SCHOLARLY PRESENTATIONS
London Business School
Conference on Comparative Transitions
June 12, 2004.
TRANSACTORSHIP IN TRANSITION: The Shifting World of Aid and Advice in the U.S.-Russia Relationship
Janine Wedeli
In the study of foreign policy, aid, development, and relations among nations, little attention is paid to how policies are implemented and to the intermediaries who serve as links among parties. Much more attention typically is focused on policies and end results. Yet the means of implementation and organizing a relationship can crucially affect outcomes; the means can even shape the ends. And intermediaries or "cultural brokers"1 can play a huge and underappreciated role in relations among nations, international organizations, and other entities. Brokers not only bridge gaps between cultures, but they also can serve as missionaries, spreading one tradition to another.2 With regard to relations among nations, brokers that bridge sides can facilitate, frustrate, or even subvert relationship-building.
The U.S.-Russia relationship that developed during the 1990s in the service of U.S. economic policy and aid to Russia is an example of how relationships can be undermined. After the breakup of the Soviet Union in 1991, the United States had an opportunity to build a positive political and economic relationship with the new Russia. Instead, bad policy, ill-conceived strategy, and poor implementation managed to turn one of the most promising rapprochements of the last century into a debacle. Indeed, much of the U.S. approach to Russia in the 1990s is a case study in how not to do foreign aid and international relationship-building.
The policy prescriptions proffered by the United States and the international financial institutions to rebuild the Russian economy -- in which radical privatization and marketization were applied in a cold-turkey manner to a society with no recent experience of either -- are well documented.3 But the intermediaries, networks, and structures -- formal and informal -- through which advice and aid were given are much less familiar. Yet, as I argue in this paper, these vitally shaped the course of Russian economic reform and U.S.-Russia relations in the post-Cold-War period.
In the U.S.-Russia case, trans-state brokers played a decisive role in foreign and international relations. The Americans built on the tradition of prominent economists from the developed world who served as brokers of information, influence, and money to the "developing" world, not only purveyors of advice. Their Russian counterparts built on the conventional role of compradors -- local practitioners who serve foreign interests by facilitating the outsiders= entry into the local economy. Together, the trans-state brokers developed a modus operandi of "transactorship," a form of collusion between the representatives of parties on opposite sides.
Transactorship is a mode of organizing relations between parties (subnational groups, nations and/or international organizations) that have been separated -- culturally, societally, and perhaps geographically. In transactorship, the separated parties have representatives I call "transactors." Their job is to build bridges between parties.
"Transactors" are players in a small, informal group who work together for mutual gain, while formally representing different parties. Even though transactors may genuinely share the stated goals of the parties they represent (and they uphold at least the pretext of that representation in public), they develop their own additional goals and ways of operating for their own benefit. The additional goals of transactors, advertently or inadvertently, may undermine or subordinate the aims of the parties for whom they came together to begin with and on whose behalf they ostensibly act. The behavior of members of such groups is marked by extreme flexibility and a readiness to exchange roles, even to the extent of representing parties other than the ones that first designated them as representatives or to which they are formally attached.
In the case of U.S. economic aid to Russia, two circles came together to form a transactor group: The "Harvard Group" representing the United States and the "Chubais Clan" representing Russia. The Harvard Group, which became the major beneficiary of U.S. economic aid to Russia in the 1990s, refers to a circle of people affiliated with Harvard University and the Harvard Institute for International Development (HIID) -- hereafter the "Harvard Institute" -- and some of their associates. Harvard professor of economics Andrei Shleifer served as project director of the Harvard Institute’s Russia project. Legal expert Jonathan Hay was on-site general director in Moscow. Another key Harvard person was professor of economics Jeffrey Sachs.
In the late 1980s, members of the Harvard Group began to develop close contacts with Anatoly Chubais and his circle of associates, which came to be known in Russia as the "St. Petersburg" or "Chubais" Clan. A "clan," as Russian social scientists and journalists use the term, is an informal group of elites that places its members strategically to promote their mutual political and economic interests. 4 The Harvard and Chubais groups had much in common, including devotion to economic reform, a track record of advocating particular reform ideas and/or programs, and a commitment to seeing themselves emerge as central players in Russian reform processes. They also shared considerable energy, ambition, and youth; most were in their 30s.
Together, the Harvard-Chubais transactors seized a moment of social, political, and economic flux to become the designated representatives of their respective parties. Each side worked to enhance the stature of the other side and to provide entr’e for it. The Chubais Clan sought the fruits of the Western, moneyed world; and the Harvard Group offered access to it. In turn and in time, the Russians offered connections that enabled access to the financial spoils of an unraveling superpower. The interests of the Harvard Group and those of the Chubais Clan -- influence, prestige, and money -- became as one.
The Harvard consultants distinguished themselves from their potential American competitors, including other consultants working in Russia, by their Harvard aura of prestige and access to top officials in the Clinton administration (many of them Harvard-connected) and thus to considerable foreign aid monies. The Harvard Group’s social-professional connections aided their ability to speak as if they embodied the authority and legitimacy of the United States. The Chubais Clan’s access to Harvard’s prominent and powerful networks in the West helped the Clan gain the upper hand vis-a-vis other groups, including reform-minded ones, in the struggle for power. Chubais became an indispensable aide to Russian President Boris Yeltsin; members of the Clan came to occupy key positions in and out of official government.
Working together, the Harvard-Chubais partners carried out radical economic "reforms" in Russia. They presided over hundreds of millions of dollars in loans from the international financial institutions and aid from Western governments.
