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Johnson's Russia List


February 4, 2000    
This Date's Issues: 4088 4089 4090

Johnson's Russia List
4 February 2000


EXCERPTS! [the full text with footnotes can be obtained
from Janine Wedel or David Johnson]

Rigging the US-Russian Relationship:
Harvard, Chubais, and the Transidentity Game
By Janine R. Wedel ( or

This article was originally published in the Fall 1999 issue of
Demokratizatsiya, Vol. 7, No. 4, pp. 469-500. Copyright  1999, Helen Dwight
Reid Educational Foundation.

Janine R. Wedel is the author of Collision and Collusion: The Strange Case
of Western Aid to Eastern Europe 1989-1998 (St. Martins Press, 1998). She
is an associate professor at the Graduate School of Public and
International Affairs at the University of Pittsburgh, and director of
research development at the Ridgway Center there. She would like to thank
Michael Bernstam, Lloyd Jeff Dumas, Clifford Gaddy, Anthony Gualfieri, Dan
Guttman, Paul Hammond, Irina Kuzes, Lynn Nelson, Erind Pajo, Dmitry Glinski
Vasiliev, Phil Williams, and Anne Williamson for helpful comments. Your
comments are welcomed; please send them to:

When the Soviet Union abruptly ceased to exist at the end of 1991, it
seemed that the West, particularly the United States, finally had what it
had always wanted: the chance to introduce quick, all-encompassing
political and economic reforms that would remake Russia in the West's own
image. It was a watershed event. After decades of separation and acrimony,
forged by the political circumstances of the cold war and exacerbated by
barriers of language, culture, information, and semi-closed borders, a
golden opportunity for reconciliation had arrived: Friendly, cooperative
relations could be built between East and West, and Western aid could help
Russia construct a democratic, free-market state. The two sides set out to
establish a new relationship, refocused on a positive path.

The United States offered Russia assistance and diplomatic partnership, as
part of the promise of a new relationship. Theoretically, aid from the
United States to Russia was to help nurture the bilateral relationship. Aid
was to serve as a bridge built by the representatives of each side with the
donor and recipient representatives carrying out the agendas of their
respective sides.[1]

In practice, however, representation can be problematic. The individuals
who are designated as emissaries, the constraints (or lack thereof) under
which they operate and the relations and agendas that they work out among
themselves can alter the stated purpose of the larger sides that the
emissaries, in theory, represent. The way in which the United States and
Russia intersected with each other through their respective representatives
is such a case. The group on each side that was elevated to play the role
of bridge builder and the relationships among the bridge builders would
fundamentally affect aid outcomes and help shape economic and political
results in ways that contradicted the announced goals of U.S. assistance:
to foster economic development and democratization and to nurture relations
with nations favorable and friendly to the United States.


In U.S. economic and aid relations with Russia, what I have termed the
transactorship model of organizing relations between sides evolved: a
small, collusive, informal group, made up of individuals ("transactors")[2]
from both sides who supplant the official relations and each side's stated
goals with the groups own agenda. Although the transactors may indeed share
the stated goals of the sides, they have additional goals, the pursuit of
which may, advertently or inadvertently, result in the subversion of the
sides' goals. All the while the transactors uphold an appearance of
operating on behalf of the side that brought them to the bridge. Those
individuals, who through processes on their respective sides are empowered
to officially represent their nation-state or demarcated group to the other
side and to the wider world, become the vehicles through which relations
between the two sides are organized. The transactors constitute a new
structure-a kind of informal governance that supplants and/or parallels
formal structures.

In transactorship there may be a dominant side, which claims monetary
andmoral superiority under some universal system of justice, and which
carries out a civilizing or social engineering mission. Central to the
dominant side's confidence that it can surmount the other side's cultural,
social, and political constraints is that it finds common ground with a
small like-minded group on the other side. The dominant side sees that
group as eminently suited both to help carry out the dominant side's
mission of reshaping society and to represent the other side. The dominant
side's choice of representatives is symbolic. The representatives of the
two sides form a transactor group that becomes the dominant side's means to
surmount any barriers between the two sides.

In the U.S.-Russia case, the representatives from the United States were a
group from the Harvard Institute for International Development (HIID); from
Russia they were a group of self-styled "reformers" the so-called Chubais
Clan. The Clan was named after its leader, Anatoly Chubais, the main
architect of economic change and an indispensable aide to Russian president
Boris Yeltsin since 1992. Major political-social upheaval attracts social
engineers and visionaries, carpetbaggers and middlemen. It was in that
context that the Chubais-Harvard transactors rose to the top in the
selection process on their respective sides. The Chubais-Harvard
transactors crystallized into a group that was characterized by loyalty and
trust within the group and by the unified front that it projected to those

One aspect of the transactorship mode of organizing relations, if there is
unequal power between the two sides, is that the representatives of the
dominant side may play a significant role in selecting and promoting those
who will represent the other side. In the U.S.-Russian case, the actors who
represented the Russian side emerged in part as a result of choices made by
the other (American) side, that is, the Harvard-connected representatives
of the United States whose offers of Western money, connections, and clout
were readily accepted and monopolized by the Chubais Clan early in the
East-West encounter.

The United States placed its Russian economic reform portfolio-set up to
help engineer the enormous shift from a command economy to free
markets-into the transactors' hands. In the West, a myth was created of the
"young reformers." As representatives of a new generation, the Reformers
were regarded as ideally suited to carry out the social engineering
mission. Westward- and forward-looking, they were portrayed as uniquely
enlightened and qualified to represent Russia and to carry the country down
the bright road to capitalism and prosperity. The reformers spoke English
and projected themselves as Western in dress, manners, and orientation-a
stark contrast to their Russian brethren, especially the often-vilified,
retrograde communists.

On the Russian side, the transactors took advantage of an "open historical
situation"-a period of immense change in which political and economic
structures were in flux, providing myriad possibilities, as historian Karl
Wittfogel described it.[4] Such open moments encourage a restructuring of
relationships and, possibly, a free-for-all-perhaps more accurately
described as a free-for-a-few.

