May 14, 1998  
This Date's Issues: 2177 •2178 • 

Johnson's Russia List
#2178
14 May 1998
davidjohnson@erols.com

[Note from David Johnson:
1. Reuters: US Predicts Difficult Months Ahead for Russia.
2. Anatol Lieven: Re 2177-Margolis/High-Risk Russia.
3. Jonathan Sanders: Alfred Kokh.
4. Alexander Orlov: Elections.
5. AP: Moscow Street Collapses. (DJ: Featuring Masha Shaumian,
Fred Weir's wife.)
6. Boston Globe: David Filipov, Lebed's quest for Kremlin begins in 
Siberian frontier.
7. The Nation: Janine Wedel, The Harvard Boys Do Russia.
8. Finansovye Izvestia: Yelena Starostenkova, The Economic Slump Is Over,
But Growth Has Yet to Begin.]

********

#1
US Predicts Difficult Months Ahead for Russia 
14 May 1998

MOSCOW -- (Reuters) Russia will need careful economic management to weather
the coming months in view of the global financial crisis that has hit all
emerging markets, U.S Deputy Treasury Secretary Lawrence Summers told a
briefing on Thursday. 
But he said he had been impressed by the government's commitment. "We
were very much impressed by the degree of cohesion and commitment," he
said, referring to meetings with officials including Deputy Prime Minister
Boris Nemtsov. 
Summers was paying his first visit to Moscow since Prime Minister Sergei
Kiriyenko appointed a new government to replace that of Victor
Chernomyrdin, dismissed by President Boris Yeltsin on March 23. 
"It is an important moment of challenge, particularly in light of
developments in emerging markets in general," Summers said, referring to
the latest tremors from Asia's financial crisis that have depressed Russian
shares and kept the government's borrowing costs high. 
Summers said investors were now more skeptical about emerging markets
and were looking for greater financial transparency, improved accounting
standards and better market regulation. 
"Careful economic management is going to be required in Russia in the
period just ahead," he said.

*********

#2
Date: Thu, 14 May 1998 
From: Anatol Lieven <lieven@iiss.org.uk>
Subject: Re: 2177- Margolis/High-Risk Russia

Sir: With reference to Eric Margolis' words, "Russia is a nation of
halves: Half free-market; half communist; half modern; half primitive; half
European; half Asian etc."
It is probably only in the context of simplistic discussions concerning
Russia that anyone in the West would still dare to use "Asian" as a synonym
for primitive, barbarous, and backward, or indeed to generalise about
"Asia" at all. It is in fact an open question which is the more primitive -
Russia, or this kind of crude western stereotype. 
Yours sincerely, Anatol Lieven 

********

#3
Date: Thu, 14 May 1998 
From: Jonathan Sanders <room101@interport.net>
Subject: Alfred Kokh

Re: today's article about Kokh--rats leaving the ship. Yesterday, Mr. Kokh
sat wtih Tom Kent< International
Editor of AP (a pretty good Russian speaker) and myself at the faculty
house lunch break of the Associated
Press/Harriman Institute Conference "Capitalism Russian: Market
Reforms--Uncivil Society? He told us
categorical in several ways, several times he is returning to Moscow in
less than a week to face interogation.


Kokh related that in the recent Sergei Stankevitch extradition hearings in
Poland (three times the Polish courts refused to heed a Russian request
that former deputy Mayor, former Assistant to BNE, and former Duma member
Stankevitch) the Polish court found the official Russian documents out
order and in some cases forgeries. Kokh said, we started reforming the
economy, but the court system, the prisons and jails--we didn't think to
start changing them-if you visit them you see the same institutions that
Solzhenitsyn depicted. Kokh claimed all he was guilt of was declaring
income on his income tax....that the whole case against him was created by
media mogul enemies....in other words, this paragon of western market
reform, did what they do in your town--He blamed the press.
Well, to be specific Kokh blamed the daily press: he was accompanied by his
publisher and another man (who
may have been the books translator); the publisher--who pushed his way into
our table--boldly and loudly told everyone who could hear him--that Kokh
had written the first true insiders account of privatization and market
reforming.

Kokh says he plans to defend himself and get back to business....something
to do with brokerage, I believe,
he also said the Russian stock market will go up 40% in or by spring 99. If
you invest now, I doubt you get nabbed for insider trading.

cheers
jonathan 

*******

#4
Date: Thu, 14 May 1998
From: Alexander Orlov <orlov@glasnet.ru>
Subject: Elections

There had never been a case in Russia's history that its Head (the President
or whoever else) was elected by democratic voting successing the previous
one. Before 1917, there were tsars, and every one knows of the procedure of
changing the king. Then the Communists came, and their leaders have been
ending either by dying (Lenin, Stalin, Brezhnev etc.) or by being made to
leave the office (Khrushchev and Gorbachev).

I think it's a serious test for Russia to have a "team" or "family" left and
another one come. Perhaps it won't be the case in 2000. I was worrying
about Ukraine for Ukrainians seems "hotheads" to me (all Ukrainians, please
excuse me). But they quietly changed their President from Kravchuk to
Kuchma, and that was performed in democratic elections.

My impression was borne out by the habit of living under Soviet power. It
was difficult to understand in 1996 how could Yeltsin's team leave offices,
perks etc. to Zyuganov's team peacefully, only due to the results of
elections.

