tell you the full story now, because it might be too damaging to speak,” he said in a whisper. “Either people won’t believe me, or they will tear the country to pieces out of sheer anger.”

A single candle lit the room where we spoke, and I had the eerie impression of being addressed by a disembodied voice, like an oracle. My interlocutor, who wanted to be referred to only as Mr. X, said Albania had become a world-class money-laundering center, much cheaper for mafiosi and international gangster capitalists than Switzerland or the Cayman Islands. Three or four US banks were involved; the racket had swollen into the billions of dollars.

I couldn’t decide whether to believe a word of this. Like many regular foreign visitors, I had been unaware of the pyramids’ existence until a few months earlier; they were Albania’s dirty secret. All I could think of was the scene in Oliver Stone’s JFK where Donald Sutherland pops up as a conveniently mysterious national security honcho and confirms every last scrap of breathless speculation about the Kennedy assassination. It sounded compelling, but where was the proof?

A couple of weeks later, as the anti-government rebellion claimed its first victims and Mr. X’s predictions of anarchy and disintegration started to look all too real, I received an unmarked brown envelope filled with what appeared to be confidential intelligence communications laying out evidence of Albanian government collusion in drug trafficking, illegal arms trading, and sanctions-busting. The state security police, the same entity whose agents had knocked Edi Rama senseless and broken his nose, was said to have masterminded the transshipment of heroin and other drugs from the eastern Mediterranean through Albania to Italy. One acting minister and one former minister were named as being personally involved.

The man who sent me the envelope had been lobbying his government without success to crack down on President Berisha and the ruling Democratic Party. He shared his information with me because he found it “truly mind-boggling” that such criminality could go on unchecked. I subsequently talked to an intelligence analyst from another Western European country who not only backed up what I’d read in the documents but described in detail how Italian organized crime groups were exploiting the Albanian pyramid schemes both to launder money and to raise it.

Even as I went to print with these allegations, I was aware of the risk of being wildly off the mark in a rapidly moving situation in which everyone had an agenda, and there was no solid way to verify anything. Over the following weeks, as testosterone-pumped young men seized Kalashnikovs from police and army depots and the country descended into chaos, I heard indications — from the Albanian ambassador to London, from the British Foreign Office, from the staff of the US Embassy in Tirana — that my sources had steered me more right than wrong. Still, it defied belief that this sliver country, set between forbidding highlands to the north and lush, fertile plains stretching to the Adriatic, could have transformed in a few years from the most isolated communist dictatorship on earth to a lawless free-for-all for traffickers and money-launderers — a giant mob-run casino in which everyone bet the house and only the house won.

Where were the IMF and the World Bank? Why did the European Union and the United States, whose overriding interest was to maintain stability in one area of the Balkans not consumed by nationalist passions or full-blown civil war, misjudge so badly?

I never did find adequate answers to these questions during my reporting trips. There was so much to absorb on the surface — the loss of at least 50 percent of the country’s Gross Domestic Product, armed rebellion and destruction, Berisha’s slow admission of defeat as the rebels bore down on Tirana, the intervention of an international peacekeeping force, new elections — that the deeper story remained fuzzy at best.

Now, thanks to an assiduously researched, compulsively readable new book by Fred Abrahams, a researcher for Human Rights Watch who has been reporting on Albania and many other countries for more than 20 years, we have about as full an account as we can hope for. Abrahams speaks the language, has read the documents, witnessed many of the key episodes for himself, and interviewed almost every player of significance. Albania is a country filled with wily, resourceful, worldly, funny, and fatalistic people, and with their many contributions Abrahams’s narrative is as darkly farcical as it is tragic.

The takeaway, oddly, is that the seemingly overwrought stories I heard in Edi Rama’s parents’ house in January 1997 were more accurate than I dared believe. While the World Bank was describing Albania, in the mid-1990s, as a “small haven of peace and economic growth,” its representative in Tirana was aware that the state statistics institute was routinely falsifying inflation figures and other key economic indicators. It was also untrue, contrary to the line taken by the IMF and Western diplomats before the deluge, that Albania was taking admirably creative advantage of foreign aid and the remittances sent home from Albanians working in Italy and Greece.

The clear driver of Albania’s progress was the war in the former Yugoslavia and the opportunities it presented for smuggling and sanctions-busting. The pyramid schemes didn’t start out as classic pyramids in the sense that they were set up with the specific purpose of defrauding credulous citizens. Rather, they were a money-laundering cover for government-sanctioned businesses, including an oil company wholly owned by Berisha’s Democratic Party. As long as the war continued, these companies could offer ordinary Albanians monthly interest at 4–6 percent. A $1,000 investment could keep an Albanian family afloat even without other sources of income.

Abrahams makes no mention of Iraqi oil revenues coming to Albania, but he does describe deals to send arms to Afghanistan, and to Rwanda during the period of the genocide. Heroin was coming through Albania from Turkey and the eastern Balkans, and a booming marijuana-growing business was established in the south of the country.

