June 1,1998 The Xation.
11
BY JANINE R. WEDEL
fter seven years of economic reform financed by billions
of dollars in U.S. and other Western aid, subsidized loans and
rescheduled debt, the majority of Russian people find them-
selves worse off economically.The privatization dnve that was
supposed to reap the fruits of the free market instead helped
to create a system of tycoon capitalism run for the benefit of a
corrupt political oligarchy that has appropriated hundreds of
millions of dollars of Western aid and plundered Russias wealth.
The architect of privatization was former First Deputy Prime
Minister Anatoly Chubais, a darling of the U.S. and Western fi-
nancial establishments.Chubaiss drastic and corrupt stewardship
made him extremely unpopular. According to The New York
1
I
I
L 1
P.
z
3
rimes, he may be the most despised man in Russia.
Essential to the implementation of Chubaiss policies was
the enthusiastic support of the Clinton Administration and its key
representative for economic assistance in Moscow, the Harvard
Institute for International Development. Using the prestige of
Harvards name and connections in the Administration, H.I.I.D.
officials acquired virtual carte blanche over the U.S. economic
aid program to Russia, with minimal oversight by the government
agencies involved. With this access and their close alliance
with Chubais and his circle, they allegedly profited on the
side. Yet few Americans are aware of H.I.I.D.3 role in Russian
privatization, and its suspected misuse of taxpayers funds.
 12 The Nation. Tune 1.1998

At the recent U.S.-Russian Investment Symposium at Har- assist countries with social and economic reform.
vards John F. Kennedy School of Government, Yuri Luzhkov, H.I.I.D. had supporters high in the Administration. One was
the Mayor of Moscow, made what might have seemed to many Lawrence Summers, himself a former Harvard economics pro-

an impolite reference to his hosts. After castigating Chubais fessor, whom Clinton named Under Secretary of the Treasury for .
and his monetarist policies, Luzhkov, according to a report of International Affairs in 1993. Summers, now Deputy Treasury
the event, singled out Harvard for the harm inflicted on the Secretary, had longstanding ties to the principals of Harvards
Russian economy by its advisers, who encouraged Chubaiss project in Russia and its later project in Ukraine.
misguided approach to privatization and monetarism. Luzhkov Summers hired a Harvard Ph.D., David Lipton (who had
was referring to H.I.I.D. Chubais, who was delegated vast powers been vice president of Jeffrey D. Sachs and Associates, a consult-
over the economy by Boris Yeltsin, was ousted in Yeltsins ing firm), to be Deputy Assistant Treasury Secretary for East-
March purge, but in May ern Europe and the Former
he was given an immensely U. S.A.I.D. was readily persuaded to hand SovietUnion.ARerSummers
lucrative post as head of
Unified Energy System, the over responsibility for shaping the Russian was promoted to Deputy
Secretary,Lipton moved into
countrys electricity monop- economy to the Harvard team in Moscow. S-merss oldjob, assuming
I

oly. Some of the main actors broad responsibility for all

with Harvards Russia project have yet to face a reckoning, but aspects of international economic policy development. Lipton
this may change if a current investigation by the U.S. govem- co-wrote numerous papers with Sachs and served with him on
ment results in prosecutions. consulting missions in Poland and Russia. Jeff and David al-
ways came [tq Russia] together, said a Russian representative