*******

#5
Moscow Street Collapses 
By Leslie Shepherd
May 14, 1998

MOSCOW (AP) -- Masha Shaumian had just left her penthouse office in central
Moscow and was driving home in the rain early Thursday when the road in
front of her started to buckle and collapse. 
A four-wheel drive vehicle 10 yards in front of her, which had been
stuck in a pothole, began sinking into the earth. 
Within three minutes, the car had disappeared -- although the driver jumped
to safety -- and the pothole had grown into a crater 75 feet deep, 120 feet
long, and 80 feet deep. 
``I thought that it was the end of the world,'' said Shaumian, public
relations director for the Russian edition of Vogue magazine, who made an
abrupt U-turn and drove home, trembling all the way. 
Water from pipes damaged by the sinking pavement began spewing into the
hole, and the front of a two-story building collapsed. Dozens of residents
were evacuated for fear of a gas explosion or more structural damage, but
no injuries were reported. 

The collapse of Bolshaya Dmitrovka Street -- just blocks from the
Kremlin -- is the latest example of how Russia's crumbling, Soviet-era
infrastructure is falling apart. 
Even Moscow -- which is more prosperous than the rest of the country and
has an ambitious building program -- can't keep up with the almost constant
need for repairs. 
In recent months, three people have boiled to death in Moscow after the
ground dissolved beneath their feet and they fell into pits of boiling
water leaking from underground pipes. 
Deputy Mayor Valery Shantsev blamed Thursday's street collapse on rain
mixing with earth that had been moved so that repairs could be made on
pipes carrying hot water to homes and offices. 
The area -- just north of the Hall of Columns, where Stalin held his
show trials, and south of the Stanislavsky Theater -- is already a beehive
of construction work, with new buildings being erected, old ones under
renovation and nearby streets torn up. 
The ground sank between two deserted buildings, eventually swallowing
two vehicles and a tractor, the Interfax news agency said. A trolley bus
still full of people was only a few seconds away from crossing that part of
the street. 
The front of a two-story building awaiting renovation collapsed, and an
apartment building opposite was evacuated after it suffered some structural
damage. Residents were taken to nearby hotels. 
One resident, Valentina Kobalyova, said she heard what she thought was
thunder just before she went to bed. 
``At 1 a.m. the police started knocking on my door and said `You have 10
minutes to collect your things,''' she said. ``We quickly went out onto the
streets and the buses were waiting there to take us to the hotel.'' 
The area was sealed off by police Thursday while the crated was being
filled by one dump truck-load after another of dirt, gravel and concrete. 

*******

#6
Boston Globe
14 May 1998
[for personal use only]
Lebed's quest for Kremlin begins in Siberian frontier 
By David Filipov


TYUKHTET, Russia - At first glance, Alexander Lebed, the paratrooper who
would one day rule Russia, looks hopelessly out of place on the stump.
Ramrod-stiff, his rugged face an emotionless mask, gripping his microphone
as if it were a hand grenade, Lebed looks more like Joe Friday than Joe
Moakley. 
But when Lebed speaks, he connects with his audience the way few Russian
politicians can in places like Tyukhtet, a forlorn Siberian frontier town
of impoverished pensioners, unemployed farmers, and lumber factory workers
who cannot remember the last time they got paid on time. 
These are people who see Soviet communism and new Russian capitalism as
equally sadistic lies imposed by bureaucrats 2,400 miles to the west in
Moscow, people for whom disenfranchisement is a way of life. But not on
this Tuesday, when Lebed braved a May blizzard to bring the people of
Tyukhtet his message: He feels their pain, and he will straighten out their
lives. 
''When I hear that the authorities can't pay salaries on time, I think
that they must be either total idiots or thieves,'' Lebed began in a voice
deep enough to shake the speaker columns. 
''Thieves, thieves!'' shouted the crowd. 

''We'll deal with them,'' Lebed boomed, a grim smile acknowledging his
listeners' approval. ''If you've had it with being without property, work,
or money, then I suggest you work with me.''
This message has won Lebed, a retired general and former Kremlin
security adviser, a lead in the race for governor of the huge,
resource-rich, cash-poor Krasnoyarsk territory to which Tyukhtet belongs.
Like a Russian version of the New Hampshire primary, the campaign has taken
on a far larger importance. 
Lebed has made it clear that he sees Krasnoyarsk as his stepping-stone
to the Kremlin. Most Russians think that if Lebed wins here, his chances of
becoming Russia's next president in the year 2000 will skyrocket. 
A power base

Krasnoyarsk, one-fourth the size of the United States, has Russia's
second-largest deposits of oil, gas, coal, and metals, as well as several
of the country's most lucrative mining concerns. That makes for a
potentially serious power base, something Lebed would need for a
presidential bid. 
The Krasnoyarsk campaign has captivated the national media and mobilized
Russia's political and business elites, forces that decided the 1996
presidential election and that will surely play a huge role in the next one. 
Lebed, riding his support in poverty-stricken small towns and cities
like Tyukhtet, won 45 percent in a first round of voting April 26. The
Kremlin-backed incumbent governor, Valery Zubov, won 35 percent and did
best in the capital, Krasnoyarsk, where living standards are somewhat
higher. A Communist candidate won 14 percent and is out of the race. Lebed
appears to have the inside track on those votes, which may decide the
outcome of the final round on May 17. 
What happens then will provide clues to one of the looming issues of
the next presidential vote: whether the Kremlin's ''party of power'' still
has the strength to pull off an upset when it needs one. 
In 1996 President Boris Yeltsin came back from single-digit approval
ratings to win reelection, thanks to the rich bankers and industrialists
who financed that bid. But the magnates are on different sides in
Krasnoyarsk. 

