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Subject:

Fw: 4179-Wedel/Tainted Transactions: Harvard, the Chubais Clan andRussia's Ruin

From:

"Andrew Jameson" <[log in to unmask]>

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Date:

Mon, 20 Mar 2000 12:14:03 -0000

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From: David Johnson <[log in to unmask]>
To: Recipient list suppressed
Subject: 4179-Wedel/Tainted Transactions: Harvard, the Chubais Clan andRussia's Ruin
Date: 18 March 2000 20:43

Johnson's Russia List
#4179
18 March 2000
[log in to unmask]

******

The National Interest
Spring 2000, No. 59, Pp. 23-34
[reprinted with permission for personal use only]
Tainted Transactions: Harvard, the Chubais Clan and Russia's Ruin
By Janine R. Wedel ([log in to unmask]) 

Only a few years ago, American policymakers were confidently predicting
that a regimen of privatization and market reform would in due course
transform Russia into a stable and prosperous democracy. America would
smooth this transition and U.S. aid—unselfish and urgent—would serve as a
"bridge", enabling representatives from both sides to implement their
respective agendas. Pictures of "Bill" and "Boris" embracing and beaming at
the camera symbolized the promise of a new era in U.S.-Russia relations,
one that bore little resemblance to the preceding decades of Cold War
acrimony.

Today all that has passed away. Far from fulfilling their promise of a
better life, the U.S.-sponsored "reforms" of the 1990s have left many, if
not most, Russians worse off.1 For this state of affairs many Russians
today blame precisely the Western aid and advice they have received.2 Some,
indeed, believe that the United States set out deliberately to destroy
their economy.

How did the United States, by far the dominant partner in the relationship,
allow one of the most promising rapprochements of the last century to
founder? Rather than proceeding on the basis of common sense and
well-established modes of representation between states, it acted upon an
ideology implemented through a most dubious mode of conducting relations
between nations. The ideology—that of radical privatization and
marketization, applied in this instance in a cold-turkey manner to a
society with no recent experience of either—is well known. The way in which
advice and aid were given is much less familiar, but it is a vital part of
the story.

It is necessary to give this distinctive way of conducting business a name,
and, drawing on my experience as an anthropologist, I shall call it
"transactorship."3 By "transactors", then, I shall mean players in a small,
informal group who work together for mutual gain, while formally
representing different parties. Even though transactors may genuinely share
the stated goals of the parties they represent, they have additional goals
and ways of operating of their own. These may, advertently or
inadvertently, subvert or subordinate the aims of those for whom they
ostensibly act. The behavior of members of such groups is marked by extreme
flexibility and a readiness to exchange roles, even to the extent of
representing parties other than the ones to which they are formally attached.

In what follows, I shall show that during the 1990s the cozy manner in
which American advisers and Russian representatives—that is, the
transactors—interacted and the outcomes of their activities ran directly
counter to the stated aims of the U.S. aid program in Russia. Specifically,
those goals were to foster economic development and democratization and to
nurture friendly bilateral relations. As a new decade begins, key
transactors in this program are under investigation for money laundering,
corruption and other criminal activities—the consequences of their
undeclared goals. 

Transactorship, as it applies in the U.S.-Russia relationship over the last
decade, involves individuals, institutions and groups whose official status
is difficult to establish. Indeed, nearly everything about transactors is
ambiguous. Their sphere of activity is neither fixedly public nor private,
neither firmly political nor economic; their activities are neither fully
open nor completely hidden and conspiratorial; and the transactors are not
exclusively committed to one side or the other. This malleability affords
them enormous flexibility, which in turn enhances their influence on all
sides. Alas, it is also what has sabotaged the once high hopes for a new
era in U.S.-Russia relations.

The Emergence of Transactorship

How in the case of Russia and the United States did the transactors come
together to be designated as the bridge builders from their respective
sides? As the vast Soviet state was collapsing in late 1991, Harvard
professors Jeffrey Sachs, Andrei Shleifer and others participated in
meetings at a dacha outside Moscow. There, young would-be Russian
"reformers" were in the process of devising a blueprint for economic and
political change. The key Russians present at the dacha were the economists
Yegor Gaidar and Anatoly Chubais. These meetings occurred at the time when
Boris Yeltsin, then president of what was still Soviet Russia, was putting
together his team of economic advisers. Gaidar would become the first
"architect" of economic "reform" in post- communist Russia. A long-standing
group of associates from St. Petersburg, centered around Chubais, was to
figure prominently in Yeltsin's team. Indeed, Chubais would go on to
replace Gaidar, and to become an indispensable aide to Yeltsin. 

While at the dacha, Sachs, his associate Anders Åslund and several other
Westerners offered their services to the Russians, including that of
facilitating access to Western money—an offer the Russians accepted. In the
ensuing months and years the members of the Harvard and Chubais teams saw
to it that they became the designated representatives for their respective
sides—and transactors in the sense I have described. On the American side,
representatives from the Harvard Institute for International Development
(HIID) would provide the theory and advice to reinvent the Russian economy. 

