Tainted Transactions

Tainted Transactions

Mini Teaser: How a team of Cambridge operators, working together with a Russian "clan", confused all categories and wreaked havoc on Russia's economy.

by Author(s): Janine R. Wedel

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. For this state of affairs many
Russians today blame precisely the Western aid and advice they have
received. 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." 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 Ã…slund 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. 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." 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. 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. 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. 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.
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", which,
given his position and status, was a particularly valuable

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."

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.

Essay Types: Essay