Dueling magnates

Boris Berezovsky, an oil and media tycoon with close ties to the Yeltsin
family, has backed Lebed's campaign. Vladimir Potanin, Berezovsky's rival
both in business and as political kingmaker, has backed Zubov. Potanin is
head of a financial empire that owns, among other things, a controlling
interest in the Norilsk Nickel works in Krasnoyarsk, one of the world's
major producers of semiprecious metals. 
''Krasnoyarsk region has become the arena of a battle of national, and
in some ways planetary, scope,'' Lebed deadpanned as he chain-smoked
Russian cigarettes during an interview. 
In opposing Lebed, Potanin has been joined by some unlikely allies.
Communist leader Gennady Zyuganov, a presumed contestant for the
presidency, has warned that a Lebed presidency would mean ''fascist rule''
for Russia and told his supporters to back Zubov - although, privately,
Communist leaders admit the voters may not listen. 
Another possible contender in the 2000 race, Moscow Mayor Yury Luzhkov,
has also tried to sap Lebed's momentum by urging voters to back Zubov or
face a dictatorship. 

It is not surprising Lebed's opponents warn of such things. In the past
he has expressed little interest in or understanding of democracy. During
the interview he was more circumspect, talking about the need to
decentralize power, which he said was disproportionately amassed in
Yeltsin's Kremlin, which he called ''a crazy system that by some
misunderstanding is called democracy.''
Lebed, a career military officer, skyrocketed to national prominence
after he placed a strong third in the 1996 presidential election and
briefly headed Yeltsin's National Security Council. But after he was fired
in October 1996, his popularity quickly plunged. Since then he has softened
his image and learned a few things about campaigning. 
The old Lebed promised a war on crime and corruption. The new Lebed
talks about the conflicts he helped end: He closed the deal in 1996 that
halted Russia's bloody campaign in separatist Chechnya, and the 14th army
he commanded in 1992 intervened to end a civil war in Moldova. 
''I don't plan to declare war on everyone,'' Lebed said. ''My speciality
over the past six years has been stopping wars.''
Now, unlike Zyuganov and Luzhkov, Lebed never talks about reversing the
results of Russia's big sell-offs of state property. ''I'm very calm about
privatization and nationalization,'' he said. ''One incautious move, and
you can start a big fight. People elect a governor not so that he start
fights, but so that he can make life better.'' 

War hero

In 1996 Lebed was the gruff Afghanistan war hero who bragged in his
memoirs of how he once lined up 11 subordinates and broke each of their
jaws with his fist to teach them a lesson. He made international headlines
with frighteningly casual slurs against Jews and Mormons. He called for
limiting visas to foreigners and denounced the import of groceries from the
West as ''food aggression.'' He vowed to deal with criminals by shooting
them. 
Now Lebed has replaced his uniform with a natty blue suit and has
ditched the military jargon and nationalist rhetoric. 
''My task as governor is to create normal rules for everyone and make
sure they are followed by everyone,'' he said. ''I very clearly understand
that the rules of the army are completely inapplicable to civilian life.
I've worked hard to minimize the general in me, to learn to compromise, to
learn to be tolerant, to learn to be patient, to learn to listen to people,
to learn to argue with them, to learn to simply talk in a civil way.''
Pointing with his trademark cigarette holder, he listed his ideas for
Krasnoyarsk region: paying off wage debts, passing laws to attract
investment, reducing the region's federal tax burden, and forcing companies
to put their profits into the region rather than Moscow. Some of Russia's
most lucrative oil and mining concerns have facilities in Krasnoyarsk
region, but they run their finances through Moscow offices. 
''All the factories are here,'' Lebed said. ''But all the taxes are
paid there.''
Lebed prefers one-liners to details. Asked how he would convince company
heads to change the tax setup, he declared: ''I will get them together, and
we will solve the problem.'' Asked if he thought his powerful financial
backers might pressure him into accepting their point of view, Lebed
barked: ''I'm like water, you can't pressure me.''
But like much of what Lebed says, the simple concept of decentralization
gets to the heart of what people in all Russia's farflung regions say is
wrong with the country. Even Zubov, Lebed's opponent, has taken up the cry.
Last weekend Zubov went on Krasnoyarsk television to demand better
treatment for his region from Moscow. In a sign of how seriously the
Kremlin takes this election, the government quickly released over $8
million in funds to pay late wages in Krasnoyarsk. 

If the reaction in Tyukhtet is any indication, the Kremlin's move is
too little, too late. 
''Moscow and Zubov want to buy us off, but they won't change the
problem,'' said Vladimir Churkin, 47, the owner of Tyukhtet's bankrupt
bakery. ''Lebed is different. He speaks in simple language that we
understand. He stopped the war in Chechnya. He can solve our problems.''