T
he activities of H.I.I.D. in Russia proTiide some cautionary
lessons on abuse of trust by supposedly disinterested foreign
advisers, on U.S. arrogance and on the entire policy of support
for a single Russian group of so-calledreformers.The H.I.I.D.
story is a familiar one in the ongoing saga of US. foreignpol-
icy disasters created by those saidtobe our.best and brightest. professor of economics at Harvard in his early 30s, became di-
Through the late summer and fall of 1991,as the Soviet state
fell apart, Harvard Professor Jeffrey Sachs and other Western
economists participated in meetings at a dacha outside Mos-
cow where young, pro-Yeltsin reformers planned Russias eco-
nomic and political future. Sachs teamed up withYegor Gaidar,
Yeltsins first architect of economic reform, to promote a plan
of shock therapy to swiftly eliminate most of the price con-
trols and subsidies that had underpinned life for Soviet citizens
for decades. Shock therapy produced more shock-not least,
hyperinflation that hit 2,500 percent-than therapy. One result
was the evaporation of much potential investment capital: the
substantial savings of Russians. By November 1992, Gaidar
was under attack for his failed policies and was soon pushed
aside. When Gaidar came under seige, Sachs wrote a memo
to one of Gaidars principal opponents, Ruslan Khasbulatov,
Speaker of the Supreme Soviet, then the Russian parliament,
at the International Monetary Fund. They were like an insep-
arable couple. Sachs, who was named director of H.I.I.D. in
1995, lobbied for and received U.S.A.I.D. grants for the institute
to work in Ukraine in 1996 and 1997.
Andrei Shleifer, a Russian-born 6migr6 and already a tenured
rector of H.I.I.D.3 Russia project. Shleifer was also a prot6gk of
Summers, with whom he received at least one foundation grant.
Summers wrote a promotional blurb for Privatizing Russia (a
1995book co-written by Shleifer and subsidized by H.I.I.D.) de-
claring that the authors did remarkable things in Russia, and
now they have written a remarkable book.
Another Harvard player was a former World Bank consultant
named Jonathan Hay, a Rhodes scholar who had attended Mos-
cows Pushkin Institute for Russian Language. In 1991,while still
at Harvard Law School, he had become a senior legal adviser to
the G.K.I., the Russian states new privatization committee; the
followingyear he was made H.I.I.D.s general directorin Moscow.
The youthful Hay assumedvast powers over contractors,policies
and program specifics; he not only controlled access to the
Chubais circle but served as its mouthpiece.

H
offering advice and to help arrange Western aid and contacts in ,.I.I,D.s first awards from U.S.A.I.D. for work in Russia
the U.S. Congress. came in 1992, during the Bush Administration. Over the
Enter Anatoly Chubais, a smooth, 42-year-old English- next four years, with the endorsement of the Clinton Ad-
speaking would-be capitalist who became Yeltsins economic ministration, the institute would be awarded $57.7 mil-
czar. Chubais, committed to radical reform, vowed to construct lion-all but $17.4 million without competitive bidding. For
a market economy and sweep away the vestiges of Communism. example, in June 1994Administration officials signed a waiver
The U.S. Agency for International Development (U.S.A.I.D.), that enabled H.I.I.D. to receive $20 million for its Russian legal
without experience in the former Soviet Union, was readily reform program. Approving such a large sum as a noncompeti-
persuaded to hand over the responsibility for reshapin4 the tive amendment to a much smaller award (the institutesorigi-
Russian economy to H.I.I.D., which was founded in 1974 to nal 1992award was $2.1 million) was highly unusual, as was the
citation of foreign policy considerations as the reason for the
Janine R. Wdel is an anthropologist and associate research projkssor waiver. Nonetheless, the waiver was endorsed by five U.S. gov-
and research fellow at the Institute for European, Russian and ernment agencies, including the Treasury Department and the
Eurasian Studies at The George Washington University.Her new book, National Security Council, two of the leading agencies formu-
Collision and Collusion: The Strange Case of Western Aid to Eastern lating U.S. aid policy toward Russia. In addition to the millions
Europe 1989-1998, will be published by St. Martin k later this year. it received directly, H.I.I.D. helped steer and coordinate some
 Tune 1.1998 The &ti&. 13

$300 million in U.S.A.I.D. grants to other contractors, such as rection of Chubais, who was chairman of its board even while
the Big Sixaccounting firms and the giant Burson-Marsteller head of the G.K.I., and Boycko, who was C.E.O. for most of
P.R. firm. its existence, the R.P.C. was legally a private, nonprofit, non-