As the era of reform came to a close (made undeniable by the collapse of the Russian ruble in August 1998), members of the Harvard-Chubais team faced legal problems for alleged misconduct. In the fall of 2000, the U.S. government filed a $120 million lawsuit against Harvard University, the Harvard project's two leaders (Andrei Shleifer and Jonathan Hay), and their wives.5
The lawsuit alleges that Harvard defrauded the U.S. government of $40 million and that its two principals "were using their positions, inside information and influence, as well as USAID-funded resources, to advance their own personal business interests and investments and those of their wives and friends."6 Those interests allegedly entailed investments in many of the same areas in which the Harvard advisers were being paid to provide "impartial" advice to help develop the Russian economy and a legal and regulatory framework for it. The investments, which the defendants do not deny, included securities, equities, oil and aluminum companies, real estate, and mutual funds.7 Harvard also allegedly defrauded an American mutual funds firm working in Russia.8
Further, the Harvard-Chubais associates facilitated investments on behalf of the endowments of Ivy-League universities. Hedge fund manager Nancy Zimmerman, wife of Harvard’s Shleifer, managed a portion of the Yale University endowment.9 Her investment company traded in short-term Russian government bonds (GKOs) and repatriated the profits to the United States beyond the allowable limits set by Russian law. Zimmerman was ideally placed to time these highly lucrative transactions because her husband advised the Russian official making decisions regarding the government’s backing of GKOs.10 Meanwhile, Harvard’s endowment, the Harvard Management Company, benefitted from some of the most valuable privatization deals to which it gained access through Chubais-Harvard networks. The deals were officially closed to foreign investors.11
The end result of all this was that the foreign policy and aid process was modified, to its detriment, by relationships formed between the donor and recipient representatives, by their joint agendas and interests, and by their ability to influence the policies, laws, contracts, and media of their respective sides. Ultimately, I argue, the activities of Harvard-Chubais transactors undermined the stated objectives of U.S. aid to Russia.
The Emergence of Transactorship in the U.S.-Russia Case
As the vast Soviet state was collapsing in late 1991, Harvard professors Jeffrey Sachs, Andrei Shleifer, and others participated in meetings at a dacha outside Moscow. There, young would-be Russian "Reformers" were devising a blueprint for economic and political change. Boris Yeltsin, then president of what was still Soviet Russia, was putting together his team of economic advisers.
Chief among them were Yegor Gaidar, the first "architect" of economic reform in post-communist Russia, and Anatoly Chubais, who was part of Gaidar’s team and later would replace him as the "economic reform czar." A long-standing group of associates, centered around Chubais and mostly from St. Petersburg, his hometown, was to figure prominently in Chubais’s team.
Core members of the Clan were originally brought together through university and club activities in the mid-1980s in what was then Leningrad. Chubais was an active participant in ECO (Economics and Organization of Industrial Production), a club, and its namesake magazine, which was published by the Russian Academy of Sciences. According to Leonid Bazilevich, vice president of the club, who was Chubais’s professor and acquainted with several members of the Clan, members were "very intensively connected" with one another at that time and "well-oriented to Western economic models." Later, in the Gorbachev years of glasnost, some members of the Clan became involved in explicitly political activities and established an informal club that called itself Reforma. The club organized meetings that sometimes attracted hundreds of people. It put together lists of candidates and platforms for local and national elections and drafted legislation. Chubais et al established contact with St. Petersburg mayor Anatoly Sobchak and assumed key positions in Sobchak’s administration. Although later, in Moscow, the Chubais Clan took on some powerful members who were not from their hometown (notably Maxim Boycko from Moscow, whom Shleifer says he introduced to the Chubais circle), all operated as part of a strategic alliance.12
Made significant by virtue of hundreds of millions of Western dollars, Chubais was a useful figure for Yeltsin: first, beginning in November 1991, as head of Russia’s new privatization agency, the State Property Committee, then additionally as first deputy prime minister in 1994. He continued as a key Yeltsin deputy throughout the 1990s, both in and out of government. In March 1997, Western support and political maneuvering catapulted him to first deputy prime minister and minister of finance. Although fired by 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.
Across the Atlantic, with high hopes for a favorable relationship with its Cold-War adversary, the U.S. Congress allocated funds through the U.S. Agency for International Development, or USAID, the U.S. government’s foreign aid organization, to promote economic reform in Russia. Maintaining that Russian economic reform was so important, and the "window of opportunity" to effect change so narrow, Harvard-connected officials in the Clinton administration saw to it that the Harvard Institute was granted special treatment.
The Harvard Institute secured funding without the usual competitive bidding, and from 1992 to 1997, managed virtually the entire Russian economic aid portfolio -- more than $350 million -- in addition to the $40 million it received directly. The portfolio encompassed privatization, legal reform, capital markets and the development of a Russian securities and exchange commission. In 1996, the U.S. General Accounting Office (GAO), the governmental body that monitors how appropriated monies are spent, found that Harvard had "substantial control of the U.S. assistance program."13 Harvard gained authority over other contractors, some of whom were its competitors, and recommended U.S. policies while being itself a chief recipient of that aid. The GAO confirmed that the Harvard Institute "served in an oversight role for a substantial portion of the Russian assistance program."14
As the first head of the State Property Committee beginning in November 1991, Chubais, together with his team of St. Petersburg and Harvard associates, drew up plans to privatize some 15,000 state enterprises. The team designed and coordinated the signature mass-voucher privatization program, launched in November 1992, in which citizens were given shares, or "vouchers," in state-owned enterprises. USAID spent $58 million to underwrite the privatization program, including its design, implementation, and promotion.15 The Harvard Group was centrally involved in these tasks and mobilized multiple sponsorships for its work. Project documents of Jeffrey D. Sachs and Associates submitted to the Finnish government (one of several sources lending support to the Harvard-Chubais team) state that "The [Sachs] team has had an extensive interaction with the [Russian] State Committee on Privatization and has helped in the design of the mass privatization program legislation recently enacted by Parliament."16 The documents further state that Andrei Shleifer "has played a central role in the formulation of the Russian privatization program…"17
Providing invaluable support to the Harvard-Chubais transactors was Lawrence Summers, earlier a member of the Harvard faculty and chief economist at the World Bank from 1991 to 1993 (and now president of Harvard). He had strong ties to the Harvard team, notably to Shleifer. Summers would play a principal role in designing U.S. and international economic policies at the U.S. Treasury, where he would occupy the posts of undersecretary, deputy secretary and, finally, secretary through much of the 1990s.
