The Harvard Boys Do Russia
After seven years of economic "reform" financed by billions of
dollars in U.S.
MAY 14, 1998
After seven years of economic “reform”
financed by billions of dollars in U.S. and other Western aid, subsidized loans
and rescheduled debt, the majority of Russian people find themselves worse off
economically. The privatization drive that was supposed to reap the fruits of
the free market instead helped to create a system of tycoon capitalism run for
the benefit of a corrupt political oligarchy that has appropriated hundreds of
millions of dollars of Western aid and plundered Russia’s wealth.
The architect of privatization was former
First Deputy Prime Minister Anatoly Chubais, a darling of the U.S. and Western
financial establishments. Chubais’s drastic and corrupt stewardship made him
extremely unpopular. According to The New York Times, he “may be
the most despised man in Russia.”
Essential to the implementation of
Chubais’s policies was the enthusiastic support of the Clinton Administration
and its key representative for economic assistance in Moscow, the Harvard
Institute for International Development. Using the prestige of Harvard’s name
and connections in the Administration, H.I.I.D. officials acquired virtual
carte blanche over the U.S. economic aid program to Russia, with minimal
oversight by the government agencies involved. With this access and their close
alliance with Chubais and his circle, they allegedly profited on the side. Yet
few Americans are aware of H.I.I.D.’s role in Russian privatization, and its
suspected misuse of taxpayers’ funds.
At the recent U.S.-Russian Investment
Symposium at Harvard’s John F. Kennedy School of Government, Yuri Luzhkov, the
Mayor of Moscow, made what might have seemed to many an impolite reference to
his hosts. After castigating Chubais and his monetarist policies, Luzhkov,
according to a report of the event, “singled out Harvard for the harm inflicted
on the Russian economy by its advisers, who encouraged Chubais’s misguided
approach to privatization and monetarism.” Luzhkov was referring to H.I.I.D.
Chubais, who was delegated vast powers over the economy by Boris Yeltsin, was
ousted in Yeltsin’s March purge, but in May he was given an immensely lucrative
post as head of Unified Energy System, the country’s electricity monopoly. Some
of the main actors with Harvard’s Russia project have yet to face a reckoning,
but this may change if a current investigation by the U.S. government results
in prosecutions.
The activities of H.I.I.D. in Russia
provide some cautionary lessons on abuse of trust by supposedly disinterested
foreign advisers, on U.S. arrogance and on the entire policy of support for a
single Russian group of so-called reformers. The H.I.I.D. story is a familiar
one in the ongoing saga of U.S. foreign policy disasters created by those said
to be our “best and brightest.”
Through the late summer and fall of 1991,
as the Soviet state fell apart, Harvard Professor Jeffrey Sachs and other
Western economists participated in meetings at a dacha outside Moscow where
young, pro-Yeltsin reformers planned Russia’s economic and political future.
Sachs teamed up with Yegor Gaidar, Yeltsin’s first architect of economic
reform, to promote a plan of “shock therapy” to swiftly eliminate most of the
price controls and subsidies that had underpinned life for Soviet citizens for
decades. Shock therapy produced more shock–not least, hyperinflation that hit 2,500
percent–than therapy. One result was the evaporation of much potential
investment capital: the substantial savings of Russians. By November 1992,
Gaidar was under attack for his failed policies and was soon pushed aside. When
Gaidar came under seige, Sachs wrote a memo to one of Gaidar’s principal
opponents, Ruslan Khasbulatov, Speaker of the Supreme Soviet, then the Russian
parliament, offering advice and to help arrange Western aid and contacts in the
U.S. Congress.
Enter Anatoly Chubais, a smooth, 42-year-old
English-speaking would-be capitalist who became Yeltsin’s economic czar.
Chubais, committed to “radical reform,” vowed to construct a market economy and
sweep away the vestiges of Communism. The U.S. Agency for International
Development (U.S.A.I.D.), without experience in the former Soviet Union, was
readily persuaded to hand over the responsibility for reshaping the Russian
economy to H.I.I.D., which was founded in 1974 to assist countries with social
and economic reform.