n
governmental organization. In fact, it was established by another
sYeltsinsRussian governmenttook over Soviet assets in late Yeltsin decree and helped cariy out government policy on infla-
1991and early 1992, severalprivatizationschemeswere float- tion and other macroeconomic issues and also negotiated loans
ed. The one the Supreme Sovietpassed in 1992 was structured with international financial institutions. H.I.I.D. was a founder
to prevent corruption, but the program Chubais eventually of the R.P.C., andhdrei Shleifer served on the board of directors.
carried out instead encouraged the accmdation of property Its other members were recruited by Chubais, according to Ira
in a few hands and opened the door to widespread cormption. It Lieberman, a senior manager in the private-sector development
was so controversial that Chubais ultimately had to rely !argely department of the World Bank who helped design the R.P.C.
onyeltsins presidential decrees, not parliamentary approval, for With H.I.I.D.s help, the R.P.C. received some $45 million fiom
implementation. Many U.S. officials embraced this dictatorial U.S.A.I.D. and millions from the European Union, individual
modus operandi, and Jonathan Hay and his associates drafted Europeangovernments,Japan and other countries, as well as loans
many of the decrees. As U.S.A.I.D.s Walter Coles, an early sup- from the World Bank ($59 million) and the European Bank for
porter of Chubaiss privatization program, put it, If we needed Reconstruction and Development ($43 million), which must be
a decree, Chubais didnt have to go through the burea~cracy.~~ repaid by the Russian people. One result of this funding was the
With help from his H.I.I.D. advisers and other Westerners, enrichment,political and financial, of Chubais and his allies.
Chubais and his cronies set up a network of aid-hded private9 H.I.I.D. helped create several more aid-funded institutions.
organizations that enabled them to bypass legitimate govern- ne was the Federal Commission on Securities, a rough equiva-
ment agencies and circumvent the new parliament of the Russiam lent of the U.S. Securities and Exchange Commission (S.E.C.).
Federation, the Duma. Through this network, two of CIiubaks It too was established by presidential decree, and it was run by
associates,Maxim Boyclm (who co-wote PrivatizingRussia with Cliubais protdgd Dmitry Vasiliev. The commission had very limit-
Shleifer) and Dmitry Vasiliev, oversaw almgst a third of a billion ed enforcementpowers and funding, but U.S.A.I.D. supplied the
dollars in aid money and millions more in loans from interna- cash through two Hasvard-createdinstitutionsrun by Hay, Vasiliev .
tional financial institutions. and other members of the Harvard-Chubais coterie.
Much of this largesse flowed through the Moscow-basedRus- One of these was the Institute for Law-Based Economy, fund-
sian Privatization Center (R.P.C.). Founded in 1992 under the di- ed by both the World Bank and U.S.A.I.D. This institute, set up

