Janine Wedel - Shadow Elite - How the World's New Power Brokers Undermine Democracy, Government, and the Free Market

* The Russian acronym is the GKI.

** The Federal Securities Commission is also known by Americans as the “Russian SEC.”

*** This depository maintains the records of mutual fund investors’ holdings.

The more interviewing I did, the more I saw that, despite the participants’ different titles and the slick brochures outlining the organizations’ different functions, the same people ran the show. Even the sponsors and funders were largely the same. The dynamic seemed to lie in who , not what . The who was reflected in how the Chubais-Harvard players had personalized the bureaucracy. They worked in and through organizations, both governmental and non-, doing what was necessary to advance their goals, with the organizations as a resource for their collective efforts.

TIES BETWEEN THE Chubais and the Harvard associates were forged in the late 1980s as the Soviet Union was coming undone and the world was wondering just where Mikhail Gorbachev’s glasnost and perestroika would lead. It was natural for these players to gravitate toward one another. They had similar personal qualities: energy, ambition, and youth. They saw eye to eye on matters of economic ideology and policy. All were top-flight players in their own milieus. The Harvard set was well connected in the prestige- and resource-rich world of international economic policy, international financial institutions, and premier economic associations. The Chubais Clan was bravely testing the waters, introducing subversive free-market ideas in their hometown of Leningrad (now St. Petersburg).

While a university student in economics during the Gorbachev years, Chubais courageously started a club called Reforma. The club’s risky discussions of market economics attracted hundreds of people eager for change—people whose life experience and only real point of reference was the stagnant communist system. Chubais and Reforma helped transform Leningrad into a model of reform by crafting platforms for local and national elections, drafting legislation, and eventually helping to lead its government. The Chubais associates would come to be known in Russia as the St. Petersburg Clan or Chubais Clan. Like any clan, it had “no registered structure” and was “based on informal relations between its members,” as Olga Kryshtanovskaya explains clans. Its members were “united by a community of views and loyalty to an idea or a leader.” 4

Sachs, rainmaker of the nascent transnational network, brought together chosen economists from West and East, amassed resources—from the New York–based Ford Foundation to the Japanese Sasakawa Foundation—and spawned projects in various iterations. Through Sachs, Andrei Shleifer met Chubais. Shleifer in turn introduced Boycko, a Muscovite, to the Russians from St. Petersburg, Shleifer told me. Amid an environment shifting by the minute, these transnationals traded ideas about how to fix the ailing economy. 5

In 1991, as the Soviet state was collapsing, Boris Yeltsin summoned Chubais from his post as deputy mayor of the newly rechristened St. Petersburg to help guide the nation through this epochal transition. Yeltsin, then president of what was still Soviet Russia, was putting together his team of economic advisers. Chief among them were Yegor Gaidar—the first “architect” of economic reform in postcommunist Russia, with whom Sachs had been working—and Chubais, who was part of Gaidar’s team and later would replace him as the “economic reform czar.” Unlike the unkempt, less-appealing Gaidar, Chubais was suave and well spoken. He presented an impressive figure to a Western audience. The Chubais Clan assumed a national role.

Meanwhile, across the Atlantic, with high hopes for a favorable relationship with the new Russia, the U.S. Congress allocated funds to the U.S. Agency for International Development (USAID), the U.S. government’s chief foreign aid body, to promote Russian reform. The effort could scarcely be more urgent: Economic reform was crucial, and the “window of opportunity” to effect change narrow. Guiding that reform was a United States foreign policy and assistance priority. Who better to pull off this high-stakes international-relations and nation-building feat than the Harvard “Best and Brightest” and the up-and-coming Young Reformers?

Sachs put together an institutional vehicle for what would become the USAID-funded Harvard project. He “packaged HIID as an AID consultant,” arranging for the decades-old Harvard Institute for International Development to receive U.S. foreign-aid monies to support the reform efforts, according to an administration insider. No one really knew how to reform economies out of central planning. It was something that had never been done on such a huge scale before. So the Harvard Institute’s appeal to an insecure USAID is not hard to understand. USAID was depleted of in-house expertise after decades of contracting out and had no experience in Russia, yet was under an obligation to carry out congressional spending mandates. The consultants, on the other hand, besides carrying the Harvard imprimatur, emanated self-confidence. Their already robust access to resources and social-professional connections made them all the more attractive. And, crucially, they had ties to the forward-thinking Chubais associates. 6

Enter Larry Summers

It is highly unlikely that the Chubais-Harvard partners could have pulled off what they did on the American side without their friend Lawrence (Larry) Summers being highly placed in the U.S. government. Earlier a Harvard faculty member, later president of Harvard (and still later, head of President Obama’s National Economic Council), Summers became perfectly positioned to be the partners’ patron and protector when Bill Clinton took office in 1993. Having served as chief economist of the World Bank from 1991 to 1993, Summers held the posts of undersecretary, deputy secretary, and, finally, secretary of the Treasury through much of the 1990s. At Treasury, Summers played a principal role in designing U.S. and international economic policies. Even as undersecretary for international affairs, Summers was directly responsible for designing Treasury’s country-assistance strategies and for formulating and implementing international economic policies. 7

Andrei Shleifer was a protégé of Summers and on intimate terms with him. Their relationship began in the 1970s with Summers as Shleifer’s mentor and professor (Shleifer credits Summers with inspiring him to study economics), and continued in walks on the beach at Truro on Cape Cod, where their families vacationed together. In addition to being close friends, the two were coauthors, joint grant recipients, and faculty colleagues and allies at Harvard. Shleifer’s wife, Nancy Zimmerman, a specialist in the high-finance area of global, fixed-income securities markets, was frequently consulted by Summers and David Lipton. (Lipton had been Summers’s deputy at Treasury responsible for eastern Europe and the former Soviet Union, and earlier Sachs’s sidekick and vice president of Jeffrey D. Sachs and Associates.) Summers reportedly dubbed the quartet “our little world.” 8

In 1992 Shleifer became project director of the Harvard Institute’s Russia project. When a rivalry between Sachs and Shleifer ended their working relationship, to hear observers tell it, the Harvard project became Shleifer’s baby, while Sachs continued his association with Gaidar. Meanwhile, in 1991 Hay had been named a senior legal adviser to Russia’s new privatization agency, the State Property Committee, and the following year he became the Harvard Institute’s on-site director in Moscow, and the institute’s public face there. From here on, Shleifer and Hay were the key drivers of the project. 9