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

Summers was equally indispensable as a patron of Chubais et al. While corruption played differently in Russia than in the West, in the latter it was important for Chubais’s continued good standing to explain away allegations. Members of the Chubais Clan—Summers’s “Dream Team”—were consistently under investigation by Russian authorities. Documented reports abound, which the Chubais players do not deny, of their taking money in return for favors in the privatization process. In one incident, Chubais and several members of his clan each received $90,000 (or more) from a Swiss firm not normally engaged in publishing, but controlled by a company that had received privatization favors, explained after the fact as an advance for a book on the history of Russian privatization. Summers consistently led the charge not only to safeguard Chubais’s reputation, but to keep him in power. While Yeltsin in 1996 had fired Chubais—in the midst of an uproar over privatization—from his post as first deputy prime minister (to which he had additionally been named in 1994), in March 1997, amid Western support and political maneuvering, Yeltsin catapulted Chubais back to the post of first deputy prime minister—and added the portfolio of minister of finance. Although again fired by Yeltsin in March 1998 along with the entire government of Prime Minister Viktor Chernomyrdin, Chubais was reappointed in June 1998 to be Yeltsin’s special envoy in charge of Russia’s relations with international lending institutions. 55

In times of special crisis, Summers sought to ensure Chubais’s continued top billing. When the issue of “Russian” corruption began to capture American headlines in 1998 and the Bank of New York money-laundering scandals hit the press in 1999, Treasury Secretary Summers rushed to the defense of Chubais and other key players. Chubais admitted to a newspaper that he had “conned” from the IMF a $4.8 billion loan installment in July 1998, the details of that deal having been worked out in Summers’s home over brunch—a meeting that the New York Times deemed crucial to obtaining release of the funds. In testimony before the U.S. House of Representatives Committee on International Relations, for example, Summers stoutly defended Chubais and asked that Chubais’s prepared statement (titled “I Didn’t Lie”)—be placed in the Congressional Record. Less than a year later, allegations began surfacing of the alleged involvement of Chubais and clan member Alfred Kokh, a onetime minister of the State Property Committee, in laundering billions of dollars through the Bank of New York and other Western banks. 56

Whether or not Chubais lied, the protective network he and his clan enjoyed, together with their Harvard cohort, indisputably aided their ability to virtually determine American foreign policy in at least one crucial area of U.S.-Russia relations. At a time when the Russian people were suddenly freer than ever before, the players also did the same with Russian domestic economic policy and significant aspects of state building.

And who or what was capable of stopping them? The Chubais-Harvard partners were members of a flex net that was its own entity—to all intents and purposes, answerable to little outside itself.

Fruits of the Flex Net

The Chubais-Harvard players can be seen as employing an emergency modus operandi (personalizing bureaucracy, revising rules, privatizing information, and so on) in response to a onetime historical event that called for dramatic action. But as the aftermath of 9/11 in the United States has made clear, emergency measures have a way of becoming more permanent.

Just a few short years after these icons of enlightened social engineering set out to transform Russia, a lot had not gone quite as planned. As the era of reform came to a crashing close (made undeniable by the collapse of the Russian ruble in August 1998), Russia was far from a stable and prosperous democracy. The rapprochement that was supposed to usher in a new era seemed like a distant memory. While the American triumphalism—and Russian acquiescence—of the immediate post–Cold War period could not last forever, the fact that U.S.-sponsored “reform” left many Russians worse off materially than they had been under communism did not help America’s standing. The United States lost the moral authority with which many Russians had earlier credited it. A clan-state was in evidence, with the reform strategy having helped birth it. Oligarchies—in which instant billionaires such as Boris Berezovsky and Mikhail Khodorkovsky acquired fortunes virtually overnight while much of the rest of the population was left impoverished—had been created through the privatizations and mass looting of the 1990s. Progress toward building the checks and balances and other institutions of a democratic state was difficult to detect. In short, the Russian order that the Chubais-Harvard players helped forge in the 1990s went in a direction that was decidedly other than the one that had been anticipated. While blame cannot be laid solely at the feet of Chubais and the Young Reformers and their Western underwriters (and while we can’t know what other scenarios might have developed without their involvement), ample responsibility for what did happen is theirs.

Tellingly, Russia turned to more decisive leadership. In the next decade President Vladimir Putin set out to rein in the oligarchs, as well as those who opposed his rule. As he hobbled his adversaries, he entrusted control over gas, oil, and weapons reserves and industries to clans of industrial elites and former KGB functionaries. The form of governing introduced by Putin produced a state with a democratic façade, but it is one lacking in genuine representative democracy.

Three paradoxes leap out from this experience: First, the reforms and the activities of the reformers who were supposed to usher in a democratic system actually hindered that development and facilitated the expansion of an unaccountable state. Second, while they were entrusted with creating a competitive market economy—complete with a legal and regulatory backbone—to replace the failed communist system, the “reformers” not only served as a powerful example of noncompetitive dealing within a closed circle, they facilitated the very opposite of their stated goal: a corrupt bureaucracy that virtually precluded the development of a free market economy. Finally, they ended up as practitioners—and high-level ones—in the new authoritarian state.

Unflagging Flexians

What has become of the members of the Chubais-Harvard flex net who made such an impact in the 1990s? Generally, their fortunes have risen. The Young Reformers have become technocrats making money in an authoritarian state. Anatoly Chubais is the poster boy among them. From 1998 to 2008 he was chairman of Unified Energy Systems, Russia’s electricity monopoly, a powerful post that placed him at the center of the nation’s economic life. In 2008, President Dmitry Medvedev appointed Chubais head of the state-run Russian Corporation of Nanotechnologies, another powerful post. That same year J. P. Morgan Chase named him to the firm’s International Council. For his part, Dmitry Vasiliev had been recruited a year earlier by J. P. Morgan to lead its Russian investment branch. Vasiliev landed there from a top job in Moscow’s huge energy conglomerate—a position he had received thanks to Chubais. 57

Not surprisingly, Chubais has earned a reputation for taking care of his friends—including not only Vasiliev, but Boycko and Kokh as well. Kokh has used his former status and continued closeness to Chubais for investments in the energy sector.

The American players in this story are similarly or better known today—and largely without negative overtones. Jeffrey Sachs has reinvented himself several times since his “shock therapy” days. Despite the claims made in his project documents regarding his personal involvement in Russian reforms, when they began to get less-than-favorable reviews in the West, Sachs quickly distanced himself from responsibility. As a journalist summed it up: “The economic collapse of Russia was, in his [Sachs’s] calculation, the fault of the World Bank, the International Monetary Fund, the first Bush administration and the Clinton administration, and European governments for failing to deliver promised billions in aid.” As a celebrity activist whose endeavors enlist movie stars and other “personalities,” Sachs pursued an anti-AIDS campaign and later recast himself as an antipoverty expert. The latter effort, which he has pursued since 2002, now as head of Columbia University’s Earth Institute, looks like old hat to this veteran observer of Sachs’s modus operandi, replete with might-be-official, might-not-be-official self-presentations that characterized his activities in eastern Europe. 58