Maintaining that Russian economic reform was so important, and the "window
of opportunity" to effect change so narrow, U.S. policymakers granted the
Harvard Institute special treatment. Between 1992 and 1997, the Institute
received $40.4 million from the U.S. Agency for International Development
(USAID) in non-competitive grants, and—until USAID suspended its funding in
May 1997—had been slated to receive another $17.4 million.
Harvard-connected officials in the Clinton administration, citing "foreign
policy" considerations, largely bypassed the normal public bidding process
required for foreign aid contracts. The waivers to competition were backed
by friends of the Harvard Institute group, especially in the U.S.
Treasury.4 Approving such a large sum of money mostly as non-competitive
amendments to a much smaller award (the Harvard Institute's original award
was $2.1 million) was highly unusual, according to U.S. government
procurement officers and U.S. General Accounting Office (GAO) officials,
including Louis H. Zanardi, who later spearheaded GAO's investigation of
HIID activities in Russia and Ukraine. Indeed, the U.S. government
delegated virtually its entire Russian economic aid portfolio—more than
$350 million—for management by the Harvard Institute. The Institute was
also provided the legal authority to manage other contractors (some of whom
were its competitors), leaving it in the unique position of recommending
U.S. aid policies while being itself a chief recipient of that aid. In 1996
the GAO found that the Harvard Institute had "substantial control of the
U.S. assistance program."5 According to U.S. government procurement
officers and GAO officials, delegating so much aid to a private entity was
unprecedented.

In Russia, the Harvard representatives worked exclusively with Anatoly
Chubais and the circle around him, which came to be known as the Chubais
Clan.6 The interests of the Harvard Institute group and those of 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.7 By mid-1993, the Harvard-Chubais players had formed an
informal and extremely influential transactor group that was shaping the
direction and consequences of U.S. economic aid and much Western economic
policy toward Russia.

Providing pivotal support to the Harvard-Chubais transactors was Lawrence
Summers, earlier a member of the Harvard faculty and at this time chief
economist at the World Bank. Summers had strong ties to the Harvard team,
including Shleifer, the economist who served as project director of the
Harvard Institute's program in Russia.8 Soon, Summers would play a
principal role in designing U.S. and international economic policies at the
U.S. Treasury, where he would occupy the posts of undersecretary, then
deputy secretary and, finally, secretary. 

The Chubais transactors advertised themselves, and were advertised by their
promoters, as the "Young Reformers." The Western media promoted their
mystique and overlooked other reform-minded groups in Russia.9 Western
donors tended to identify Russians as reformers not on the basis of their
commitment to the free market but because they possessed personal
attributes to which the Westerners responded favorably: proficiency in the
English language; a Western look; an ability to parrot the slogans of
"markets", "reform" and "democracy"; and name recognition by
well-credentialed fellow Westerners. Members of the Chubais team possessed
all of these qualities. By their sponsors in the West, they were depicted
as enlightened and uniquely qualified to represent Russia and usher it down
the road to capitalism and prosperity. Summers dubbed them a "dream
team",10 which, given his position and status, was a particularly valuable
endorsement.

In Russia, however, the Chubais transactors' primary source of clout was
neither ideology nor even reform strategy, but precisely their standing
with and their ability to get resources from the West. As the 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 transformed itself
into the most powerful elite clan of Russia in the past five years."11

U.S. support proved decisive in this transformation. The administration's
"dream team" seal of approval bolstered the Clan's standing as Russia's
chief brokers with the West and the international financial institutions,
and as the legitimate representative of Russia. It also enabled the
Harvard-Chubais transactors to exact hundreds of millions of dollars in
Western loans and American aid. 

The Modus Operandi

It is time now to look in greater detail at the way in which this
extraordinarily effective operation worked—effective, that is, in acquiring
standing and funds. There were five basic operating principles.

· Democracy by Decree

The transactors' preferred way of proceeding in the Russian context was by
means of top-down presidential decree. U.S. officials explicitly encouraged
this practice as an efficient means of achieving market reform. As USAID's
Walter Coles, a key American official in the privatization aid program, put
it, "If we needed a decree, Chubais didn't have to go through the
bureaucracy."12 Rule by decree also allowed the transactors to bypass the
democratically elected Supreme Soviet and the Duma. The Harvard Institute's
Russia director, Jonathan Hay, and his associates went so far as to draft
some of the Kremlin decrees themselves. Needless to say, this did nothing
to advance Russia's evolution toward a democratic system, nor was it
consistent with the declared American aim of encouraging that evolution.

· Flex Organizations

A similar anti-democratic ethos pervaded the network of Harvard-Chubais
transactor-run organizations. The transactors established and oversaw a
network of aid- funded, aid-created "private" organizations whose
ostensible purpose was to conduct economic reform, but which were often
used to promote the transactors' parochial agendas. These organizations
supplanted or circumvented state institutions. They routinely performed
functions that, in modern states, are typically the province of
governmental bureaucracies. They served to allow the bypassing of the Duma
and other relevant actors, whose input was in the long term crucial to the
successful implementation of economic reforms in Russia. Further, the
aid-created organizations served as a critical resource for the
transactors, a vehicle by which to exploit financial and political
opportunities for their own ends. I call these bodies "flex organizations"
in recognition of their impressively adaptable, chameleon-like,
multipurpose character.

