This Date's Issues: 1127 • 1128
Johnson's Russia List
15 August 1997
[Note from David Johnson:
ADVANCE WARNING: JRL will be off to the dacha for
a longish weekend starting Saturday morning and ending,
maybe, Tuesday night. I want you all to catch up on
your reading and be prepared to share your thoughts.
The level of passivity here--summer doldrums?--has
become too high. I thank those recipients who have
contributed their views.
1. David Filipov (Boston Globe): On the
2. Max Smetannikov: ILBE.
3. Wall Street Journal: CARLA ANNE ROBBINS and STEVE
Harvard Men Built Market, But Didn't Steer Clear of It.
4. Rossiyskaya Gazeta: Aleksey Pushkov (member of the Foreign
and Defense Policy Council Collegium), "Russia-NATO: Advice,
But No Love Yet."
5. Financial Times (UK): Chrystia Freeland, Russia: Business
war breaks out.
6. RIA Novosti: PROCEEDS FROM PRIVATIZATION TO BE LAID IN THE
GROUND OF 1998 BUDGET, CHUBAIS SAYS.
7. NTV: Zyuganov Promises 'Hot' Fall Session of State Duma.
8. RIA Novosti: MULTINATIONAL SEA BREEZE - 97 EXERCISES TO BE
HELD IN PREDETERMINED TIME, SAYS UKRAINIAN DEPUTY DEFENSE MINISTER.]
Date: Fri, 15 Aug 1997 02:20:51 +0400
From: David Filipov <email@example.com>
David - Akh, akh. My name comes up in your list too often in ways that make
my mother cry. So, against my better judgement, I feel compelled to respond:
Joel Ostrow writes about the Harvard/USAID-ILBE fuss:
"It is unfortunate that in so many stories like these the assumption of
Russian criminal intensions [sic] dominates. Why was ILBE's concern to have a
detailed account of where the equipment was going next given short-shrift
here? Why the implicit assumption that such a need is illegitimate? This
is the impression conveyed, because Fillipov [sic] did not think to press his
American sources on their insensitivity to ILBE's need for information (or
did not fight hard enough to prevent that part of the story from being
edited out.) As a former Moscow correspondent myself, this is a glaring
Despite his poor syntax, bad spelling and mean-spirited insinuations, Joel
Ostrow does make a good point -- the assumption of criminal intentions on
the part of Russian entities is one of the most unfortunate, and difficult,
obstacles for honest Russians.
However, in the case of ILBE, the US allegation of criminality was whole
point of the story, and therefore it got the first word. The allegation is
out there, like the allegations against the HIID people here, and although
in both cases the wrongdoing is still unproven, the allegations concern
large amounts of money and the even larger issue of trust. They are
Although I certainly don't believe my version of the ILBE story was a
masterpiece of Hearstian journalism, I do think ILBE's director, Sergei
Shiskin, got to make his point, albeit in abridged form. The story was
indeed cut, as they often are these days, to fit the "news hole," something
even Joel Ostrow would not be able to expand, as hard as he pushes.
Which brings me to Dorothy Rosenberg, who writes:
"By the way, I do not consider myself a "Chubais hater",
however, I disagree with David Filipov's assertion that he is
just another corrupt Russian politician and thus not of interest
to US readers.
In the words of (I believe FDR in reference to Somoza's
father) "of course he's an SOB, but he's our SOB." As documented
by Janine Wedel and others, Chubais received considerable (and
very likely decisive) US support in achieving his current
position of power. Who received USAID funding and what it
produced is of considerable interest to US-taxpaying readers."
Whoa, Dorothy. You write better than Joel, but you misinterpret me here.
I was trying to point out the short-sightedness of making Chubais the sole
focal point of our disenchantment with Russian reform. I was not endorsing
him as "our SOB," and certainly not making an argument for continued
"support from the Western press" for the "young reformers."
When Chubais is gone, and Alexoleg Chernolebedobulis is named Yeltsin's next
emminence rouge, will US-funding in Russia stop being misused or going
As for Janine Wedel, she made her argument at length in our coverage of the
HIID thing in May, and then had an opinion piece on the subject published in
the Globe's op-ed page. So the taxpaying Boston reader has had no problem
getting her side of the story.
From: "max smetannikov" <firstname.lastname@example.org>
Organization: Bloomberg News Washington D.C.
Date: Thu, 14 Aug 1997 17:54:05 GMT-0500
Subject: Re: Ostrow/
In response to Ostrow's comment:
Joel -- ILBE isn't a Russian shop, it's a U.S. contractor
which struck a bad cord with AID. Before you get lost in the
polemics, please read WSJ 08/13, which has a comprehensive version of
the story. The ILBE story is about what happens to Americans who do
business in Moscow by Russian rules of the game than anything else.