On the American side, there was no comparable "open historical situation."
But the end of the cold war held the promise of a "New World Order," for
which a fresh relationship with Russia was pivotal. When the Soviet Union
broke up, a cadre of well-heeled East-West brokers who already had been
working the Central and Eastern Europe circuit readily accepted the new
challenge. They included the "econolobbyists," economists whose primary
role was public relations.[5] As the international attention to one country
undergoing reform diminished, they typically moved on to another. For
example, Harvard economist Jeffrey Sachs progressed from consulting in
Poland and countries of the former Yugoslavia to Russia, Ukraine, and

A rare, narrow, and repeatedly cited "window of opportunity" to effect
change was employed to justify special treatment given the Harvard
Institute group. In the service of Russian economic reform,
Harvard-connected high government officials circumvented standard
procedures and approved the virtual privatization of U.S. foreign policy in
the crucial area of Russian economic reform.

The Chubais-Harvard transactors leveraged U.S. support and became the
gatekeepers for hundreds of millions of dollars in Western aid. U.S.
support bolstered the Chubais Clan's standing as the chief broker with the
West and with the international financial institutions. Working as a unit,
the transactors played a decisive role in making and executing policy and
in shaping the direction and ultimate results of much of the economic aid
to Russia.

To carry out their social engineering mission, transactors often spurn
legitimate institutions such as democratically elected parliaments,
judiciary bodies, and government bureaucracies that might encumber or
resist the transactors' agendas and activities. Such flouting is possible
because funding is provided from outside the side undergoing change and is
not dependent on favorable public opinion.

Transactorship involves individuals, institutions, and groups whose status
is illusive. Nearly everything about it is ambiguous and difficult to pin
down: its sphere of activity is neither state nor private; its activities
are neither open nor conspiratorial; and the transactors are neither of
this side nor that-with some transactors representing the different sides

Part of what attracts the transactors to each other and to the mission is
their ability to shape the structure by supplanting relations under the
guise of carrying out official duties. Regardless of whether they formally
represented the donor or recipient side, the Chubais-Harvard transactors
typically acted in concert. Their main allegiance-while obtaining and using
aid in terms of public relations, policy, financial interests, and other
purposes-appears often to have been to their group. Transactors remain
semiautonomous and rather free-floating to the extent that formal
bureaucracies on neither side constrain them; they are largely above formal
accountability, at least in the short run. The illusive quality of
transactorship may, in part, explain its resiliency.

Transactorship, an informal social structure, is institutionalized somewhat
independently of specific individuals, although its persistence is entirely
dependent on the persistence of the transactor group as a whole. The
transactors pool a set of multiple identities and statuses, which the group
can use to maximize individual and group opportunities. Individual players
move around as needed, to occupy a set of roles. The group draws on the
same collection of people in myriad ways.

The U.S.-Russia transactorship story is a case study of a more general
phenomenon. The transactor group that was formed and the ways in which it
operated to take advantage of the open historical situation constitute a
specific mode of organizing relations between nations that warrants
thorough analysis. How and with whose help did the representatives of each
side accede to this role? What were the consequences of the choices that
were made? Under what circumstances and to whom, if anyone, were the
transactors accountable? What are the consequences of the transactorship
mode of organizing relations between nations in a world of increasing
globalization? To address these questions, it is important to understand in
context the U.S.-Russia case of transactorship.

The Reformer Mystique...[section not reproduced here]

The Chubais Clan...[section not reproduced here]

The Making of the Harvard-Chubais Partnership

In the late summer and fall of 1991, as the vast Soviet state was breaking
up, Harvard professor Jeffrey Sachs and other Western economists
participated in meetings at a dacha outside Moscow where young "reformers"
planned Russia's economic and political future. Boris Yeltsin, then
president of Russia within the Soviet Union and undermining Mikhail
Gorbachev, president of the Soviet Union (which would break up by year's
end), was building his team of advisers. The long-standing group of
associates around Anatoly Chubais were to figure prominently. The group's
prestigious Western contacts, which would prove crucial to its success,
distinguished it from other parties looking to have a hand in shaping
Russia's economic policy.

At the dacha, Sachs, his associate Anders Aslund (a former Swedish diplomat
affiliated with Washington think tanks), and several other Westerners
offered their services and access to Western money to the Russians. The key
Russians present were the economist Yegor Gaidar, who would become the
first "architect" of economic reform, and Chubais, who was part of Gaidar's
team and who later would take Gaidar's place as chief economic policymaker.
Individual Russians paired off with their Western partners to work on
economic policy. Chubais, with his savvy, self-starting style, found common
ground with Andrei Shleifer, a Russian-born U.S. émigré who, still in his
early thirties, had climbed to the pinnacle of academic success in America
as a tenured professor of economics at Harvard. Shleifer met Chubais
through Sachs.[25] Both Shleifer and Chubais were young, ambitious, and
eager to make economic policy history. They combined forces to plan the
privatization of Russia's state-owned enterprises.

Supporting the Sachs-Gaidar-Chubais agenda (although not present at the
dacha meetings) was yet another Harvard man, Lawrence Summers. In 1991,
Summers was named chief economist at the World Bank. In 1993, newly
inaugurated President Clinton appointed Summers under secretary of the
treasury for international affairs. In this role, Summers was directly
responsible for designing the Treasury Department's country-assistance
strategies and for the formulation and implementation of international
economic policies.[26] He had deep-rooted ties to the principals of
Harvard's Russia project. Shleifer credits Summers with inspiring him to
study economics;[27] the two received at least one foundation grant
together.[28] Summers's publicity quote for Privatizing Russia, a book
co-authored by Shleifer, declares that "[t]he authors did remarkable things
in Russia and now they have written a remarkable book."[29]

Summers had also long been close to Sachs, his colleague from Harvard.
Summers hired Sachs's protégé, David Lipton, a Harvard Ph.D. who had been
vice president of Sachs's consulting firm, to be deputy assistant secretary
of the treasury for Eastern Europe and the former Soviet Union.[30] After
Summers was promoted to deputy treasury secretary in 1995, Lipton moved
into Summers's old job, and assumed "broad responsibility" for all aspects
of international economic policy development. Lipton and Sachs published
numerous joint papers and served together on consulting missions in Poland
and Russia. "Jeff and David always came [to Russia] together," remarked
Andrei Vernikov, a Russian representative at the IMF; "They were like an
inseparable couple."[31]

Sachs helped Gaidar to promote a policy of "shock therapy," which aimed to
swiftly eliminate most of the price controls and subsidies that had
underpinned life for Soviet citizens for decades. Gaidar served as minister
of finance and the economy from November 1991 to April 1992, then as first
deputy prime minister, followed by acting prime minister to December 1992.
By November 1992, Gaidar was under severe attack for failed policies.