The Chubais team was advertised by its promoters as the "Young Reformers." The Western media built up their mystique and overlooked other reform-minded groups in Russia. Donors tended to identify Russians as reformers not only on the basis of their commitment to the free market but because they possessed personal attributes to which the Westerners responded favorably: proficiency in English; a Western look; facility in the vernacular of "markets," "reform" and "democracy;" and name recognition by well-credentialed fellow Westerners. Members of the Chubais team possessed all of these qualities. By their sponsors in the West, they were depicted as enlightened and uniquely qualified to represent Russia and usher it down the road to capitalism and prosperity. Summers dubbed them a "dream team," which, given his influence, was a particularly beneficial endorsement.
In Russia, however, the Chubais team’s primary source of clout was neither ideology nor even reform strategy, but precisely its standing with and ability to get resources from the West. As the Russian sociologist Olga Kryshtanovskaya explained, "Chubais has what no other elite group has, which is the support of the top political quarters in the West, above all the USA, the World Bank and the IMF, and consequently, control over the money flow from the West to Russia. In this way, a small group of young educated reformers led by Anatoly Chubais transformed itself into the most powerful elite clan of Russia in the past five years."18
U.S. support proved decisive in this transformation. The administration’s "dream team" seal of approval bolstered the Clan’s standing as Russia’s chief brokers with the West and international financial institutions, and as the legitimate representative of Russia.
Old and New Fields of Activity
The Harvard team followed in the footsteps of a long tradition of American economists from prestigious schools providing expertise to countries less rich than their own. These nonstate actors -- whether with the support of their governments or international financial institutions, or as ‘independent" agents (albeit typically promoting the policies of the former) -- often played pivotal roles as brokers.19
The collapse of centralized economies in Central and Eastern Europe and the former Soviet Union provided new challenges and a new theater of operation for economic advice-givers. Jet-setting high-profile "econolobbyists"20 moved from one transitional country to another promoting privatization, shock therapy, and other prescriptions. In the West, the economists wrote op-ed pieces, delivered speeches calling for aid, and thereby helped define the "reform" agenda. They were perceived as able to effect market reforms in the East. In the East, the economists’ value was seen in their ability to deliver Western money and connections and to help policymakers "sell" controversial reforms in the transitional countries.
The discrepant ways in which the outside advisers were perceived and valued in donor contexts, as compared with recipient contexts, recalled the advisers' predecessors working in developing countries. What differed was the new venue of operation made possible by the collapse of communist governments, the novel opportunities that this provided for brokers, and the high profile of the "transition" that the reforms were supposed to expedite.
Another development was also at work. Even before the revolutions of 1989 and the end of the Cold-War world, new fields of activity for nonstate actors had begun to open up. The "retreat of the state" charted by Strange21 -- in which nonstate actors with economic and political power have become increasingly important forces in international relations, and the fragmentation of power outlined by Mathews,22 set in action a whole new world of opportunities for brokers, even as they helped shape the state and relations among states.
These opportunities encourage actors to play multiple and sometimes conflicting roles: to work for several organizations -- state and/or private, engage a variety of sponsors, and pursue their own business interests -- all at the same time. As Dezalay and Garth have observed: "The international arena... multiplies the possibilities for double strategies of smugglers, compradors, and brokers, since there are many potential uncertainties and mistranslations surrounding individual positions."23 When more leeway is afforded to individuals, many ethical choices are made by them, rather than for them, as Strange has noted.24 Brokers display a range of activities and ethical choices, with transactorship at one end of a continuum of double strategies and multiplicity and conflictedness of roles.
The increased delegation of authority by states to nonstate actors increases the likelihood of activities that further the interests of the actors, rather than the public interest. This delegation makes the issue of who represents the state -- and any multiple and conflicting roles that its representatives might play -- all the more important.
Features of Transactorship and the U.S.-Russia case
Below I outline several organizational features of the transactorship mode of organizing relationships among parties. Together, these features make transactors more effective in achieving their goals than mere peripatetic and energetic brokers playing multiple roles.
One, Forming an Exclusive Group Made up of Members from Different Parties.
Transactors form an exclusive group comprised of members from different sides. The transactor group sees to it that their sides assign to it broad authority. The transactors create their own alternative structure, including informal channels of information and action that bar other potential brokers from participation. This structure operates on each side, as well as to bridge the sides. The alternative structure both uses and supplants the formal institutions, organizations, and processes of the parties that the transactors represent. Transactors often bypass legitimate institutions such as legislative and judiciary bodies and bureaucracies that might encumber or resist their activities. While selectively spurning the organizations and processes of their parties, they create their own to short-circuit existing ones.
The Harvard Group and the Chubais Clan skillfully skirted governmental bodies that might have stood in their path, created new bodies, and secured influence on their respective sides. The U.S. delegation of its Russia economic assistance portfolio to the Harvard Institute built on a tradition in which much work of government (including development assistance) is outsourced to private contractors. Yet, that the United States put one of its most important foreign policy initiatives at the time -- Russian economic reform -- in the hands of a private entity was a departure from established practice, especially in the arena of foreign assistance. (That portfolio involved "the conduct of foreign relations and the determination of foreign policy," which, according to regulations issued by the U.S. Office of Management and Budget, is an "inherently governmental function."25 Such functions are to be carried out by government officials, not contractors.) Harvard largely bypassed the usual public bidding process for foreign aid contracts through waivers to competition endorsed by Harvard associates at the highest levels of the Clinton administration. This was highly unusual, according to U.S. government procurement officers and GAO officials, as was the justification given for the waivers -- "foreign policy considerations" -- that granted Harvard preferential treatment.26
Meanwhile, in the political, legal, administrative, economic, and social flux that accompanied the collapse of communism in Russia, clans had wide latitude and were subject to few restraints. The Chubais Clan acquired broad powers, ostensibly to carry out the complex tasks of economic reform, and controlled the ministries responsible for privatization and the economy. Thus both the Russian and U.S. contexts, albeit by virtue of different processes and to differing degrees, invited actors to monopolize resources and influence and thereby set the conditions for the emergence of transactorship.
