The Harvard Boys Do Russia
Despite exposure of this corruption in the Russian media (and, far more hesitantly, in the U.S. media), the H.I.I.D.-Chubais clique remained until recently the major instrument of U.S. economic aid policy to Russia. It even used the high-level Gore-Chernomyrdin Commission, which helped orchestrate the cooperation of U.S.-Russian oil deals and the Mir space station. The commission's now-defunct Capital Markets Forum was chaired on the Russian side by Chubais and Vasiliev, and on the U.S. side by S.E.C. chairman Arthur Levitt Jr. and Treasury Secretary Robert Rubin. Andrei Shleifer was named special coordinator to all four of the Capital Markets Forum's working subgroups. Hebert, Hay's girlfriend, served on two of the subgroups, as did the C.E.O.s of Salomon Brothers, Merrill Lynch and other powerful Wall Street investment houses. When The Nation contacted the S.E.C. for information about Capital Markets, we were told to call Shleifer for comment. Shleifer, who is under investigation by U.S.A.I.D.'s inspector general for misuse of funds, declined to be interviewed for this article. A U.S. Treasury spokesman said Shleifer and Hebert were appointed to Capital Markets by the Chubais group--specifically, according to other sources, by Dmitry Vasiliev.
In fact, H.I.I.D. projects were never adequately monitored by U.S.A.I.D. In 1996, a General Accounting Office report described U.S.A.I.D.'s management and oversight of H.I.I.D. as "lax." In early 1997, U.S.A.I.D.'s inspector general received incriminating documents about H.I.I.D.'s activities in Russia and began investigating. In May Shleifer 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 managers were engaged in activities for "private gain." The men had allegedly used their positions to profit from investments in the Russian securities markets and other private enterprises. According to sources close to the U.S. investigation, while advising the Russian government on capital markets, for example, Hay and his father allegedly used inside information to invest in Russian government bonds. Hay and Shleifer may ultimately face criminal and/or civil prosecution. Shleifer remains a tenured professor at Harvard, and Hay continues to work with members of the Chubais clique in Russia. Sachs, who has stated he never invests in countries where he advises and who is not implicated in the current U.S. government investigation, remains head of H.I.I.D. After Yeltsin's Cabinet shakeup in March, Chubais was moved to a new position of prominence. His role in Russia's political-economic affairs had been tarnished by reports of personal enrichment. Two examples:
§ In February 1996, Chubais's Foundation for the Protection of Private Property received a five-year, $2.9 million unsecured interest-free loan. According to the pro-Yeltsin, pro-reform Izvestia, Stolichny Bank, an institution that enjoys lines of credit from the European Bank for Reconstruction and Development and the World Bank, made the loan in return for a small percentage of the Sibneft oil company when it was sold at auction, and for later control of one of the state's largest banks. Chubais defended himself by saying such practices were common in the West, but failed to provide any reasonable explanation for some $300,000 in 1996 income not accounted for by his government salary.
§ During Yeltsin's 1996 presidential campaign, security officials apprehended two close associates of Chubais as they were walking out of a main government building with a box containing more than $500,000 in cash for Yeltsin's campaign. According to tapes of a later meeting recorded by a member of one of Russia's security services, Chubais and his cronies strategized about burying evidence of any illegal transaction, while publicly claiming that any allegations of chicanery were the work of political enemies. A protracted, lackadaisical investigation began but was eventually dropped--more evidence of Chubais's remarkable resilience. He remained valuable to Yeltsin largely because of his perceived ability to deal with the West, where many still regard him as a symbol of Russian reform.
During the five years that the Chubais clique presided over Western economic aid and policy in Russia, they did enormous harm. By unconditionally backing Chubais and his associates, the Harvard operatives, their U.S. government patrons and Western donors may have reinforced the new post-Soviet oligarchical system. Shleifer acknowledged as much in Privatizing Russia, the book he wrote with Chubais crony Maxim Boycko, who with his patron would later be caught in another financial indiscretion involving taking a "veiled bribe" in the form of advances on a book on the history of Russian privatization. "Aid can change the political equilibrium," they said, "by explicitly helping free-market reformers to defeat their opponents."
Richard Morningstar, U.S. aid coordinator for the former Soviet Union, stands by this approach: "If we hadn't been there to provide funding to Chubais, could we have won the battle to carry out privatization? Probably not. 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." In early 1996, after he was temporarily removed 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.I.D.-funded payroll, a show of loyalty that former U.S.A.I.D. assistant administrator Thomas Dine says he supported. Western policy-makers like Morningstar and Dine have depicted Chubais as a selfless visionary battling reactionary forces. In the spring of 1997, Summers called him and his associates a "dream team." With few exceptions, the U.S. mainstream media have promulgated this view.
United States policy toward Russia requires a full-scale Congressional investigation. The General Accounting Office did investigate H.I.I.D.'s Russian and Ukrainian projects in 1996, but the findings were largely suppressed by the agency's timid management. The audit team concluded, for example, that the U.S. government exercised "favoritism" toward Harvard, but this conclusion and the supporting documentation were removed from the final report. Last fall Congress asked the G.A.O. to look into Eastern European aid programs and Shleifer's role in the Gore-Chernomyrdin Commission. 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 democracy and economic reform in Russia and helped create a fat-cat oligarchy run amok.