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

The Center had the rights but not the responsibility of the government in still other ways. The loans it accepted from the international financial institutions were not ratified by the democratically elected parliament; neither the parliament nor the government had decision-making authority or control over the ways Center monies were spent. Yet the government (read: taxpayers) was responsible for paying them back. As a Russian representative to an international financial institution observed, “The same people who approve the loans use the money.” 46

The Center not only bypassed parliament, but also the State Property Committee during the brief period (November 1994 to January 1995) when it was not run by a Chubais Clan member. According to documents I obtained from Russia’s Chamber of Accounts, the nongovernmental Center wielded more influence over certain privatization matters than did the State Property Committee, the government agency responsible for privatization. The Center, then, had the best of each world: the authority of government, but without responsibility to parliament or government auditors. 47

In supplanting the state, yet beyond its accountability, flex nets diminish checks and balances through still another means: operating through executive authority. Eschewing legislative and judicial bodies that might encumber or oppose their activities, the Chubais-Harvard players realized many of their goals through top-down decisions in the executive branch. They organized the issuance of many presidential decrees—their chief strategy for legal reform. Hay and his associates themselves drafted decrees for President Yeltsin’s signature. According to a consultant who worked with the Harvard team and shared an office with Hay during the period of intense reform from 1992 to 1996, most of the legislation that was pushed by Yeltsin and Chubais was written by Hay. As the consultant explained it, “Jonathan bypassed the whole system. . . . Jonathan would draft a law or decree, [Chubais Clan member Albert] Sokin, a pretty good lawyer, would Russify it, and [then Jonathan] would just messenger it over to Chubais. If he [Chubais] liked it, he walked it down the hall to Yeltsin [for signature].” 48

Achieving legal change by decree was a departure from Harvard’s contract with the U.S. government, which specified passing laws through the legislature. This modus operandi further diverged from stated U.S. policy regarding establishing democratic and legal institutions and consolidating Russian democracy, as well as voices in the aid community who supported those goals. USAID’s Washington Office of Democracy Assistance for Russia had an agenda and a sensibility not so easily seduced by the rapid-privatization-at-all-costs mentality (while neglecting the creation of a legal and regulatory backbone) of the USAID economic reform people. That office opposed the use of decrees, expressing that they were inconsistent with democratic purposes. But these voices seemed not to stand a chance. With the Harvard flexians personalizing bureaucracy and with Summers as their sponsor, the officials who prevailed were those who turned a blind eye as the Chubais-Harvard partners made end-runs around the parliament, reorganized official bodies for their own ends, and engaged in other not-so-democratic processes. 49

Through these activities, the Chubais-Harvard players helped to create in Russia a hybrid habitat— the fourth, corresponding feature of flex nets. They contributed to the development of the clan system and the “clan-state” in the 1990s. With the clan monopolizing foreign aid and running segments of government related to the economy, competing clans had equivalent ties with other segments of government such as the “power ministries” (the ministries of defense and internal affairs, and the security services) or the energy ministry (of which the energy giant Gazprom is a part). Collectively, these clans made up the clan-state, in which there is little separation of the clan—with its own political and economic agendas—from the state: The same people with the same agenda undertaking the same activities constitute the clan and the relevant state authorities. The clan-state is democracy-challenged: It lacks visibility, accountability, and means of representation for those under its control. The only real counter to a clan’s influence comes from a competitor clan, as when one clan sics law enforcement and prosecutorial authorities on a rival one. 50

That, in Russia, the Chubais-Harvard players helped forge the working rules of the emerging order may not be so very surprising amid the political, legal, administrative, economic, and societal flux that accompanied the undoing of an authoritarian system. The players’ ability to relax rules and fashion a hybrid habitat was obviously extensive. But the Harvard players also did so in the United States. And while they did so to much less wholesale effect, what they achieved was a portent of things to come. The amounts let to the Harvard Institute in uncompeted awards may today seem trivial (think the Iraq war). But the model they crafted broke new ground, both in structural terms: a private organization directing a momentous policy arena and carrying out inherently governmental functions, while managing itself and its competitors; and in operational ones: private players monopolizing official information, policy, and implementation and thereby fashioning new institutional forms of power and influence, largely invisible and scarcely accountable to citizens.

More Transnational Togetherness

Noting who stood (and stands) up to defend the Chubais and Harvard players in response to their public troubles offers opportunities to glimpse the larger network that helped sponsor and also benefited from the players’ activities. Media accounts of the reform efforts gone bad and of Harvard advisers run amok or “gone native”—the way the tale was told on the few occasions when it did attract mainstream press attention—focused on corruption, greed, or a few bad apples who enriched themselves. This focus misses a crucial operational feature: the solidarity and self-propelling quality of the flex net, as well as the wider network that was invested in their success. The Harvard players required such a network through which to secure privileges and resources in the United States—and this network also had a stake in the players’ semicloaked financial and business success in Russia. 51

Clues into the interests of this wider network may be found in the fact that the endowment funds of two Ivy League universities, Harvard and Yale, gained access to valuable investments through networks inhabited by the Chubais-Harvard associates. Shleifer’s wife, the currency trader and hedge fund manager Nancy Zimmerman, was front and center. She had worked in the 1980s for Robert Rubin at Goldman Sachs (also a sometime board member of the Harvard Management Company, which oversees Harvard University’s investments) and remained close to him when he was secretary of the treasury and Larry Summers’s boss (until Summers was himself promoted to the post). 52

Zimmerman managed a portion of the Yale University endowment. Her investment company traded in short-term Russian government bonds (GKOs) and repatriated the profits to the United States beyond the allowable limits set by Russian law. Zimmerman was ideally placed to time these highly lucrative transactions because her husband, Shleifer, advised the Russian official making decisions regarding the government’s backing of GKOs. Meanwhile, Harvard’s endowment—the Harvard Management Company—benefited from some of the most valuable privatization deals, to which it received entrée through networks occupied by the Chubais-Harvard nexus. The deals were officially closed to foreign investors. 53

The players’ responses to allegations of “corruption” leveled against them illuminate the self-protecting quality of the network. There was plenty to do on both sides of the Atlantic. Summers shielded both Shleifer’s job at Harvard and his reputation. When Summers became Harvard’s president, he was even better positioned to protect Shleifer, and not surprisingly, Shleifer and Zimmerman lobbied for his appointment. As the legal proceedings of the government’s lawsuit heated up, Summers is credited with keeping his friend’s job intact. Summers did recuse himself from the school’s managing of the case, but he asked the relevant dean to protect Shleifer. 54