Chubais took over where Gaidar left off. To help him in his appointed task,
Chubais assembled a group of Westward-looking, energetic associates in
their thirties members of the Chubais Clan. From the start, the "young
reformers" together with their Harvard helpmates chose rapid, massive
privatization as their showcase reform. Harvard economist Shleifer became
director of the Harvard Institute's Russia project. Another Harvard player
was a former World Bank consultant named Jonathan Hay. In 1991, while still
at Harvard law school, Hay became a senior legal adviser to Russia's new
privatization agency, the State Property Committee (GKI).[32] The following
year, the youthful, hard-working Hay was made the Harvard Institute's
general director in Moscow.

Just what did the Harvard group and the Chubais Clan have to offer each
other? One characteristic of the transactorship mode of organizing
relations if there is a dominant side is that the main comparative
advantage and clout of the group representing the dominant side in the eyes
of the other side is the dominant groups access to and offering of
resources. In the early 1990s, many Russian elites looked to the West for
solutions. At that time, no one held more sway than Western experts,
especially those from Harvard. Yet, although prestige and "symbolic
capital" were part of Harvard's attraction, money was the magnet that
wedded the Harvard group to the Chubais Clan.

With aid money and Harvard's involvement, the Chubais Clan, which Deputy
Secretary Summers later called a "dream team," came to occupy important
positions in the Russian government.[33] Made significant by virtue of
hundreds of millions of Western dollars, Chubais was a useful figure for
Yeltsin: first as head of the GKI, beginning in November 1991, then
additionally as first deputy prime minister in 1994, and later as the
lightening rod for complaints about economic policies after the Communists
won the Russian parliament (Duma) election in December 1995. Chubais made a
comeback in 1996 as head of Yeltsin's successful reelection campaign and
was named chief of staff for the president. In March 1997, Western support
and political maneuvering catapulted Chubais to first deputy prime minister
and minister of finance. Although fired by Boris Yeltsin in March 1998,
Chubais was reappointed in June 1998 to be Yeltsin's special envoy in
charge of Russia's relations with international lending institutions.

Chubais came to be on intimate terms with many Western officials, including
the highest executives of the IMF, the World Bank, and the U.S. government,
including Deputy Treasury Secretary Summers. In a letter of April 1997
(obtained and published by Nezavisimaya Gazeta) from Summers to Chubais,
addressed "Dear Anatoly," Summers instructed Chubais on the conduct of
Russian foreign and domestic economic policy.[34]

As Russia roiled in economic ruin in July 1998, Summers entertained
Chubais, who had been appointed a month earlier to the new post, in his
home for brunch, where officials worked out the details of an emergency IMF
loan. The meeting was crucial in obtaining release of the funds, according
to a New York Times report.[35] After the crash a month later, Chubais, the
chief negotiator of the bailout, said he had "conned" from the IMF its last
$4.8 billion tranche.[36] Even this statement brought administration
officials to Mr. Chubais' defense.[37] As we now know, the IMF money
disappeared in short order.[38]

Nevertheless, Chubais remained a favored son of the Washington
establishment. In Washington in May 1999, Chubais, now chairman of the
electricity monopoly United Energy Systems, was received by Summers,
Treasury Secretary Robert Rubin, Secretary of State Madeleine Albright,
Undersecretary Strobe Talbott, and National Security Adviser Sandy Berger,
as well as top officials in the IMF and the World Bank.

Later, in August and September 1999, newspapers reported that billions of
dollars had been channeled through the Bank of New York in a major money
laundering operation,[39] and that the source of some of the money may have
been IMF loans.[40] Among those under investigation for alleged money
laundering were Anatoly Chubais and other current and former members of
Yeltsin's government.[41]

Working the American Side

On both sides in the U.S.-Russia case, the transactors, even if formally
serving their respective governments, supplanted the governments structures
and authority through the informal parallel executive structure that they
set up. On the U.S. side, this involved special treatment accorded the
Harvard Institute group through high government directives promoted by
Harvard-connected administration officials. Competitive bidding and other
standard government regulations and procedures were largely circumvented.

Without experience in Russia and under obligation to carry out
congressional spending mandates, an insecure foreign aid vehicle, the U.S.
Agency for International Development (USAID), was persuaded to largely
delegate responsibility for Americas role in reshaping the Russian economy
to the Harvard Institute group. The Harvard Institute's first award from
USAID for work in Russia came in 1992, during the Bush administration. Over
the next four years, between 1992 and 1997, with the endorsement of
influential proponents in the Clinton administration, the Institute
received $40.4 million from USAID in noncompetitive grants for work in
Russia. It was slated to receive another $17.4 million until USAID
suspended its funding in May 1997, citing allegations of misuse of
funds.[42] Approving such a large sum of money as a noncompetitive
"amendment" to a much smaller award (the Harvard Institute's original 1992
award was $2.1 million) was highly unusual, according to U.S.
officials.[43] Also highly unusual was the citing of "foreign policy"
considerations-that is, the national security of the United States-as the
reason for the waiver.

