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CDI Library > Johnson's Russia List

Johnson's Russia List
 

 

February 12, 1998   
This Date's Issues: 2058 2059   2060

Johnson's Russia List (List Two)
#2059
12 February 1998
davidjohnson@erols.com

********

Date: Wed, 11 Feb 1998 
From: Anne Williamson <awilliamson@mcione.com>
Subject: Crime of the Century

In the current exchange on JRL regarding crime, I am compelled to join
Michelle Berdy and Jonas Bernstein in support of Peter Reddaway’s remarks
concerning Anders Aslund’s nefarious contentions which The Weekly Standard
surprisingly saw fit to publish.

The following material is one chapter from my just-completed book, How
America Built the New Russian Oligarchy. My effort follows privatization
and the development of the securities market and the financial industry
generally while examining the West’s assistance efforts via USAID (Harvard
University), the IMF and the World Bank. “Crime” is inadequate as a word
and even as a concept to describe what these people perpetrated and
continue to perpetrate in Russia.

The principal criminal debacles from which all others flowed are Jeffery
Sachs’s and Yegor Gaidar’s shock therapy and voucher privatization. The
preceding chapter, “Foreign Manners”, deals with Sachs’s and Aslund’s 1992
macroeconomic “reforms” and the attached chapter is the one that deals with
voucher privatization as executed by Harvard’s minions. Later chapters
detail Shares-for-Loans and other scams, swindles and robberies in which
Harvard Management, which invests the university’s endowment, and the
billionaire speculator philanthropist moralist George Soros loom large as
beneficiaries.

However, it is the crime of voucher privatization that needs to be
understood in its specifics before anyone can possibly understand the
totality of what the US did in Russia. Everyone seems to have skipped
these details or to have forgotten them, but they are critical.
(Journalists who write dismissively of Russians that they “sold their
vouchers for a bottle of vodka” do truth no service and only compound the
injustice the US and Harvard foisted upon a then-trusting people in the
name of American citizens whose good intentions they dishonored.)

The chapter, I think, stands alone, however, the following people with
whom readers might be unfamiliar are introduced earlier:

Ardy Stoutjesdijk - Head of the World Bank Moscow mission from late 1991
through 1995.

Bill Potrin - Head of Deloitte and Touche from 1989 through 1996 who worked
with Chubais et al on the design of voucher privatization in 1992.

Andrei Kortunov - Former analyst at the Institute for the Study of the USA
and Canada, who today is with the Ford Foundation.

Leonid Grigoriev - Russia’s representative to the World Bank from 1992
through 1997.

Aleksandr Prokhanov - editor of the nationalist broadsheet, Zavtra.

Aleksandr Omelchenko - a Moscow-based Russian attorney.

As for myself, I have covered Russia since 1987 for a wide range of
publications, everything from the Wall Street Journal to SPY magazine. My
initial efforts focused on the art world, especially the film industry,
where it will be recalled perestroika began. I switched to the economic
story in 1992 and signed the contract to write the book with Farrar, Straus
and Giroux in 1993 and have worked professionally on that effort
exclusively ever since.

As a final note regarding crime, the most egregious current one from US
citizens’ and taxpayers’ point of view is the continued funding of Jonathan
Hay and his innamorata Beth Hebert and their partner-in-crime Dmitry
Vasiliev at the Federal Securities Commission via World Bank lending and of
Jeff Sachs’s HIID and Anders Aslund in Ukraine via another USAID
noncompeted agreement for which Sachs, Aslund and George Soros lobbied
behind closed doors in 1996 after Ukraine initially rejected USAID’s offer
of yet another assistance contract. This latter result was made possible
despite a wary Congress’s protest thanks to a national security waver
issued by a collection of Clinton Administration Treasury and National
Security Council appointees, all of whom have significant ties to Harvard
University.

As Peter Reddaway wrote, it is “odd, indeed shameful, for Aslund to smear
Mr Boldyrev and the report (on privatization) by claiming that the
Accounting Office is ‘controlled by the Communist-dominated parliament’”.
The Harvard crowd’s long-standing habit has been to cloud the truth
concerning their deeds with shameless red baiting whenever challenged and
it is really disgraceful of Aslund to continue in this vein when the
Accounting Office is the only organization within the Russian government
striving for accountability regarding public officials, programs and funds.

----------

CHAPTER EIGHT: LOCAL CUSTOMS

Chubais? A poor man can not think about others when he is cutting the
pie. He strives to grab the biggest piece of it. It's a purely
psychological condition of people which have come out of the previous
system. It is not about their guilt, it is not even guilt, but a misfortune.

-Aleksandr Omelchenko


Gasheka Street runs for three or four unbroken city blocks behind the
Peking Hotel which itself is bordered on the other side by the Garden Ring
Road, the key boulevard encircling central Moscow. One glance at the
unbroken row of dilapidated buildings was enough; my driver grinned and
nodded when I pointed to the solitary shiny building far down the street.
It used to be a person's shoes were the giveaway, but in the first phase of
Russian reform a building's swankness identified the occupants' origins, as
did the standard entry icon of the Western-occupied building - a steel tube
overflowing with crushed cigarette butts.