********

#7
June 1, 1998
The Nation
The Harvard Boys Do Russia
By Janine R. Wedel (jwedel@gwis2.circ.gwu.edu)
Janine R. Wedel is an anthropologist and associate research professor and
research fellow at the Institute for European, Russian and Eurasian Studies at
The George Washington University. Her new book, Collision and Collusion: The
Strange Case of Western Aid to Eastern Europe 1989-1998, will be published by
St. Martin's later this year.

After seven years of economic "reform" financed by billions of dollars
in U.S.
and other Western aid, subsidized loans and rescheduled debt, the majority of
Russian people find themselves worse off economically. The privatization drive
that was supposed to reap the fruits of the free market instead helped to
create a system of tycoon capitalism run for the benefit of a corrupt
political oligarchy that has appropriated hundreds of millions of dollars of
Western aid and plundered Russia's wealth.
The architect of privatization was former First Deputy Prime Minister
Anatoly
Chubais, a darling of the U.S. and Western financial establishments. Chubais's
drastic and corrupt stewardship made him extremely unpopular. According to The
New York Times, he "may be the most despised man in Russia."
Essential to the implementation of Chubais's policies was the enthusiastic
support of the Clinton Administration and its key representative for economic
assistance in Moscow, the Harvard Institute for International Development.
Using the prestige of Harvard's name and connections in the Administration,
H.I.I.D. officials acquired virtual carte blanche over the U.S. economic aid
program to Russia, with minimal oversight by the government agencies involved.
With this access and their close alliance with Chubais and his circle, they
allegedly profited on the side. Yet few Americans are aware of H.I.I.D.'s role
in Russian privatization, and its suspected misuse of taxpayers' funds. 
At the recent U.S.-Russian Investment Symposium at Harvard's John F.
Kennedy
School of Government, Yuri Luzhkov, the Mayor of Moscow, made what might have
seemed to many an impolite reference to his hosts. After castigating Chubais
and his monetarist policies, Luzhkov, according to a report of the event,
"singled out Harvard for the harm inflicted on the Russian economy by its
advisers, who encouraged Chubais's misguided approach to privatization and
monetarism." Luzhkov was referring to H.I.I.D. Chubais, who was delegated vast
powers over the economy by Boris Yeltsin, was ousted in Yeltsin's March purge,
but in May he was given an immensely lucrative post as head of Unified
Energy System, the
country's electricity monopoly. Some of the main actors with Harvard's Russia
project have yet to face a reckoning, but this may change if a current


investigation by the U.S. government results in prosecutions.
The activities of H.I.I.D. in Russia provide some cautionary lessons
on abuse
of trust by supposedly disinterested foreign advisers, on U.S. arrogance and
on the entire policy of support for a single Russian group of so-called
reformers. The H.I.I.D. story is a familiar one in the ongoing saga of U.S.
foreign policy disasters created by those said to be our "best and brightest."
Through the late summer and fall of 1991, as the Soviet state fell apart,
Harvard Professor Jeffrey Sachs and other Western economists participated in
meetings at a dacha outside Moscow where young, pro-Yeltsin reformers planned
Russia's economic and political future. Sachs teamed up with Yegor Gaidar,
Yeltsin's first architect of economic reform, to promote a plan of "shock
therapy" to swiftly eliminate most of the price controls and subsidies that
had underpinned life for Soviet citizens for decades. Shock therapy produced
more shock-not least, hyperinflation that hit 2,500 percent-than therapy. One
result was the evaporation of much potential investment capital: the
substantial savings of Russians. By November 1992, Gaidar was under attack for
his failed policies and was soon pushed aside. When Gaidar came under seige,
Sachs wrote a memo
to one of Gaidar's principal opponents, Ruslan Khasbulatov, Speaker of the
Supreme Soviet, then the Russian parliament, offering advice and to help
arrange Western aid and contacts in the U.S. Congress.
Enter Anatoly Chubais, a smooth, 42-year-old English-speaking would-be
capitalist who became Yeltsin's economic czar. Chubais, committed to "radical
reform," vowed to construct a market economy and sweep away the vestiges of
Communism. The U.S. Agency for International Development (U.S.A.I.D.), without
experience in the former Soviet Union, was readily persuaded to hand over the
responsibility for reshaping the Russian economy to H.I.I.D., which was
founded in 1974 to assist countries with social and economic reform.
H.I.I.D. had supporters high in the Administration. One was Lawrence
Summers,
himself a former Harvard economics professor, whom Clinton named Under
Secretary of the Treasury for International Affairs in 1993. Summers, now
Deputy Treasury Secretary, had longstanding ties to the principals of
Harvard's project in Russia and its later project in Ukraine.
Summers hired a Harvard Ph.D., David Lipton (who had been vice president of
Jeffrey D. Sachs and Associates, a consulting firm), to be Deputy Assistant
Treasury Secretary for Eastern Europe and the Former Soviet Union. After
Summers was promoted to Deputy Secretary, Lipton moved into Summers's old job,
assuming "broad responsibility" for all aspects of international economic
policy development. Lipton co-wrote numerous papers with Sachs and served with
him on consulting missions in Poland and Russia. "Jeff and David always came
[to Russia] together," said a Russian representative at the International
Monetary Fund. "They were like an inseparable couple." Sachs, who was named
director of H.I.I.D. in 1995, lobbied for and received U.S.A.I.D. grants for