Nonetheless, the waiver was endorsed by five U.S. government agencies,
including the Department of the Treasury and the National Security Council
(NSC), two of the leading bodies making U.S. aid policy toward Russia (and
Ukraine). From Treasury, the Harvard-connected David Lipton and Lawrence
Summers supported the Harvard Institute projects. Carlos Pascual signed the
waiver on behalf of USAID in his capacity as USAID's deputy assistant
administrator of the Bureau for Europe and the New Independent States.
Pascual's support for Harvard Institute projects continued, and he was
later promoted to the NSC, with his current title of special assistant to
the president and senior director for Russian, Ukrainian, and Eurasian

The Harvard Institute enjoyed a special standing in the U.S. aid
bureaucracy and secured terms that were different from, and more
advantageous than, those for many other aid contractors. Harvard-connected
key officials were responsible for handing the Institute not only the bulk
of USAID's economic reform portfolio in Russia, but also the legal
authority to manage other contractors. In addition to receiving millions in
direct funding, the Institute helped steer and coordinate USAID's $300
million reform portfolio in grants to the Big Six accounting firms and
other companies such as the public relations firm Burson Marsteller.[45]
These awards put the Harvard Institute in the unique position of
recommending U.S. aid policies in support of market reforms while being a
chief recipient of the aid, as well as overseeing other aid contractors,
some of whom were the Harvard Institute's competitors.

Because of its special standing with USAID and other government agencies,
the Chubais-Harvard transactors were able to urge contractors to use
certain institutions and people. Jonathan Hay, the Harvard Institute's
general director and its public face in Moscow, assumed large power over
contractors, policies, and program specifics. He had easy access to the
powerful Chubais Clan, but also served as its spokesman. The Institute
sometimes spoke on behalf of the Chubais Clan, sometimes on behalf of
itself as an aid contractor, and sometimes also as a contractor managing
the projects of competitor contractors. Thus, from an American perspective,
the Harvard Institute appeared to have a conflict of interest.

Beginning in 1992, Hay served as a key link between the Chubais Clan and
the aid community at large. Donor officials, contractors, and even General
Accounting Office (GAO) investigators wanting to talk to Russian officials
responsible for aid were directed instead to Hay. Hay said he viewed his
role as "getting policy focused right and turning that into a message for
donors," which included helping Chubais and others to prepare requests to
the leadership of USAID that communicated what the Russian government
wanted to do.[46] Many consultants not connected to Harvard indicated that
Hay had some control over their purse strings and that he spoke on behalf
of the Russian government (that is, the Chubais Clan) to USAID. Thus, it is
not surprising that at a meeting that I observed among Hay, representatives
of the Clan, and senior aid-paid Western consultants, the consultants
treated Hay with considerable deference.[47]

All this meant that, in practice, and under cover of economic aid, the
United States delegated to the Harvard Institute, a private entity, foreign
policy in a crucial area that involved complicated choices. This
arrangement eventually came under scrutiny. In 1996, Congress asked the GAO
to investigate the Harvard Institute's activities in Russia and Ukraine.
The GAO found that "HIID served in an oversight role for a substantial
portion of the Russian assistance program,"[48] that the Harvard Institute
had substantial control of the U.S. assistance program,[49] and that
USAID's management and oversight over Harvard had been "lax."[50]

In 1997, as the result of another investigation, this time by USAID itself,
USAID canceled nearly $14 million of its commitments to the Harvard
Institute amid allegations that Andrei Shleifer and Jonathan Hay, the
Russia project's two principals, had "abused the trust of the United States
Government by using personal relationships . . . for private gain."[51] In
May 1997, the Harvard Institute fired the two men, citing evidence that
they had used their positions and inside knowledge as advisers to profit
from investments in the Russian securities markets and other private
enterprises. Although acknowledging that they participated in and benefited
from many of the alleged activities, Hay and Shleifer denied that the
activities constituted a conflict of interest with their official
positions. As of this writing, the men remain under criminal and/or civil
investigation by the U.S. Justice Department, according to sources close to
the investigation.[52] Tellingly, USAID Deputy Administrator Donald
Pressley acknowledged: "We had even more than usual confidence in them
[Harvard advisers], and that's one reason we are so distressed that this
has occurred."[53]

Working the Russian Side

Given the "open historical situation" and the fact that the workings of the
new system were far from established, the Russian side was much more easily
maneuvered than the American one. In the Russian context, the very concept
of "the state" may be problematic. It is easy to see how clans could
significantly shape society, politics, and the economy in what appears to
have crystallized into a "clan-state."[54]

The notion of the clan-state builds on Graham's observation that Russia is
run by rival clans.[55] Under the clan-state, individual clans, each
controlling property and resources, are so closely identified with
particular ministries or institutional segments of government that their
agendas and activities sometimes seem identical. Whereas the Chubais Clan
was closely identified with segments of government concerned with
privatization and the economy, competing clans had equivalent ties with
other government organizations, such as the "power ministries" of defense
and internal affairs, and the security services.

In the clan-state there is little separation of the clan from the state.
The same people, with the same agenda, constitute both the clan and the
relevant state authorities. The clan is at once the judge, jury, and
legislature. The clan-state has limited outside accountability, visibility,
and means of representation for those under its control. Generally, a
clan's influence can be checked or constrained only by a rival clan, as
judicial processes are often politically motivated.

Loyalty to the clan above any institution for which clan members are
formally working or with which they are affiliated is an essential
ingredient of the Russian clan system. Members of a clan are "institutional
nomads," in that their loyalty is primarily to the group, rather than to
any particular institution with which they are associated.[56] The clan
places its people in various formal and informal positions where they can
access resources to serve clan agendas; it moves members around as it
serves the clan's goals.