The donors' flagship organization was the Russian Privatization Center,
which had close ties to Harvard University. Its founding documents state
that Harvard University is both a "founder" and "Full Member of the
[Russian Privatization] Center."13 The center received funds from all major
and some minor Western donors and lenders: the United States, the IMF, the
World Bank, the European Bank for Reconstruction and Development, the
European Union, Germany and Japan.14 The center's chief executive officer,
a Russian from the Chubais Clan, has written that while head of the center
he managed some $4 billion in Western funds.15 The Chamber of Accounts,
Russia's rough equivalent of the U.S. General Accounting Office,
investigated how that money was spent. An auditor from the Chamber
concluded that the "money was not spent as designated. Donors paid . . .
for something you can't determine."16 When I interviewed aid-paid
consultants working at the center, I was told that the funds were routinely
used for political purposes. 

The center was an archetypal flex organization, one that switched its
identity and status situationally. Formally and legally, it was nonprofit
and non-governmental. But it was established by Russian presidential decree
and received aid because it was run by the Chubais transactors, who also
played key roles in the Russian government. In practice, the center played
the role of government agency. It negotiated with and received loans from
international financial institutions—which typically lend to governments,
not private entities—and did so on behalf of the Russian state.

According to documents from Russia's Chamber of Accounts, the center
wielded more control over certain privatization documents and directives
than did the Russian government agency formally responsible for
privatization.17 Two center officials, its CEO from the Chubais Clan and
Harvard's Moscow representative, Hay, were in fact authorized to sign
privatization decisions on Russia's behalf. Thus did a Russian and an
American, both of them affiliated with a private entity, end up acting as
representatives of the Russian Federation.

· "Transidentity"

It was not only organizations that could change guises. The flex
organization had its individual equivalent in the phenomenon of
"transidentity", which refers to the ability of a transactor to change his
identity at will, regardless of which side originally designated him as its
representative.18 Key Harvard-Chubais transactors were quintessential
chameleons. To suit the transactors' purposes, the same individual could
represent the United States in one meeting and Russia in the next—and
perhaps himself at a third—regardless of national origin. 

Jonathan Hay, who alternatively acted as an American and a Russian,
provides a telling example of this phenomenon. In addition to being
Harvard's chief representative in Russia, with formal management authority
over many other U.S. contractors, Hay was appointed by members of the
Chubais Clan to be a Russian. As such, he was empowered to approve or veto
high-level privatization decisions of the Russian government. According to
a U.S. official investigating Harvard's activities, Hay "played more
Russian than American." The financial arena yields many such examples of
transidentity, in which Chubais transactors appointed Americans to act as
Russians.19 

It was (and is) difficult to glean exactly who prominent consultants on the
international circuit represented, for whom they actually worked, who paid
them, and where their loyalties and ambitions lay at any given time.
Harvard economist Jeffrey Sachs, who served as director of the Harvard
Institute from 1995 to 1999, provides a case in point.20 According to
journalist John Helmer, Sachs and his associates (including David Lipton,
vice president of Sachs' consulting firm who later went to Treasury to work
for Summers21) played both the Russian and the IMF sides of the street.
During negotiations in 1992 between the IMF and the Russian government, for
example, Sachs and his associates appeared as advisers to the Russian side.
But they were at the same time "writing secret memoranda advising the IMF
negotiators as well."22

Compounding this ambiguity is the question of whether Sachs was an official
adviser to the Russian government. Although he maintains that he was,23 key
Russian economists as well as international officials cast doubts on his
claim.24 Jean Foglizzio, the IMF's first Moscow resident representative,
was also taken aback by Sachs' practice of introducing himself as an
adviser to the Russian government. As Foglizzio put it, "[When] the prime
minister [Viktor Chernomyrdin], who is the head of government, says 'I
never requested Mr. Sachs to advise me'—it triggers an unpleasant feeling,
meaning, who is he?"25

Sachs also offered his services as an intermediary. According to Andrei
Vernikov, a Russian representative to the IMF, and other sources, Sachs
presented himself to leading Russians as a powerbroker who could deliver
Western aid. In 1992, when Yegor Gaidar (with whom Sachs had been working)
was under attack and his future looked precarious, Sachs offered his
services to Gaidar's parliamentary opposition. In November 1992 Sachs wrote
a memorandum to the chairman of the Supreme Soviet, Ruslan Khasbulatov
(whose reputation in the West was that of a retrograde communist), offering
advice, Western aid and contacts with the U.S. Congress. Khasbulatov
declined Sachs' help after circulating the memo.26 Sachs also proved adept
at lobbying American policymakers.27