To monopolize resources, transactors exclude other potential brokers outside their group, while promoting their own people on each side. Transactors act as gatekeepers for each other. Each side’s transactors become the funnels through which the other side’s transactors gain access to its side. A key source of legitimacy and clout of each side's transactors is their access to key people on the other side, whose reputations they help promote on their side. The Chubais Clan was Harvard’s avenue to Russia and crucial to its ability to claim clout and contacts with the Russian government; the Clan served both as Harvard’s entr’e to Russia and Russian powerbrokers and to U.S. officials more generally. In turn, Harvard acted as the Clan’s entr’e to the eyes and ears of U.S. policymakers and funds.
Two, Shifting and Multiple Agency.
Another feature of transactorship is shifting and multiple agency, or representation.27 In the U.S.-Russia case, I observed two manifestations of shifting and multiple agency: flex organizing and transidentity capability.
One manifestation of shifting and multiple agency, flex organizing, occurs at the organizational level. "Flex organizations" -- so-called in recognition of their impressively chameleon-like, multipurpose character -- have the ability to shift their status or identity. These organizations were a key part of the Harvard-Chubais transactors’ informal alternative structure.
The transactors set up and ran a network of aid-funded organizations, the ostensible purpose of which was to conduct economic reform.28
Flex organizations exhibit these traits: (1) empowerment of the organization by a group that uses the organization to further the group’s strategic goals; (2) the ability to shift agency -- the flexibility after which they are named; and (3) the propensity to bypass otherwise relevant institutions, notably those of government.
With respect to the first trait, flex organizations are propelled by informal groups whose influence derives in significant part from actors' ability to move back and forth between state and private spheres and to attain advantages in one sphere for use in another. Whatever the specifics of their legal standing in a particular country, flex organizations depend on the coercive powers of the state and relationships with state officials who often play dual roles, empowering both state and private organizations.
The donors’ flagship organization was the Moscow-based Russian Privatization Center. Chubais served as chairman of the board; Harvard's Shleifer served on the board of directors. The Center was supported by the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, the United States, the European Union, Germany, Japan, and others.
With regard to the second trait of flex organizations -- the ability to shift agency -- the Center could switch its identity and status situationally. Legally it was a nonprofit nongovernmental organization (NGO). Yet it was established by a Russian presidential decree and helped carry out government policy on inflation and other macroeconomic issues. It negotiated with and received loans from the international financial institutions on behalf of the Russian government, when typically these institutions lend only to governments.
With respect to the third trait of flex organizations -- the bypassing of otherwise relevant institutions -- the Center circumvented the democratically elected parliament and the Russian government agency formally responsible for privatization. Indeed, according to documents provided by Russi’s Chamber of Accounts, the Center wielded more control over certain privatization directives than did the government agency.29 Two Center officials, its CEO (Maxim Boycko) from the Chubais Clan and Harvard’s Moscow representative, Jonathan Hay, were authorized by Russians to sign off on high-level privatization decisions of the Russian government. Thus did a Russian and an American, both of them officially working for a private entity, come to act as representatives of the Russian state.
Transidentity capability, another manifestation of shifting and multiple agency, operates at the individual level. It is the ability of an individual transactor, based on official (or apparently official) authorization from two or more parties, to change whom he represents, regardless of which party originally designated him as its representative.30 The most effective and influential transactors are extremely adept at working their multiple roles.
Key Harvard-Chubais transactors could switch the side they represented back and forth as useful to them.31 Harvard director Hay at various times acted as a representative of the United States (with formal anagement authority over other U.S. contractors), of Russia (in approving state privatization decisions), and of his girlfriend’s (now wife’s) private interests.
It was (and is) difficult to glean exactly whom, at any given time, prominent consultants on the international circuit represented, for whom they actually worked, all sources of funds, and where their loyalties and ambitions lay. Jeffrey Sachs, who served as director of the Harvard Institute from 1995 to 1999 and conducted advisory projects in the region (sometimes under the umbrella of Jeffrey D. Sachs and Associates, Inc.), provides a case in point. According to journalist John Helmer, Sachs played both the Russian and the IMF sides of the street. During negotiations in 1992 between the IMF and the Russian government, for example, Sachs and his associates appeared as advisers to the Russian side. However, Helmer writes that "they played both sides, writing secret memoranda advising the IMF negotiators as well."
Compounding this ambiguity is the question of whether Sachs was an official adviser to the Russian government. Although he maintains that he was, key Russian economists as well as international officials cast doubts on his claim. Jean Foglizzo, the IMF’s first Moscow resident representative, was also taken aback by Sachs’ practice of introducing himself as an adviser to the Russian government. As Foglizzo 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?"
Another ubiquitous transactor was Anders ?slund, a former Swedish envoy to Russia who worked with Sachs and Gaidar. Aslund seemed at once to represent and speak on behalf of American, Russian, and Swedish governments and authorities. Accordingly, he was understood by some Russian officials in Washington to be Chubais’ personal envoy. Although a "private" citizen of Sweden who played a leading role in Swedish policy and aid toward Russia, Aslund nonetheless participated in high-level meetings at the U.S. Treasury and State Departments about U.S. and IMF policies. Aslund was also involved in business activities in Russia. According to the Russian Interior Ministry’s Department of Organized Crime, he had "significant" investments in the Russian Federation. In addition to his work for governments, the Harvard-Chubais transactors, and the private sector, Aslund was engaged in public relations activities. His assignment in Ukraine, where he was funded by George Soros, explicitly included public relations on behalf of that country, according to other Soros-funded consultants who worked with Aslund there. His effectiveness in this role 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 presented himself on these occasions as an objective analyst, despite his promotional roles.