Wall Street Journal
August 13, 1997
[for personal use only]
Harvard Men Built Market, But Didn't Steer Clear of It
By CARLA ANNE ROBBINS and STEVE LIESMAN Staff Reporters of THE WALL STREET
MOSCOW -- Harvard economist Andrei Shleifer and Harvard legal expert
Jonathan Hay were two of the best and the brightest advisers the U.S. has
ever sent to Russia.
With funding from the U.S. Agency for International Development and
personal connections in President Boris Yeltsin's inner circle, they spent
nearly five years
running America's flagship advisory program in Russia: helping sell off
thousands of state-owned firms, rewriting Soviet-era laws and creating
capital markets in the birthplace of Lenin.
Then things suddenly went wrong. In May, AID alleged that the two men,
influence over nascent Russian capital markets," had "abused the trust of
the United States
government by using personal relationships ... for private gain." What made
the accusations especially surprising was that the Harvard men had been
assigned to promote, among other things, Western ideals of fair play. AID
announced a deeper investigation and canceled the Harvard project.
The affair has strained relations between Moscow and Washington. First
Deputy Prime Minister Anatoly Chubais, the leading Russian reformer and
favored U.S. ally, rejected the charges and denounced the investigation as
a plot "produced by those in the United
States who do not support the ideas of the Russian radical reform." Inside
Russia, where opponents of market changes are still powerful, the affair
threatens to discredit Russian
reformers. Whether or not the allegations are true, "this could feed the
worst fantasies of Russians: that the whole [reform] effort was an attempt
to rape and pillage Russia," warns Marshall Goldman, a Harvard expert on
Russia who wasn't connected with the aid rogram.
World Bank Inquiry
When the issue will be resolved is uncertain. A World Bank inquiry last
week found no misuse of the bank's funds at a Harvard-directed Moscow think
tank that is at the center of the affair. AID says its investigation is
continuing. But investigators have so far been unable to review certain
accounts and other documents at the think tank and returned to the U.S.
last week in frustration. In the past several days, the U.S. Embassy called
in the Moscow police and protested to the Yeltsin government after
officials at the Moscow think tank removed files and $500,000 worth of
equipment that AID and Harvard claim as their own.
The immediate issue in Mr. Hay's case is investment in Russian government
officials say investigators also are looking at possible use of
U.S.-funded staff and resources by Mr. Hay's companion, Elizabeth Hebert, a
Moscow mutual-fund manager.
In Mr. Shleifer's case, the issue is Russian investing by his wife, Nancy
Zimmerman, who runs a hedge fund, or private investment partnership, that
invests around the globe. AID alleged that Mr. Hay, with Mr. Shleifer's
knowledge and participation, used U.S.-financed resources in Moscow to
support Ms. Zimmerman's Russian investing.
AID's conflict-of-interest rules say no employee may "make loans or
investments to or in any business, profession or occupation" in project
countries. Rules at the Harvard Institute for International Development,
which oversaw the project for AID, are more specific:
"HIID employees and members of their families may engage in no financial
transactions or investments within the project country."
HIID's director, Jeffrey Sachs, a Harvard economist and prominent former
adviser to Russia, removed Messrs. Shleifer and Hay from the project,
saying: "HIID has zero tolerance for conflicts of interest, whether actual
or perceived." Mr. Shleifer remains a tenured Harvard professor. Allies and
critics offer a variety of explanations for the
collapse of the aid program, including political plots in Washington and
Moscow and academic rivalries at Harvard. Some say there is little love
lost between Mr. Sachs and Mr. Shleifer. Others claim that AID, which has
few friends on Capitol Hill, is looking for scapegoats to excuse its own
management problems. In Russia, some see Messrs. Hay and Shleifer as
casualties of a bitter struggle for control of Russia's stock market being
waged by the Russian central bank and the Russian Federal Securities
Commission. Both Harvard men served as key advisers to the
Others offer a different theory, citing the corrosive influences of money
and Russia's dubious moral atmosphere. William McCulloch, a former AID
contractor who had a number of dealings -- some successful, some not --
with Mr. Hay or the Harvard
operation, contends that "after so much time there, Jonathan was starting
to think and act like the Russians do ... . It was an easy line to cross.
The Russians have no concept of conflict of interest."
Mr. Shleifer and Mr. Hay declined to be interviewed for this article, but
both, through their attorneys, denied any impropriety. A memorandum
prepared for Mr. Shleifer's
attorneys by a Columbia law professor contends that neither Mr. Shleifer
nor his wife was subject to Harvard's or AID's conflict-of-interest rules
because Mr. Shleifer was a consultant to HIID rather than an employee. It
also says he "accepted his position as an
HIID "consultant" with an understanding that investment activities would
not be restricted." His wife, Ms. Zimmerman, said in late May that any
used were contracted for and reimbursed. Also in May, a lawyer for Mr. Hay
said his client didn't violate any conflict-of-interest rules because all
his investments were in the Russian bond market, which he didn't advise and
which wasn't a "business, profession or
Harvard lawyers reply that the HIID restrictions applied to all markets and
say there is no doubt Mr. Hay was subject to them. In Mr. Shleifer's case,
Harvard sidestepped the issue, making no ruling on his prior compliance but
stating that in the future the restrictions
would apply to all people in Mr. Shleifer's senior position. But Harvard
denies it agreed Mr. Shleifer could invest as he wished. "No HIID director
knew of or authorized any exception to the HIID policy concerning
investment in foreign countries by Andrei
Shleifer or his family," says James H. Rowe, a university vice president.