It’s not that ordinary Albanians didn’t know where their money was coming from. They were content not to ask questions, satisfied that the government was underwriting the investment schemes, and that the government, in turn, had the support of the international community. Even the political opposition said nothing, because they too were invested in the pyramids, and they knew that challenging them would be electoral suicide. As Abrahams writes:

To question the pyramid schemes was like speaking against communism during the time of Hoxha: everyone thought you were insane. It was a confederacy of collusion, a societal secret, a profiteers’ pact.

The Dayton Accords, which ended the Yugoslav wars in December 1995, struck a first blow against Albania’s gangster economy. By the summer of 1996, interest rates had climbed to 20 or even 30 percent a month — a sure sign the jig was almost up. But the investors kept piling on, in large part because the international community did little or nothing to raise the alarm. When the lingering international sanctions against Serbia and Montenegro were lifted toward the end of 1996, it proved the coup de grâce. Rates jumped to 44 percent or higher, marking the final transition from money-laundering business to pure scam. President Berisha made flailing attempts to maintain the confidence of Albanian investors, describing their deposits as “the most honest and the cleanest money in Europe and the world.” But it was too late. Four days after Berisha’s intervention, the Sude scheme in Tirana collapsed.

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For much of its history, Albania has been Europe’s accidental country. It owed its independence in 1912 not to anything its citizens did but to the broader ambitions of its neighbors, Serbia and Bulgaria, as they fought to cast off the yoke of Ottoman rule. To the extent that it was a byproduct of Serbia’s expansionist dreams, Albania played a walk-on part in the entanglements that led to the assassination of Archduke Franz Ferdinand. It played a similarly inadvertent role in World War II, as Mussolini made the mistake of invading, the Nazis felt obliged to bail him out, and both Axis powers were sapped of energy and manpower they could have used to prolong or turn the tide of the war elsewhere.

The devastation visited on the fragile young country transformed Enver Hoxha from a mild-mannered French teacher into a hardened resistance fighter and, after the war, into the country’s undisputed communist leader. Hoxha ditched one patron after the other — first Tito, then Stalin, then Mao — until he reached the quixotic conclusion that Albania should fend for itself. “Better to eat grass than betray our principles,” he would say. He banned religion, beards, and all culture imports except the workaday British comedian Norman Wisdom. He also, famously, covered the country in concrete bunkers to deter foreign invaders. Hoxha proved as ruthless as he was quirky, condemning not only his political adversaries but also their families to years of hard labor in copper mines. As his health failed, in the early 1980s, he was determined not to be overshadowed by any successor and watched with satisfaction as one top deputy, Hysni Kapo, predeceased him, and another, Mehmet Shehu, was either shot or induced to kill himself.

Abrahams takes up the story as Hoxha himself is dying in 1985. One of his cardiologists, Ylli Popa, comes off shift and casually leafs through a book he finds in Hoxha’s library about the Soviet secret police chief Lavrenty Beria. To his alarm, he finds that Hoxha has underlined a passage in which Beria describes the arrest of a group of top Moscow physicians accused of plotting against Stalin. Popa hastily puts the book back — and feels fortunate to live to tell the tale.

Hoxha was succeeded by a party apparatchik, Ramiz Alia, who wore his hair “combed back in disciplined, straight lines, as if following a five-year plan” but proved considerably more flexible and pragmatic than the old man. Had the eastern European revolutions of 1989 not intervened, it is conceivable that Alia would have brought Albania out of its deep isolation by himself. As it was, the ruling party went into denial when the Berlin Wall was breached — the news did not make the state-sanctioned media for days — then muddled its way through the popular uprising that came to Albania as surely as other uprisings had come to East Germany, Czechoslovakia, and Romania.

Sali Berisha first came to prominence when Alia sent him as an emissary to try to calm a massive student protest at Tirana’s university in 1990. Berisha, like Ylli Popa, was a cardiologist held in high esteem by the party, and for a long time people weren’t sure whose side he was on — no doubt because he was himself testing which way the wind would blow. He did not give up his party membership until February 1991, when a large statue of Enver Hoxha was toppled in Skanderbeg Square in the center of Tirana. Soon, however, he reinvented himself as a fervent anticommunist, taking the leadership of the newly formed Democratic Party and steering himself and the party to victory in Albania’s second attempt at a democratic election in 1992.

Western politicians and diplomats understood, correctly, that Berisha had an acute political brain and an ability to connect with impoverished farmers from his native north as easily as with visiting dignitaries. What they underestimated was what one fellow doctor described to Abrahams as his pathological ambition, jealousy, anger, and paranoia. Although he was as tainted by the past as anyone, Berisha didn’t hesitate to use other people’s communist histories as an excuse to purge them whenever it suited him. He talked the democratic talk, but took all his political cues from the Hoxha model. For four or five years, Berisha played the international community like he had played the student protest movement. He gave the West what it wanted by promising not to stir up trouble in Albanian-majority Kosovo, across the mountains from the village where he grew up. In return he assumed — with some reason — he had a license to rule at home as he saw fit.