the institute to work in Ukraine in 1996 and 1997.
Andrei Shleifer, a Russian-born emigre and already a tenured professor of
economics at Harvard in his early 30s, became director of H.I.I.D.'s Russia
project. Shleifer was also a protege of Summers, with whom he received at
least one foundation grant. Summers wrote a promotional blurb for Privatizing
Russia (a 1995 book co-written by Shleifer and subsidized by H.I.I.D.)
declaring that "the authors did remarkable things in Russia, and now they have
written a remarkable book." 
Another Harvard player was a former World Bank consultant named Jonathan
Hay,
a Rhodes scholar who had attended Moscow's Pushkin Institute for Russian
Language. In 1991, while still at Harvard Law School, he had become a senior
legal adviser to the G.K.I., the Russian state's new privatization committee;
the following year he was made H.I.I.D.'s general director in Moscow. The
youthful Hay assumed vast powers over contractors, policies and program
specifics; he not only controlled access to the Chubais circle but served as
its mouthpiece. 
H.I.I.D.'s first awards from U.S.A.I.D. for work in Russia came in 1992,
during the Bush Administration. Over the next four years, with the endorsement
of the Clinton Administration, the institute would be awarded $57.7 million-
all but $17.4 million without competitive bidding. For example, in June 1994
Administration officials signed a waiver that enabled H.I.I.D. to receive $20
million for its Russian legal reform program. Approving such a large sum as a
noncompetitive "amendment" to a much smaller award (the institute's original
1992 award was $2.1 million) was highly unusual, as was the citation of
"foreign policy" considerations as the reason for the waiver. Nonetheless, the
waiver was endorsed by five U.S. government agencies, including the Treasury
Department and the National Security Council, two of the leading agencies
formulating U.S. aid policy toward Russia. In addition to the millions it
received directly, H.I.I.D. helped steer and coordinate some $300 million in
U.S.A.I.D. grants to other contractors, such as the Big Six accounting firms
and the giant Burson-Marsteller P.R. firm.
As Yeltsin's Russian government took over Soviet assets in late 1991 and
early 1992, several privatization schemes were floated. The one the Supreme
Soviet passed in 1992 was structured to prevent corruption, but the program
Chubais eventually carried out instead encouraged the accumulation of property
in a few hands and opened the door to widespread corruption. It was so
controversial that Chubais ultimately had to rely largely on Yeltsin's
presidential decrees, not parliamentary approval, for implementation. Many
U.S. officials embraced this dictatorial modus operandi, and Jonathan Hay and
his associates drafted many of the decrees. As U.S.A.I.D.'s Walter Coles, an
early supporter of Chubais's privatization program, put it, "If we needed a
decree, Chubais didn't have to go through the bureaucracy."
With help from his H.I.I.D. advisers and other Westerners, Chubais and his
cronies set up a network of aid-funded "private" organizations that enabled


them to bypass legitimate government agencies and circumvent the new
parliament of the Russian Federation, the Duma. Through this network, two of
Chubais's associates, Maxim Boycko (who co-wrote Privatizing Russia with
Shleifer) and Dmitry Vasiliev, oversaw almost a third of a billion dollars in
aid money and millions more in loans from international financial
institutions.
Much of this largesse flowed through the Moscow-based Russian Privatization
Center (R.P.C.). Founded in 1992 under the direction of Chubais, who was
chairman of its board even while head of the G.K.I., and Boycko, who was
C.E.O. for most of its existence, the R.P.C. was legally a private, nonprofit,
nongovernmental organization. In fact, it was established by another Yeltsin
decree and helped carry out government policy on inflation and other
macroeconomic issues and also negotiated loans with international financial
institutions. H.I.I.D. was a founder of the R.P.C., and Andrei Shleifer served
on the board of directors. Its other members were recruited by Chubais,
according to Ira Lieberman, a senior manager in the private-sector development
department of the World Bank who helped design the R.P.C. With H.I.I.D.'s
help, the R.P.C. received some $45 million from U.S.A.I.D. and millions from
the European Union, individual European governments, Japan and other
countries, as well as loans from the World Bank ($59 million) and the European
Bank for Reconstruction and Development ($43 million), which must be repaid by
the Russian people. One result of this funding was the enrichment, political
and financial, of Chubais and his allies.
H.I.I.D. helped create several more aid-funded institutions. One was the
Federal Commission on Securities, a rough equivalent of the U.S. Securities
and Exchange Commission (S.E.C.). It too was established by presidential
decree, and it was run by Chubais protege Dmitry Vasiliev. The commission had
very limited enforcement powers and funding, but U.S.A.I.D. supplied the cash
through two Harvard-created institutions run by Hay, Vasiliev and other
members of the Harvard-Chubais coterie. 
One of these was the Institute for Law-Based Economy, funded by both the
World
Bank and U.S.A.I.D. This institute, set up to help develop a legal and
regulatory framework for markets, evolved to encompass drafting decrees for
the Russian government; it got nearly $20 million from U.S.A.I.D. Last August,
the Russian directors of I.L.B.E. were caught removing $500,000 worth of U.S.
office equipment from the organization's Moscow office; the equipment was
returned only after weeks of U.S. pressure. When auditors from U.S.A.I.D.'s
inspector general's office sought records and documents regarding I.L.B.E.
operations, the organization refused to turn them over. 
The device of setting up private organizations backed by the power of the
Yeltsin government and maintaining close ties to H.I.I.D. was a way of
insuring deniability. Shleifer, Hay and other Harvard principals, all U.S.
citizens, were "Russian" when convenient. Hay, for example, served alternately
and sometimes simultaneously as aid contractor, manager of other contractors