At AID, Donald Pressley, the deputy assistant administrator for Europe and
the New Independent States, says: "We regarded Prof. Shleifer as the
project director. He was not just a consultant; he was the key manager."
The story begins in the early 1990s when Moscow was a magnet for Western
social scientists eager to help one of the century's most ambitious social
building a capitalist democracy on communism's ashes. Mr. Shleifer, then a
brash and brilliant 30-year-old Harvard economics professor and an expert
on corporate finance, and Mr. Hay, also 30 at the time and about to
graduate from Harvard Law School, were
among the first to arrive. On a November 1991 Moscow trip, Mr. Shleifer met
Mr. Chubais and Dmitry Vasilyev, the men in charge of moving state
enterprises to private Russian ownership. The three clicked. Mr. Shleifer
soon started a monthly shuttle between
Cambridge, Mass., and Moscow, with Mr. Hay living in Moscow to coordinate
the effort there.
For Mr. Shleifer it was a homecoming, if an ambivalent one. Raised in
Russia, he immigrated to the U.S. with his family when he was 15. Life for
Soviet Jews in those
days was so bitter "that his parents wouldn't even talk about the Soviet
Union" once they got out, a close friend says. "They were very upset when
Andrei wanted to get
involved in privatization" back in Russia. The early years in the U.S. were
difficult, friends say, as his parents struggled to find work and he to
assimilate. But Mr. Shleifer evidently never lacked self-confidence. At
Harvard he won a research assistantship with Lawrence Summers, then a
Massachusetts Institute of Technology economics professor and now deputy
Treasury secretary, by citing five alleged mistakes in a Summers research
paper. They became close. Mr. Summers championed Mr. Shleifer's tenure bid
at Harvard and sponsored his first trip back to the U.S.S.R. by including
him in a 1990 World Bank
mission to Lithuania.
For Mr. Hay, Moscow was something of a homecoming as well. An Idaho native,
he had spent several months at Moscow's Pushkin Institute for Russian
Language while an undergraduate. With a shock of unkempt brown hair, Mr.
Hay had the look of a distracted young professor. He also had a gilded and
varied resume: Rhodes scholar, New York City housing activist and Harvard
Law, where he won a first-year prize for having top grades.
In Russia, Mr. Hay and Mr. Shleifer dazzled U.S. and Russian colleagues
alike. Mr. Hay "worked about 20 hours a day," recalls Jim Norris, AID's
director. AID's Mr. Pressley adds: "They both had incredible access to the
reformers ... . They delivered the goods." Those close ties were born early
in the privatization
program. The mood in their rundown headquarters was a cross between a
college dorm the night before finals and a military bunker. In a few
feverish weeks, the team
drew up plans to sell off 15,000 state enterprises and give vouchers to 150
million Russians to buy shares in them. The reformers feared that any delay
would let their
many opponents -- Communists, apparatchiks and competing advisers -- block
the program. That sense of being under siege marked their subsequent reform
efforts and forged a strong bond among team members.
For all their history-making efforts, they got little official outside
support that first year; Mr. Hay's $30,000 salary was paid by the Ford
Foundation. But by late 1992, the
Bush administration and Congress had begun to share the urgency; no one
wanted blame for losing Russia. AID awarded the Harvard institute a $2.1
million agreement, with Mr. Shleifer in charge, to provide technical help
Over the next five years, HIID's agreements with AID grew to total $57
million, as it added the tasks of advising Russia on legal reform and
building capital markets from the ground up. The Clinton administration was
so enthusiastic about the Harvard team -- and
under such congressional pressure to disburse aid quickly -- that nearly
$40 million was awarded without competitive bidding. And, wary of AID's
sluggish bureaucracy, the administration gave the Harvard institute more
and more managerial responsibility. By
1995, the Harvard program was coordinating $285 million of grants to other
HIID also gave Mr. Shleifer a free hand to run what everyone in Cambridge
saw as his project. "You have to understand the culture of academia,"
professor says. "No one ever really thinks they work for anyone else."
To some outsiders, the situation looked ripe for trouble. "AID gave Harvard
a blank check ... . They opened themselves to all sorts of shenanigans,"
says Janine Wedel, a research professor at George Washington University in
Washington, who was one of the first to
raise questions about the Russia program. In February 1996, House
International Relations Committee Chairman Benjamin Gilman, a New York
asked the General Accounting Office to probe possible favoritism for
Harvard in AID contracting. The GAO's report criticized AID for exercising
"minimal oversight" but found no favoritism or financial improprieties.