H.I.I.D. had supporters high in the
Administration. One was Lawrence Summers, himself a former Harvard economics
professor, whom Clinton named Under Secretary of the Treasury for International
Affairs in 1993. Summers, now Deputy Treasury Secretary, had longstanding ties
to the principals of Harvard’s project in Russia and its later project in
Ukraine.
Summers hired a Harvard Ph.D., David
Lipton (who had been vice president of Jeffrey D. Sachs and Associates, a
consulting firm), to be Deputy Assistant Treasury Secretary for Eastern Europe
and the Former Soviet Union. After Summers was promoted to Deputy Secretary,
Lipton moved into Summers’s old job, assuming “broad responsibility” for all
aspects of international economic policy development. Lipton co-wrote numerous
papers with Sachs and served with him on consulting missions in Poland and
Russia. “Jeff and David always came [to Russia] together,” said a Russian
representative at the International Monetary Fund. “They were like an
inseparable couple.” Sachs, who was named director of H.I.I.D. in 1995, lobbied
for and received U.S.A.I.D. grants for the institute to work in Ukraine in 1996
and 1997.
Andrei Shleifer, a Russian-born émigré and
already a tenured professor of economics at Harvard in his early 30s, became
director of H.I.I.D.’s Russia project. Shleifer was also a protégé of Summers,
with whom he received at least one foundation grant. Summers wrote a
promotional blurb for Privatizing Russia (a 1995 book
co-written by Shleifer and subsidized by H.I.I.D.) declaring that “the authors
did remarkable things in Russia, and now they have written a remarkable book.”
Another Harvard player was a former World
Bank consultant named Jonathan Hay, a Rhodes scholar who had attended Moscow’s
Pushkin Institute for Russian Language. In 1991, while still at Harvard Law
School, he had become a senior legal adviser to the G.K.I., the Russian state’s
new privatization committee; the following year he was made H.I.I.D.’s general
director in Moscow. The youthful Hay assumed vast powers over contractors,
policies and program specifics; he not only controlled access to the Chubais
circle but served as its mouthpiece.
H.I.I.D.’s first awards from U.S.A.I.D.
for work in Russia came in 1992, during the Bush Administration. Over the next
four years, with the endorsement of the Clinton Administration, the institute
would be awarded $57.7 million–all but $17.4 million without competitive
bidding. For example, in June 1994 Administration officials signed a waiver
that enabled H.I.I.D. to receive $20 million for its Russian legal reform
program. Approving such a large sum as a noncompetitive “amendment” to a much
smaller award (the institute’s original 1992 award was $2.1 million) was highly
unusual, as was the citation of “foreign policy” considerations as the reason
for the waiver. Nonetheless, the waiver was endorsed by five U.S. government
agencies, including the Treasury Department and the National Security Council,
two of the leading agencies formulating U.S. aid policy toward Russia. In
addition to the millions it received directly, H.I.I.D. helped steer and
coordinate some $300 million in U.S.A.I.D. grants to other contractors, such as
the Big Six accounting firms and the giant Burson-Marsteller P.R. firm.
A s Yeltsin’s Russian government took over
Soviet assets in late 1991 and early 1992, several privatization schemes were
floated. The one the Supreme Soviet passed in 1992 was structured to prevent
corruption, but the program Chubais eventually carried out instead encouraged
the accumulation of property in a few hands and opened the door to widespread
corruption. It was so controversial that Chubais ultimately had to rely largely
on Yeltsin’s presidential decrees, not parliamentary approval, for
implementation. Many U.S. officials embraced this dictatorial modus operandi,
and Jonathan Hay and his associates drafted many of the decrees. As
U.S.A.I.D.’s Walter Coles, an early supporter of Chubais’s privatization
program, put it, “If we needed a decree, Chubais didn’t have to go through the
bureaucracy.”
With help from his H.I.I.D. advisers and
other Westerners, Chubais and his cronies set up a network of aid-funded
“private” organizations that enabled them to bypass legitimate government
agencies and circumvent the new parliament of the Russian Federation, the Duma.
Through this network, two of Chubais’s associates, Maxim Boycko (who co-wrotePrivatizing
Russia with Shleifer) and Dmitry Vasiliev, oversaw almost a third of a
billion dollars in aid money and millions more in loans from international
financial institutions.