I visited several of the building's tenants from time to time but without
an occupant listing posted, I didn't realize one person I'd been looking
for was headquartered within. Telephone messages and a faxed letter to the
Harvard Institute of International Development [HIID] chief Jonathan Hay,
whom I'd been told by Russians, Brits and Americans had written the laws
governing privatization, had had no response. 

Hay turned out to be an unlikely character to have become so influential,
but he had the right connections and was lucky in his timing. When Larry
Summers was elevated to Chief Economist of the World Bank in 1990, he quick
passed the cookie plate to Sachs and Andrei Shleifer, another Harvard
economics professor who'd emigrated from the Soviet Union as a teenager,
and funded their efforts to "reform" Soviet Lithuania. That served to
raise Harvard's profile in what would soon be foreign aid's vast new
frontier, and Hay - just graduated from Harvard Law - did catch a pale
reflection of their glory in Leningrad where reportedly he was helping
Chubais by writing "reform" legislation. But it was the election of Bill
Clinton that lifted all their boats when the new president handed Summers
the not unuseful position of Undersecretary of the Treasury.

Since US bilateral aid was structured so that nearly every government
agency got a piece of the action, Summers was able to position himself to
run an ad hoc effort regarding Russian economic reform at Treasury with his
deputy, David Lipton, Sachs's former partner in the Washington-based,
private consultancy of Sachs and Associates. When USAID hesitated over
picking up the Russian hot potato, Treasury championed the Harvard
Institute of International Development [HIID] as a potentially effective
manager of USAID's Moscow program. 

HIID soon succeeded in signing with USAID a non-competed Co-operative
Agreement that would grow by a series of wavers from $2 million to $57
million within three years - without competition - on the preposterous
basis of "national security", and which contained the surprising bonus of
control over much of the US assistance package. Sachs quickly maneuvered
Hay, who was not only a Harvard man but an accomplished Russian speaker
who'd studied at Moscow's Pushkin Language Institute in the early eighties,
into position as HIID's Moscow manager, while Summers's protégé, Andrei
Shleifer, became the Cambridge-based chief honcho of HIID's Moscow shop. 

By late 1992, Jeffrey Sachs was a man whose Moscow team had compiled a
record that ought to have been examined more carefully before anyone in the
US government signed on the dotted line, unless economic sabotage of the
former USSR really was the US's intention; inflation was running at 2500%
and the details of the faux privatization program had already been
published. But caution was out of step with the times and no match for the
Harvard professor with the bow-tie personality and friends in high places.
Sachs and Aslund kept their Moscow operation open until early 1994, but
after witnessing the ascendancy of Vladimir Zhirinovsky and getting the
cold shoulder from Viktor Chernomyrdin's apparat, the two decided to move
on and eventually made a nuisance of themselves in Ukraine at taxpayers'
expense. Consequently, it was the GKI group led by Hay and Shleifer on the
Western side and Anatole Chubais, Maxim Boyko, Dimitri Vasiliev et al on
the Russian side that drove the long-term reform effort fueled by USAID's
grants to HIID. 

Choosing favoritism over the hard slog of institution-building, the
Harvard crowd sold themselves by overselling their Russian contacts whose
importance and competence they exaggerated to USAID officials. Goosed by
Treasury, USAID's leadership straightway bought Harvard's argument that it
would be more effective to concentrate funds and effort on the promising
Russian go-getters Harvard had identified, rather than to risk
fragmentation in attempting to build a consensus or to assist in
engineering compromises between different social and political groups. In
the days and years ahead, the Harvard crowd would continue their
self-serving disinformation campaign through an unrelenting campaign of
distortion the mainstream media swallowed eagerly and then obligingly
passed on to their readers and viewers. When challenged, the "Veritas"
cabal shouted a lot of blather about the threat of Communist revanchism
(their lucky charm with the big spenders in the US Congress) rather than
laying out any cogent defense of what they were doing.

In short, the basis of US policy would be a deliberate strategy
reminiscent of FDR's brain trusters, who conducted a socialist revolution
in the US within the administration during the first 100 days of taking
power. Now the heirs of the brain trusters - the best and the brightest -
would presume to conduct a capitalist revolution in Russia using all the
tools and money Western socialism could provide. One Russian who worked US
taxpayer-funded pr. on behalf of HIID remarked, "The formula was simplistic
and unchanging - the client was Russia which equaled Russian reform which
equaled Anatole Chubais."

Two years later wasn't the best of times for Hay and company, the would be
American Masters of the Russian Universe. The summer rush of dollars into
the nascent stock market had reversed admist uncertainties of share
registration and of unauthorized secondary share emissions. Nobody really
knew who owned what in Russia. While the West was spooked by corporate
transgressions and violations of shareholders' rights, what galled the
Russians was just about everything concerning the program, but that autumn
reports of the prices at which national assets had been sold during voucher
privatization were a special irritant. 