If AID was dazzled by Mr. Shleifer and Mr. Hay, the Russians were
enthralled. In 1995, Mr. Vasilyev, a veteran of the privatization drive and
by then head of Russia's new Federal Securities Commission, turned down a
multimillion-dollar AID grant for assistance to be
provided by SRI International, formerly Stanford Research Institute. AID
officials say he told them that if it wasn't going to be Harvard, he didn't
want the help. Mr. Vasilyev made Mr. Hay a top adviser to the securities
All that money, power and influence changed the Harvard operation. Gone
were the dingy offices and meager salaries. HIID moved, among other places,
into one of Moscow's fanciest addresses, Dukat Place, with a marble lobby
and 24-hour security. Citicorp had made the same choice. The change could
also be felt at the securities commission, where Mr. Hay was said by
associates to be the right-hand man to Mr. Vasilyev. The commission
resisted outside advice, says Andrei Volgin, a Russian stock-market
pioneer. "It was an arrogance that developed" there, he says.
Moscow Think Tank
AID says the problems began at a Moscow think tank called the Institute for
a Law-Based Economy. ILBE was founded in February 1995 with the help of Mr.
Hay and Mr. Shleifer -- plus eventually $8 million in U.S. aid and $4
million from the World Bank -- to write
economic legislation and train a core group of Russian advisers to direct
future legal reform. Among its tasks was helping to create Russia's first
mutual-fund regulations and procedures.
But Mr. Hay's ambitions for ILBE went beyond anything AID or the World Bank
could provide, says Mr. McCulloch, the former AID contractor. "Jonathan was
tired of begging for funds," he says. Mr. McCulloch, who was renting space
from ILBE while working on an AID-funded zoning project, says that in early
1996 Mr. Hay told him the Yeltsin government had given ILBE a 49-year lease
on a prime Moscow parcel. "I estimated
that developing the single building would bring $6 million to $8 million
... . I told them that if they got the [adjoining] property it could go $30
million to $40 million," Mr. McCulloch says. He says he hoped to work on
the project when his AID contract expired, but his proposal to the Russian
government was never answered.
ILBE also set up a for-profit arm, ILBE-Consulting, at the same offices and
with largely the same staff. ILBE-Consulting, Mr. Hay explained to AID,
would give ILBE's professionals real-world experience and help keep ILBE
solvent if American or World Bank funds ran dry. AID agreed to contribute
$1,158 to starting up the for-profit arm.
ILBE officials say that ILBE-Consulting provided services to more than 15
clients and that scrupulous accounts were kept. Two of its early clients
were businesses run by Mr. Shleifer's wife, Ms. Zimmerman, and by Ms.
Hebert, who had begun dating Mr. Hay
around the end of 1995 or start of 1996.
Looking back, Mr. Pressley says that AID may have "opened a gray area" by
allowing both for-profit and nonprofit activities at ILBE. "But when we
agreed to the
establishment of ILBE-Consulting, we did not expect nor would we have
approved of it providing services to the close associates or family members
of AID-financed advisers," he says.
A Fund for Russians
Ms. Hebert was a pioneer of Russian investing. In 1994, working for
Britain's Robert Fleming & Co., she launched a fund for Westerners to
invest in the Russian stock market and earned a reputation as a savvy
portfolio manager. But she wanted to sell mutual funds
to Russians, to tap into the billions of rubles they refused to entrust to
banks. In mid-1996 she started her own company, Pallada Asset Management.
"Athena-Pallada was the goddess of wisdom and fair competition," read the
promotional material. Though more-established companies were in the race,
Pallada became the first company authorized to sell mutual-fund shares to
Russians. ILBE staffers say that once Ms. Hebert began
developing her own fund company, she started spending considerable time at
the ILBE/ILBE-Consulting offices. Staffers say she used desks, phones and
and spent long hours consulting with ILBE lawyers.
In an interview this May, Ms. Hebert said she never received any
professional benefit from her relationship with Mr. Hay. Mr. Hay, in a
letter to an AID investigator, said that Pallada was "treated no
differently" from other mutual-fund companies. "ILBE lawyers, representing
the Federal [Securities] Commission, reviewed Pallada's applications and
filings to make sure they were in compliance with the regulations of the
federal commission." This service, he said, was available to all
mutual-fund companies, "although some ... may not try to work cooperatively
with the ILBE lawyers."
Ms. Hebert also hired ILBE-Consulting. An ILBE-Consulting invoice provided
by Ms. Hebert shows Pallada was billed $4,100 for help in such matters as
preparation of a charter and incorporation of her company,
"re-registration" and consultation on tax
issues. Some documents seen in the Pallada file at the Moscow Registration
Chamber bear the name or signature of Sergei Shishkin -- then deputy
director of ILBE and now its director -- next to a Russian word that means
manager or director. But other documents
don't list him as a Pallada director. Ms. Hebert provided a law firm's
statement saying documents it reviewed showed Mr. Shishkin wasn't general
director of Pallada.