The most effective and influential transactors are extremely adept at
working their multiple roles and identities. One such ubiquitous transactor
was Anders Åslund, a former Swedish envoy to Russia who worked with Sachs
and Gaidar. Åslund seemed at once to represent and speak on behalf of
American, Russian and Swedish governments and authorities. Accordingly, he
was understood by some Russian officials in Washington to be Chubais'
personal envoy. Though a "private" citizen of Sweden who played a leading
role in Swedish policy and aid toward Russia,28 he nonetheless participated
in high-level meetings at the U.S. Treasury and State Departments about
U.S. and IMF policies.29 Åslund was also involved in business activities in
Russia30 and Ukraine.31 According to the Russian Interior Ministry's
Department of Organized Crime, he had "significant" investments in the
Russian Federation.32 In addition to his work for governments, the
Harvard-Chubais transactors and the private sector, Åslund was engaged in
public relations activities. His assignment in Ukraine, where he was funded
by George Soros, explicitly included public relations on behalf of that
country, according to other Soros-funded consultants who worked with Åslund
there.33 His effectiveness in this role was no doubt enhanced by his
affiliation with Washington think tanks, his frequent contributions to
publications such as the Washington Post and the London Financial Times,
and the fact that he always presented himself on these occasions as an
objective analyst, despite his many promotional roles.

· Interchangeability

The maneuverability for individuals afforded by transidentity was also
present at the group level. The Harvard Institute group, though formally
representing the United States, also represented the Chubais group.34 Thus,
some U.S. officials and investigators requesting meetings with Russians
were instead directed to Americans. In lobbying for aid contracts, the
Harvard Institute group continually cited its access to Russian "reformers"
as its primary advantage; this was in fact a key component of its public
relations effort. In turn, Harvard acted as the Chubais Clan's entrée to
the eyes and ears of U.S. policymakers and to American funds. In the United
States, the Harvard transactors touted Chubais as the voice of Russia, and
he became the quintessential enlightened Russian in the eyes of many U.S.
officials and commentators. 

Not surprisingly, then, in times of crisis for the Harvard-Chubais
nexus—such as the ruble crisis of August 1998 and the Bank of New York
money laundering scandals—the transactors and their associates have sought
to bolster their colleagues' continued clout and standing in both Russia
and the United States. Thus, Summers has frequently rushed to the defense
of Chubais and other key transactors. In testimony before the U.S. House of
Representatives' Committee on International Relations, for example, Summers
stoutly defended Chubais and asked that Chubais' prepared statement ("I
Didn't Lie") be placed in the congressional record.35 Similarly, Åslund
serves as a staunch defender of and advocate for Chubais. Of late, he also
has been arguing Vladimir Putin's cause.36

· Unaccountability and Self-perpetuation

Transactors are largely above formal accountability. The group places its
members in various positions to serve its agendas, which may or may not
conflict with those of the government or public interest they supposedly
serve. The result is a game of musical chairs. For example, a key agency in
Russian "reform", the State Property Committee, was headed by a succession
of Chubais transactors, among them Chubais himself, Maxim Boycko and Alfred
Kokh. Kokh was named chairman of the Committee after Boycko was fired by
Yeltsin for accepting a thinly veiled $90,000 bribe from a company that had
received preferential treatment in the privatization process. Kokh himself
was later removed for accepting a $100,000 payment from the same company.
Chubais, Boycko and Kokh also held a variety of key positions in the
Harvard-Chubais transactor-run, aid-funded Russian Privatization Center.

The Chubais transactors are unlikely to disappear in Vladimir Putin's
Russia. In fact, Putin has long been intertwined with them. An operative in
the KGB and briefly head of its successor agency, Putin, like most members
of the Chubais Clan, hails from St. Petersburg and was intimately involved
in the "reforms" there. After moving to Moscow to work with Chubais, Putin
helped to suppress criminal investigations that implicated Yeltsin and
members of his family—as well as Chubais himself.37 Chubais, in addition to
running the country's electricity conglomerate, is helping to run Putin's
presidential campaign.38

Consequences of Transactorship 

What, it might be asked, is wrong with the transactorship mode of
organizing relations between the United States and Russia in such
circumstances? Many U.S. officials have argued that it is the most
effective method by which to implement market reform—through a committed
group with intimate access to both sides (and to many activities in both
countries). In fact, there are several things that are seriously wrong with
this argument.

Transactorship has served to undermine democratic processes and the
development of transparent, accountable institutions.

Operating by decree is clearly anti-democratic and contrary to the aid
community's stated goal of building democracy in Russia. It has weakened
the message to the Russians that the United States stands for democracy.
Further, the aid-created flex organizations have supplanted the state and
often carried out functions that ought to have been the province of
governmental bureaucracies. 

As well, the flex organizations have likely facilitated the development of
what I have called elsewhere the "clan-state", a state captured by
unauthorized groups and characterized by pervasive corruption.39 In such a
state, individual clans, each of which controls property and resources, are
so closely identified with particular ministries or institutional segments
of government that the respective agendas of the state and the clan become
indistinguishable. Thus, while the Chubais transactors were closely
identified with segments of government concerned with privatization and the
economy, competing clans had equivalent ties with other government
organizations, such as the ministries of defense and internal affairs and
the security services. Generally, where judicial processes are politically
motivated, a clan's influence can be checked or constrained only by a rival
clan. By systematically bypassing the democratically elected parliament,
U.S. aid flouted a crucial feature of democratic governance: namely,
parliamentarianism.

Transactorship has frustrated true market reform. 