The public sneered when it became known Russia had collected twice less
than the revenues from privatization in Hungary, a country that would
hardly constitute a particularly large Russian oblast or province.
Moskovsky Komsomolets mocked the fans of Vancouver's Canucks, saying they
would have gotten better value had the team purchased the Gorky Automobile
Factory with its 100,000 workforce for $26.6 million than the $25 million
they did pay for Pavel "The Russian Rocket" Buré on a five year contract.
New addresses in Bargain City were announced daily; the Hotel Cosmos with
its $10 million annual net profit sold for $23,500,000, the national
electric company United Energies sold for $650,000,000, ZIL Automobile
Works' one billion in assets went for $4 million, and Gazprom, representing
approximately a third of the world's natural gas, was valued at
$230,000,000. Ports, oil companies, high-tech factories of the military
sector, all sold for a pittance. 

GKI records provided enough material for Vladimir Polevanov, Chubais's
controversial 1994 successor at GKI, to assert a string of dubious results
which justified re-nationalization. The new chief reported that the
criminalization of the process had led to humongous sums of cash being
laundered and the general advancement of the criminal class in Russian
society, that no true proprietors had been created and that a careful study
of correspondence from the Russian people to the agency revealed that the
program was most commonly referred to as "a deceit". Polevanov concluded
that "none of the aims of privatization as established" by presidential
decree had been achieved and, worst of all from the state's immediate point
of view, "We have now impoverished owners who are demanding social benefits
from the state." 

Asked for her analysis, free market economist Larisa Piyasheva seethed,
"These guys were able to carry on the biggest privatization in the world
without creating a single private enterprise. It's an amazing fact of mass
hypnosis which some day psychiatrists might be able to explain." The
program had indeed put in place an expensive, time-consuming, distracting
and destructive paper chase at the conclusion of which the government stood
still mighty as the largest shareholder in any single allegedly privatized
enterprise. 

The Russian Duma was none too pleased either. The parliamentary body
refused either to approve the results of the voucher auctions or to
authorize the terms of the second stage of privatization that was
proceeding by cash auctions. Since the Russian constitution assigns
responsibility for federal property to the parliament, that meant the sale
of Russian assets was occurring by means of a presidential decree [ukaz],
and therefore the transfers were anti-constitutional. Quite suddenly that
Christmas, the re-nationalization crowd took advantage of the capital's
annual holiday shutdown and barred foreign experts from GKI. The Russian
people hardly noticed and those who did seemed, if anything, rather
pleased. When the foreigners returned to the capital, there was some
shouting, some furious politicking and Polevanov was history by the end of
January. Still, the reluctant Jonathan Hay was proving to be a real pill.
There was some peculiar, oddly childish business on the telephone, and
other curiosities. 

When the elevator doors in the Gasheka Street building opened unexpectedly
onto HIID's offices, I stepped into a reception area with none of the usual
4-color brochures, upbeat studies or snappy newsletters that comprise
assistance propaganda. Asking for Hay I bluffed my way past the lone
receptionist and told the secretary I found guarding his office I'd dropped
by to schedule an appointment since Mr. Hay and I had had so much
difficulty connecting by telephone. My request had a paralyzing effect
upon the young woman. Yet more peculiar behavior and several whispered and
excited consultations with Hay behind semi-closed doors ensued. Ignoring
all hints and signals that Hay would just as soon I dematerialized, I
remained cheerfully insistent until I was at last shown to his office.


Within I found a nondescript, thirtyish fellow, visibly angry and standing
defensively behind his desk. I introduced myself and stated my business.
Out flew my fax which fluttered from time to time in the space between us
along with the question of whether or not I knew a certain Mike McGaw. I
shook my head, "No." Hay, in a surreal monologue during which my eye was
drawn repeatedly to his stomach whose soft flesh was quivering and quaking
from the passions my request had unleashed, informed me that Mike McCaw was
a journalist who had appeared in his office - just as I had! - and with
whom he had been very friendly and open, but who had not only criticized
USAID in print, but also - hold on to your hat - had had the temerity to
testify negatively about USAID to the United States Congress. No, Hay
informed me, he "just didn't feel like talking to anyone", especially if
they were of a mind to present Russia as a xenophobic country, which he did
not believe to be true, and then were to criticize USAID.

Suspecting I might be dealing with a sociopath, I protested any knowledge
of McCaw or of his congressional testimony and said I couldn't really
comment usefully concerning either. I allowed that even though I did find
his thoughts regarding xenophobia (a subject about which I had not
inquired) of consuming interest personally, my purpose was to examine how
successfully the West's effort to assist Russia into the community of
democratic and prosperous nations was proceeding, taking the establishment
of the property right as a key barometer. 

Hay's eyes narrowed. He asked to know what I meant by "property rights".
I ticked off the usual list - the individual citizen's final redoubt from
the tyranny of the state, the basis of a middle class, and the foundation
of the open markets his team professed to be creating. Reacting with the
personal outrage one would expect from a Pentecostal minister questioned
about his masturbatory practices, Hay drew a long breath and cobra-like,
pulled himself up to his full height while making his eyes into really
tiny, tiny slits.