Corporate registration documents show that ILBE-Consulting also took a
1.96% stake in Pallada. Mikhail Volkov, the for-profit arm's general
director, says it agreed to become a "nominal holder" for tax purposes in
the U.S. and "to speed up the registration
process in Russia." He says that after registration, the interest was
transferred back to Ms. Hebert's U.S. company, Boston Capital Management,
and that there was no money involved.
At the time ILBE-Consulting was providing these services to Pallada, Mr.
Volkov's wife, Viktoria Volkova, was, like Mr. Hay, an adviser to the
Federal Securities Commission, which would judge Pallada's applications to
run Russian mutual funds. Mr. Volkov
says ILBE-Consulting's work for Pallada was limited to corporate
registration and didn't include any dealings with the securities commission.
Pallada Asset Management leaped bureaucratic hurdles that competitors say
they truggled to overcome. Documents show that on Aug. 8, 1996, just two
days after being registered as a corporation by the Moscow Registration
Chamber, Pallada got a mutual-fund
management license from the Federal Securities Commission; and a bit over a
month later, the commission registered the prospectus for Pallada's mutual
fund, making Pallada the first company authorized to sell fund shares to
Russians. Competitors were astonished. Far-better-capitalized companies
such as Credit Suisse Group of Zurich and Pioneer Group of Boston had been
trying for months to open funds. "We had not heard of Pallada Asset
Management in the 18 previous months we had spent preparing to launch our
mutual fund," says Charles Mallory, a Credit Suisse executive in Moscow.
Suisse hadn't been told it was even possible to register a fund prospectus,
he says. Several weeks later, he received similar approval.
Why Pallada was first isn't entirely clear, but it is known that Mr. Hay
and Mr. Vasilyev had said they wanted to create a mutual-fund industry not
dominated by Russia's big banks or large foreign companies. Pallada was
small and was run by someone they trusted.
Ms. Hebert, in a letter to The Wall Street Journal, said, "There were
several plausible answers including that no other management companies had
submitted a complete set of documents for registration in compliance with
theregulations (because they were pushing for greater leniency in the
regulations among other things)." In a recent interview, Ms. Hebert
declined to comment for the record, except to criticize the Journal. "I
think it is unconscionable the way The Wall Street Journal has acted and
misconstrued facts," she said.
Later in 1996, more success came Pallada's way: a government fund to
manage. The fund, set up to compensate victims of the pyramid schemes once
rampant in Russia, was under the direction of Mr. Vasilyev and his Federal
Securities Commission. As of June, it was worth about 23 billion rubles, or
$4 million. Last week, the Russian Parliament's nvestigative arm said that
it had begun an inquiry into how Pallada was selected.
In a brief interview, Mr. Vasilyev declined to explain how Pallada was
chosen, noting only that it had offered to take a commission of just 0.14%
of profits and telling a reporter: "You can manage the fund yourself if you
can offer a low commission like that." He also wouldn't explain why Pallada
was the first to win approval to sell mutual-fund shares to Russians, but
he said it didn't matter because several others were approved before long.
Investing in Russia
Like Ms. Hebert, Ms. Zimmerman had experience as an investor and fund
manager. She met Mr. Shleifer in Chicago, where she was working for an
investment firm and he taught at the University of Chicago graduate school
of business. In 1988, she joined Goldman, Sachs & Co. in New York and ran a
fixed-income options desk. After marrying, they continued to live apart as
Ms. Zimmerman pursued her Wall Street career and Mr. Shleifer sought tenure
But in late 1993, pregnant with their first child, she moved to Boston and
soon started her own hedge fund, in partnership with San Francisco's
Farallon Capital Management. Her principal company was called Farallon
Fixed Income Associates and it invested mainly
in government debt around the world. In early 1996, Ms. Zimmerman set up a
Russian firm called New World Capital to buy debt inside Russia for her
fund. According to registration documents, she appointed Mr. Shishkin, then
deputy director of ILBE, as New World Capital general director. Corporate
documents on file at the Moscow Registration Chamber also list an
ILBE/ILBE-Consulting address and phone number as New World Capital's.
ILBE staffers say they often overheard Mr. Hay in Moscow on the phone with
Ms. Zimmerman in Boston discussing her investments. In a May letter to Mr.
suspending the Harvard institute contract, AID said it had evidence that
Mr. Hay "directed HIID and ILBE staff" to help Ms. Zimmerman with her
investments by "buying and selling Russian bonds, tracking deposits and
withdrawals from ... Russian bank accounts, consulting about tax aspects
of the investments and possible additional investment opportunities."