Morninpfur risk-adiusted performance rating omong 2,437 domestic

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14 The Nation. Tune 1.1998

to help develop a legal and regulatory framework for markets, tal. Ostensibly, there was to be total separation between the de-
evolved to encompass drafting decrees for the Russian govern- pository and any mutual fund using its services. But the selection
ment; it got nearly $20 million from U.S.A.I.D. Last August, the of Zagachin defied this tenet of open markets: Pallada and the
Russian directors of I.L.B.E. were caught removing $500,000 depository were rull by people with ties to each other through
worth of U.S. office equipment from the organizationsMoscow H.I.I.D. Thus the verypeoplewho were supposedto be the trustees
office; the equipment was returned only after weeks of U.S. pres-of the system not only ,undercutthe aid programs stated goal of
sure. When auditors from U.S.A.I.D.3 inspector generals office building independentinstitutionsbut replicatedtheSovietpractice
sought records and documentsregarding I.L.B.E. operations, the of skimming assets to benefit the nornenklatura.
organizationrefused to turn them over. h i e Williamson, a journalist who specializes in Soviet and
Russian affairs, details these and other conflicts of interest be-
he device of setting up private organizations backed by the tween H.1.I.D.k advisers and their supposedclients-the Russian
power of the Yeltsin government and maintaining close ties to people-in her forthcoming book, How America Built the New
H.I.I.D. was a way of insuring deniability. Shleifer, Hay and Russian OZigarchy. For example, in 1995, in Chubais-organized
other Harvard principals, all U.S. citizens, were Russian7y insider auctions of prime national properties, known as loans-
when convenient. Hay, for example, served alternately and for-shares, the Harvard Management Company (H.M.C.), which
sometimes simultaneously as aid contractor, manager of other invests the universitys endowment, and billionaire speculator
contractors and representative of the Russian government. If George Soros were the only foreign entities allowed to partici-
Western donors were attacked pate. H.M.C. and Soros be-
for funding controversial pri- Exploiting their intimate ties with Chubais came significant sharehold-
vatization practices of the ers in Novolipetsk, Russias
state, the donors could claim and the government, the H.I.I.D. team set up second-largest steel mill,
they were funding private some -profitable
- businesses in Russia. and Sidanko Oil, whose re-
organizations, even if these serves exceed those of Mobil.
organizationswere controlled or strongly influencedby key state H.M.C. and Soros also invested in Russias high-yielding, 1.M.F.-
officials.If the Chubais circle came under fire for misuse of funds, subsidized domestic bond market.
they could claim that Americans made the decisions. Foreign Even more dubious, according to Williamson, was Soross
donors could insist that the Russians acted on their own. July 1997 purchase of 24 percent of Sviazinvest, the telecom-
Against the backdrop of Russias Klondike capitalism, which munications giant, in partnership with Uneximbanks Vladimir
they were helping create and Chubais and his team were suppos- Potanin. It was later learned that shortly before this purchase
edly regulating, the H.I.I.D. advisers exploited their intimate ties Soros had tided over Yeltsins government with a backdoor loan
with Chubais and the government and were allegedly able to of hundreds of millions of dollars while the government was
conduct business activities for their own enrichment. According awaiting proceeds of a Eurobond issue; the loan now appears to
to sources close to the U.S. governments investigation, Hay used have been used by Uneximbank to purchase Norilsk Nickel in
his influence, as well as U.S.A.1.D.-financed resources, to help August 1997.According to Williamson, the U.S. assistance pro-
his girlfriend, Elizabeth Hebert, set up a mutual fund, Pallada gram in Russia was rife with such conflicts of interest involving
Asset Management, in Russia. Pallada became the first mutual H.I.I.D. advisers and their U.S.A.1.D.-funded Chubais allies,
fund to be licensed by VasilievsFederal Commission on Secu- H.M.C. managers, favored Russian bankers, Soros and insider
rities. Vasiliev approved Pallada ahead of Credit Suisse First expatriates working in Russias nascent markets.
Boston and Pioneer First Voucher, much larger and more estab-
lished financial institutions. espite exposure of this corruption in the Russian media (and,
After Pallada was set up, Hebert,Hay, Shleifer and Vasiliev far more hesitantly, in the U.S. media), the H.I.1.D.-Chubais
looked for ways to continue their activities as aid funds dwindled. clique remained until recently the major instrument of U.S.
Using I.L.B.E. resources and fimding, they established a private economic aid policy to Russia. It even used the high-level
consulting firm with taxpayer money. One of the firms first Gore-Chernomyrdin Commission, which helped orchestrate
clients was Shleifers wife, Nancy Zimmerman, who operated a the cooperation of U.S.-Russian oil deals and the Mir space sta-
Boston-based hedge fund that traded heavily in Russian bonds. tion. The commissions now-defunct Capital Markets Forum
Accordingto Russian registration documents,Zimmermans com- was chaired on the Russian side by Chubais and Vasiliev, and on
pany set up a Russian firm with Sergei Shishkin, the I.L.B.E. the U.S. side by S.E.C. chairman Arthur Levitt Jr. and Treasury
chief, as general director. Corporate documents on file in Moscow Secretary Robert Rubin. Andrei Shleifer was named special co-
showed that the address and phone number of the company and ordinator to all four of the Capital Markets Forums working
the I.L.B.E. were the same. subgroups. Hebert, Hays girlfriend, served on two of the sub-
Then there is the First Russian SpecializedDepository, which groups, as did the C.E.0.s of Salomon Brothers, Merrill Lynch
holds the records and assets of mutual fund investors. This insti- and other powerful Wall Street investment houses. When The
tution, funded by a World Bank loan, also worked to the benefit Nation contacted the S.E.C. for information about Capital Mar-
of Hay, Vasiliev, Hebert and another associate, Julia Zagachin. kets, we were told to call Shleifer for comment. Shleifer, who is
According to sources close to the U.S. governments investiga- under investigation by U.S.A.I.D.3 inspector general for misuse
tion, Zagachin, an American married to a Russian, was selected of funds, declined to be interviewed for this article. A U.S.
to run the depository even though she lacked the required capi- Treasury spokesman said Shleifer and Hebert were appointedto
June 1,1998 The Nation.- 15
Capital Markets by the Chubais goup-specifically, according