Surely, I ventured in dulcimer tones and very, very carefully, his work
must have given him some insight about the complexity of establishing
property rights in a society that had neither a cultural base to support
them nor a history of having had them. Hay exhaled slowly, and replied,
his words popping out on little clouds of vaporous spit, that culture had
nothing to do with property rights. I said I thought the two were
connected. Hay stared a moment more, unexpectedly got jumpy, looked away
and grabbed up a sheaf of papers lying on his desk while putting it to me
that if I would agree to give him quote approval from any possible
interviews and if I put that promise in writing, then and only then could
he entertain the thought of scheduling a meeting. Though I did eventually
meet with Hay several times - a feat requiring the intercession of US
Ambassador Thomas Pickering - nothing he ever told me said as much as our
first encounter.

Outside I stopped at the street ashtray, always the best place near such
compounds to pick up the scuttlebutt concerning the doings of the Americans
or myakigolovy ["the soft-headed ones"] housed within and pondered how was
it that the American effort to develop a law-based democratic society in
Russia was being led by a recent graduate from Harvard Law School, who had
never practiced law or even passed the bar, who believes a person guilty
until proven innocent, who thinks that the public's right to know is so
much annoying hogwash, that taxpayers' resources should be handed to really
smart and dedicated people - like himself - without accountability or
criticism, that the right of censorship is the price of access and that
considers the property right an obscure, almost quaint, curiosity for
anyone inquiring about Russian privatization. 

I suddenly remembered a thoroughly annoyed free market economist by the
name of Vitaly Naishul complaining on Soviet television that in the course
of a tour of the United States, the only place he'd been asked to make a
contribution to the Communist Party was Harvard University.




******************************************************************************


Russian privatization did not begin in 1992. During the latter years of
the Gorbola era, the top boys hived off with an alacrity that soon became a
stampede. A minister and his clerks seized the property, the equipment and
sold one another "stock" in the new entity and then rushed to sign
lucrative contracts with interested Western parties. Institute heads came
out on the basis of the real estate alone that they controlled, but
generally an academic boss created a small, private structure in his own
name and then slowly transferred the assets from the public institution to
his own and then channeled the most promising projects and the most gifted
people to it. Abel Aganbegyan, Gorbachev's former economic counselor,
followed the pattern to the letter when in 1990, he linked his Academy of
the National Economy with a Boston-based firm to form a joint venture
called Bain-Link, which has done handsomely on imports and, after 1992,
USAID and TACIS consulting contracts. 

Andrei Kortunov, now with the Ford Foundation, noted that what was typical
of academic institutions was true for industry, as well, "The director of a
large plant just starts a small private venture and then signs a
preferential contract with the part of the state enterprise which he
controls and - just gradually - transfers all the goodies from the state to
his enterprise. The higher position you have, the greater the opportunity.
If you are Chubais, you can start a foundation, the Foundation for a Civil
Society, like he did for his own soft landing and political future through
the use of GKI's [USAID supported] resources. If you were Gaidar in 1992,
you started three foundations, as he did." Gaidar's efforts paid off when
his Institute for Economies in Transition created a 1994 joint venture with
Pioneer Group dubbed Pioneer Investment which created a $100 million
off-shore investment fund that received OPIC guarantees.

USSR monies had been making their way for years to the safety of the West
through a maze of hidden bank accounts. Several years before the failed
coup, the Gorbola authorized the party to put its money into small
enterprises, sweet real estate deals, joint stock companies, private banks
and other capitalist ventures supposedly to generate revenues to support
perestroika. Instead, $200 billion is said to have disappeared while
Gorbachev busied himself accumulating a $90 billion debt to the West. As
early as 1988, evidence was available of Soviet officials having gone
commercial. Government honchos began charging businessmen tens of
thousands of dollars for the privilege of meeting with them. Gorbachev and
then Yeltsin took up these practices, hiring public relations firms in the
West to openly solicit private meetings with businessmen for them on a
commercial basis.

The rationale for public officials conducting themselves as investment
bankers was that there were no other entities to introduce market
structures. Sergei Stankevich, a deputy mayor already under fire for his
personal involvement in a commercial bank in late 1991, explained, "In the
case of the bank, it is not me who is an owner or a co-owner in a direct or
indirect form. It is the municipal system which invested money in the
bank. We are owners of buildings, we are owners of land and we are making
the first steps. If we see that the model was fired properly, then we can
sell our holdings. But the problem for us now is - it's a paradox - in
order to accelerate privatization we should first municipalize, and, only
after that, privatize." 

Stankevich's rational was specious. There was no shortage of eager market
participants. As far as the municipalization of property, Moscow's
government has not stepped aside from commercial structures it either
created or allowed, but has instead become the ubiquitous partner of
private enterprise.

By the fall of 1991, the criminal machine comprised of old Commies,
so-called democrats, an emboldened mafia and national property was in
remarkably good working order. The West's decision "to stabilize" with G-7
citizens' cash a government composed of Communists was one that could only
be justified on the basis of these people being something other than the
pylesosy ["vacuum cleaners'] they were. But where did people - especially
the mainstream media - think the Communists had gone? They didn't emigrate
en masse. Only a handful committed suicide. Other than the master of
brinkmanship Boris Yeltsin, the only one of importance to resign was
Gorbachev and that required the liquidation of an entire country. Those who
did leave government ended up heading newly commercialized government
agencies that remain dependent upon government largesse and special deals.

