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

Concerned about conflicts of interest and questions of accountability, donors created the trappings of independent institutions. The RPC, for example, was set up with much of the usual Western apparatus of bona fide nonprofit organizations and even employed some Western administrators paid by donors. As a U.S. aid official in Moscow put it: “The RPC may be private but certainly looks political, just as the Heritage Foundation may be private but certainly supports a political constituency. The average Russian doesn’t make that distinction.”

The network of Local Privatization Centers, or LPCs, outside Moscow under the umbrella of the Moscow RPC illustrates this point. The LPCs were supposed to develop restructuring plans for enterprises and advise local governments on policy questions. With Western aid concentrated in Moscow, donors endorsed aid to the provinces. By 1996, ten LPCs had been set up, each with about 12 employees and one or two satellite offices with several employees.126 Three aid-paid consulting firms—Price Waterhouse, Arthur Andersen, and Carana—were charged with setting up the LPCs, two or three each. Representatives of all three reported that the LPCs, far from serving development, instead were steeped in political considerations, and they questioned the degree to which the LPCs were designed for sustainability.127

The idea of channeling technical resources beyond Moscow and setting up centers to help do so sounded promising. However, with aid as a political resource for the Chubais Clan and local leaders accustomed to looking to Moscow for favors, the Moscow RPC used its network of LPCs for its own political purposes.128 Dennis Mitchem, a former partner at Arthur Andersen, reported that “many things revolved around political considerations. I was told by Victor Pankrashchenko [deputy director at RPC] that, for political reasons, our center in Novosibirsk would not be opened.”129 Thus, although Arthur Andersen was supposed to set up four LPCs, it was allowed to set up only three.

The USAID-funded RPC replicated Moscow’s central authority in the patron-client tradition of Soviet society with regard to how central authority and local elites treated each other. Under that system, the careers of regional elites depended on high communist patrons in Moscow, and access and invitations to Moscow depended on the whim of high party officials there. Following that practice, Maxim Boycko, the RPCs managing director at the time, handpicked the directors and deputy directors of the regional centers, according to the consultants who helped to set up the LPCs and a USAID official in Moscow handling them.130 Mitchem noted that “there were political reasons behind appointments” and that “some appointments were purely political.”131

LPC leaders were rewarded for loyalty, even if that involved doing little or nothing, and sometimes even were reprimanded for local reform initiatives. Mitchem said that it was disconcerting to contractors that “we had some strong talents, and we made it clear to the RPC and AID that we wanted to use our talents,” but were often stymied. He also said that the LPC directors were concerned mainly with pleasing the RPC: “They did what Maxim [Boycko] wanted. Maybe the RPC didn’t want to accomplish anything.”132

Robert Otto of Carana, who set up the rest of the LPCs, likewise stated that local directors were “inclined to do whatever Moscow told them to do. The central office defines the rules of the road. From the start it was clear that the RPC wanted the LPCs to facilitate the RPC’s agenda.” Otto recounted that “the only thing that mattered to the RPC was that the LPCs did what [the RPC] wanted doing.… The LPC people slid very easily into that because it was normal for them to get orders from Moscow.”133

Under all these circumstances, were useful activities with a potentially lasting impact being accomplished? The RPC received so much money largely because of the Western clout of “reformers” Chubais and Boycko. Was an organization dependent on the clout of these two men able to spawn sustainable institutions? After a 1996 investigation into the Harvard Institute’s activities in Russia, the GAO concluded that “the RPC’s sustainability is in question once USAID assistance ends in 1997.”134

In the autumn of 1994, Harvard made another institutional push by creating several more aid-funded “private” institutions. One was the Russian Federal Commission on Securities and the Capital Market, or the Federal Securities Commission, a rough equivalent of the U.S. Securities and Exchange Commission (also known by Americans as the “Russian SEC”). The Federal Securities Commission was founded by Russian presidential decree and run by Chubais Clan member Dmitry Vasiliev, who served as executive director and vice chairman of the board, while Chubais served as chairman. The commission had very limited enforcement powers and Russian funding, but USAID supplied funds through two Harvard-created and -funded organizations run by Jonathan Hay, Vasiliev, and other members of the Harvard-Chubais coterie.

One organization was the Institute for Law-Based Economy (ILBE), funded both by the World Bank and USAID. ILBE was set up to help develop a legal and regulatory framework for markets and evolved to entail drafting decrees for the Russian government. It received nearly $20 million from USAID. Like the RPC, one of ILBE’s founding partners was the “President and Fellows of Harvard University.”135 The 1996 confidential State Department report referred to earlier suggests that Harvard was involved in ILBE’s activities. The report states that, according to the Harvard Institute, ILBE’s “founders are expected to provide political support for the activities of the ILBE.”136

It is logical that this state of affairs led to abuse. In particular, key transactors obstructed reform when such initiatives originated outside their own group or when the initiatives were perceived as conflicting with the agendas of their group.137 When a USAID-funded organization run by the Chubais-Harvard transactors failed to receive the additional USAID funds they had expected, they promptly blocked legal reform activities in the areas of title registration and mortgages—programs that were launched by agencies of the Russian government.138 In such instances, the transactors’ interference put them at cross purposes with their own purported aim of fostering markets.

Despite persistent reports of such abuse, U.S. officials for many months defended and supported the Harvard-Chubais group, though from the beginning USAID had failed to monitor the group adequately, as indicated by the GAO’s 1996 finding that USAID’s management and oversight of the Harvard Institute was “lax.” When, in 1997, USAID’s inspector received disturbing documents and began investigating the Harvard Institute, the laundry list of alleged misconduct included investments in the lucrative Russian securities markets and other “activities for personal gain.”139 For example, the U.S. government suit against Harvard University and four American transactors in September 2000 alleged that “Shleifer, [Nancy] Zimmerman [Shleifer’s wife], and Hay purchased several hundred thousand dollars worth of shares in Russian oil companies, and concealed the ownership of those shares by using the name of Shleifer’s father-in-law.” Hay has been named in another investigation, as well.140

Hay allegedly also used his influence, as well as USAID-financed resources, to help his girlfriend (now wife), Elizabeth Hebert, set up Pallada Asset Management, a mutual fund, in Russia, according to government sources. A third transactor, Sergei Shishkin, appeared as needed, once as the head of ILBE, sometimes as the director of five Russian companies, among them Pallada. After U.S. investigators noticed this, new Pallada documents materialized without Shishkin’s name. Pallada became the first mutual fund to be licensed by Vasiliev’s Federal Securities Commission. Vasiliev approved Pallada ahead of both Credit Suisse First Boston and Pioneer First Voucher, much larger and more established financial institutions.141 Moreover, as reported in Russia, Vasiliev’s commission entrusted Pallada—without a competitive tender and with funding from the World Bank’s Investment Protection Fund—with management of a government fund to compensate victims of equities fraud. Russia’s Accounting Chamber reported that an investigation had revealed that not a single kopeck had been paid to a defrauded investor in the first year and a half of the fund’s existence, though the fund’s Western consultants had been receiving their salaries.142