The Chubais Clan positioned its members in many crucial activities and
institutions. Beginning in 1992, Chubais acquired a broad portfolio,
ranging from privatization and the restructuring of enterprises, to legal
reform and the development of capital markets and a regulatory framework
for business and securities transactions.[57] A number of commissions
dealing with bankruptcies, tax arrears, and debt were set up under Chubais,
who also headed the GKI and in 1994 became first deputy prime minister. The
creation of the Commission on Economic Reform in 1995 was further
confirmation, as the Russian newspaper Kommersant Daily stated, that "a new
center of economic power is being created around First Deputy Prime
Minister Anatoly Chubais." With "very great" powers, the commission was
described as "a quasi-Council of Ministers . . . in direct competition with
the bodies that have already been vested with such powers."[58] As
sociologist Kryshtanovskaya summed it up, "Gradually, his [Chubais's] men
started controlling not just privatisation, but also the anti-trust policy,
the bankruptcy mechanism, taxes, relations with regions (including the
organisation of the gubernatorial elections) and what was called the
propaganda work in Soviet times."[59]

Further increasing their influence, the Chubais-Harvard transactors
employed an important principle of transactorship: that transactors,
limited in what they can achieve through open lobbying and parliamentary
processes, often bypass them. The transactors operated through presidential
decrees, the preferred method for many market reforms. Harvard general
director Jonathan Hay and his associates drafted some of the decrees. The
transactors bragged that after the privatization program passed Russia's
parliament, "every subsequent major regulation of privatization was
introduced by presidential decree rather than parliamentary action."[60]
Moreover, a 1996 presidential directive dictated that only Chubais (at the
time chief of staff) had the authority to decide whether presidential
decrees were ready to be signed. The directive could be circumvented only
on receiving direct instructions from the president.[61]

Despite the fact that building democracy was a stated goal of the aid
community, many aid officials embraced this dictatorial modus operandi.
They promoted presidential decrees and the circumvention of parliamentary
authority, viewing such practices as efficient means of achieving market
reform. As USAID's Walter Coles, a key American official in the
privatization and economic restructuring program in Russia, pointed out,
"If we needed a decree, Chubais didn't have to go through the bureaucracy."
Acknowledging the lack of political support for many reform measures, Coles
said, "There was no way that reformers could go to the Duma [the parliament
set up in 1993] for large amounts of money to move along reform."[62]

However, as the U.S.-Russian aid case has shown, without public support or
understanding, decrees are a very weak basis for achieving the stated goal
of economic aid, that of helping to build a market economy. Some reforms,
such as lifting price controls, could be achieved by decree. But many other
reforms advocated by the aid community, including privatization and
economic restructuring, depended on changes in law, public administration,
or mindsets and required working with the full spectrum of legislative and
market participants, not just one clan. Without support from the parties to
the reform process, reforms were likely to be subverted in the process of

As stated earlier, transactors, although they may share the overall goals
of the sides they represent, may advertently or inadvertently, subvert
those goals in pursuing their own private agendas. The Chubais-Harvard
transactors were known to block reform efforts on occasion. In particular,
the transactors obstructed reform initiatives when they originated outside
their own group or when the initiatives were perceived as conflicting with
their agendas.[64] When a USAID-funded organization run by the
Chubais-Harvard transactors did not receive the additional USAID funds it
had expected, its leaders interfered with legal reform activities
concerning title registration and mortgages that were launched by agencies
of the Russian government.[65] The transactors' interference with the
record of property put them at cross-purposes with their own philosophical
goals of fostering markets.

Flex Organizations

The Chubais-Harvard transactors took advantage of the clan-state
organization and may have helped to further develop it. With their resource
base of funding from outside, the transactors set up and ran a network of
aid-funded private organizations to promote the transactors' agendas.
Although these organizations were formally private, they often carried out
functions that ought to have been the province of the state. The
organizations helped the transactors to bypass government, bureaucracy, and
parties they found necessary to circumvent. This informal parallel
executive structure enabled by foreign funding mimicked the dual system
under communism, in which many state organizations had counterpart
Communist Party organizations that wielded the prevailing influence.

For many in the donor community, channeling money through private
organizations was ideal, because that would circumvent inefficient and
cumbersome bureaucracy. In the U.S.-Russia aid case, such organizations
enabled the transactors to bypass legitimate bodies of government, such as
ministries and branch ministries relevant to the activities being
performed, and to circumvent the democratically elected Duma. Indeed, the
transactor-run organizations frequently carried out key functions of the
state (for example, negotiating loans with the international financial
institutions, making and executing economic policy, and implementing legal
reform). This network of "private" organizations that were parallel to
state organizations facilitated the Clan's operations in multiple arenas
and served to expand its influence. USAID's Walter Coles conceded that the
organizations were "set up as a way to get around the government

The influence of transactor-run organizations is further enhanced by their
ambiguous, "flex" quality. Flex organizations play multiple and conflicting
roles and can switch their status and identity as convenient. They can
claim to be of one side or another (Russian or American). They are
constantly blending and/or traversing the spheres of state and private and
of bureaucracy and private enterprise. (Note that the uncritical
application to Russia of Western dichotomies of state and private is
analytically problematic.)[67] Flex organizations appear to be quite
compatible with the Russian context, in which control and influence, not
ownership, are pivotal.[68] The flexibility they afford lends
maneuverability to the transactors, which enhances their effectiveness and

Adding to the apparent impressiveness of the Chubais-Harvard transactor
organizations was the fact that they were run largely by Russians. What
donors often missed was that, needing a repository for funds, the model
organizational structures they laid down were created for their own
convenience. Although some of the organizations possessed the vestiges of
formal organizations, such as mission statements, boards of directors, and
bookkeeping practices that could be described in an annual report, there
was no assurance that any of this would work according to the donors'
conceptions, or that funds would be used in the way the donors had
envisioned. Finally, although the USAID-created, transactor-run
organizations had separate names and stated functions, the organizations
all were spawned, operated, and run by the Chubais-Harvard transactors and
their associates. The donors' reports discussed the organizations without
indicating their links to one another, but they were all part of the same

The donors' flagship organization was the "private," Moscow-based Russian
Privatization Center (RPC). The RPC was held up by many in the aid
community as a model for other aid-supported organizations. With the
Harvard Institute's help, the RPC received some $45 million from USAID,[69]
millions of dollars more in grants from the EU, the governments of
Japan[70] and Germany, the British Know How Fund, and "many other
governmental and non-governmental organizations," according to the RPCs
annual report.[71] The RPC also received loans both from the World Bank
($59 million) and the European Bank for Reconstruction and Development ($43
million) to be repaid by the Russian people/state.[72]