Leonid Miloslavsky, then a correspondent for the Russian business weekly
Commersant, remarked slyly that the West was worried about the wrong
people, saying it was people like Yeltsin and Gavriil Popov, then the mayor
of Moscow, and his St. Petersburg counterpart, Anatole Sobchak, who should
be drawing scrutiny. "They are Bolsheviks," Miloslavsky insisted, "It's
true the Communists don't have any problems. They all have their
connections, know whom to bribe and are quite accustomed to the system, but
people like Popov and Yeltsin are more serious. There is no opposition to
them and they do what they want."

That then was the environment in which the Russian privatization
program was to be devised and executed. When a couple of KGB agents were
caught trying to privatize agency "safe" apartments in their own names,
most citizens enjoyed a bit of comic relief from the grim business of open
thievery surrounding them. The biggest problem was that the privatization
program authorized by the Supreme Soviet the previous July was stalled. In
the Russian style, control of GKI kicked off a power struggle that consumed
the first six months of the agency's efforts.

In Moscow, Mayor Gavriil Popov had appointed free market economist Larisa
Piyasheva to advise him on privatization in November, 1991. Piyasheva,
then a 43-year old blond, crystal blue-eyed classic Slav and a graduate of
the Plekhanov Institute, was inspired not by the triumphant United States,
but instead by the defeated Germany of her childhood that grew into an
economic giant, while her own country atrophied in victory.

Contrary to the mythology of the Marshall Plan, which only did a good job
selling American goods to wartorn Europe by providing the credit purchasers
of American manufacturing needed, the Europeans rebuilt their continent
themselves. The Germans managed their recovery brilliantly thanks to
Ludwig Erhard, the German Minister of Economics, who put the theories of
Austrian economist Wilhelm Ropke into play on a quiet Sunday in June 1948.
The Sabbath was chosen intentionally, Erhard always said, so that the
French, the British and the American occupiers, whom he knew to be
enthralled by Keynesianism and state controls, could not issue
countermanding orders. On that day, Erhard introduced a new currency, the
Deutschmark, abolished controls on wages and prices and slashed personal
income tax rates. The German economy took off like a rocket, a fact that
came to be known as "a miracle". 

Refusing to be a party to "the mere leasing of socialism", Piyasheva's
program was the first to offer property rights to citizens as opposed to
leaseholds. According to the plan, the sale of retailing, catering and
service facilities to their workers was to be accomplished within a period
of time not to exceed two months. Unsold properties were immediately to be
auctioned with foreign participation - a controversial element - allowed.
New owners were to have the freedom to sell or radically change enterprises
if they saw better opportunities or usage. The program's rapid and bold
commitment to creating a showcase of capitalism in Moscow caused a
sensation. "A madwoman!", "Crazy!", "Incomprehensible!", were but a few of
the comments. 

One Muscovite who served with Mossoviet's privatization committee, Evgenny
Zhitnitsky, said Piasheva's program became bogged down in details which
were a ruse behind which hid the interests of Lyuzhkov (then head of
Mossoviet) who wanted to lease property, "Eventually, Mossoviet decided it
was necessary to acquire computers, a definite schedule of work, a location
for this work and so on and so forth. Today, I regret that our commission
became an obstacle to Piyasheva's idea. She was right, it would have been
better in our circumstances to have just done it and then worried about
details. Our hesitation cost Muscovites their opportunity to become
proprietors." 

Piyasheva's program shared one important element with that of Grigori
Yavlinsky's, i.e. selling property for rubles. Leonid Grigoriev explained,
"Yavlinsky's basic idea was to use privatization, in part, as a force to
reduce the ruble overhang (citizens' savings), not to gain the support of
factory directors as it happened." The perfectly obvious idea of putting
the nation's assets into competition for citizens' savings in order to
privatize state property was undone by shock therapy's hyperinflation.

Piyasheva noted wryly that Gaidar freed prices only for consumer goods and
services, but not for raw materials, minerals and real estate, thereby
preserving the nomenklatura's choicest bites while simultaneously robbing
the people of their savings, "Gaidar is, in fact, a Communist. As a
Communist, he can't consider private property to be of principle importance
and even said it was too early for privatization, that first financial
stabilization should be achieved. He is also influenced by the political
climate. He wants to keep his office, so he is ready to compromise. He
got used to compromises working in those publications. At the same time,
he has a good education and it must be said that he is a real professional."

The public at first was no happier with Gaidar's reforms, but by spring
shops were filled with goods, a fact so new and remarkable that it could
only prove a happy distraction. But having no rubles to purchase the
increasing array of new and shiny products, much less their own nations'
assets, disconcerted the people in a way one Zhirinovsky supporter captured
with wistful anger, "Now the Russian people are like guests at another
peoples' great fair of achievement."

Once Anatole Chubais had control of GKI and the brief for privatization,
Bill Potrin recalled the first item of business was the same as Mossoviet's
- funding. Though the WB's Ira Leiberman, "a real expert at ‘managing the
rules'", went to work, he couldn't get the job done within the context of
the Bank's bureaucracy. Neither could the eager EBRD. Eventually EU funds
were provided and after March, 1993, "The EU got funding fatigue and USAID
kicked in."