Much of this largesse flowed through the
Moscow-based Russian Privatization Center (R.P.C.). Founded in 1992 under the
direction of Chubais, who was chairman of its board even while head of the
G.K.I., and Boycko, who was C.E.O. for most of its existence, the R.P.C. was
legally a private, nonprofit, nongovernmental organization. In fact, it was
established by another Yeltsin decree and helped carry out government policy on
inflation and other macroeconomic issues and also negotiated loans with
international financial institutions. H.I.I.D. was a founder of the R.P.C., and
Andrei Shleifer served on the board of directors. Its other members were
recruited by Chubais, according to Ira Lieberman, a senior manager in the
private-sector development department of the World Bank who helped design the
R.P.C. With H.I.I.D.’s help, the R.P.C. received some $45 million from U.S.A.I.D.
and millions from the European Union, individual European governments, Japan
and other countries, as well as loans from the World Bank ($59 million) and the
European Bank for Reconstruction and Development ($43 million), which must be
repaid by the Russian people. One result of this funding was the enrichment,
political and financial, of Chubais and his allies.
H.I.I.D. helped create several more
aid-funded institutions. One was the Federal Commission on Securities, a rough
equivalent of the U.S. Securities and Exchange Commission (S.E.C.). It too was
established by presidential decree, and it was run by Chubais protégé Dmitry
Vasiliev. The commission had very limited enforcement powers and funding, but
U.S.A.I.D. supplied the cash through two Harvard-created institutions run by
Hay, Vasiliev and other members of the Harvard-Chubais coterie.
One of these was the Institute for
Law-Based Economy, funded by both the World Bank and U.S.A.I.D. This institute,
set up to help develop a legal and regulatory framework for markets, evolved to
encompass drafting decrees for the Russian government; it got nearly $20
million from U.S.A.I.D. Last August, the Russian directors of I.L.B.E. were
caught removing $500,000 worth of U.S. office equipment from the organization’s
Moscow office; the equipment was returned only after weeks of U.S. pressure.
When auditors from U.S.A.I.D.’s inspector general’s office sought records and
documents regarding I.L.B.E. operations, the organization refused to turn them
over.
The device of setting up private
organizations backed by the power of the Yeltsin government and maintaining
close ties to H.I.I.D. was a way of insuring deniability. Shleifer, Hay and
other Harvard principals, all U.S. citizens, were “Russian” when convenient. Hay,
for example, served alternately and sometimes simultaneously as aid contractor,
manager of other contractors and representative of the Russian government. If
Western donors were attacked for funding controversial privatization practices
of the state, the donors could claim they were funding “private” organizations,
even if these organizations were controlled or strongly influenced by key state
officials. If the Chubais circle came under fire for misuse of funds, they
could claim that Americans made the decisions. Foreign donors could insist that
the Russians acted on their own.
Against the backdrop of Russia’s Klondike
capitalism, which they were helping create and Chubais and his team were
supposedly regulating, the H.I.I.D. advisers exploited their intimate ties with
Chubais and the government and were allegedly able to conduct business
activities for their own enrichment. According to sources close to the U.S.
government’s investigation, Hay used his influence, as well as
U.S.A.I.D.-financed resources, to help his girlfriend, Elizabeth Hebert, set up
a mutual fund, Pallada Asset Management, in Russia. Pallada became the first
mutual fund to be licensed by Vasiliev’s Federal Commission on Securities.
Vasiliev approved Pallada ahead of Credit Suisse First Boston and Pioneer First
Voucher, much larger and more established financial institutions.
After Pallada was set up, Hebert, Hay,
Shleifer and Vasiliev looked for ways to continue their activities as aid funds
dwindled. Using I.L.B.E. resources and funding, they established a private
consulting firm with taxpayer money. One of the firm’s first clients was
Shleifer’s wife, Nancy Zimmerman, who operated a Boston-based hedge fund that
traded heavily in Russian bonds. According to Russian registration documents,
Zimmerman’s company set up a Russian firm with Sergei Shishkin, the I.L.B.E.
chief, as general director. Corporate documents on file in Moscow showed that
the address and phone number of the company and the I.L.B.E. were the same.
Then there is the First Russian
Specialized Depository, which holds the records and assets of mutual fund
investors. This institution, funded by a World Bank loan, also worked to the
benefit of Hay, Vasiliev, Hebert and another associate, Julia Zagachin.