Without public support or understanding, decrees constitute a weak
foundation on which to build a market economy. Some reforms, such as
lifting price controls, may be achieved by decree. But many others depend
on changes in law, public administration or mindsets, and require
cooperation among a full spectrum of legislative and market participants,
not just a clan.40

A case in point was USAID's efforts to reform Russia's tax system, and to
establish clearing and settlement organizations (CSOs)—an essential
ingredient in a sophisticated financial system. The efforts failed largely
because they were placed solely in the hands of one group, which then
declined to work with other market participants. In Moscow, for example,
despite millions of USAID dollars, many Russian brokers were excluded from
the process and consequently declined to use the CSO. Since 1994, when
consultants working under USAID contracts totaling $13.9 million set out to
design and implement CSOs in five Russian cities, very little evidence of
progress has emerged. After an investigation into the Harvard Institute's
activities in Russia, the U.S. General Accounting Office issued a report
calling the CSO effort "disappointing."41 Yet, absent support from parties
to the reform process, reforms were almost certain to be ignored or even
subverted during implementation. 

To repeat, transactors, although they may share the overall goals of the
sides they represent, may advertently or inadvertently subvert those goals
in pursuit of their own private agendas. The Chubais-Harvard transactors
were known to block reform efforts on occasion. In particular, they were
inclined to obstruct reform initiatives when they originated outside their
own group or were perceived to conflict with their own agendas.42 When a
USAID-funded organization run by the Chubais-Harvard transactors failed to
receive the additional USAID funds it had expected, its leaders promptly
obstructed legal reform activities in the areas of title registration and
mortgages—programs that were launched by agencies of the Russian
government.43 In such instances, the transactors' interference put them at
cross purposes with their own purported aim of fostering markets. 

Lack of transparency, too, became apparent in the manner in which the
transactors implemented economic reforms. Secrecy shrouded the
privatization process, with numerous, unfortunate consequences for the
Russian people. Privatization, which was largely shaped by the
Harvard-Chubais transactors and significant parts of which were funded by
USAID, 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 a
half dozen corrupt oligarchs. The "reforms" were more about wealth
confiscation than wealth creation; and the incentive system encouraged
looting, asset stripping and capital flight.44

Transactorship has encouraged the maximization of opportunities for
personal gain. 

The prestige and access of the Harvard-Chubais transactors facilitated
their involvement in other areas, including allegedly the Russian
securities market, both in Russia and internationally, and may have helped
them enrich themselves. In such ways, the private agendas of the
Harvard-Chubais transactors helped to subvert the goals of the sides they
were supposed to be serving.

Providing a small group of powerbrokers with a blank check inevitably
encouraged corruption, precisely at a time when the international community
should have been demanding safeguards in Russia such as the development of
a legal and regulatory framework, property rights and the sanctity of
contracts. Over the years many substantiated reports of the Chubais
transactors using public monies for personal enrichment have been
published.45 Today these same persons are among those under investigation
for alleged involvement in laundering billions of dollars through the Bank
of New York and other banks.46

The Harvard Institute has also had its difficulties. In 1996 the GAO found
that USAID's management over Harvard was "lax."47 In 1997 the government
cancelled most of the last $14 million earmarked for the Institute, citing
evidence that the project's two managers—Hay and Shleifer—had used their
positions and inside knowledge to profit from investments in the Russian
securities markets and other private enterprises.48 The two remain under
criminal and/or civil investigation by the U.S. Department of Justice.49 In
January 2000 a Harvard task force issued a report alluding to that
financial scandal. It recommended that the Harvard Institute for
International Development be closed and that selected programs be
integrated into other university programs. The Institute was closed shortly
thereafter. An inspired Harvard University spokesperson, Joe Wrinn, spun
the story thus: "It's a vote of confidence for the study of international
development and its permanent integration into Harvard University."50

Because the transactors' success is grounded in mutual loyalty and trust,
and because of their shared record of activities, some of which have left
them vulnerable to allegations of corruption, the transactors have ample
incentive to stick together. Any desertions must be well considered, as
they could have serious consequences for all involved.

Transactorship has encouraged not only corruption but also the ability to
deny it. 

Transactorship affords maximum flexibility and influence to the
transactors, and minimal accountability to the sides the transactors
presumably represent. If the Harvard Institute's manager in Russia were
asked by U.S. authorities to account for privatization decisions and
monies, he could respond by claiming that he made those decisions as a
Russian, not as an American. If USAID came under fire for funding the
Russian state, it could claim that it was funding private organizations. 

Now that the issue of "Russian" corruption has captured headlines, Treasury
Secretary Summers has lately been insisting that the Russian government
make amends. "This has been a U.S. demand for years", he claims, as if he
had not himself addressed letters to "Dear Anatoly"51 and met with Chubais
as recently as the summer of 1999. This only months after Chubais admitted
that he had "conned" from the IMF a $4.8 billion installment in July
1998,52 the details of that deal having been worked out in Summers' home
over brunch—at a meeting that the New York Times deemed crucial to
obtaining release of the funds.53

Transactorship has proved particularly harmful in a setting in which
communism until recently prevailed. 