ever adequately monitored

by U.S.A.I.D. In 1996, a General Pncco~ntingOffice repo~t.de-
scribed U.S.A.I.D.s management and oversight of H.1J.D. as
lax. In early 1997, U.S.A.I.D.3 inspector general received in-
criminating documents about 1H.I.I.D.B activities in Russia and
began investigating. In May Slnleifer and Hay lost their projects
when the agency canceled most of the $14 million still earmarked
for H.I.I.D., citing evidence that the two mmagers were engaged
in activities for private gain. The men had allegedly used their
POSitiQnSto profit fiQmhESmfX1t5 inthe
kets and other private enterprises. According to SQUSC~S close
to the U.S. investigation, while advising the Russian g~vem-
ment on capital markets, for example, Hay and his father. al-
legedly used inside hfomatbn to hvest hRussian government
bonds. Hay and Shleifer may ultimately face criminal andlor
civil prosecution. Slaleiferremains a tenured professor at Hasvard,
and Hay continues to work with members ofthe Chubais clique
in Russia. Sachs, W ~ has Q stated he never invests in countries
where he advises and who is not implicated in
governmentinvestigation,remains head ofH.H.1.
Cabinet shalceup in March, Chubais was moved
QfpSOITlhlenCe.Hi5 role in ssias political-economicaffairs had
been tarnished by S ~ ~ Q ofS ~personal
S enrichment.TWQexamples:
Q In February 1996, Chubaiss Foundation for the Protection
of Private Property received a five-year, $2.9 -millionunsecured
interest-fiee loan. Acco~dingto the prQ-ydt5in, pro-reform
h e s ~ aStolichy
, Bank, an institution that enjoys lines of credit
from the European adc ~ Q Reconstruction
S and Development
and the World B d , made the loan in r e m for a small percent-
age of the Sibneft oil company when it was sold at auction, and for
later control of one ofthe states largest banks. Chubais defended
himself by saying such practices were G Q ~ inQthe West, ~ but
failed to provide any reasonable explanation for sosne $ ~ O O , O O ~
in 1996 income not accdunted for by his government salary.
Q During Yeltsins 1996 presidential campaign, security of-
ficials apprehended two close associates of Chbais as they were
walking out of a main govement building with a box contain-
ing more than $5QO,OOO in cash forlueltshscampaign. Acc~rd-
ing to tapes of a later meeting recorded by a member of one of
Russias security services, Chubais and his cronies strategized
about busying evidence of any illegal transaction, while publicly
claiming that any allegations of chicanery were the W Q S ~sf
political enemies.A protracted, lackadaisicalinvestigationbegan
but was eventually & o p p ~ d - m ~ ~evidence
e of Chubaiss re-
markable resilience. He remained valuable t~ Yeltsin lasgely
because of his perceived ability to deal with the West, where
many still regard him as a symbol of ~ u s s i a nreform.