While Chubais and the Western "expert" contingent were kicking around
ideas for a national privatization program, the Committee on Foreign
Investment Gaidar had established under Leonid Grigoriev engaged Goldman
Sachs, the New York investment bank, to handle the privatization of large
enterprises. Robert Hormats, Vice President of Goldman Sachs, appeared in
the Kremlin to announce the deal, and then vanished. "Chubais put Boyko,
Hay and Vasiliev on GKI. Jeffrey Sachs was not on that mission, but Boyko
was his protégé. There was quite a debate at that time, well, it was a
real fight between Goldman Sachs and Jeffrey Sachs. Sachs versus Sachs.
Jeffrey Sachs said throw the whole thing to the market, mass privatization
would be ‘more academically interesting'," Potrin recalled. 

Goldman Sachs thought the Commission had given the firm a mandate and sent
in thirty people to mine the deal. It was a strategic mistake. Goldman
bought full page ads in the Financial Times and hired Gottlieb, a big white
shoe firm, and, Potrin recalled, "They started filing briefs on how it was
going to look. Goldman Sachs wanted to go deal by deal. Jeffrey Sachs won.
Afterwards, the Foreign Investment Commission was disbanded and Grigoriev
was sent to the World Bank to get him out of the way. The entire business
was a huge embarrassment to Goldman." 

And a huge loss for Russia. Instead of purposeful men whose very business
is to find large investors - and who could have best negotiated workable
terms to protect investors' capital and the Russian peoples' assets
utilizing concessions and leases as did Lenin during NEP - the Russians
got Sachs's kids' brigade of MBA aspirants and their computer models of a
future Slavic economic paradise that assumed voucher privatization's
implied property right would soon be equal to the real thing.

While the country was being openly looted, the Russian people and the
Supreme Soviet were rapidly loosing confidence in both the Yeltsin
government and the Gaidar reforms. Where was the privatization program?
By spring, Piyasheva accepted that her reputation as an advocate of the
market economy was what led to her appointment providing as it did cover
for Popov's true mercenary aims. Still, she clung to her official perch
and used it as a bully pulpit to push tirelessly for a national
privatization plan she had designed around vouchers and to argue against
cash auctions in which only looters, black marketeers and foreigners would
have the wherewithal to participate, "Such a program is dangerous. When
you must privatize all property, it simply can not be done through
auctions. You must distribute it among the people."

What Piyasheva proposed was to make good on Lenin's promise of "Land to
the Peasants! Factories to the workers!" using bona fide free market
economics. All of an enterprises shares would go to its employees;
approximately half of the voting shares were to be given for free to
individuals and the remaining half, which had to be paid for within a year,
to the enterprise on credit - thereby invoking a market. (To deal with
recalcitrant Red Directors, her plan offered a management buy-out scheme.)
Sale profits were to be split between the municipalities affected, social
programs and the enterprises themselves. There was to be no limit on
salaries and wages. The state was to retain selected enterprises connected
with energy, transport, communications and defense, a maximum of 20% of the
national property. Income from the energy sector was to support
unemployment insurance, retraining programs and loans to nascent and
restructuring enterprises for a period of two years while an orderly
process for privatizing the sector was developed. The state would see to
legal reform and sound finance by putting the central bank on contract to
prevent inflation and thereby attract foreign investment which was to be
wide-open. There were to be no state subsidies, no foreign loans and no
foreign aid.

"This plan would go into effect with all enterprises simultaneously and
all state property would be privatized within a year. No shares will be
left to the state," Piyasheva emphasized, "From the first stage the package
of shares is owned by the people who work in the enterprise. If they agree
to sell or if they are bankrupt, they can sell the enterprise collectively.
We plan to prevent the state from condemning property or buying bankrupt
enterprises for a period of five years, then we will see. There would be
no restrictions on the buying and selling of land and each enterprise will
be sold with the real estate it encompasses."

Chubais seized on Piasheva's program and proceeded to do it violence. The
Harvard plan incorporated two fatal changes - the government was to retain
the controlling share block and the companies themselves received no money
from the auction sales, the proceeds destined for various government
entities instead. From first step to last, the program was riddled with
perverse incentives. 

Since I'd heard that the IFC was advising GKI, I soon found their
temporary, second floor offices at the - where else? - Metropole. There,
just steps from the balcony where the legendary bass, Feodov Chaliapin, and
later, Vladimir Lenin, both held crowds assembled below in thrall, I spoke
for the first time with one Roger Gale, a cheerful Englishman in charge of
the organization's Russian effort. 

Recently returned from London, fortysomething Gale's face was alit with
enthusiasm and his remarks buoyant during our conversation. Gale, just
then, was particularly pleased about a 19th century building near the
Bolshoi Theater he and Ardy Stoutjesdijk were negotiating to buy and
restore for their organizations' headquarters. He recalled happily his
contribution to the trade decree signed in early February, which had led to
the great crowds of citizen/peddlers ["tolkuchka" or "the shove"] gathered
in Lubyanka Square and other city venues so often seen in Western
television footage that winter. The crowds had become so large and so
stinging to Russian pride, being as they were in the middle of Moscow, that
only days earlier the municipal government had signed a decree relegating
the trade to several nearby sidestreets. Gale claimed a hand in the
original legislation, which he said was the start of free trade in Russia,
by having been in the right place at the right time, "Now they say on the
streets of Moscow that it has completely got out of hand. There was an
article in 'The Economist' I saw while I was away, ten thousand people in
one spot, but I see that it has now disappeared from the streets, so they
must have-," here Gale paused, apparently at a loss as to where the ten
thousand strong garage sale had disappeared.