The financial arena yields additional examples of transidentity, in which Chubais transactors appointed Harvard people to act as Russians.32
Three, Institutionalized Deniability.
Institutionalized deniability, another feature of transactorship, results from shifting and multiple agency and also characterizes flex organizations and transidentities. Deniability means that, because actors and organizations can change their agency, they always have an "out." They can evade culpability for actions that might be questioned by voices of one of their parties by claiming that their actions were in the service of another party. Deniability is "institutionalized" in that it is built into the very structure of shifting and multiple agency.
For example, because Harvard adviser Hay was given signature authority over certain privatization activities, he could, if questioned by U.S. investigators, legitimately claim that he conducted those activities "as a Russian" and thus, with respect to those transactions should not be constrained by U.S. norms or regulations. Likewise, if the Russian Privatization Center came under fire for its activities as a state organization, it could legitimately claim to be a private one.
Flex organizations and transidentities, understandably, call to mind the notion of conflict of interest. But they serve to obfuscate conflict of interest. Unlike a lawyer who represents a client who has embezzled funds from a bank on the one hand, and represents the bank on the other, in flex organizations and transidentities, the roles are ambiguous. In conflict of interest, an actor can deny the facts, but not the conflict if the facts are true. But with flex organizations, for example, it is not clear what the conflicts are because structures and roles are themselves ambiguous. An actor can plausibly deny responsibility and get away with it. The difference lies in the ability of a flex organization to exploit this ambiguity.
Transactorship Outcomes in the U.S.-Russia Case
What was wrong with the transactorship mode: in this case, funding a committed group with intimate access to both sides? Although not necessarily abandoning the ostensible goals of the parties they represent, transactors develop additional goals and activities for their own benefit -- either at the outset of their coming together or over time. The Harvard-Chubais transactors played a decisive role in defining Russia’s economic reform agenda; their stated goals largely were the same as those of the international financial institutions and Western policy and aid circles. Yet, at the same time, the transactors developed significant additional agendas (such as investments) that depended on their own "dirty togetherness"33 and conflicted with the stated goals of at least one of their parties (the United States). Transactorship lies at the extreme end of a continuum of multiplicity and conflictedness of roles, as presented earlier. It follows that some of the goals and activities of the transactors, intentionally or not, may diverge from those of their parties in such a way that they undermine the key goals of at least one of the parties.
Some practitioners and pundits have argued that the strategy undertaken in the U.S.-Russia case was the most effective way to carry out economic reform in Russia. To the contrary, I argue, the transactorship mode of organizing relations served to frustrate the stated goals (of both the United States and Russia) of building democracy, a market economy, and a constructive relationship between the two nations. There are three major ways in which the transactorship modus operandi undermined those goals and in which the means thereby helped shape the ends.
First, transactorship frequently served to frustrate true market reform. The transactors often used exclusionary mechanisms. But, without support from the broad array of parties to Russian reform, reforms were likely to be ignored or even subverted in the process of implementation. For example, without public support or understanding, decrees are a weak basis for reforming an economy and building market institutions. Some reforms, such as lifting price controls, could be achieved by decree. But many others 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. By virtue of its exclusivity, the transactorship mode of organization failed to implement those aspects of market reform that required broad-based stakeholder participation and support.
A case in point was USAID's showcase effort to reform Russia's tax system and to set up clearing and settlement organizations (CSOs), an essential ingredient in a sophisticated financial system. Those efforts failed primarily because they were put largely into the hands of the Harvard-Chubais group, which declined to work with other market participants. In Moscow, for example, despite millions of USAID dollars, many of the Russian brokers were excluded from the process and declined to use the Moscow CSO.34 Thus, since 1994, when consultants working under USAID contracts totaling $13.9 million set out to design and implement CSOs in five Russian cities, very little evidence of progress has emerged. The GAO called the CSO effort ‘disappointing.’35
Key Harvard transactors sometimes obstructed reform initiatives that originated outside their own group. For example, when they failed to receive additional USAID funds, they blocked legal reform activities in title registration and mortgages -- programs that were launched by agencies of the Russian government, according to interviews with USAID-paid consultants and GAO sources. This interference put the transactors at cross purposes with their own purported aim of fostering markets. As GAO investigator Louis Zanardi observed: The Harvard people were motivated "to keep power within their own structure."36
The very individuals who were made responsible for creating the regulatory infrastructure in the image of Western institutions such as the U.S. Securities and Exchange Commission, one of whose functions is to eliminate insider trading, are those who allegedly invested in the lucrative securities market, oil and aluminum companies, real estate, and mutual funds. These areas "were within the scope of their [Harvard's] economic and legal advice on behalf of USAID," according to the U.S. Department of Justice. Justice concluded that "Harvard's actions, instead of fulfilling their intended purpose of fostering trust and openness in the nascent mutual fund market, in fact involved exactly the type of favoritism and perceived and actual barriers to entry and success that the United States was spending hundreds of millions of dollars to dispel."37
Second, transactorship served to stunt the development of and circumvent accountable and democratic institutions. On the Russian side, the transactors operated by presidential decree and through flex organizations. This was contrary to the aid community=s stated goal of consolidating Russian democracy.
Moreover, USAID's sponsorship of these organizations exported the very model that the Harvard Group had perfected -- that of private organizations performing inherently governmental functions, hidden from and unaccountable to taxpayers. This encouraged an opaque and unaccountable system of operating precisely at a time when donors and the international financial institutions should have been demanding property rights, the sanctity of contracts, and other institutional safeguards.
Also damaging was the broader message about democratic process that the transactorship mode of organizing conveyed to the broad array of stakeholders close to the aid process and to the Russian people at large. A virtual blank check to the Harvard-Chubais transactors sent a message of unrestricted license while neglecting the creation of a legal and regulatory backbone for Russia's market economy. And, by systematically bypassing the democratically elected Duma, the United States flouted a key feature of Western civilization: parliamentarianism.