Berisha purged much of the original leadership of his Democratic Party, strangled attempts to create an open media, forced the country’s chief justice into exile in the United States, and had the opposition leader, Fatos Nano, jailed for 12 years for corruption. His one major defeat came in 1994, when he attempted to change the constitution to accord himself greater powers. As one British observer wryly told Abrahams: “Berisha was so convinced he’d win, he didn’t bother to fix it.” In the parliamentary elections of 1996 he went to the opposite extreme, orchestrating such an orgy of ballot-stuffing that the opposition pulled out of the election before the polls had closed. A protest in central Tirana two days later — held under the noses of international election observers — ended in violence as police waded into the crowd with clubs and hauled dozens of demonstrators, including many prominent politicians, into custody.

Such misadventures fit a depressing pattern of authoritarianism we’ve seen throughout the postcommunist world from Belarus to Kazakhstan, but in Albania they have had surprisingly broad geopolitical ramifications. The war in Yugoslavia turned the country into a gangster republic like no other, with knock-on effects throughout southern Europe. When the war profiteering dried up and the country descended into anarchy, it triggered another conflict as the nascent Kosovo Liberation Army took the unmissable opportunity to stock up on freely circulating weaponry and ammunition and launch its bid for independence from Serbian rule. The very trouble the West was so anxious to avoid became an inevitability, and, within two years, NATO planes were bombing Belgrade.

Albania also played a significant, if underreported early role in the showdown between al-Qaeda and the United States. In a joint operation with the CIA in 1998, the Albanian secret service captured five members of Egyptian Islamic Jihad and sent them home in an early instance of extraordinary rendition. Ayman al-Zawahiri, the Islamic Jihad leader, vowed to punish the Americans “in the language that they understand,” and al-Qaeda launched suicide attacks on the US embassies in Kenya and Tanzania days later. Fatos Klosi, then the head of the Albanian secret service, described the rendition to Abrahams as “not very legal but necessary.”

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In his analysis of Albania’s relations with the outside world as it emerged from communism, Abrahams focuses almost exclusively on the United States. It wasn’t the only relationship that mattered, but it was the most important and the most complex. In contrast to the Europeans, who really were asleep at the wheel, the Americans developed misgivings about Berisha as early as 1994, when Richard Schifter of the National Security Council had dinner with the Albanian leader in Tirana and concluded he was psychologically unstable. After the end of the war in Yugoslavia, the CIA started to pay attention, too, quietly insisting on Berisha and his ministers pulling back on the worst of the smuggling activities. A Human Rights Watch report written by Abrahams in 1995 gave considerable ammunition to the anti-Berisha camp, painting a vivid picture of a mercurial leader invested in personal power at the expense of institution-building or other durable reforms.

The Clinton administration and its representatives remained divided, however; they were far from convinced that a government led by the Socialist Party would be more cooperative with US interests. Only after the fraudulent 1996 elections did the State Department start to be openly critical, and even then the Albanian government found a surprisingly sympathetic ear in Ambassador Marisa Lino, who was often at odds with her own staff and her superiors in Washington.

As Abrahams argues, the mistake was not that the United States backed the wrong horse but that it did far too little to rein in Berisha’s worst political instincts when he was still susceptible to their influence. “In the desert of Albania’s early post-communist politics,” he laments, “the U.S. watered one sprig.”

Part of the problem may have been the level of sheer unadulterated love Albanians have shown to the United States and its representatives — a love that could challenge the critical faculties of even the most hard-hearted. When James Baker, the Secretary of State, arrived in 1991, the crowd smothered the windshield of his limousine in kisses and attempted to lift the vehicle off the airport tarmac so they could carry him into Tirana in triumph. The ardor remained undimmed when George W. Bush passed through in 2007. Commemorative stamps were issued, a statue erected, and a road renamed in his honor. It bothered nobody that Bush was at the nadir of his popularity. The crowds mobbed him as they had mobbed Baker — and someone even helped himself to his wristwatch.

The effects of the 1997 debacle are still palpable. Albania has been rebuilding, slowly and painfully, but corruption remains a huge problem, as does the instinct for authoritarianism. The country is small and there is a familiarity to the contempt with which the ruling factions regard each other. Edi Rama is now the country’s prime minister, while Berisha, who has undergone a remarkable series of political transformations, remains his chief rival, unflagging in his energies even in his eighth decade. Although many foreign observers like Rama personally, they hesitate to call his tenure much of an improvement on the eight years that Berisha served as prime minister from 2005 to 2013. One of Rama’s nicknames is “Berisha in jeans.”

Sadly, the disillusionment kicked in a long time ago. On the 10th anniversary of the fall of communism in 2001, Abrahams visited the central town of Kavaja and noticed a white marble sculpture from the socialist-realist era entitled “Freedom-Democracy.” It was filthy and neglected and resembled two fingers sticking in the air. If that wasn’t cynical enough, someone had squatted on the base and defecated on it.

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Andrew Gumbel is a Los Angeles–based journalist and writer and a longtime foreign correspondent for British newspapers.