Janine Wedel - Collision and Collusion - The Strange Case of Western Aid to Eastern Europe

Chubais took over where Gaidar left off. According to some Westerners’ reports, he was much more presentable than Gaidar. He seemed suave and well spoken. Then in his mid-30s, Chubais was adept at cultivating and charming his Western contacts. The British magazine Economist predicted a future for Chubais as Russian president by the year 2010.14 Western politicians and investors came to see him as the only man capable of keeping the nation on the troublesome road to economic reform. Chubais was on intimate terms with some Western officials, including high officials of the World Bank, the IMF, and the U.S. government, including Deputy Treasury Secretary Lawrence Summers. In a letter of April 1997 (obtained and published by a Russian newspaper) addressed “Dear Anatoly,” Summers instructed Chubais on the conduct of Russian foreign and domestic economic policy.15

To help him in his appointed task, Chubais assembled a group of Westward-looking, energetic associates in their 30s, many of whom were long-standing friends from St. Petersburg. From the start, the “young reformers” and their Harvard helpmates chose rapid, massive privatization as their showcase reform. The Harvard group secured awards from the U.S. Agency for International Development for work on privatization and other economic reforms and channeled them through the Harvard Institute for International Development. According to Treasury official Mark Medish, “Sachs was the one who packaged HIID as an AID consultant.”16 Harvard economist Shleifer became director of the Institute’s Russia project. Another Harvard player was a former World Bank consultant named Jonathan Hay, who played a minor part in the Jeffrey D. Sachs and Associates project.17 In 1991, while still at Harvard Law School, Hay had become a senior legal adviser to Russia’s new privatization agency, the State Property Committee (GKI).18 The following year, the youthful, hard-working Hay was made the Harvard Institute’s general director in Moscow.

With aid money and Harvard’s involvement, the St. Petersburg Clan, which Deputy Secretary Summers later called a “dream team”19 (an invaluable endorsement given his position and status), came to occupy important positions in the Russian government and ran a series of aid-created and funded “private” institutions. Made significant by virtue of hundreds of millions of Western dollars, Chubais was a useful figure for Yeltsin: first as head of the GKI, beginning in November 1991, then additionally as first deputy prime minister in 1994, and later as the lightning rod for complaints about economic policies after the communists won the Russian parliament (Duma) election in December 1995. Chubais made a comeback in 1996 as head of Yeltsin’s successful reelection campaign and was named chief of staff for the president. In March 1997, Western support and political maneuvering catapulted him to first deputy prime minister and minister of finance. Although fired by Yeltsin in March 1998, Chubais was reappointed in June 1998 to be Yeltsin’s special envoy in charge of Russia’s relations with international lending institutions.

Chubais’s success at courting power on all sides placed the Chubais Clan in a unique position. As Russian sociologist Olga Kryshtanovskaya explained it, “Chubais has what no other elite group has, which is the support of the top political quarters in the West, above all the USA, the World Bank and the IMF, and consequently, control over the money flow from the West to Russia. In this way, a small group of young educated reformers led by Anatoly Chubais turned into the most powerful elite clan of Russia in the past five years.”20

The interests of the Harvard Institute group and the Chubais Clan soon became one and the same. Their members became known for their loyalty to each other and for the unified front they projected to the outside world. By mid-1993, the Harvard-Chubais players had formed an informal, collusive and extremely influential group of “transactors” that was shaping the direction and consequences of U.S. economic aid and much Western economic policy toward Russia. “Transactors” work together for mutual gain, even while formally representing their respective parties. Transactors may genuinely share the stated goals of the parties they represent—in this case, the United States and Russia—but they have additional goals that may, advertently or inadvertently, subvert or subordinate the purposes of the parties they ostensibly represent.21 As a new decade begins, some key transactors in this story are under investigation for corruption and other criminal activities—the consequences of their undeclared goals. Recently, the U.S. government brought a suit against four American transactors and Harvard University. It alleges that the defendants “were using their positions, inside information and influence, as well as USAID-funded resources, to advance their own personal business interests and investments and those of their wives and friends.”22

HARVARD’S BLANK CHECK FROM UNCLE SAM

Without experience in Russia and under obligation to carry out congressional spending mandates, an insecure USAID was persuaded to largely delegate responsibility for America’s role in reshaping the Russian economy to the Harvard Institute group. The Institute’s first award from USAID for work in Russia came in 1992, during the Bush administration. Over the next four years, between 1992 and 1997, with the endorsement of influential proponents in the Clinton administration, the Institute received $40.4 million from USAID in noncompetitive grants for work in Russia. It was slated to receive another $17.4 million, but USAID suspended its funding in May 1997, citing allegations of misuse of funds.23 Approving such a large sum of money as a noncompetitive “amendment” to a much smaller award (the Harvard Institute’s original 1992 award was $2.1 million) was highly unusual, according to U.S. officials.24 Also highly unusual was the citing of “foreign policy” considerations—that is, the national security of the United States—as the reason for the waiver.

Nonetheless, the waiver was endorsed by five U.S. government agencies, including the Department of the Treasury and the National Security Council (NSC), two of the leading bodies making U.S. aid and economic policy toward Russia (and Ukraine). From Treasury, the Harvard-connected David Lipton and Lawrence Summers supported the Harvard Institute projects. In his capacity as USAID’s deputy assistant administrator of the Bureau for Europe and the New Independent States, Carlos Pascual signed the waiver on behalf of USAID. Pascual’s support for Harvard projects continued, and he was later promoted to the NSC, where he served as director of Russian, Ukrainian, and Eurasian Affairs from 1995 to 1999.25

Thus, through high government directives promoted by Harvard-connected administration officials, and with competitive bidding and other standard government regulations and procedures largely circumvented, the Harvard Institute secured terms that were different from, and more advantageous than, those for many other aid contractors. Further, key Harvard-connected officials were responsible for handing the Institute not only the bulk of USAID’s economic reform portfolio in Russia, but also the authority to manage other contractors. In addition to receiving tens of millions in direct funding, the Institute helped steer and coordinate USAID’s $300 million reform portfolio in grants to the Big Six accounting firms and other companies such as the public relations firm Burson-Marsteller.26 This put the Harvard Institute in the unique position of recommending U.S. aid policies in support of market reforms while being a chief recipient of the aid, as well as overseeing other aid contractors, some of whom were the Institute’s competitors. Louis Zanardi, the U.S. General Accounting Office (GAO) official who spearheaded the GAO investigation of the Harvard Institute’s activities, adds that the Institute’s substantial influence was possible “because of its close relationship with the Chubais group and USAID.”27