Finally, the third problem with transactorship in the U.S.-Russia case is that it harmed the Russian-American relationship. Tellingly, when the ruble collapsed so dramatically in 1998 and it became clear that the Harvard-Chubais partnership had failed, there was no one waiting in the wings to replace it. U.S. policy became, at best, "muddle through." Russia turned to more decisive leadership. The era of looking to the West for leadership -- and to American advisers -- was over. The United States had lost the moral authority with which many Russians had credited it during the Cold War.38
After a decade of "reform," Russia is far from the stable and prosperous American ally that U.S. policymakers had envisioned. The "reforms" of the 1990s left many Russians worse off than they had been under decades of communist rule. Many Russians have blamed precisely the Western aid and advice they have received for this state of affairs.39
Conclusions and Implications for Accountability
For transactorship to develop, certain conditions must be present and self-starting actors from more than one party must come together to form a group. Political-legal-administrative conditions in both Russia and the United States enabled the transactorship relationship to come about and facilitated the "success" of the Harvard-Chubais group in their endeavors.
In Russia, the breakdown of the command system and the implementation of economic reforms encouraged the colonization of the nexus between state and private, which the Chubais Clan did very effectively. Still, as Wedel has observed, transactorship emerged in the U.S.-Russian assistance relationship, but not in comparable U.S. relationships with the other post-communist nations she studied, notably those of Central Europe.40 Why? The answer lies in part in the political, societal, cultural, and institutional frameworks of the recipient countries. Significant differences characterized the structures within which aid was delivered in Central Europe, as compared with Russia. Although market reform-oriented groups in Central Europe garnered much of the aid (such as the circles associated with the reform agendas of Finance Minister Leszek Balcerowicz in Poland) they did not monopolize it, in contrast to the Chubais Clan’s near-monopoly (together with the Harvard Group) over the management U.S. economic assistance to Russia.
Moreover, very different frameworks developed in the 1990s in Russia as compared, for example, with Poland, where there is little evidence of criminal mafia infiltration in the political establishment, as there is in Russia. Polish recipients generally operated in a more transparent and accountable way, and their primary motivation was largely to build a political base, not self-enrichment, in contrast to some Russian recipients.41 Thus, although there was considerable criticism of Balcerowicz’s Polish program of market reform, to which the most vocal alternatives were postcommunist or nationalistic populist programs, charges of corruption generally gained little traction.
In the United States, the Harvard team took advantage of the tradition of "government by third party." This practice is masked, as Guttman expresses, by "the fiction that the official workforce is in control, whereas for the past half century the bipartisan policy has been to grow government through a private workforce."42
Indeed, the federal government today writes paychecks for millions more contract and grant employees than for civil servants.43 But, with "private" employees delivering services ranging from the management of nuclear weapons and the space program to the development of government budgets and policies, the laws in place to protect taxpayer-citizens from official abuse often do not apply to nongovernmental employees who perform governmental services.44 Although U.S. prosecutors charge that the investments of the Harvard advisers violated federal conflict-of-interest regulations, Harvard’s lawyers contend that these activities did not defy the university’s agreements with the U.S. government.45 Harvard’s Shleifer, project director of Harvard Institute’s program in Russia, maintains that he was a "mere consultant" on the project (although he, with Jonathan Hay, ran it), and that there was no conflict of interest.46
Government by third party was a necessary, but not sufficient, condition for an American role in this case of transactorship. The prestige afforded Harvard, and the privileges that its principals received through their contacts in the administration, facilitated both the practical advantages and the authority and legitimacy that were crucial to the success of the Harvard transactors in the Western policy and aid community. Further, when questions were raised, Harvard projects and players often did not receive close scrutiny for those reasons. As a U.S. official investigating the conduct of the Harvard Institute observed: "The [Clinton administration’s] excuse [for any alleged or perceived wrongdoing] always was: those [Harvard] guys, we need them; they’re the experts."47 USAID Deputy Administrator Donald Pressley acknowledged after the U.S. Justice Department filed its law suit: "We had even more than usual confidence in them [Harvard advisers]."48
The U.S.-Russia case of transactorship appears unusual, but not entirely aberrant, and the mode of organizing relationships is not new. Although transactorship itself, and/or certain features of it such as flex organizing (which can exist within one party alone) may be most visible in societies undergoing fundamental transformation, such forms of organizing may be found in a variety of settings, including the United States.49
Certain conditions that facilitate the emergence of transactorship have become more prevalent in the international arena of retreated states and diffuse authority. Such circumstances provide greater incentives for people to play multiple, conflicting roles that overlap government, business, and nongovernmental organizations and that enable them to bypass selectively the constraints on these institutions. Because these circumstances call for a higher degree of flexibility and deniability, features of transactorship, if not transactorship in its entirety, likely will become more common.
What are the implications for accountability when states rely on actors and organizations that can fulfill multiple, conflicting, and ambiguous roles? Transactorship and flex organizations are inherently unaccountable because shifting agency builds deniability into them. Any accountability depends on the players. It is conceivable that transactors could use their mode of organization to serve public purposes, but whether they do so is entirely up to them.
The delegation of foreign-policy and "nation-building" authority is especially risky. When a state delegates such authority to a private entity, it runs a high risk of encouraging unsanctioned policies and activities. In transactorship situations, the only control, check, or even information that a state has on its counterpart is through its own representatives who themselves are operating in a different cultural, social, political, and institutional context. Without independent information, which transactors make difficult for their sides to obtain, it is very difficult to monitor the activities that take place on the other side. Further, because the representatives themselves engage in representational gymnastics, and can shift their allegiances to achieve their own objectives under cover of deniability, the state is without mechanisms to ensure accountability. The result is that the transactors, who are attractive to their parties because they hold the promise of easily bridging the cultural-social–political gap among parties, can, ironically, instead serve to widen the gap.