Ms. Zimmerman and a lawyer for Messrs. Hay and Shleifer say that any
services were provided by ILBE's for-profit arm. "We contracted
Zimmerman said in May. "We paid them for their services." A lawyer for her
companies, Paul Vizcarrondo, displayed an invoice from ILBE-Consulting to
Fixed Income Associates for $8,800 worth of services provided between
February and November of 1996. It cites registration, document preparation,
"maintenance" and "nominee services" for New World Capital. The lawyer also
said that ILBE's Mr. Shishkin, although listed as New World's director,
"wasn't running" the company. Instead, he "would receive instructions, he
placed trades for them [and] transferred funds," Mr. Vizcarrondo said. Mr.
Shishkin declined to be interviewed.
A Share Depository
AID investigators also are looking into links among Mr. Hay, Ms. Hebert and
Ms. Zimmerman. In his letter to the AID investigator, Mr. Hay said he
indirectly benefited from a purchase of Russian government bonds handled by
Ms. Zimmerman's hedge fund. In June 1996, his father wired $150,000 to
Farallon, Mr. Hay said, and then took $50,000 from an account belonging to
Mr. Hay. Two months later his father returned $53,359
to his account. Mr. Hay said he had discussed possible investments in
Russian bonds with his father but didn't returned $53,359 to his account.
Mr. Hay said he had discussed possible investments in Russian bonds with
his father but didn't specifically recall uthorizing his father's actions.
Investigators are looking, as well, into what if any role the three may
have played in an AID-supported company called First Russian Specialized
Depository. First Russian, the first private company in Russia to provide
independent share registry and accounting
services for mutual funds, received $700,000 in AID-funded technical
assistance as well as support from the World Bank. Ms. Hebert's Pallada was
its first mutual-fund client.
First Russian had been founded by Forum Financial Group of Portland, Maine,
as part of a
World-Bank-funded pilot project for Mr. Vasilyev's securities commission.
But Forum soon sold it to Julia Zagachin, a former HIID employee and an
acquaintance of Mr. Hay and Ms. Hebert. According to David Goldstein, Forum
Financial's general counsel, Mr. Hay and Ms. Hebert were involved in
negotiations needed to make the transfer. In addition, he says, "we
understood at the time that we sold our interest that Farallon was the
source of the financing" for the $400,000 purchase. Ms. Zagachin says she
didn't get any financing from Farallon but rather "borrowed money from some
friends." Ms. Zimmerman says Ms. Zagachin had asked for financing and
documents were drawn up, "but it was rejected by [my] partners and my
husband as a conflict of interest."
In a letter to Harvard's president written after AID's allegations were
made public this spring, Mr. Vasilyev, the securities regulator, said that
Ms. Zimmerman had asked him in early 1996 whether her investment plans
posed a conflict of interest and that he assured her they didn't.
The Reformers Protest
By the fall of 1996, ILBE staffers had begun to grumble about possible
conflicts. ILBE and Harvard staffers began to speak up after a new Moscow
AID director, Janet Ballantyne, took over in October and put Mark Ward,
AID's Moscow legal counsel, in charge of the Harvard program. In late March
of this year, AID called in its inspector general. It is hard to say what
surprised the Clinton administration more: the accusations against the
gilded Harvard team or the fierce reaction from the Russian reformers. In
an April letter to Richard Morningstar, the State Department's overall
coordinator of aid to the former Soviet Union, Mr. Vasilyev strongly
objected to the investigation. "I completely don't understand why the U.S.
government is ready to sacrifice the openness of
Russia's market and the main programs of technical aid to conduct a
demonstration investigation based on the ordinary rumors circulating in
Moscow and being spread
by those who oppose [Federal Securities Commission] policy," he wrote.
A month later, First Deputy Prime Minister Chubais made his own public
criticisms and said he would no longer work with Harvard. On his way out of
the news conference, however, he told a reporter he wanted to continue
working with Messrs. Hay and Shleifer.
Relations this month hit a new low as the AID investigation seemed to stall
and a public battle erupted over who would get ILBE's AID-funded equipment.
U.S. officials say they have been unable to get all the ILBE documents they
need. Mikhail Orlov, deputy
director of ILBE, says it gave the U.S. many records and is awaiting
clarification of why more are needed. As for the furniture, computers,
phones and file cabinets that Russian movers took away from Harvard's
offices last week, even after the U.S. Embassy called in the Moscow police,
Mr. Orlov says ILBE is "prepared to return at any time the property ... .
[But] it is necessary to observe certain procedures and satisfy a number of
Doubts Expressed About Russia-NATO Cooperation
August 13, 1997
[translation for personal use only]
Article by Aleksey Pushkov, member of the Foreign and Defense
Policy Council Collegium: "Russia-NATO: Advice, But No Love Yet"
After four years of debates and various moves, a decision on NATO
expansion was nonetheless made by NATO's Madrid summit. By virtue of that
fact Russia-NATO relations are moving onto another plane. Regular
consultations, coordinated positions, and the adoption of joint decisions
on European security issues will be carried out by the Russia-NATO Council
founded in Paris.