The transactorship mode of organizing relations is reminiscent of precisely
those features of communism that the international community should be
concerned not to reinforce. The informal, but influential, parallel
executive established by the Harvard- Chubais transactors recalls the
powerful patronage networks that virtually ran the Soviet Union. Political
aid disguised as economic aid is only too familiar to Russians raised under
a system of political control over economic decisions. As Shleifer
acknowledged in a 1995 book funded by Harvard, "Aid helps reform not
because it directly helps the economy—it is simply too small for that—but
because it helps the reformers in their political battles."54

And yet U.S. officials have defended this approach. In a 1997 interview,
Ambassador Richard L. Morningstar, U.S. aid coordinator to the former
Soviet Union, said, "When you're talking about a few hundred million
dollars, you're not going to change the country, but you can provide
targeted assistance to help Chubais"55—an admission of direct interference
in Russia's political life. U.S. assistance to Chubais continued even after
he was dismissed by Yeltsin as first deputy prime minister in January 1996:
he was placed on the Harvard payroll, a demonstration of solidarity for
which senior U.S. officials openly declared their support. 

*                 *                 *

The U.S.-Russian experience of transactorship is interesting and disturbing
not only in its own right, but because this mode of operating may well
become more frequent as a way of conducting trans-national affairs in the
twenty-first century. With the ongoing process of globalization, the
nationality of actors is becoming increasingly irrelevant. Already global
elites, with ever closer connections to one another and fewer to the
nation- state, see themselves not so much as American, Brazilian or
Italian, but as members of an exclusive and highly mobile multinational
club, whose rules and regulations have yet to be written. In many respects,
members of what Peter Berger has identified as the overlapping "Davos" and
"Faculty Club" cultures have much more in common in terms of lifestyle and
taste with each other than they have with their fellow nationals. And as
Berger observes, "it may be that commonalties in taste make it easier to
find common ground politically"—and, of course, economically.56

While all this is true, global elites will continue to operate in a world
organized into nation-states. In such a world, assumptions about
representation, grounded in national and international law, are based on
the idea that an individual can formally represent either one state or
another, but not both. The transactor mode of behavior may seem to offer a
means of having it both ways, of squaring the circle. But it also raises
crucial public policy questions. What are the implications of a state of
affairs in which the "choice" of who represents one side is shaped to a
significant degree by self-selected representatives of the other? What are
the consequences when the same player represents multiple sides? Wherein
lies the accountability to electorates and parliaments in a world of
growing coziness and joint decision-making among governing elites? Where,
if at all, do representation and democracy enter the picture? The
U.S.-Russian case in the last decade provides a cautionary lesson in all
these respects. But it has been a very expensive lesson.


