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

THE GREAT GRAB

The Chubais Clan’s partnership with the Harvard group took shape in 1991 and 1992, when Russian economic reform activities were centralized in the GKI. It was as the engine of Russia’s ongoing privatization that Chubais played his largest role—an admirable one in the eyes of international financial institutions and many Western governments; a sinister one to many Russians.

Shortly after Boris Yeltsin became the elected president of the Russian Federation in June 1991, the Federation’s Supreme Soviet passed a law mandating privatization. This was two months before the August coup attempt. In the confused political environment that followed the attempt, several schemes to realize privatization were floated before the Supreme Soviet.60

One was the brainchild of the Chubais-Harvard team. As the first head of the new GKI beginning in November 1991, Chubais, together with his team of St. Petersburg and Western advisers, drew up plans to privatize no fewer than 15,000 state enterprises. The team designed and coordinated the signature mass-voucher privatization program, launched in November 1992, in which citizens were given shares, or “vouchers,” in state-owned enterprises. USAID spent $58 million to underwrite this privatization program, including its design, implementation, and promotion.61 Through the Harvard Institute, USAID supported about ten advisers to the GKI,62 whose contracts added up to $7.75 million.63

In addition to USAID and the Harvard Institute, the Harvard group worked under other venues and funding. Project documents of Jeffrey D. Sachs and Associates state that “Professor Sachs, Dr. Lipton, and Professor Shleifer have worked with Deputy Prime Minister Chubais and the staff of the Russian State Committee on Privatization.… 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 legislation recently enacted by Parliament.”64 The documents further state that Andrei Shleifer “has played a central role in the formulation of the Russian privatization program.…”65

A USAID privatization official explained that “it was essential to jump-start the mass privatization program. At that time there was enormous pressure to get things going.”66 At first blush, it indeed seems that things “got going”—the U.S. Department of State’s 1996 annual report on aid to the former Soviet Union declared that “Russia’s mass-privatization program was successfully completed in July 1994, with state assets having been transferred to over 40 million new shareholders. By 1996 an estimated half of Russia’s workers were employed in private firms—almost three times as many as in 1992.”67

However, the privatization of state-owned enterprises by issuing vouchers was controversial from the start, and only a small minority of Russian citizens benefited from it. The privatization program that the Supreme Soviet had passed in 1992 was structured to prevent corruption, but the program that Chubais implemented encouraged the accumulation of vouchers and property in a few hands and opened the door to widespread corruption. Sociologists Lynn D. Nelson and Irina Y. Kuzes, who have detailed the minute-to-minute proposals and politicking around privatization, explain:

The reformers did not want to openly discuss the actual objective behind their voucher distribution proposal, because they were telling the public one thing while pursuing an entirely different goal. Whereas at the time of the parliament’s June discussions Chubais had clearly stated, “The politics of the State Property Management Committee are not to further the stratification of society but to let everyone take part in people-oriented privatization,” the plan that [the] GKI had secretly developed was designed to have the opposite effect. And by November, Chubais was not hesitant to advance an entirely different interpretation of voucher privatization’s meaning for the Russian citizenry. Now he was not speaking about the “stratification of society,” but rather about personal freedom, freedom to cash in on vouchers rather than to participate in “people-oriented privatization.”68

Citizens could purchase shares in formerly state-owned companies by investing their vouchers directly at auctions or indirectly through unregulated voucher investment funds. Either way, managers retained control over most industries, investors wound up owning very little, and the average Russian struggled to survive amid economic hardship.69 Economist James Millar concludes that voucher privatization was “a de facto fraud.”70

Privatization was intended to spread the fruits of the free market. Instead, it helped to create a system of “tycoon capitalism” acting in the service of half a dozen corrupt oligarchs. The “reforms” were more about wealth confiscation than wealth creation; and the incentive system encouraged looting, asset stripping, and capital flight.71 E. Wayne Merry, former chief political analyst at the U.S. Embassy in Moscow, observes that “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.…”72

Moreover, as crime specialists Svetlana Glinkina73 and Louise Shelley74 point out, privatization was carried out with little concern for organized crime.75 Yet privatization processes shaped the distribution of wealth in Russian society as well as citizens’ perceptions of democracy and capitalism. Part of the public came to associate the terms “market economy,” “economic reform,” and “the West” with dubious activities that benefited only a few people while others experienced a devastating decline in their standard of living—a far cry from their secure lives under socialism.

Public sentiment against privatization was visceral: Russians came to call it the “great grab.” Distancing himself from Chubais’s policies and citing the corrupt nature of the governmental apparatus, Yeltsin derided “Chubais-style” privatization.76 In the December 1995 Duma election in Russia, communist parties won about one-third of the popular vote and 42 percent of the seats, a strong showing that was partly attributable to anti-privatization sentiment.77 Reform came under siege by citizens and parliamentarians, and activities of the Chubais Clan were placed under investigation by parliamentary bodies. As Russia scholar Peter Reddaway reports:

In 1997, the Duma voted by 288 to 6 to denounce the privatization program of 1992-1996 as “unsatisfactory.” According to the chairman of the Duma commission set up to examine the program, its results were “chaotic” and “criminal”: Although 57 percent of Russia’s firms were privatized, the state budget received only $3-5 billion for them, because they were sold at nominal prices to corrupt cliques.78

Chubais, one of the most hated public figures in Russia, was branded by millions of Russians as the architect of “grabitization”—the man who gave away the nation’s great factories and its vast wealth of natural resources at fire-sale prices. As the executor of privatization, he had strong links with some of Russia’s rising power groups and new rich, and many average people perceived him as an agent of the privileged. In 1997 nationwide public opinion polls, 70 percent of those surveyed said that Chubais’s privatization policies had a “bad” effect79—one that was linked to Harvard and America. At a 1998 symposium entitled “Investment Opportunities in Russia” at Harvard’s John F. Kennedy School of Government, Yuri Luzhkov, the mayor of Moscow, made what might have seemed to many an impolite reference to his hosts. After castigating Chubais and his monetarist policies, Luzhkov, according to a report of the event, “singled out Harvard for the harm inflicted on the Russian economy by its advisers who encouraged Chubais’s misguided approach to privatization and monetarism.”80 Luzhkov said that “Harvard was in fact harmful to us by having proposed one of the models for privatization in Russia. Moreover this was a substantive harm.”81