The RPC epitomized the operations of the aid-supported Chubais-Harvard
transactors. The RPC was closely tied to Harvard in multiple ways, only one
of which was characterized by a USAID-supplied explanation: that the
Harvard Institute provided management support to the RPC.[73] RPC documents
state that the Harvard Institute was both a "founder" and "Full Member of
the [Russian Privatization] Center," which is the "highest governing body
of the RPC."[74] Harvard's Andrei Shleifer served on the board of
directors, along with Anders Aslund, long connected to Sachs and Shleifer.
Aslund helped to deliver Swedish government monies to the RPC and served as
a broker between the Chubais-Harvard transactors and the governments of
Sweden and the United States. Members of the Clan appointed one another to
serve in the founding, governing, and management structure of the RPC,
including Chubais (chairman of the board), Boycko (managing director until
1 July 1996), Eduard Boure (managing director after 1 July 1996), and
Dmitry Vasiliev (deputy chairman of the board), who also served as a vice
chair of the GKI.[75] Chubais, who recruited the RPC's board members,
continued to serve on it even after Yeltsin dismissed him from government.[76]

Formally and legally the RPC was a nonprofit, nongovernmental organization.
But the "private" RPC was established by Russian presidential decree and
received foreign aid funds because it was run by the Chubais "reformers,"
who played key roles in the Russian government. Lending credibility to its
appearance as a "government" organization, the RPC's tasks included helping
to make policy on inflation and other major macroeconomic issues, as well
as negotiating loans with international financial institutions. Even more
convincing was the fact that the RPC had more control than the GKI over
some secret privatization documents and directives, according to the
Chamber of Accounts, Russia's rough equivalent of the GAO. Two RPC
officials were authorized to sign privatization decisions (Boycko and the
American Jonathan Hay).[77] So a Russian and an American-both representing
a private entity-were approving major privatization decisions on behalf of
the Russian state.

The largesse that flowed through the RPC appears to have been much greater
than the sum-total of all these figures would indicate. The RPC's chief
executive officer, Chubais Clan principal Maxim Boycko, has written that he
managed some $4 billion from the West while head of the RPC, according to
Chamber of Accounts auditor Veniamin Sokolov. The Chamber of Accounts has
attempted to investigate how some of this money was spent. A report issued
by the Chamber in May 1998 shows that the "money was not spent as
designated. Donors paid hundreds of thousands of dollars for nothing . . .
for something you can't determine."[78]

A confidential 1996 report commissioned by the State Department's
coordinator of U.S. assistance to the NIS called the Russian Privatization
Center "substantially over funded and largely 'an instrument in search of a
mission.'"[79] The report also said that the center suffers from "imperial
overstretch."[80] And there were many reports by aid-paid consultants that
the center and its network of Local Privatization Centers were used for
political purposes.[81]

Thus the transactor-created, aid-funded organizations had a chameleon like
quality: They could switch their status and identity situationally. They
were situated somewhere between state and private, between the Russian
government and Western donors, and between Western and Russian allegiance
and orientation. They were sometimes private, sometimes state, sometimes
pro-Western, sometimes pro-Russian. Whatever their predilection at a given
moment, the organizations were run by the Chubais-Harvard transactors (with
financial support from USAID through Harvard and U.S. contractors)[82] and
served as the transactors' domain and political and financial resource to
allocate in the communist tradition, through patronage networks such as
those that had virtually run the Soviet Union.


Not only can transactor-run organizations switch status and identity
according to the situation, but so can some of their individual members.
Under transactorship, one source of flexibility and influence lies in
"transidentity capabilities": the ability of a transactor to shift his
identity at will, regardless of which side originally designated him as a

Key Chubais-Harvard transactors had transidentity capabilities in that they
could switch their national identity back and forth as convenient:
sometimes as Russian representatives, sometimes as American ones,
regardless of which side they came from. The same individual could
represent the United States in one context and Russia in another, as called
for by circumstance.

A significant example is that of the Harvard Institute's Russia project
general director Jonathan Hay. Hay's transidentity was institutionalized by
policies and procedures on both sides. Formally a representative of the
United States, Hay interchangeably acted as an American and a Russian. As
an American, Hay not only acted as Harvard's chief representative in
Russia, but also exercised formal management authority over other U.S.
contractors, which the U.S. government had granted to the Harvard Institute
under a cooperative agreement. In addition to being among the most
influential foreign consultants in Russia, Hay was also appointed by
members of the Chubais Clan to be a Russian. As a Russian, Hay was
empowered to sign off on pivotal, high-level privatization decisions of the
Russian government.[84] According to a U.S. official investigating
Harvard's activities, Hay "played more Russian than American."

Another example of transidentities is that of Julia Zagachin, an associate
of Hay. Zagachin was an American citizen married to a Russian who was
chosen by Chubais Clan principal Dmitry Vasiliev, head of the Russian
Federal Securities Commission, to assume a position designated for a
Russian citizen. Zagachin was to run the First Russian Specialized
Depository, which holds the records of mutual fund investors' holdings and
was funded by a 1996 World Bank loan. As journalist Anne Williamson has
reported, the World Bank had established that the head of the depository
was to be a Russian citizen. But Vasiliev and other members of the Clan had
determined that if their associate Zagachin headed the depository, they
would retain greater control over its assets and functions, so as to evade
accountability if necessary.[85]

It was also difficult to pin down prominent consultants on the
international circuit in terms of whom they represented, whom they were
working for, who paid them, and where their ambitions lay. Harvard
economist Jeffrey Sachs is a case in point. According to journalist John
Helmer, Sachs and his associates (including David Lipton, who later went to
Treasury with Lawrence Summers) played both the Russian and the IMF sides.
During negotiations in 1992 between the IMF and the Russian government,
Sachs and associates appeared as advisers to the Russian side. However, as
Helmer writes, "they played both sides, writing secret memoranda advising
the IMF negotiators as well."[86]

Adding to the ambiguity was the question of whether Sachs was an official
adviser to the Russian government. Although he maintains that he
was[87]-and he certainly was often portrayed as such in the West-key
Russian economists as well as international officials say his primary role
was promotional[88] rather than policymaking.[89] Jean Foglizzio, the IMF's
first Moscow resident representative, was taken aback by Sachs's practice
of introducing himself as an adviser to the Russian government. As
Foglizzio put it, "[When] the prime minister [Viktor Chernomyrdin], who is
the head of government, says 'I never requested Mr. Sachs to advise me'-it
triggers an unpleasant feeling, meaning, who is he?"[90]