uring the five years that the Chubaiscliquepresided over West-

ern economic aid and policy in Russia? they did enomom
harm. By uncon&tionally backing Chubais md his associates,
the Harvasd operatives, their US. g o v e q e n t patrons and
Western donors may have reinforced the new post-Soviet oli-
garchical system. Shleifer aclmowledged as much inPrivatizing
Russia, the book he wrote with Chubais crony Maxim Boycko,
wh6 with his patron would later be caught in another financial in-
16 The Nation.
discretion involving taking a veiled bribe in the form of ad-
vances on a book on the history of Russian privatization.Aid can
change the political equilibrium,they said, %yexplicitlyhelping
free-marketreformers to defeat their opponents.
Richard Morningstar, U.S. aid coordinator for the former
Soviet Union, stands by this approach: If we hadnt been there
to provide funding to Chubais, could we have won the battle to
carry out privatization?Probably not. When youre talking about
a few hundred million dollars, youre not going to change the
counw, but you can provide targeted assistance to help Chubais.
In early 1996,after he was temporarilyremoved from high office
by Yeltsin because he represented unpopular economic policies,
H.I.I.D. came to his rescue by placing him on its U.S.A.1.D.-
funded payroll, a show of loyalty that former U.S.A.I.D. assistant
administratorThomas Dine says he supported. Westerg poiicy-
makers like Morningstar and Dine have depicted Chubais as a
selfless visionary battling reactionary forces. In the spring of
LABOR IS MOBILIZING ITS INVESTMENT POWER TO PRESSURE CORPORATE AMERICA.
Union
1 DAVIDMOBERG
ike Quigley, a building trades union leader
from Chicagos exurban sprawl, was angry,
right to the tips of his well-waxed mustache.
Despite his protests, retail giant Sears was
using nonunion, out-of-state workers for
a major construction project in his backyard.
He found it particularly galling, he to1dA.F.L.-
C.I.O. president John Sweeney at a union issues
forum this spring, because pension funds of
the very workers who couldnt get the jobs had
large holdings of Sears stock. Union.pension
funds own many of the corporations in this coqtry, he said
passionately. Cant we get our funds to teachthose people to
stop abusing workers?
Thats what were trying to do, Sweeneyreplied. Workers are
becoming more and more mindful of the fact that they have sub-
stantialmoneys in thekpensions, he said later, and they want to
see those moneys protected but also working for them, for their
jobs and for the economic success of the industriesthey work in.
The A.F.L.-C.I.O. under Sweeney has thrown its support be-
hind the pioneering work of a handful of unions, including the
Teamsters, the ServiceEmployees (S.E.I.U.), the Union ofNeedle-
trades, Industrial & Textile Employees (UNITE) and the Carpen-
ters, to make their pension funds into activist investors. They are
not alone: Church-linkedpension funds have for many years used
shareholdermeetings to raise issues about human rights overseas,
discrimination at home and environmental violations, and since
the mid-eighties large public-employee pension funds have flexed
their muscle, mainly over corporate mismanagement. But in re-
David Moberg is a senior editor at In These Times.
June 1,1998
~ 1997, Summers called him and his associates a dream team.
,With few exceptions, the U.S. mainstream media have promul-
gated this view.
United States policy toward Russia requires a full-scale Con-
gressional investigation. The General Accounting Office did
investigate H.I.I.D.3 Russian and Ukrainian projects in 1996,
but the findings were largely suppressed by the agencys timid
management. The audit team concluded, for example, that the
~
US. government exercised favoritism toward Harvard, but this
conclusion and the supporting documentationwere removed from
the final report. Last fall Congress asked the G.A.O. to look into
Eastern European aid programs and Shleifers role in the Gore-
. ChernomyrdinCommission. Such questions need to be answered,
but any.serious inquiry must go beyond individual corruption
and examine how U.S. policy, using tens of millions in taxpayer
dollars, helped deform democracyand economicreform in Russia
and helped create a fat-cat oligarchy run amok. H
ion Power
I
cent years pension funds in which unions play a
decisive role have emerged as among the most
innovative, aggressive and successfulactivist in-
vestors, even though organized labor has barely
begun to tap its potential to exert pressure on
managements ownership flank.
So far, despite some success stories, its hard
1 to tell how much these efforts have benefited
union members, either as pensioners or active
workers. But strategies that rely on union pen-
5 sion power and on other .ways of influencing
managementsaccess to capital provide new arrows for the union
quiver and open a new terrain of battle. They also raise questions
about how corporations are governed and whom they serve.
And although there are still doubts about the ultimate potential
and inherent limitations of these strategies, they have at least
greatly discomfited management.
At first glance,unions appear to wield enormouspension clout.
They play a role in pension funds that are worth about $2.8 trillion
and own about one-eighth of all corporate stock. But most of that
money is in public-employeefunds, where unions often have limit-
ed influence, though laws vary fi-om state to state. About one-
fifth of the total is in corporate-controlled single-employerfutids,
which unions can influence only through collective bargaining,
usually on overalllevelsof funding and benefits. That leaves al-
most $330 billion in about 2,100 multi-employer pensions, where
control is evenly split between management and worker trustees.
Along with some pension funds for union staff, these multi-
employer plans are often called union pension funds because
unions usually have a strong voice in decisions. They have been
the new activists, and they often work closely with some of the