Notes

1 The Russian "population has suffered increasing hardship" since the ruble
devaluation of August 1998. An estimated 38 percent was living in poverty
at the close of the first quarter of 1999, as compared with 28 percent one
year earlier. Real incomes in June 1999 were 77 percent of their June 1998
level. (OECD Economic Outlook, December 1999, p. 132.) Further, Russian
citizens became poorer in 1999, even though wage arrears and absolute
numbers below the poverty line trended down. "The average level of
Russians' real cash income—incomes adjusted to account for
inflation—decreased 15 percent", according to the Russian Statistics
Agency. (Yevgenia Borisova, "Poverty Still Widespread Despite Modest
Growth", Moscow Times, January 13, 2000, also in Johnson's Russia List,
January 13, 2000.) An estimated 70 percent of Russians now live below or
just above the poverty line.
2 See United States Information Agency, "Is Economic Reform in Russia
Dead?", Opinion Analysis (USIA: Office of Research and Media Reaction,
March 15, 1999), pp. 3-4. The ratio of Russians who had favorable attitudes
toward U.S.-Russia rapprochement versus those who did not declined steeply
from 1994 to 1999. In 1994 the ratio was 2.47, as compared with 1.67 in
1999. See Boris Dubin, "Vremia i Lyudi: O Massovom Vospriiatii Social'nykh
Peremen", Russian Public Opinion Monitor (May-June 1999), pp. 22-3.
3 In coining this usage of "transactor", I purposefully draw on the
original meaning of the term: someone who carries through or does business.
4 For further detail, see my "Rigging the U.S.-Russian Relationship:
Harvard, Chubais, and the Transidentity Game", Demokratizatsiya: The
Journal of Post-Soviet Democratization (Fall 1999), pp. 478-9. 
5 U.S. GAO, Foreign Assistance: Harvard Institute for International
Development's Work in Russia and Ukraine (Washington, dc: GAO, November
1996), p. 3.
6 A "clan", as Russians use the term, is an informal group whose members
promote their mutual political, financial and strategic interests. See Olga
Kryshtanovskaya, "The Real Masters of Russia", Argumenty i Fakty (May
1997), also in Johnson's Russia List.
7 Although individuals are often thought of as the primary unit to take
advantage of economic opportunities, this unit with respect to transactors
is often the transactor group. Individual transactors must take the
interests of their fellow transactors into account when making choices.
8 The two received at least one foundation grant together (vita of Andrei
Shleifer supplied by HIID).
9 For the definitive history of Russian reform efforts, see Lynn D. Nelson
and Irina Y. Kuzes, Property to the People: The Struggle for Radical
Economic Reform in Russia (Armonk, NY: M.E. Sharpe, 1994); and Nelson and
Kuzes, Radical Reform in Yeltsin's Russia: Political, Economic and Social
Dimensions (Armonk, NY: M.E. Sharpe, 1995).
10 Russia Business Watch (Spring 1997), p. 19.
11 Kryshtanovskaya, "The Real Masters of Russia."
12 Author's interview with Coles, June 6, 1996.
13 U.S. GAO, Foreign Assistance, p. 60.
14 Russian Privatization Center 1994 Annual Report, pp. 5, 24.
15 Author's interview with and documents provided by Veniamin Sokolov
(auditor at the Chamber of Accounts of the Russian Federation), May 31, 1998.
16 Ibid; Sokolov, talk at American University, June 2, 1998. In 1994 both
the Duma and the head of the Russian State Property Committee requested a
detailed accounting from the Russian Privatization Center. They got
nothing. (Sergei Zavorotnyi, "The Traces of 'Privatization' Go Overseas",
Komsomolskaya Pravda, April 8, 1997.)
17 Author's interview with and documents provided by Sokolov, May 31, 1998.
See State Property Committee order no. 188 (which gave Jonathan Hay veto
power over the Committee's projects), October 5, 1992.
18 The concept of "transidentities" draws on Fredrik Barth's work. See his
Ethnic Groups and Boundaries: The Social Organization of Culture Difference
(Boston, ma: Little, Brown & Co., 1969).
19 See my "Rigging the U.S.-Russian Relationship", p. 485; and Anne
Williamson, Contagion. The Betrayal of Liberty: Russia and the United
States in the 1990s (forthcoming), chap. 15.
20 In time, Sachs and Shleifer emerged as rivals and ran largely separate
operations in Moscow. Still, they shared the transactorship mode of
operating and many contacts in the Chubais Clan.
21 Lipton and Sachs served together on consulting missions in Poland and
Russia. "Jeff and David . . . were like an inseparable couple", remarked
Andrei Vernikov, a Russian representative at the IMF. (Author's interview
with Vernikov, November 22, 1997.) Lipton was named deputy assistant
secretary of the treasury for Eastern Europe and the former Soviet Union.
After Summers was promoted to deputy treasury secretary in 1995, Lipton
moved into Summers' old job and assumed "broad responsibility" for
international economic policy development. 
22 It was unclear who paid for Sachs and his team. (Helmer, "Russia and the
IMF: Who Pays the Piper Calls the Tune", Johnson's Russia List, February
17, 1999.)
23 While providing no documentation for his role, Sachs writes, "I was an
official advisor of the Russian Government from December 1991 to January
1994. Together with Anders Åslund I directed the Macroeconomics and Finance
Unit (MFU) of the Russian Ministry of Finance, housed within Government
offices." Sachs further writes that his work in Russia with Åslund "was
supported mainly by the Ford Foundation and the Swedish Government. I was
not paid by the Russian Government." (Letter to author, March 12, 1998.)
24 Gaidar Institute head Aleksander Bevz told journalist Anne Williamson
that, "Sachs was never an official adviser to the government, that's his
own illusion." Gaidar, too, described Sachs and Åslund as "insignificant
figures." Williamson reports that, "Even Gaidar's archrival, [Grigory]
Yavlinsky, insisted, 'What we did was not based on even 10 percent of their
[Sachs' and Åslund's] advice. Gaidar was using those people as loudspeakers
for the West, but, in fact, Gaidar did as he wished.'" (Williamson,
Contagion, chap. 7.)
25 Williamson's interview with Foglizzio, February 1, 1994.
26 Memorandum from Sachs to Khasbulatov of November 19, 1992; author's
interviews with Stanford University economist Michael Bernstam, August 21,