and representative of the Russian government. If Western donors were attacked
for funding controversial privatization practices of the state, the donors
could claim they were funding "private" organizations, even if these
organizations were controlled or strongly influenced by key state officials.
If the Chubais circle came under fire for misuse of funds, they could claim
that Americans made the decisions. Foreign donors could insist that the
Russians acted on their own.
Against the backdrop of Russia's Klondike capitalism, which they were
helping
create and Chubais and his team were supposedly regulating, the H.I.I.D.
advisers exploited their intimate ties with Chubais and the government and
were allegedly able to conduct business activities for their own
enrichment. 
According to sources close to the U.S. government's investigation, Hay used
his influence, as well as U.S.A.I.D.-financed resources, to help his
girlfriend, Elizabeth Hebert, set up a mutual fund, Pallada Asset Management,
in Russia. Pallada became the first mutual fund to be licensed by Vasiliev's
Federal Commission on Securities. Vasiliev approved Pallada ahead of Credit
Suisse First Boston and Pioneer First Voucher, much larger and more
established financial institutions.
After Pallada was set up, Hebert, Hay, Shleifer and Vasiliev looked for
ways
to continue their activities as aid funds dwindled. Using I.L.B.E. resources
and funding, they established a private consulting firm with taxpayer money.
One of the firm's first clients was Shleifer's wife, Nancy Zimmerman, who
operated a Boston-based hedge fund that traded heavily in Russian bonds.
According to Russian registration documents, Zimmerman's company set up a
Russian firm with Sergei Shishkin, the I.L.B.E. chief, as general director.
Corporate documents on file in Moscow showed that the address and phone number
of the company and the I.L.B.E. were the same.
Then there is the First Russian Specialized Depository, which holds the
records and assets of mutual fund investors. This institution, funded by a
World Bank loan, also worked to the benefit of Hay, Vasiliev, Hebert and
another associate, Julia Zagachin. According to sources close to the U.S.
government's investigation, Zagachin, an American married to a Russian, was
selected to run the depository even though she lacked the required capital.
Ostensibly, there was to be total separation between the depository and any
mutual fund using its services. But the selection of Zagachin defied this
tenet of open markets: Pallada and the depository were run by people with ties
to each other through H.I.I.D. Thus the very people who were supposed to be
the trustees of the system not only undercut the aid program's stated goal of
building independent institutions but replicated the Soviet practice of
skimming assets to benefit the nomenklatura.
Anne Williamson, a journalist who specializes in Soviet and Russian
affairs,
details these and other conflicts of interest between H.I.I.D.'s advisers and
their supposed clients-the Russian people-in her forthcoming book, How America
Built the New Russian Oligarchy. For example, in 1995, in Chubais-organized


insider auctions of prime national properties, known as loans-for-shares, the
Harvard Management Company (H.M.C.), which invests the university's endowment,
and billionaire speculator George Soros were the only foreign entities allowed
to participate. H.M.C. and Soros became significant sharehold-
ers in Novolipetsk, Russia's second-largest steel mill, and Sidanko Oil, whose
reserves exceed those of Mobil. H.M.C. and Soros also invested in Russia's
high-yielding, I.M.F.-subsidized domestic bond market.
Even more dubious, according to Williamson, was Soros's July 1997
purchase of
24 percent of Sviazinvest, the telecommunications giant, in partnership with
Uneximbank's Vladimir Potanin. It was later learned that shortly before this
purchase Soros had tided over Yeltsin's government with a backdoor loan of
hundreds of millions of dollars while the government was awaiting proceeds of
a Eurobond issue; the loan now appears to have been used by Uneximbank to
purchase Norilsk Nickel in August 1997. According to Williamson, the U.S.
assistance program in Russia was rife with such conflicts of interest
involving H.I.I.D. advisers and their U.S.A.I.D.-funded Chubais allies, H.M.C.
managers, favored Russian bankers, Soros and insider expatriates working in
Russia's nascent markets.
Despite exposure of this corruption in the Russian media (and, far more
hesitantly, in the U.S. media), the H.I.I.D.-Chubais clique remained until
recently the major instrument of U.S. economic aid policy to Russia. It even
used the high-level Gore-Chernomyrdin Commission, which helped orchestrate the
cooperation of U.S.-Russian oil deals and the Mir space station. The
commission's now-defunct Capital Markets Forum was chaired on the Russian side
by Chubais and Vasiliev, and on the U.S. side by S.E.C. chairman Arthur Levitt
Jr. and Treasury Secretary Robert Rubin. Andrei Shleifer was named special
coordinator to all four of the Capital Markets Forum's working subgroups.
Hebert, Hay's girlfriend, served on two of the subgroups, as did the
C.E.O.s
of Salomon Brothers, Merrill Lynch and other powerful Wall Street investment
houses. When The Nation contacted the S.E.C. for information about Capital
Markets, we were told to call Shleifer for comment. Shleifer, who is under
investigation by U.S.A.I.D.'s inspector general for misuse of funds, declined
to be interviewed for this article. A U.S. Treasury spokesman said Shleifer
and Hebert were appointed to Capital Markets by the Chubais group-
specifically, according to other sources, by Dmitry Vasiliev.
In fact, H.I.I.D. projects were never adequately monitored by U.S.A.I.D. In
1996, a General Accounting Office report described U.S.A.I.D.'s management and
oversight of H.I.I.D. as "lax." In early 1997, U.S.A.I.D.'s inspector general
received incriminating documents about H.I.I.D.'s activities in Russia and
began investigating. In May Shleifer and Hay lost their projects when the
agency canceled most of the $14 million still earmarked for H.I.I.D., citing
evidence that the two managers were engaged in activities for "private gain."
The men had allegedly used their positions to profit from investments in
the