END NOTES
iI wish to thank Yves Dezalay and Bryant Garth for their invaluable comments on drafts of this article.
1. Anthropologists Eric Wolf ("Aspects of Group Relations in a Complex Society: Mexico," American Anthropologist, vol. 58, 1956, pp. 1065-1078) and Clifford Geertz ("The Javanese Kijaji: The Changing Role of a Cultural Broker," Comparative Studies in Society and History, vol. 2, 1960, pp. 228-249) introduced the term "cultural brokers" -- go-betweens in a context of social and cultural heterogeneity.
2. See, for example, Hopkins, Nicholas S., Ekpo, Monday U., Heileman, Janet, Michtom, Maddy, Osterweil, Ann, Sieber, R.T., and George H. Smith, "Brokers and Symbols in American Urban Life," Anthropological Quarterly, vol. 50, no. 2, 1977, pp. 65-75.
3. See, for example, Paul Klebnikov (Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia, NY: Harcourt, Inc., 2000), David Kotz, with Fred Weir (Revolution from Above: The Demise of the Soviet Union, London, UK: Routledge, 1997), Piroska Mohacsi Nagy (The Meltdown of the Russian State: The Deformation and Collapse of the State in Russia, Northhampton, MA: Edward Elgar, 2000), Lynn D. Nelson and Irina Y. Kuzes (Property to the People: The Struggle for Radical Economic Reform in Russia, Armonk, NY: M.E. Sharpe, 1994; and Radical Reform in Yeltsin’s Russia: Political, Economic and Social Dimensions, Armonk, NY: M.E. Sharpe, 1995), and Anne Williamson ("The Rape of Russia," Testimony before the Committee on Banking and Financial Services of the United States House of Representatives, September 21, 1999, http://www.russians.org/williamson_testimony.htm).
4. See, in particular, Olga Kryshtanovskaya ("The Real Masters of Russia,"Argumenty i Fakty, no. 21, May 1997, reprinted in Johnson’s Russia List, by David Johnson, Washington, D.C.: internet newsletter).
5. The wives have since been dismissed from the case.
6. United States Attorney, District of Massachusetts, "United States Sues Harvard and Others for False Claims Relating to USAID Programs in Russia," Press Release, U.S. Department of Justice, September 26, 2000.
7. Ibid. For details, see United States District Court, District of Massachusetts, "United States of America, Plaintiff, v. The President and Fellows of Harvard College," Andrei Shleifer, Jonathan Hay, Nancy Zimmerman, and Elizabeth Hebert, Defendants, Civil Action No. OOCV11977DPW, September 26, 2000, p. 30; and for example, Thanassis Cambanis, "US Seeking $102M from Harvard, Pair," Boston Globe, June 27, 2002.
8. The suit registered by Forum Financial Group of Portland, Maine, states that Hay and Shleifer used their pull with Russian officials to acquire for the company the rights to the country’s first mutual fund. They then compelled its owner to sell his interest in the fund. When Forum filed suit in fall 2000, Harvard spokesman Joe Wrinn called its claims "baseless." Yet, two years later, Harvard and its two co-defendants quietly settled with the company, denying any wrongdoing by it or the co-defendants. See, for example, David H. Gellis, "Harvard in Settlement Talks with Forum," The Harvard Crimson, October 30, 2002; and "Harvard Settles With Mutual Funds Company Over Fraud Allegations," Associated Press, November 8, 2002.
9. "Yale Connection to Harvard Russian Fraud Case," Yale Insider, printed 10/1/02 from
http:/www.yaleinsider.org/article.jsp?id=16.
10. "US Complaint and Jury Trial Demand," pp. 25 and 27, cited in Yale Insider, ibid. See also Bruce Rubenstein, "Harvard Accused of Ignoring Russian Aid Scam: Academics Rigged Russian Market," Corporate Legal Times, January 2001.
11. For details and documentation regarding the Harvard Management Company, see Janine R. Wedel, Collision and Collusion: The Strange Case of Western Aid to Eastern Europe, New York, N.Y.: Palgrave, 2001, pp. 160-165.
12. For details and documentation regarding the social and political background of the Chubais Clan, see Janine R. Wedel, 2001, op cit, pp. 133-135; and Yale Insider, op cit.
13. U.S. General Accounting Office, Foreign Assistance: Harvard Institute for International Development’s Work in Russia and Ukraine, Washington, D.C.: GAO, November 1996, p. 3.
14. U.S. GAO, op cit, p. 17.
15. For details and documentation regarding the privatization program and U.S. funding of it, see Wedel, 2001, op cit, pp. 138-142.
16. Project documents submitted by Jeffrey D. Sachs and Associates Inc. to the Finnish government: ‘World Institute for Development Economic Research Project on the Transformation of Centrally Planned Economies: Report on Activities, First Half of 1991," pp. 4 and 7.
17. Ibid., p. 2.
18. Kryshtanovskaya, op cit.
19. See Yves Dezalay and Bryant Garth (The Internationalization of Palace Wars: Lawyers, Economists, and the Contest to Transform Latin American States, Chicago, IL: University of Chicago Press, 2002), Paul W. Drake, ed. (Money Doctors, Foreign Debts, and Economic Reforms in Latin America from the 1890s to the Present) Wilmington, DE: Scholarly Resources, 1994), Eduardo Silva (The State and Capital in Chile: Business Elites, Technocrats, and Market Economics, Boulder, CO: Westview Press, 1996), and Juan Gabriel Valdez (Pinochet's Economists: The Chicago School in Chile, Cambridge, MA: Cambridge University Press, 1995).
20. For discussion of the "econolobbyists," see Janine R. Wedel, 2001, op cit, pp. 46-49.
21. Susan Strange, The Retreat of the State, Cambridge, UK: Cambridge University Press, 1996.
22. Jessica Mathews, "Power Shift," Foreign Affairs, vol. 76, no. 1, 1997, pp. 50-66.
23. Dezalay and Garth, op cit, p. 10.
24. Strange, op cit.
25. Office of Management and Budget, Office of Federal Procurement Policy, Policy Letter 92-1 to the Heads of Executive Agencies and Departments, Washington, D.C., September 23, 1992.
