INVITED TESTIMONY AND COMMENTARY
U.S. Aid to Russia: Where It All Went Wrong (Excerpt)
Testimony before the Committee on International Relation
U.S. House of Representatives
September 17, 1998
The United States has been asleep at the switch of its aid policies toward Russia. There have been many signs of trouble, but these have been ignored by the Clinton administration and largely overlooked by Congress. Our challenge now is to foster friendship with the Russian people after having facilitated bad policies and anti-American sentiment and to act before we are faced with an international crisis.
The United States, over the past seven years, has embarked upon a fairly consistent course of economic relations with Russia. Three interrelated policies characterize this course: 1) the provision of billions of dollars in U.S. and other Western aid, subsidized loans and rescheduled debt; 2) the urging of radical economic "reforms," including the privatization of state-owned assets; and 3) the backing of a hand-picked political-economic group, or "clan," to perform these so-called "reforms." The United States has consistently supported President Boris Yeltsin and a cadre of self-styled Russian "reformers" to conduct Western aid-funded reforms and negotiate economic relations with the West. U.S. support for Anatoly Chubais, Yegor Gaidar, and the so-called "Chubais Clan" (dominated by a decade-old clique from St. Petersburg), bolstered the Clan's standing as Russia's chief brokers with the West and the international financial institutions. The Chubais Clan -- not the Russian economy as a whole -- was the chief beneficiary of economic aid from the U.S. Agency for International Development (USAID).
Throughout the 1990s, Anatoly Chubais was a useful deputy for Russian president Boris Yeltsin. In November 1991 he headed Russia's new privatization agency, the State Property Committee (GKI). He then also became first deputy prime minister in January 1994, and later was a useful lightning 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 him 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.
Working closely with Harvard University's Institute for International Development (called HIID), the Chubais Clan controlled, directly and indirectly, millions of dollars in U.S. aid through a variety of> institutions and organizations set up to perform privatization, develop capital markets, form a Russian securities and exchange commission, and related activities. Between 1992 and 1997, the Harvard group received $40.4 million from USAID in noncompetitive grants for work in Russia and was slated to receive another $17.4 million until USAID suspended Harvard's funding in May 1997, citing evidence that Harvard principals were engaged in "activities for personal gain." The first highly unusual aspect of these awards is that Harvard secured most of the money without competitive bidding. Competition had to be waived at the highest levels of the Clinton administration. Top officials of five U.S. government agencies, many connected to Harvard, including the Department of Treasury and the National Security Council (NSC) -- two of the leading agencies formulating U.S. aid policy toward Russia (and Ukraine) -- signed waivers. From Treasury, the Harvard-linked Lawrence Summers and David Lipton backed Harvard projects. The waivers stated that awards were being given to Harvard for "foreign policy" considerations -- that is, the national security of the United States.
Another highly unusual -- and highly damaging -- aspect of the U.S. arrangement with Harvard is that the United States, under cover of economic aid, delegated foreign policy in a crucial area, involving complicated and controversial choices, to Harvard University -- a private entity. In addition to receiving millions of dollars in direct funding, Harvard and the Chubais Clan helped steer and coordinate USAID's $300 million economic reform portfolio, which encompassed privatization, legal reform, capital markets, and the development of a Russian securities and exchange commission. In other words, the United States put Harvard in the unique position of recommending U.S. economic aid policies while being a chief recipient of the aid as well as overseeing other aid contractors, some of whom were Harvard's competitors.
Further, economic reform was not necessarily the driving agenda of the Harvard-Chubais Clan partnership. Members of the Chubais Clan -- the very group which Deputy Treasury Secretary Summers called a "dream team" -- were consistently under investigation in Russia, and many reports of personal enrichment from public and foreign monies have been convincingly substantiated. The Harvard group appears to have been similarly engaged: USAID cancelled most of the last $14 million earmarked for Harvard, citing evidence that the project's two managers had allegedly used their positions as advisers to profit from investments in the Russian securities markets and other private enterprises. These men remain under review by USAID's Inspector General and the U.S. Department of Justice. In 1996 the U.S. General Accounting Office (GAO) concluded that USAID's management and oversight of Harvard was "lax." Clearly, the United States failed to adequately monitor the Harvard group.