Russian securities markets and other private enterprises. According to sources
close to the U.S. investigation, while advising the Russian government on
capital markets, for example, Hay and his father allegedly used inside
information to invest in Russian government bonds. Hay and Shleifer may
ultimately face criminal and/or civil prosecution. Shleifer remains a tenured
professor at Harvard, and Hay continues to work with members of the Chubais
clique in Russia. Sachs, who has stated he never invests in countries where he
advises and who is not implicated in the current U.S. government
investigation, remains head of H.I.I.D. After Yeltsin's Cabinet shakeup in
March, Chubais was moved to a new position of prominence. His role in Russia's
political-economic affairs had been tarnished by reports of personal
enrichment. Two examples:
x In February 1996, Chubais's Foundation for the Protection of Private
Property received a five-year, $2.9 million unsecured interest-free loan.
According to the pro-Yeltsin, pro-reform Izvestia, Stolichny Bank, an
institution that enjoys lines of credit from the European Bank for
Reconstruction and Development and the World Bank, made the loan in return for
a small percentage of the Sibneft oil company when it was sold at auction, and
for later control of one of the state's largest banks. Chubais defended
himself by saying such practices were common in the West, but failed to
provide any reasonable explanation for some $300,000 in 1996 income not
accounted for by his government salary.
x During Yeltsin's 1996 presidential campaign, security officials
apprehended
two close associates of Chubais as they were walking out of a main government
building with a box containing more than $500,000 in cash for Yeltsin's
campaign. According to tapes of a later meeting recorded by a member of one of
Russia's security services, Chubais and his cronies strategized about burying
evidence of any illegal transaction, while publicly claiming that any
allegations of chicanery were the work of political enemies. A protracted,
lackadaisical investigation began but was eventually dropped-more evidence of
Chubais's remarkable resilience. He remained valuable to Yeltsin largely
because of his perceived ability to deal with the West, where many still
regard him as a symbol of Russian reform.
During the five years that the Chubais clique presided over Western
economic
aid and policy in Russia, they did enormous harm. By unconditionally backing
Chubais and his associates, the Harvard operatives, their U.S. government
patrons and Western donors may have reinforced the new post-Soviet
oligarchical system. Shleifer acknowledged as much in Privatizing Russia, the
book he wrote with Chubais crony Maxim Boycko, who with his patron would later
be caught in another financial indiscretion involving taking a "veiled bribe"
in the form of advances on a book on the history of Russian privatization.
"Aid can change the political equilibrium," they said, "by explicitly helping
free-market reformers to defeat their opponents."
Richard Morningstar, U.S. aid coordinator for the former Soviet Union,
stands


by this approach: "If we hadn't been there to provide funding to Chubais,
could we have won the battle to carry out privatization? Probably not. When
you're talking about a few hundred million dollars, you're not going to change
the country, but you can provide targeted assistance to help Chubais." In
early 1996, after he was temporarily removed from high office by Yeltsin
because he represented unpopular economic policies, H.I.I.D. came to his
rescue by placing him on its U.S.A.I.D.-funded payroll, a show of loyalty that
former U.S.A.I.D. assistant administrator Thomas Dine says he supported.
Western policy-makers like Morningstar and Dine have depicted Chubais as a
selfless visionary battling reactionary forces. In the spring of 1997, Summers
called him and his associates a "dream team." With few exceptions, the U.S.
mainstream media have promulgated this view.
United States policy toward Russia requires a full-scale Congressional
investigation. The General Accounting Office did investigate H.I.I.D.'s
Russian and Ukrainian projects in 1996, but the findings were largely
suppressed by the agency's timid management. The audit team concluded, for
example, that the U.S. government exercised "favoritism" toward Harvard, but
this conclusion and the supporting documentation were removed from the final
report. Last fall Congress asked the G.A.O. to look into Eastern European aid
programs and Shleifer's role in the Gore-Chernomyrdin Commission. Such
questions need to be answered, but any serious inquiry must go beyond
individual corruption and examine how U.S. policy, using tens of millions in
taxpayer dollars, helped deform democracy and economic reform in Russia and
helped create a fat-cat oligarchy run amok. 