Sachs also offered his services as an intermediary. According to Andrei
Vernikov, a Russian representative to the IMF, and other sources, Sachs
presented himself as a power broker who could deliver Western aid. In 1992,
when Yegor Gaidar (with whom Sachs had been working) was under attack and
his future looked precarious, Sachs offered his services to Gaidar's
parliamentary opposition. In November 1992, Sachs wrote a memorandum to the
chairman of the Supreme Soviet, Ruslan Khasbulatov (whose reputation in the
West was that of a retrograde communist), offering advice, Western aid, and
contacts with the U.S. Congress. (Khasbulatov declined Sachs' help after
circulating the memo.)[91] Sachs was also adept at lobbying American
policymakers, as indicated, for example, in U.S. State Department

An associate of Sachs's and another ubiquitous transactor was Anders
Aslund. Aslund was a former Swedish envoy to Russia who later worked with
Sachs and Yegor Gaidar. Aslund appeared to represent and to speak on behalf
of American, Russian, and Swedish governments and authorities. For example,
he was seen by some Russian officials in Washington as Chubais's personal
envoy in Washington. Although a private citizen (of Sweden), he
participated in high-level, closed meetings shaping U.S. and IMF policies
toward Russia in the Departments of Treasury and State.[93] And he was
known to have played a role in Swedish aid and policy toward Russia, as
stated earlier.[94]

Aslund was also involved in brokering business activities in Russia[95] and
Ukraine.[96] He had "significant" business investments in Russia, according
to Vyacheslav Razinkin, head of the Interior Ministry's Department of
Organized Crime.[97]

In addition to (or perhaps as part of) his work for governments and the
Chubais Clan and business, Aslund was paid to do public relations. His
assignment in Ukraine, where he also was active and funded by George
Soros's Open Societies Institute, explicitly included public relations on
behalf of Ukraine, according to Soros-funded advisers who worked with
Aslund in Russia and Ukraine.[98] His effectiveness in this role no doubt
was enhanced by his affiliation with Washington think tanks, his frequent
contributions to publications such as the Washington Post and the London
Financial Times, and the fact that he was invariably presented as an
objective analyst despite the promotional roles he additionally played.

Thus, a crucial feature of the transactorship mode of organizing relations
is that it institutionalizes flexibility and affords maximum leeway for
transactors to play on their transidentities. The most effective
transactors are the ones most skilled at exploiting this flexible
structure; they have multiple roles and identities at their disposal and
are adept at working them.

Intra Transactions...[not reproduced here]

Maximizing Opportunities

The latitude that the transactorship setup permits-through flex
organizations, transidentities, and the interchangeability of one side's
transactors with those of the other-appears to encourage transactors to
extend their activities into other areas. Transactors can use the access
provided by the transactorship relationship to maximize their opportunities
in many arenas. Transactors, who have been officially designated as the
vehicles through which relations between the two sides are organized, are
not supposed to be working on behalf of their own individual interests or
those of the transactor group. But having identified a unified agenda and
significant common interests that can be best achieved by working within
the transactor group, that is precisely what the transactors do-all the
while supposedly merely acting on behalf of their respective sides.

The Chubais-Harvard transactors extended themselves into many important
spheres and institutions, not only Russian economic reform and foreign aid.
The entree, legitimacy, and resources that they had by virtue of aid
facilitated their influence in other areas, both in Russia and
internationally, and allegedly also facilitated their acquisition of
personal wealth.

The "open opportunities situation" appears to have encouraged the
transactors to take on multiple roles and identities and use them to the
advantage of individual transactors, their associates, and the group as a
whole. This stoked allegations of corruption on all sides. Members of the
Chubais Clan-the very group that Treasury Secretary Summers had called a
"dream team"-were consistently under investigation in Russia. There were
many substantiated reports of the Chubais groups using public monies for
personal enrichment.[104] The Harvard group also allegedly misused aid
funds, as stated earlier.

According to sources close to the U.S. government's investigation of the
Harvard Institute's activities, Jonathan Hay used his influence, as well as
USAID-financed resources, to help his friend Elizabeth Hebert set up
Pallada Asset Management, a mutual fund in Russia. A third transactor,
Sergei Shishkin, appeared as needed, once as head of the U.S.-funded,
Chubais-Harvard group-run Institute for Law Based Economy, sometimes as the
director of five Russian companies, among them Pallada. After U.S.
investigators noticed this, new Pallada documents materialized without
Shishkin's name.

Pallada became the first mutual fund to be licensed by Russia's Federal
Securities Commission, run by Chubais Clan principal Dmitry Vasiliev.
Vasiliev approved Pallada ahead of both Credit Suisse First Boston and
Pioneer First Voucher, much larger and more established financial
institutions.[105] Moreover, as reported in Russia, Vasiliev's commission
entrusted Pallada-without a competitive tender and with funding from the
World Banks Investment Protection Fund-with management of a government fund
to compensate victims of equities fraud. Russia's Chamber of Accounts
reported that an investigation had revealed that not a single kopeck had
been paid to a defrauded investor in the first year and a half of the funds
existence, although the fund's Western consultants had been receiving their

Another piece of the Harvard commercial puzzle involved the First Russian
Specialized Depository, discussed earlier. Hay associate Julia Zagachin 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: Both the depository and Pallada were run by people
with close ties through the Harvard group.[107] And so the very people who
were supposed to be the trustees of the system not only undercut the aid
program's stated goal of building lasting, nonaligned institutions, but
operated in a way that echoed the Soviet practice of skimming assets for
the benefit of the nomenklatura.