Much more important, the U.S. strategy of reform through aid to one group has totally failed. Millions of dollars have been wasted, and the transparent, accountable institutions so critical to the development of democracy and a stable economy for this world power have yet to be established.....
Toward a New Foreign Policy
Given the continuing socioeconomic deterioration of Russia, what should
the United States do? If the U.S. government wants to adhere to its own
declared objectives and help promote in Russia sound economic development
and equitable growth as well as viable and transparent democratic
institutions, it has no option than to reverse its current policies and
practices.
The U.S. role in creating a system of tycoon capitalism and the current economic meltdown, coupled with military policies such as NATO expansion, have fueled anti-American sentiment in Russia. The first thing we should do, as Joseph Stiglitz, a leading World Bank economist, correctly suggests, is to adopt "a greater degree of humility...(and) acknowledgement of the fact that we do not have all of the answers." Washington must also accept that the future shape of Russian society will and must be determined by the Russian people. U.S. policy should at least try to adhere to some of the principles that it preaches, such as participatory democracy and the rule of law or even "no taxation without representation." In line with this, the U.S. must stop its policy of support-at-all-costs for Yeltsin and the Chubais Clan, not only in USAID targets but also in U.S. influence in IMF and World Bank lending.
Second, the U.S. government should recognize that a healthy banking and financial system cannot arise without a revival of production and distribution in the "real" economy. Measures that emphasize increases in tax collection and reductions in government expenditures under the current extremely depressed conditions simply guarantee accelerated decline of the real economy and social-political chaos. The United States should use its great influence on the IMF and World Bank to reduce their pressure on Russia to pursue such suicidal policies.
Not only did the IMF bailout fail to restore confidence, but the international aid has been fundamentally ill-conceived. As Veniamin Sokolov warned: "Giving more loans to the Yeltsin government is comparable to giving a drug addict a fresh supply of narcotics. Any new loans will only go to the realm of financial speculation and to prop up support for Boris Yeltsin. Russia does not need any further such lending." In sum, further aid will go to the same corrupt niches and is likely to make the situation worse, not better.
Third, the United States should launch a high-level drive to try to recover monies from aid organizations and international financial institutions that have ended up in private unregulated bank accounts outside of Russia. This would show concern for the Russian people, who otherwise would be held responsible for paying back loans from which they did not benefit. It also would demonstrate U.S. commitment to the rule of law.
Fourth, the United States should embark on a broad-based policy to encourage governance and the rule of law. It is essential that the United States discontinue support of non-inclusive organizations and the bypassing of democratic process through decree. Some U.S. aid funds have gone for "democracy building," including strengthening and revamping the judiciary. However, these efforts have been a low priority and have been undermined by the practice of U.S. encouragement of the Chubais Clan to enact swift "reforms" without approval of the Duma, Russia's popularly elected legislature.
The United States needs to adopt a pro-democracy stance that encourages institution-building and as broad a range of democratic positions as possible. We must cease to select specific groups or individuals as the recipients of uncritical support, which both corrupts our "favorites" and delegitimizes them in the eyes of their fellow citizens.
Fifth, U.S. officials and advisers need to establish contact and ties with a wide cross-section of the Russian leadership -- politicians, economists, and social and political activists -- and not only Yeltsin and his allies. How Russian elites perceive the efficacy of U.S. aid programs and politics should be a source of concern, especially because many Russians have questioned American intentions.
Although a reversal of policy will require a long and resolute process of diplomacy, Clinton administration officials can take steps, by, for example, meeting with members of the Duma and a diversity of Russian elites. Some aid-funded people-to-people exchanges and programs to develop the economy from the bottom up have been useful and have created goodwill among the Russian people. Given the unfortunate record of U.S.-Russia relations, exchanges that involve a broad section of the Russian population, especially at local and regional levels, are now crucial.
Available on-line at Johnson's Russia List, #2414, 6 Oct. 1998.