The Council's creation drew far more interest from Western observers
than the purely military and nuclear aspects of the Paris agreement between
Russia and the alliance. But the reaction was varied. Politicians who
sympathize with Russia stress that Moscow has achieved the main objective:
Henceforth it has direct access to NATO. And this means that Russia will
be able to influence the alliance's decisions. Those who take a suspicious
or hostile view of Russia see the Council as a direct threat to NATO's
A desire to turn the Council into a formal body, incapable of tackling
any serious issues, can be discerned in certain NATO countries, primarily
the United States. Russian diplomacy has frequently encountered that
People at the Brussels headquarters of the alliance itself take an
intermediate view: On the one hand they emphasize the importance of
Russia's taking part in the alliance's activity, while on the other hand
they insist on rigid restrictions on the council's jurisdiction. According
to NATO representatives, it must be reduced to discussing joint
peacekeeping operations and actions to prevent conflicts and to combat
terrorism. Questions directly pertaining to Russian security, for instance
the Baltic countries' admission to NATO, must remain outside the framework
of the consultations.
It should be noted that, during the news conference after the summit
meeting in Helsinki, Boris Yeltsin stated optimistically that henceforth
decisions on European security issues will be adopted on the basis of
consensus. This statement was, however, immediately rejected by Bill
Clinton. According to him, Russia has received a "voice but not a veto" in
NATO. And this means that its view will be taken into consideration, but
nothing more. And you can be sure that Clinton's interpretation of the
accords is far closer to NATO's understanding of the situation.
It is typical that, after the signing of the Founding Act, Russia and
NATO had a serious disagreement regarding the actions of U.S. and British
units in Bosnia. The Russian Foreign Ministry opposed the attempts to
arrest Bosnian Serbs accused of crimes against the civilian population as
exceeding the peacekeeping forces' mandate and threatening to wreck the
whole Bosnian peace process. But Washington and London reaffirmed their
intention of taking further action, despite Russia's' objections.
The hitch that arose in mid-July with regard to the first working
session of the Consultative Council at ambassadorial level is also
significant. Contrary to the accord in the Founding Act that such sessions
would be chaired by three cochairmen -- NATO's secretary general, a
representative of Russia, and one alliance country's ambassador to Brussels
-- the NATO leadership proposed handing full control to the secretary
general. Moscow objected strongly. The session was postponed for a few
days and the upshot was that it took place in accordance with the
previously agreed formula. But the desire to show Russia its place did not
Thus, Russia is beginning its collaboration with NATO with extremely
limited potential. NATO's stance boils down to enlisting Russia in its
actions where necessary and leaving it out when there is no need for it to
The first council session at foreign minister level will be held in
New York in September. After that it will be possible to judge whether
NATO takes a serious view of collaboration with Russia or whether they are
just trying to neutralize it as a factor in European politics.
Financial Times (UK)
15 August 1997
[for personal use only]
Russia: Business war breaks out
By Chrystia Freeland in Moscow
The simmering conflict between Russia's once allied leading businesses
erupted yesterday as Mr Vladimir Gussinsky, a media and finance tycoon,
accused his rivals of seeking to create an "oligarchy".
Mr Gussinsky's outburst follows two controversial privatisations, both
won by the powerful Oneximbank group, which have split Russia's once
united business élite into fiercely antagonistic camps.
Contradicting previous denials, Mr Gussinsky admitted his Most financial
group had participated in a failed bid to buy Svyazinvest, the recently
privatised telecommunications company.
The company went to a consortium led by Oneximbank, in an auction which
the winners hailed as a fair and transparent process, intended to break
the Russian pattern of insider-dominated sell-offs.
But Mr Gussinsky yesterday implied that Oneximbank owed its victory, and
its subsequent triumph in the privatisation of Norilsk Nickel, one of
the world's leading nickel producers, to what he called a deal with the
"Today, more and more crudely, the relations between one of my former
colleagues and the government are crossing acceptable boundaries," Mr
Gussinsky claimed, in a comment clearly targeted at Mr Vladimir Potanin,
the Oneximbank chief.
"Openly and directly some politicians are helping him to obtain economic
goals. When one player is in a more advantageous position, and part of
the government is co-operating with him for political ends, then that is
oligarchy." Mr Gussinsky's attack is significant because his comments
imply the young reformist ministers in the Russian government have sided
with Mr Potanin.
Critics have dismissed his allegations as sour grapes. But whatever Mr
Gussinsky's motives may be, it is a clear sign the reform wing of the
Russian cabinet, led by Mr Boris Nemtsov and Mr Anatoly Chubais, has
lost the backing of the influential Most media group and other top
In the past, the reformers have enjoyed the enthusiastic support of the
Most media machine, an ally which has often been vital in pushing
through unpopular change.
Mr Gussinsky also hinted that the struggle between Russia's powerful
financial barons will soon move on to the favoured battlefield of Moscow
politics, the war of kompromat, or compromising documents. The media
chief said new information would become public showing alleged links
between Oneximbank and government.