1997 and October 17, 1997.
27 See, for example, an Action Memorandum of February 4, 1993 from a State
Department official to the secretary of state, in which Sachs requests an
appointment with the secretary. The memorandum notes that Sachs also had
sought appointments with National Security Adviser Anthony Lake, Treasury
undersecretary-designate Larry Summers, and ambassador-designate Strobe
Talbott.
28 Sources include Dan Josefsson, "The Art of Ruining a Country With Some
Professional Help from Sweden", etc English Edition 1 (1999).
29 Author's interviews with U.S. officials in the Departments of Treasury
and State.
30 For example, Åslund has long been linked to Brunswick, which began as a
Moscow- based brokerage firm and evolved into an investment bank, the
Brunswick Group. (See Williamson, Contagion, chap. 13.) Two of Åslund's
Swedish associates worked for Chubais at the State Property Committee,
where they helped to design and implement voucher privatization.
(Williamson's interview with Martin Andersson, February 1995.) Later, "with
still good relations to Chubais", they started Brunswick Brokerage to
participate in voucher privatization and to help sell these and other
assets to Western investors. (Sven-Ivan Sundqvist, "Svenska Rad Biter Pa
Ryssen: Svenska Finansman i Ledningen for Brunswick Group, Foretaget Som
Ska Hjalpa Ryska Staten Att Privatisera Industrin", Dagens Nyheter, June
15, 1997.)
31 Sources for Åslund's business activities in Russia and Ukraine include
those specified in the previous endnotes, as well as a number of additional
reports and sources in Russia, Ukraine, Sweden and Washington.
32 See Williamson, Contagion, chap. 13. 
33 Sources include author's conversations with Marek Dabrowski, May 9, 1995
and November 27, 1997. For details of Åslund's Ukraine activities, see my
Collision and Collusion: The Strange Case of Western Aid to Eastern Europe
1989-1998 (New York: St. Martin's Press, 1998), pp. 158-61. 
34 Harvard transactors Hay and Shleifer often spoke for key Chubais
transactors, notably Maxim Boycko, CEO of the Russian Privatization Center,
and Dmitry Vasiliev, head of the Federal Commission, the Russian version of
the U.S. Securities and Exchange Commission. 
35 "The United States and Russia, Part II: Russia in Crisis", September 17,
1998, Hearing transcript, pp. 29-30.
36 See, for example, Barry Wood, "Russia's Economy", Voice of America,
January 3, 2000; also in Johnson's Russia List, January 4, 2000; and "The
State of the (Former Soviet) Union" (Washington, dc: Carnegie Endowment for
International Peace, January 6, 2000), also in Johnson's Russia List,
January 12, 2000.
37 Putin worked under Pavel Borodin, the Kremlin's property manager, who
has been linked to the Mabetex scandal. Swiss prosecutors have alleged that
Mabetex Project Engineering, a Kremlin contractor, paid tens of thousands
of dollars in credit card bills for members of the Yeltsin family. In one
of his first acts, Putin signed a decree protecting Yeltsin from future
prosecution and providing him 1with amenities such as a residence and a
pension. See Sharon LaFraniere, Washington Post, January 7, 2000; and Paul
J. Saunders, Washington Times, January 6, 2000.
38 See, for example, Paul Starobin, "The Brain Trust Polishing Putin's
Image", Business Week, January 31, 2000.
39 See my "Informal Relations and Institutional Change: How Eastern
European Cliques and States Mutually Respond", presented at the World Bank,
Social Development Group (Washington, dc, April 20, 1998).
40 See my Collision and Collusion, pp. 134-7, 145.
41 U.S. GAO, Foreign Assistance, p. 8.
42 U.S. GAO sources confirm this observation. (Author's conversations with
Zanardi, October 28, 1997 and April 23, 1998.)
43 Author's interviews with USAID-paid contractors and U.S. government
sources. A member of the GAO audit team confirms this observation.
(Author's conversations with Zanardi, October 28, 1997 and April 23, 1998.)
44 For details, see "Whither Reform" speech by World Bank chief economist
Joseph Stiglitz (worldbank.org/ knowledge/chiefecon/); Jonas Bernstein,
"Loans for the Sharks", Moscow Times, December 19, 1995; and Fritz W.
Ermarth, "Seeing Russia Plain: The Russian Crisis and American
Intelligence", The National Interest (Spring 1999).
45 See accounts in Johnson's Russia List; my Collision and Collusion, pp.
151-5; and Williamson, Contagion, especially chaps. 13, 15.
46 In August and September 1999, newspapers reported that billions of
dollars had been laundered through the Bank of New York. (See Raymond
Bonner with Timothy L. O'Brien, New York Times, August 19, 1999.) Anatoly
Chubais and other members of Yeltsin's government are alleged to have been
involved in money laundering. (See Jack Kelly, USA Today, August 26, 1999.)
47 U.S. GAO, Foreign Assistance, p. 43.
48 Letter from USAID to HIID director Jeffrey Sachs, May 20, 1997. See also
"USAID Suspends Two Harvard Agreements in Russia" (Washington, dc: USAID
Press Office, May 20, 1997).
49 Hay has been named in other investigations as well. He, together with
Dart Management, Inc., is the subject of a civil action in the U.S.
District Court of New Jersey brought by Avisma Titano-Magnesium Kombinat
over an alleged fraud and money laundering scheme. 
50 Beth McMurtrie, "Report Advises Harvard to Dismantle its Institute for
International Development", The Chronicle of Higher Education, January 12,
2000.
51 In a letter of April 1997 (obtained and published by Nezavisimaya
Gazeta), Summers instructed Chubais on the conduct of Russian foreign and
domestic economic policy.
52 Kommersant Daily, September 8, 1998; Los Angeles Times, September 9, 1998.
53 Michael R. Gordon and David E. Sanger, New York Times, July 17, 1998. 
54 Maxim Boycko, Andrei Shleifer and Robert Vishny, Privatizing Russia
(Cambridge, ma: MIT Press, 1995), p. 142.
55 Author's interview with Morningstar, February 11, 1997.
56 Peter L. Berger, "Four Faces of Global Culture", The National Interest
(Fall 1997), pp. 24-5.

******
------- 
David Johnson 
home phone: 301-942-9281 
work phone: 202-332-0600 ext. 107 
email: [log in to unmask] 
fax: 1-202-478-1701 (Jfax; comes direct to email) 
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USA

Web page for CDI Russia Weekly: 
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