I told him about the municipal decree, adding that he and Stoutjesdijk
might want to rethink their real estate deal. Those crowds of thousands and
of whom Gale was so proud and for whom he claimed some measure of
responsibility were now located directly before their envisioned grand
headquarters. Flustered, Gale squawked, "I've just been calling the fellow
today that has the building, he didn't tell me this!", and paused before
recovering and saying, "but then, we've just been talking about the
possibilities."

I asked why the program named the government as the owner of all property.
Gale explained that all corporatization was intended to do was to fix
government control over an enterprise, concluding that "it's necessary as a
first step to determine exactly who owns this property. It's the state's
property, it's always been the state's property, but to privatize the
government still has to exercise control of these enterprises in order to
pass them to the private sector." 

I replied that what the advisers were agreeing to was quite dangerous in a
country where the last time the state wanted to get rid of leaseholders who
considered themselves owners, it starved and slaughtered them in the
millions. Gale didn't seem to catch my reference to collectivization. He
didn't know either that the Soviet constitution, still in effect then,
vested ownership of the national property in all the people, undivided.
Piyasheva remarked later, "I want the property to remain that of the
people, only divided. These advisers have some selfish aims. They want to
maintain governmental shares in enterprises as a guarantee of their
investment. It can be explained only in this way." 

Though public agencies mandated to turn a profit like the IFC, OPIC, and
the Russian American Enterprise Fund, are all the rage in allegedly
budget-conscious Washington, their participation is always lethal for this
very reason. The pressure to protect the taxpayer-provided investments
they make, their respective agencies' futures and their own positions leads
them to rely upon the government in question as a bulwark for their own
investment choices, which works only if the government retains at least
partial ownership. Further, it distorts these mixed aid agencies by causing
them to enhance their political power with the recipient government since
governments - not entrepreneurs, not profits, not economic success - are
their guarantor. In this way, government - even when "in partnership" with
private business - reinforce government's powers by assigning it the role
of distributing resources (foreign aid/investor guarantees/subsidized
loans), which is the same role government plays in a centrally-planned
economy. 

When Gale informed me that the small scale privatization the IFC had
undertaken in Nizhny-Novgorod involved not ownership, but lifetime leases I
objected again, but he insisted that it was understood ownership would
follow. Besides, he said, privatization was generally understood to mean
not only ownership but the operation of an enterprise under commercial
terms and concluded that, in fact, there is no difference between a
leasehold and a property right. Piyasheva responded acidly, "It makes no
difference to him, of course. It does make a difference to us."

The confusion suited the Russian government which - at the time - only
wanted to be fed, and the US foreign assistance horde which wanted the
same. Besides, the state was simply incapable of conceiving of a Russia in
which it did not control enterprise. "Chubais didn't understand a thing he
was doing, he never so much as read an article on privatization," one
Russian close to the process revealed, "Russian privatization is an example
of attempting a task without any theory or any practice. It's what we used
to call a ‘bamboo tractor', referring to what the Chinese tried to invent
in the 1950s. It's an old joke meaning something invented out of local
resources, because for whatever reasons the natives can not follow other
procedures, so they have to be very domestic in their approach."

But, in fact, GKI did proceed according to theory, a theory outlined in
Privatizing Russia, Maxim Boyko's memoirs of the process written in
collaboration with Andrei Shleifer and the University of Chicago's Robert
Vishny. This small red book is really quite precious, almost sweet in the
way that a child's fable is intended to beguile an innocent reader. The
deceptions begin on page two with the assertion that shortages in the fall
of 1991 were due to controlled prices rather than the publics' fearful
hoarding and producers awaiting the opportunities free prices would
provide. On page three, Boyko states that "parliamentary support [for
privatization] seemed unlikely" after the reformers took up their labors in
early 1992. 

Why unlikely? It was that very group of "ex-communist politicians and
industrial lobbyists" who passed the law the previous July that mandated a
national privatization program, which Chubais's program was a tardy attempt
to fulfill. Boyko doesn't mention that fact. Instead, on page five, the
author speculates, "Perhaps the best explanation lies in Chubais's
political skills, a combination of coalition-building, recognition of the
special interests of the managers and workers, compromise, and appeal to
the public." 

This guileless rumination alone is a deceit since Chubais showed none of
the skills or noble deeds Boyko credits to him. A master of intrigue,
Chubais advanced his program by backroom dealing with US taxpayers' dollars
- not by making a persuasive public case or by refuting his many and highly
vocal critics decisively. One of the early reform period's greatest
failures was that at a time when the country needed a Winston Churchill to
inspire her people, to recall publicly their many historic achievements and
to rally their spirits while summoning their toil and inventiveness for yet
another critical national task, they got instead Yegor Gaidar, a guy who
looks in danger of exploding any second, yammering incomprehensibly about
"monetary policy" to a population acutely aware that it had no money.