According to sources close to the U.S. government’s investigation, Zagachin, an
American married to a Russian, was selected to run the depository even though
she lacked the required capital. Ostensibly, there was to be total separation
between the depository and any mutual fund using its services. But the
selection of Zagachin defied this tenet of open markets: Pallada and the
depository were run by people with ties to each other through H.I.I.D. Thus the
very people who were supposed to be the trustees of the system not only undercut
the aid program’s stated goal of building independent institutions but
replicated the Soviet practice of skimming assets to benefit the nomenklatura.
Anne Williamson, a journalist who
specializes in Soviet and Russian affairs, details these and other conflicts of
interest between H.I.I.D.’s advisers and their supposed clients–the Russian
people–in her forthcoming book, How America Built the New Russian
Oligarchy. For example, in 1995, in Chubais-organized insider auctions
of prime national properties, known as loans-for-shares, the Harvard Management
Company (H.M.C.), which invests the university’s endowment, and billionaire
speculator George Soros were the only foreign entities allowed to participate.
H.M.C. and Soros became significant shareholders in Novolipetsk, Russia’s
second-largest steel mill, and Sidanko Oil, whose reserves exceed those of
Mobil. H.M.C. and Soros also invested in Russia’s high-yielding,
I.M.F.-subsidized domestic bond market.
Even more dubious, according to
Williamson, was Soros’s July 1997 purchase of 24 percent of Sviazinvest, the
telecommunications giant, in partnership with Uneximbank’s Vladimir Potanin. It
was later learned that shortly before this purchase Soros had tided over
Yeltsin’s government with a backdoor loan of hundreds of millions of dollars
while the government was awaiting proceeds of a Eurobond issue; the loan now
appears to have been used by Uneximbank to purchase Norilsk Nickel in August
1997. According to Williamson, the U.S. assistance program in Russia was rife
with such conflicts of interest involving H.I.I.D. advisers and their
U.S.A.I.D.-funded Chubais allies, H.M.C. managers, favored Russian bankers,
Soros and insider expatriates working in Russia’s nascent markets.
Despite exposure of this corruption in the
Russian media (and, far more hesitantly, in the U.S. media), the
H.I.I.D.-Chubais clique remained until recently the major instrument of U.S.
economic aid policy to Russia. It even used the high-level Gore-Chernomyrdin
Commission, which helped orchestrate the cooperation of U.S.-Russian oil deals
and the Mir space station. The commission’s now-defunct Capital Markets Forum
was chaired on the Russian side by Chubais and Vasiliev, and on the U.S. side
by S.E.C. chairman Arthur Levitt Jr. and Treasury Secretary Robert Rubin.
Andrei Shleifer was named special coordinator to all four of the Capital
Markets Forum’s working subgroups. Hebert, Hay’s girlfriend, served on two of
the subgroups, as did the C.E.O.s of Salomon Brothers, Merrill Lynch and other
powerful Wall Street investment houses. When The Nation contacted
the S.E.C. for information about Capital Markets, we were told to call Shleifer
for comment. Shleifer, who is under investigation by U.S.A.I.D.’s inspector
general for misuse of funds, declined to be interviewed for this article. A
U.S. Treasury spokesman said Shleifer and Hebert were appointed to Capital
Markets by the Chubais group–specifically, according to other sources, by
Dmitry Vasiliev.
In fact, H.I.I.D. projects were never
adequately monitored by U.S.A.I.D. In 1996, a General Accounting Office report
described U.S.A.I.D.’s management and oversight of H.I.I.D. as “lax.” In early
1997, U.S.A.I.D.’s inspector general received incriminating documents about
H.I.I.D.’s activities in Russia and began investigating. In May Shleifer and
Hay lost their projects when the agency canceled most of the $14 million still
earmarked for H.I.I.D., citing evidence that the two managers were engaged in
activities for “private gain.” The men had allegedly used their positions to
profit from investments in the Russian securities markets and other private
enterprises. According to sources close to the U.S. investigation, while
advising the Russian government on capital markets, for example, Hay and his
father allegedly used inside information to invest in Russian government bonds.
Hay and Shleifer may ultimately face criminal and/or civil prosecution.