26. For details and documentation, see Wedel, 2001, op cit, pp. 130-131.
27. This concept draws on anthropological literature on brokerage, Fredrik Barth’s work on "repertoires" of identities (for example, Ethnic Groups and Boundaries: The Social Organization of Culture Difference, Boston, MA: Little, Brown & Co., 1969), and agency theory.
28. For details and documentation regarding flex organizing in the U.S.-Russia case, see Wedel, 2001, op cit, pp. 145-153 and 278-281.
29. Wedel interview with and documents provided by Chamber of Accounts auditor Veniamin Sokolov, May 31, 1998. See State Property Committee order no. 188 (which gave Jonathan Hay veto power over the Committee’s projects), October 5, 1992.
30. The concept of transidentities draws on Barth, op cit.
31. For details and documentation regarding transidentities in the U.S.-Russia case, see Wedel, 2001, op cit, pp. 153-156 and 281-284.
32. See Janine R. Wedel ("Rigging the U.S.-Russia Relationship: Harvard, Chubais, and the Transidentity Game," Demokratizatsiya: The Journal of Post-Soviet Democratization, vol. 7, no. 4, Fall 1999, p. 485); and Anne Williamson (Contagion: The Betrayal of Liberty; Russia and the United States in the Post-Cold War World, forthcoming, Chapter 13).
33. "Dirty togetherness" is a term coined by Polish sociologist Adam Podgorecki to describe the close-knit networks that enabled economic and political survival in the context of scarcity and distrust of the communist state (Adam Podgorecki, "Polish Society: A Sociological Analysis," Praxis International, vol. 7, no. 1, April 1987). Although developed in another context, the term appears to aptly characterize a group feature of transactorship.
34. For details of this case, see Janine R. Wedel, "Clique-Run Organizations and U.S. Economic Aid: An Institutional Analysis," Demokratizatsiya: The Journal of Post-Soviet Democratization, vol. 4, no. 4, Fall 1996, pp. 592-593.
35. U.S. GAO, op cit, p. 8.
36. Wedel interview with Louis Zanardi, January 25, 2001.
37. United States District Court, District of Massachusetts, "United States of America, Plaintiff, v. The President and Fellows of Harvard College," Andrei Shleifer, Jonathan Hay, Nancy Zimmerman, and Elizabeth Hebert, Defendants, Civil Action No. OOCV11977DPW, September 26, 2000, p. 30.
38. Although the context has changed, many of the transactors continue cross-national relationships with their counterparts, especially around business activities. They appear to have switched their energies from reform efforts supported by Western aid and loans to activities encouraging Western investment, notably in the Russian energy sector.
39. For details and documentation, see Wedel, 2001, op cit, p. 152.
40. Following the collapse of communist governments in 1989 in Central and Eastern Europe, Wedel undertook a study on the impacts of Western aid to the region that spanned a dozen years. In 1991-92 she began to systematically examine assistance to the Central European countries of Poland, Hungary, and then-Czechoslovakia -- the countries that donors initially designated as the most likely to succeed and which became the targets of considerable foreign aid. Later, in 1993-94, when donors turned their efforts eastward, first to Russia, and then to Ukraine, she also worked in these post-Soviet environments. She conducted hundreds of interviews with both donor and recipient representatives in multiple locations (Wedel, 2001, op cit).
41. For further analysis of this issue, see Wedel, 2001, op cit, Chapters 3 and 4.
42. Personal communication with Dan Guttman, a legal analyst specializing in American governance, June 3, 2003.
43. Paul Light, The True Size of Government, Washington, D.C.: The Brookings Institution, 1999.
44. For a discussion about the tension between accountability and autonomy of "private" government contractors, including legal decisions, see Daniel Guttman’s "Public and Private Service: The Twentieth Century Culture of Contracting Out and the Evolving Law of Diffused Sovereignty" (Administrative Law Review, vol. 52, no. 3, 2000, Washington, D.C.: Washington Law Review, American University, pp 901-908). Guttman’s article also outlines the kinds of conflicts of interests that arise between private employees and their public overseers (pp. 896-901).
45. See, for example, Thanassis Cambanis, "US Seeking $102M from Harvard, Pair," Boston Globe, June 27, 2002.
46. See, for example, United States District Court, District of Massachusetts, "United States of America, Plaintiff, v. The President and Fellows of Harvard College," Andrei Shleifer, Jonathan Hay, Nancy Zimmerman, and Elizabeth Hebert, Defendants, Civil Action No. OOCV11977DPW, Memorandum in Support of United States’ Motion for Summary Judgment Against Defendants Harvard, Shleifer & Hay, June 21, 2002, p. 40.
47. Wedel interview with Phil Rodokanakis, former senior agent in USAID’s Office of the Inspector General, January 25, 2001.
48. Interview with Donald Pressley, aired on Monitor Radio, May 22, 1997.
49. In a forthcoming paper, Wedel argues that an influential group of "neoconservatives" active in formulating and implementing U.S. policy toward Iraq and the Middle East, operate in part through flex organizing, and may have developed some of the modus operandi of transactors. For example, the Defense Policy Board, headed by Richard Perle, who advised George W. Bush on foreign policy and defense matters during the Bush campaign, appears to be a flex organization. With Perle as chairman since mid-2001, the Board evolved from a little-known organization to one with wide influence and power. Its structure allows Perle and others in his circle to retain their private business interests while holding a not-quite-public office that provides them access to defense planning and classified materials. Perle resigned from his position as chairman of the Board (but not his membership) in March 2003 amid accusations of conflicting interests. He is reported to have advised companies and their clients on business dealings using sensitive government information he was privy to through his position on the Board.