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#8
RIA Novosti
Finansovye Izvestia
May 14, 1998
THE ECONOMIC SLUMP IS OVER, BUT GROWTH HAS YET TO BEGIN
By Yelena STAROSTENKOVA

The Russian State Committee for Statistics has revised its
GDP data for the first quarter of 1998, noting that economic
growth is nowhere to be seen. Russian GDP volumes have totalled
591.1 billion roubles, or 100 percent of January-March 1997
levels.
Industrial-production volumes have increased by 1.3
percent on the first three months of 1997; however, the
respective 1996 industrial-production volumes exceed current
levels by 0.3 percent.
Industrial production was even curtailed somewhat early in
1998, what with March 1998 indices alone proving to be more
impressive than 12 months ago.
One gets the impression that such statistics attest to the
rather sluggish economic situation.
However, experts from the working center of economic
reforms think that the predominantly positive monthly
industrial-production dynamics (that were registered during the
last 15 months) make it possible to talk about an incipient
economic recovery.
Positive structural changes have been registered inside
most sectoral production dynamics (This implies domestic-market
sectors, first and foremost--Ed.)
The machine-building and the metal-working sector has
boosted production by 3.6 percent; the power industry has
chalked up a 1-percent production increment; the light industry


has registered a 5.5-percent production increment; the food
industry has boosted production by 12.3 percent; the medical
industry has expanded production by 12.6 percent; the
micro-biological industry has registered an 8.3-percent
production increment; and the printing industry has boosted
production by 16.9 percent.
A number of export-oriented sectors, i.e. the fuel
industry, ferrous metallurgy, the chemical and petro-chemical
industry, lag behind January-March 1997 levels to a small
extent. Non-ferrous metallurgy alone has registered a sizeable
production increment (12.3 percent).
On the whole, the "leaders" of rapidly developing sectors
have now changed hands. As of late March 1998, the list of such
leaders included non-ferrous metallurgy, the light and the food
industry, the machine-building and the metal-working sector and
the power industry. A more substantial agricultural output has
been chalked up all over Russia for the first time during the
current reforms. 
The commodity-market situation shows clearly that consumer
demand has increased by 2 percent; this is seen as a positive
trend, indeed. Apart from that, manufacturers store less
ready-made products at their respective warehouses.
In its quarterly survey, the Russian Government's working
center of economic reforms has noted some negative
developments, e.g. the continued investment slump. Overall
investment volumes (all funding sources) has declined by 7.1
percent on the January-March 1997 period.
Wage arrears and back pensions have now hit an all-time
high. As a matter of fact, total indebtedness has topped 60
billion roubles by April 1, 1998.
Real-life Russian wages have increased by an impressive
7.2 percent, what with real-life popular cash incomes
simultaneously plunging by 6.8 percent. Naturally enough, the
share of people, whose wages fall short of subsistence-minimum
levels, has increased from 21.4 percent to 21.9 percent.
Russia has also chalked up a somewhat smaller
foreign-trade surplus. However, a negative current-payments
balance has emerged for the first time over the last few years,
totalling about 1 percent of the entire Russian GDP.
Inflation still continues to decline, what with consumer
prices rising by 3.1 percent throughout the first quarter (The
respective 1997 increase was 5.4 percent--Ed.) Nonetheless,
credit rates, as well as stock-and-bond profitability, have
dwindled by a rather small margin.
Average inter-bank credit rates were 29.2 percent, with
the respective January-March 1997 rates totalling 30.4 percent.
Apart from that, the annual profitability of GKO-s (short-term
treasury notes) has reached 31.5 percent by the end of the
first quarter, surpassing similar 1997 levels (31.4 percent).
Inflation kept subsiding this past April, with local
prices rising by 8 percent (in annual terms); and the
respective March 1998 price hikes were 8 percent.
Real-life interest rates are still rather high; and money
supply doesn't increase. Consequently, one has every reason to
believe that local inflation will continue to decline.
At the same time, two money-supply components, e.g. the


Central Bank's net domestic assets and net international
reserves, have now changed. The former have soared to reach
$2.4 billion (owing to the Central Bank's foreign-currency
purchases right after the return of investors to the GKO
market).
For their own part, non-residents have sold off part of
Russian corporate stocks, thus reducing net domestic assets.
The rouble's rate against the dollar was rather stable. In
fact, the January-March exchange rate has plunged by 2.4
percent, with the respective January-March 1997 decline being 3
percent.
According to preliminary estimates that have been
submitted by the Russian Ministry of Finance, the federal
budget has scooped up revenues in the first quarter to the tune
of 57.3 billion roubles, or 9.7 percent of the nation's GDP.
This tallies with IMF statistics. In other words, such revenues
have exceeded 1997 levels (8.3 percent); however, they fall far
short of projected 1998 targets (12.4 percent).
The Russian Prime Minister has already stated his
intention to cut back on federal spending by 35-40 billion
roubles. By all looks, the Russian Government will have to axe
such spending still further, if it wants to attain its
projected budget-deficit ceiling (5 percent of the entire GDP).
The five-week period of political uncertainty has
negatively affected the rouble's standing; in fact, the
rouble's exchange rate used to totter on the lower brink of the
so-called rouble corridor all this time. (And it ought to be
mentioned in this connection that the Central Bank of Russia
establishes such a corridor every day--Ed.)
Sergei Kiriyenko has now been endorsed as this country's
prime minister, with the rouble's rate rising to reach the
rouble corridor's upper boundary. Still no one knows what has
happened to Russia's gold and foreign-currency reserves during
these five weeks. As of late March 1998, such reserves used to
total $16.9 billion.

*********