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

The second essential component of the strategy was that the transnational players, in addition to sharing information and resources with their opposite numbers, kept a lock on their influence. They did this by serving as each other’s gatekeepers with their own countrymen and bureaucracies, and edging out potential competitors. The Chubais Clan was the Harvard team’s avenue to Russia, crucial to its clout and contacts with the Russian government. In turn, the Harvard team was the clan’s conduit to the eyes and ears of U.S. policymakers. For instance, Harvard’s Hay arranged entrée to Russian officials for U.S. officials, even those as important as the USAID director in Moscow, Jim Norris, who oversaw its Russia operations from 1992 to 1995, during the height of the reform period. 17

With loyalty and gatekeeping as core practices, the Chubais-Harvard partners had found a recipe for their own rise to influence.

Branding Conviction

The Chubais Clan and their Harvard brethren also had in common an almost zealous devotion to radical and rapid economic reform and a commitment to seeing themselves emerge as central players in Russia’s reform processes. This shared conviction and action—the Chubais-Harvard partners’ common view of the world and of their role in it, the second feature of flex nets—eased their move forward in a self-propelling team. Their partnership crystallized around the privatization effort in 1991 and 1992, when Russian economic reform activities were centralized in the State Property Committee, the primary headquarters of privatization activities in those early days. Denationalization or privatization of the nation’s wealth and state-owned enterprises was their signature belief, goal, and practical project.

Presented in the West as a fight between enlightened Reformers trying to move the economy forward through privatization, and the retrograde Luddites who opposed them, this story misrepresented the facts. The idea or goal of privatization was not controversial, even among the communists. In the summer of 1991, shortly after Yeltsin became the elected president of the new Russia, the Russian Supreme Soviet, a communist body, passed two laws laying the groundwork for privatization. Opposition to privatization was rooted not in the idea itself but in the particular privatization program that was implemented, the opaque way in which it was put into place, and the use of executive authority to bypass the parliament. The 1991 legislation specified personal privatization accounts as the vehicle of privatization that would prevent corruption and create a degree of equality in the process of denationalization. But during a parliamentary recess in August 1992, Chubais quietly and without public discussion pushed through a decree (using Yeltsin’s emergency powers) that enacted an entirely different scheme, one in which “vouchers” would be distributed among citizens. The Harvard partners participated in this endeavor and mobilized multiple sponsors for their work. Sachs’s company reported to one of its sponsors, “The [Sachs] team has had an extensive interaction with the [Russian] State Committee on Privatization and has helped in the design of the mass privatization program.” The documents boast that “Professor Sachs, Dr. [David] Lipton and Professor Shleifer have worked with Deputy Prime Minister Chubais and the staff of the Russian State Committee on Privatization.” Shleifer, in particular, “played a central role in the formulation of the Russian privatization program.” 18

As the head of the State Property Committee (beginning in 1991), Chubais drew up plans to privatize thousands of state enterprises. The Chubais-Harvard team not only designed but also coordinated the signature mass-voucher privatization program, launched in November 1992, in which citizens were granted certificates or vouchers that they could use either to acquire shares in state-owned companies or to sell for cash. Harvard’s Shleifer and Chubais’s Boycko describe themselves as “members of the team that put it [privatization] together.” USAID, for its part, spent $58 million to underwrite privatization, including its design, implementation, and promotion via public relations firms Sawyer Miller and Burson-Marsteller. 19

As the Chubais-Harvard players went about their work, they had at their fingertips inside information that was difficult to obtain independently. Their success depended on their ability to get, guard, and craft information for public consumption—in short, to privatize information , while also branding (their) conviction— the second defining feature of flexians. They could use the information for purposes that were both difficult to detect and less than in the public interest, while controlling the message to keep their game going. They were the near-exclusive guardians of the information. And they had virtually no incentives to share it.

Potemkin Privatization

The players’ success depended on promoting their branded conviction that they were the only legitimate reformers and that their reforms were transforming Russia for the good. But without independent information, how could the public know what they were actually doing? To ensure that their claims and brand would be the most credible, the Chubais and Harvard players each burnished the reputations of their counterparts in their own national and international circles. In Russia, the Chubais Clan promoted the Harvard advisers as the best foreign economic experts. In the United States, the Harvard group touted Chubais as the voice of Russia, and it helped advertise the Chubais team as the Young Reformers. It is no coincidence, then, that the Western media built up the clan’s mystique and overlooked other qualified and reform-minded players in Russia. The mainstream American media, having bought into the myth of the Young Reformers and the Harvard Best and Brightest, exhibited little curiosity about the reality on the ground.

But from the point of view of the Russian public, away from whom information had been privatized, the reform was a fiasco. Privatization had been touted as a way that citizens would become property owners and shareholders in the economy. (Yeltsin’s rallying cry was “We need millions of owners, not a few millionaires.”) But the program that Chubais implemented fostered the concentration of vouchers and property in a few hands (through unregulated voucher investment funds, for instance); managers retained control over most industries and investors wound up owning very little. The outcome rendered privatization “a de facto fraud,” as one economist put it, and the parliamentary committee that had judged the Chubais scheme to “offer fertile ground for criminal activity” was proven right. Making matters worse was the privatization to end all privatizations: the Chubais-approved “loans for shares” scheme, involvement in which depended entirely on access to private information and informal dealing. Masterminded in 1995 by Chubais associate Vladimir Potanin, the oligarch and one-time deputy prime minister for economic affairs, the scheme transferred control of many of Russia’s prime assets for token sums to seven preselected bank chiefs. These quintessential insider deals crystallized the ascendancy of a breed of oligarchs, who would fundamentally configure the nation’s politics, economics, and society for years to come, and further intertwined state and private authority and resources. 20

All told, privatization encouraged looting, asset stripping, and moving money into Western bank accounts and offshore havens. E. Wayne Merry, who had a bird’s-eye view of the process as chief political analyst at the U.S. Embassy in Moscow, later observed: “We created a virtual open shop for thievery at a national level and for capital flight in terms of hundreds of billions of dollars, and the raping of natural resources.” 21Russians, struggling to survive severe economic hardship, 22dubbed privatization “the great grab,” for its confiscation rather than creation of wealth. While privatization may have signaled growth to Westerners, to Russians it simply meant that others had the money—and weren’t sharing it. Even Yeltsin, with his popularity severely waning as he stood for reelection in 1996, recognized that Russians were right to blame Chubais for the personal losses they had incurred and the fire sale of state enterprises, saying that “[Chubais] sold off big industry for next to nothing; we cannot forgive this.” 23