Another example of the Chubais-Harvard transactors in action, a story
detailed by journalist Anne Williamson, is that of Harvard's endowment
fund. Harvard's endowment managers and billionaire financier George Soros,
who were connected to the Chubais-Harvard group, were curiously the only
two foreign entities to get in on some of the most lucrative gems of
Russian industry-from which foreigners were excluded by regulation.[108] In
testimony before the House Banking Committee in September 1998, Soros was
asked how he was able to participate in the deals. He explained: "I think
that there were no foreign investors in that because we were a part of a
Russian group that bid. I would say I was part of the crony stuff that was
going on, and it was that [sic] still the old deal where the various groups
divided this place among themselves."[109]

The Chubais-Harvard transactors arranged for their associates to be well
represented on the high-level Gore-Chernomyrdin Commission, which helped to
facilitate cooperation on U.S.-Russian oil deals and the Mir Space Station.
Shleifer was named special coordinator of the Capital Markets Forum's
working groups and was the only representative to all four working groups.
In addition, Jonathan Hay's girlfriend, Elizabeth Hebert, served with CEOs
from Salomon Brothers, Merrill Lynch, and other powerful American-based
investment houses. In fall 1997, Congress asked the GAO to look into
Harvard's role in the Gore-Chernomyrdin Commission.

Operating as part of a strategic alliance enables members of the transactor
group to take advantage of openings in a free-floating environment that is
rife with lucrative opportunities as well as risk and uncertainty. With the
transactor group as the unit of decision making, this is a different unit
of economic analysis and decision making than is usually considered.
Individual players must take the interests of their fellow transactors into
account when making choices. Although individuals are often thought of as
the primary units to take advantage of economic opportunities, in the
environments in which the transactors operate, the unit of analysis of
responses to economic incentives is not necessarily the individual; it is
often the transactor group.

Because the transactors' success is grounded in mutual loyalty and trust,
and because of their shared record of activities, some of which may open
them up to allegations of corruption and to legal actions, there are
considerable incentives for the transactors to stick together. Polish
sociologist Adam Podgorecki has aptly called this phenomenon "dirty
togetherness."[110] Because an individual's well-being is dependent on the
transactor group, with which he shares a dubious record, any desertions
must be well considered.

Although Western donors were inclined to view the loyalty exhibited by the
Chubais Clan as part of its effectiveness, many Russians regarded the Clan
as a communist-style group that was adept at commandeering resources for
itself. Long-established loyalty might mean "They're effective" in the
West, but in Russia it tended to mean "They're sharing money."

Institutionalized Deniability...[not reproduced here]


Despite evidence of corruption, a dictatorial modus operandi, and lack of
Russian popular support, U.S. officials embraced the Chubais Clan as the
group that could deliver economic reform to Russia. As Shleifer and Chubais
Clan principal Boycko acknowledged in a 1995 book funded by Harvard and
published in the West, "Aid can change the political equilibrium by
explicitly helping free-market reformers to defeat their opponents. . . .
Aid helps reform not because it directly helps the economy-it is simply too
small for that-but because it helps the reformers in their political
battles." U.S. privatization aid, the "reformers" added, "has shown how to
. . . effectively . . . alter the balance of power between reformers and
their opponents."[113] In a 1997 interview, U.S. aid coordinator to the
former Soviet Union, Ambassador Richard L. Morningstar, stood 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."[114]

Indeed, in the short run, an efficient structure for affecting policy and
delivering aid may have been created. Yet one of the main problems with all
this is that it is a political payoff thinly disguised as economic aid.
Much of it feels familiar to Russians raised in the communist practice of
political control over economic decisions-the quintessence of the
(discredited) communist system. Thus this aid strategy followed in
communism's footsteps and may have helped to reinforce communism's legacies.

This point has not been lost on many Russians: That the chosen Chubais
"reformers" were visibly involved in politics and creating opportunities
for themselves opened Western aid to suspicion and skepticism about
capitalism, reform, privatization, and the West. Anger has accumulated over
economic "reforms"-many of them urged, designed, and funded by the United
States-reforms  that have left many Russians worse off than before the
breakup of the Soviet Union. Many people blame Western aid and advice,
according to a survey conducted by the U.S. Information Agency.[115]
Further, some
Russians now believe that the United States deliberately set out to destroy
their economy. Whatever the intentions of the policymakers, the
consequences of the policies and the transactorship mode of delivering them
appear to be far afield from stated goals.

The U.S.-Russian case of transactorship is probably not unique;[116]
transactionship is likely to become more frequent as a way of organizing
relations between nations. Some theorists argue that the nation-state is on
its way out.[117] Under an ideology of globalization, in which nationality
is irrelevant, and with ever closer connections to one another and less
loyalty to the nation-state, global elites often do not see themselves as
American or Brazilian as much as they see themselves as people who want to
make money, or play racquetball, or exercise power wherever they may be.
Williamson describes this as a world of "coziness among elites who consider
themselves international personages."[118]

At present, global elites and the supplanted relations of transactorship
operate in a world with laws and assumptions about the nature of
representation and of nation-states. For example, assumptions about
representation, grounded in national and international law, are based on
the idea that an individual can formally represent either one nation-state
or another, but not both, and that the representatives act on behalf of the
nation they represent.

In addition, foreign aid may call into question the notion of
representation. In the U.S. Russia case, aid, which by definition comes
from outside, undermined democratic processes and contravened a crucial
principle of Western governance: parliamentarianism. Even on donor side,
the structure of transactorship encouraged the thwarting of regulations and
oversight that might have prevented some of the alleged abuses.

The transactorship model raises a number of public policy questions: What
are the implications of a state of affairs in which the "choice" of who
represents one side is shaped to a significant degree by self-selected
representatives of the other? What are the consequences of the same actor
representing multiple sides? Where is the accountability?

As globalization increases, people may well be encouraged to perform a
wider array of functions. The transactorship mode of organizing relations
between nations puts people in a number of different roles and provides
many opportunities for derailing good relations. As globalization moves
forward, awareness of the conflicts of interest inherent in transactorship
relations is warranted. Public policy should recognize that many
"representatives" will not serve the interests of those they are supposedly
representing. To ensure representation and accountability by citizens, it
may be desirable to pay close attention to and monitor the nature of roles,
relationships, and institutional arrangements.

[footnotes not reproduced here]

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