But while Most's verbal volley captured the attention of the Russian
media yesterday, it is unlikely to alter Oneximbank's financial
Various inquiries into the legality of the Svyazinvest sale are under
way, but Russian officials reiterated yesterday they believed it had
been totally above board. Privately, Most executives conceded the sales
were unlikely to be overturned.
PROCEEDS FROM PRIVATIZATION TO BE LAID IN THE GROUND OF
1998 BUDGET, CHUBAIS SAYS
MOSCOW, AUGUST 14 (RIA NOVOSTI CORRESPONDENT REGINA
LUKASHINA). The proceeds from privatization have not been
exhausted and while forming the budget for 1998 the government
will lay down "serious numbers" on these proceeds in this
document, Russia`s First Deputy Prime Minister Anatoly Chubais
told journalists today.
He expressed regret saying that the wage of the budget
sphere employees and payment of pensions greatly depend upon the
incomes from privatization but not from tax collection. "We
failed to organize the work on the budget proceeds in such a way
so that to change this situation, that`s why we are dissatisfied
with the existing situation,' Chubais said. He believes that it
is necessary to strengthen the work of the State Tax Service and
Customs Committee. Having noted that "the state property is an
inexhaustible source," he said that at present the government
receives incomes from the privatization which are ten times more
than two years ago. This means "a widescale growth of the value
of the state and private property," he said. Though the number
of sites destined to privatization and sale on commercial
tenders has reduced, one can hope that incomes from
privatization will go up next year compared with the current
Chubais reported that privatization auctions on several oil
companies will be held in the second half of this year.
According to Chubais, all judicial documents on the tender of
the Rosneft company have been prepared. He pointed out that
probably it will be "one of the greatest auctions," and not only
on oil companies.
Zyuganov Promises 'Hot' Fall Session of State Duma
August 13, 1997
[translation for personal use only]
>From the "Segodnya" newscast
Communist leader Gennadiy Zyuganov is in Saratov and addressing the
local inhabitants there. The Communist party leadership is attaching
particular significance to this visit because it is called upon to improve
Zyuganov's image in the provinces before the start of parliament's fall
session. Here is a reportage from Saratov.
[Unidentified correspondent] While the electorate hurried to find the
best seats in the house, their associates took it in turns to be
photographed with their leader. And, by all accounts, tomorrow these
photographs will be used in the pre-election campaign for deputies'
mandates for the regional duma (second convocation). The elections are to
be held on 31 August. Gennadiy Andreyevich has decided to render moral
support for candidates from the people's patriotic forces while there is
Recalling his own participation in last year's presidential elections,
the communist leader made a fairly surprising statement.
[Begin Zyuganov recording] For example, the White Guard supporters in
Russia voted for me -- all of them. [end recording]
[Correspondent] As far as the country's present socio-economic
situation is concerned, Gennadiy Zyuganov was as categorical as ever:
collapse, ruin, and a further drop into the abyss. Of course, the
executive power was to blame for everything. But, according to him, the
so-called young reformers could in the next four-five months bring Russia
to complete impoverishment. Gennadiy Zyuganov did not ignore foreign
[Begin Zyuganov recording] Incidentally, look at these companies that
are supposed to be respectable -- not one of them has brought anything in.
Those coming in are just petty swindlers, or former citizens of our
country, who have been given carte-blanche. And they are trying through
middle-men to buy up everything they can that is available and as cheaply
as possible. [end recording]
[Correspondent] For example, Gennadiy Zyuganov is convinced that the
Svyazinvest shares were sold off four times below their real value. He
sees a way out of the protracted crisis primarily in the implementation of
a package of new laws devised by the Communist Party in the State Duma.
The deputies are now actively preparing for the coming fall session,
and, according to Gennadiy Zyuganov, September promises to be hot. [video
shows Zyuganov addressing meeting]
MULTINATIONAL SEA BREEZE - 97 EXERCISES TO BE HELD IN
PREDETERMINED TIME, SAYS UKRAINIAN DEPUTY DEFENSE MINISTER
KIEV, AUGUST 14 (RIA NOVOSTI CORRESPONDENT VIKTOR
DEMIDENKO). The multinational exercises Sea Breeze -97 to be
conducted near Yevpatoria will be held in the planned time, in
the third decade of August, Ukraine`s First Deputy Defense
Minister Lieutenant General Alexander Zatinaiko told a press
conference today in Kiev.
According to Zatinaiko, naval ships and detachments of
Ukraine, the United States, Turkey and Bulgaria will participate
in the exercises to be held in the framework of NATO`s
Partnership for Peace program. The Ukrainian party will be
represented by 15 combat ships and auxiliary vessels, aircraft
and a mariners company with the military equipment assigned to
it. An assault craft Ponce, Spruence frigate, a company of
mariners will represent the U.S. Navy. Turkey will forward the
Fatikh frigate and a submarine and Bulgaria an assault craft
Sirius to the exercises.
NATO countries will finance all expenditures attributed to
the exercises, Zatinaiko said.
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