But theory, the "radical market reformers" had. A theory, Boyko's book
informs, which holds that "political influence over economic life was the
fundamental cause of economic inefficiency, and that the principal
objective of reform was, therefore, to depoliticize economic life." Sounds
good, but what happened with the execution? Six years and tens of billions
in aid dollars later, the Russian economy is largely in the highly
politicized hands of approximately seven people; hell's bells, one rigged
lottery six years ago could have managed that much.

"The main weakness of the theory is that it doesn't account for time,"
Leonid Grigoriev commented, "So, proceeding by the theory, old property
rights disappear overnight and new property rights appear overnight without
any legal or institutional background. So it looks like property rights,
but it's more goodwill. Property rights can not just appear because you
transfer legal rights. Property rights are much more complicated and they
work only when you have an adequate legal and institutional background.
Otherwise, it's a battlefield. No, no, property rights are a very tricky
thing. They are not just pieces of paper."

The bargain struck, which Roger Gale described accurately as "a series of
bribes to get the vested interests to go along", was an attempt by the
reformers to trade the property under their control for the industrialists'
political power. The fatal mistake was their failure to understand that
property is power. Prominent businessman Konstantin Borovoi ridiculed the
GKI program, calling it "a monument to those Americans who are building
Communism in Russia." 

By April, the increasing popularity of Piyasheva's program had become a
threat to GKI's effort and therefore it had to be undermined. Dark
predictions of workers' behavior were they to become owners began to
circulate. What would they do but demand higher wages? Why it could only
turn out like "Yugoslavian privatization" had, as if workers receiving
ownership rights in enterprises were the cause of the war in the Balkans.
Yet the truth was only Piyasheva's program could properly be called
"privatization", wrenching as it did ownership from the government
entirely, a fact Andrei Shleifer studiously avoided when attacking her as a
populist in a Wall Street Journal editorial in the spring of 1992. 

Readers of Shleifer's cunningly worded effort wouldn't have had a clue
that the privatization program Shleifer was hawking as a free market
triumph in fact institutionalized government as the controlling shareholder
of Russian enterprise. As far as his accusation of populism, Piyasheva
shrugged it off. She had no objection to workers as owners - knowing as
she did that three generations' sacrifices need not be disavowed - since
the market would sort out the best owners far more efficiently than
government selection.

After GKI's program was approved, voucher privatization gained momentum
slowly in the winter of 1993 and by summer could said to be a viable
process. A legion of young Americans - free, all white and funded -
arrived in Moscow to begin assisting those firms lucky enough to have
nailed one of the grants awarded by USAID‘s conveyor belt funding process
to execute voucher privatization; Price Waterhouse, Bain-Link, IFC,
Deloitte & Touche, KPMG, and Arthur Andersen amongst others. The ensuing
spectacle was a surreal, inversion of the agit-prop trains that
revolutionaries organized in the 1920s to the Russian countryside which
strove to educate a mostly illiterate population in the new ideology with
cinema. During Russia's second effort in this century to re-organize, the
agit-prop privatization pipeline was manned by mostly American graduate
students. 

An acquaintance, whose mother was on the privatization committee for a
township outside Moscow, described the patterns of corruption prevalent.
He named Russian businessmen in need of good connections with the
authorities, the city administration and organized bandits as the three
most actively interested parties. Shops, promising as they do opportunity
for off-the-book cash transactions, were considered the most desirable
property, but clued-in city officials demanded huge bribes to those seeking
admittance to the auctions. Other prospective owners dug up dirt on their
competitors and then blackmailed them into staying away. Others sent
bandits, "who never threaten, but simply say, ‘Wouldn't you pay me some
money?'. The victim immediately says, ‘Of course, I would.'" 

Bidding at auctions was staged, the authorities already bribed, though "it
only becomes complicated if two parties are interested. Then the city asks
them to resolve the matter between themselves. If the two are backed by
two different mafias, then the two mafias must decide as they do in Italy."
City officials were easily compromised since their looting of public funds
left highly visible evidence - expensive homes and cars obtained in a
year's time from ruble salaries equivalent to $50 a month. 

"Even in murder cases, there's a deal," my informant said, "Usually the
murderer is known to the militsia, but opening the case would open the
criminal connections. Therefore, the murder is never solved.

"The local population can do nothing. Even if you publish the fact that
an official took a bribe, he won't even notice. Never mind the next
election, they will steal enough now for a lifetime. They have the
information and connections to perpetuate themselves. For instance, all
the CPSU bosses who were so cursed, now they are on top. This local mafia
can not be defeated now. Earlier people were depending upon the Party, now
they depend upon the U.S. dollar, it's the only thing that works in our
country. I resent these people, they are marginal, but they have power
through unity. Nothing can be done. As far as the property goes, it's
gone. The people received nothing." 

The people received nothing, but they were fated to receive nothing from
the first step. In truth, voucher privatization was a swindle of massive
proportions that dwarfed the self-enrichment schemes of common village
charlatans.

(Continued in Part Two)

*******


 

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