Shleifer remains a tenured professor at Harvard, and Hay continues to work with
members of the Chubais clique in Russia. Sachs, who has stated he never invests
in countries where he advises and who is not implicated in the current U.S.
government investigation, remains head of H.I.I.D. After Yeltsin’s Cabinet
shakeup in March, Chubais was moved to a new position of prominence. His role
in Russia’s political-economic affairs had been tarnished by reports of
personal enrichment. Two examples:
§ In February 1996, Chubais’s Foundation
for the Protection of Private Property received a five-year, $2.9 million
unsecured interest-free loan. According to the pro-Yeltsin, pro-reform Izvestia,
Stolichny Bank, an institution that enjoys lines of credit from the European
Bank for Reconstruction and Development and the World Bank, made the loan in
return for a small percentage of the Sibneft oil company when it was sold at
auction, and for later control of one of the state’s largest banks. Chubais
defended himself by saying such practices were common in the West, but failed
to provide any reasonable explanation for some $300,000 in 1996 income not
accounted for by his government salary.
§ During Yeltsin’s 1996 presidential
campaign, security officials apprehended two close associates of Chubais as
they were walking out of a main government building with a box containing more
than $500,000 in cash for Yeltsin’s campaign. According to tapes of a later
meeting recorded by a member of one of Russia’s security services, Chubais and
his cronies strategized about burying evidence of any illegal transaction,
while publicly claiming that any allegations of chicanery were the work of
political enemies. A protracted, lackadaisical investigation began but was
eventually dropped–more evidence of Chubais’s remarkable resilience. He
remained valuable to Yeltsin largely because of his perceived ability to deal
with the West, where many still regard him as a symbol of Russian reform.
During the five years that the Chubais
clique presided over Western economic aid and policy in Russia, they did
enormous harm. By unconditionally backing Chubais and his associates, the
Harvard operatives, their U.S. government patrons and Western donors may have
reinforced the new post-Soviet oligarchical system. Shleifer acknowledged as
much inPrivatizing Russia, the book he wrote with Chubais crony Maxim
Boycko, who with his patron would later be caught in another financial
indiscretion involving taking a “veiled bribe” in the form of advances on a
book on the history of Russian privatization. “Aid can change the political
equilibrium,” they said, “by explicitly helping free-market reformers to defeat
their opponents.”
Richard Morningstar, U.S. aid coordinator
for the former Soviet Union, stands by this approach: “If we hadn’t been there
to provide funding to Chubais, could we have won the battle to carry out
privatization? Probably not. When you’re talking about a few hundred million
dollars, you’re not going to change the country, but you can provide targeted
assistance to help Chubais.” In early 1996, after he was temporarily removed
from high office by Yeltsin because he represented unpopular economic policies,
H.I.I.D. came to his rescue by placing him on its U.S.A.I.D.-funded payroll, a
show of loyalty that former U.S.A.I.D. assistant administrator Thomas Dine says
he supported. Western policy-makers like Morningstar and Dine have depicted
Chubais as a selfless visionary battling reactionary forces. In the spring of
1997, Summers called him and his associates a “dream team.” With few
exceptions, the U.S. mainstream media have promulgated this view.
United States policy toward Russia
requires a full-scale Congressional investigation. The General Accounting
Office did investigate H.I.I.D.’s Russian and Ukrainian projects in 1996, but
the findings were largely suppressed by the agency’s timid management. The
audit team concluded, for example, that the U.S. government exercised
“favoritism” toward Harvard, but this conclusion and the supporting
documentation were removed from the final report. Last fall Congress asked the
G.A.O. to look into Eastern European aid programs and Shleifer’s role in the
Gore-Chernomyrdin Commission. Such questions need to be answered, but any
serious inquiry must go beyond individual corruption and examine how U.S.
policy, using tens of millions in taxpayer dollars, helped deform democracy and
economic reform in Russia and helped create a fat-cat oligarchy run amok.
JANINE R. WEDEL Janine R. Wedel is an anthropologist and associate
research professor and research fellow at the Institute for European, Russian
and Eurasian Studies at The George Washington University, and the author of Collision
and Collusion: The Strange Case of Western Aid to Eastern Europe 1989-1998 (St.
Martin's).
