December 1, 1998

A Recipe for Disaster

Andrew Nagorski

By putting too much faith in one team of reformers, America only added to Russia's economic mess

Even seven years after the fall of the "Evil Empire," Russia has continued to supply the world with plenty of bad guys. Unreconstructed communists, neo- fascists and gangster hit men aren't difficult to come by in Moscow. It's the good guys who are hard to find. That's a lesson Washington hasn't quite learned.

In her new book Collision and Collusion: The Strange Case of Western Aid to Eastern Europe 1989-1998, George Washington University anthropologist Janine Wedel argues that the Clinton administration was determined to cast Boris Yeltsin's young reformers as the good guys. This, she says, unwittingly contributed to Russia's current economic mess. The result, Wedel contends, is that American aid to Russia has proved to be "a disaster from beginning to end."

Unfortunately, she's largely right. Washington's most significant blunder was a failure to recognize that Yeltsin's reformers were introducing a system that only worsened endemic corruption, crime and cynicism. Nor did the Clinton administration heed warnings that some of Yeltsin's team were themselves profiting from the reform process.

>To American officials, Yeltsin's chief good guy was Anatoly Chubais, from 1992 until earlier this year the senior Russian official in charge of privatization and reforms. "Chubais and his protégés are the Adam Smiths of Russian reform economics," Thomas Dine, the assistant administrator of the U.S. Agency for International Development (AID), argued in 1995.

Financed by AID to the tune of $57.7 million between 1992 and 1997, the Harvard Institute for International Development ran a Moscow operation, the Harvard Project, to support reformers. The Harvard team and Chubais called the shots on how large infusions of aid were spent. Harvard economist Jeffrey Sachs and Chubais advocated "shock therapy" for Russia--the elimination of most price controls and speedy privatization of state companies.

But the recipe didn't work very well. The freeing of prices initially led to hyperinflation, wiping out the savings of average Russians. And privatization resulted mostly in what many Russians called the "great grab"--bankers, managers and outright criminal gangs taking control of the country's most important assets for prices well under market value.

The Yeltsin team, meanwhile, may not have been working solely for the public good. According to The New York Times, the CIA repeatedly tried to warn Vice President Al Gore and other officials about corruption charges against former prime minister Viktor Chernomyrdin, Chubais and other key Yeltsin aides. The agency's warnings, said the Times, were ignored.

Last year, AID cut off funding for the Harvard Project after two of its directors were accused of using their positions "for private gain"-- charges they both denied. And Chubais and four aides were embarrassed last year by the revelation that they received about $90,000 each from a Swiss company with interests in Russia, purportedly in the form of an advance for a book about privatization.

The U.S. role in Russia's economic collapse shouldn't be overblown. There's little point in asking "Who lost Russia?" Russia wasn't America's to lose, and Western economic assistance plays only a limited role in the country's economy: Russia would, in all likelihood, still be a mess today even if Washington had found a way to direct its money in a sensible, clearly accountable manner. Still, Russia's people (and America's taxpayers) would surely be happier if all of those billions of U.S. dollars had done just a little more good.

No longer available on the web at Johnson's Russia List, #2497, December 1, 1998

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