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U.S./Rus: Is The Era Of Western Aid To Russia Coming To An End?

Moscow, 11 June 1997 (RFE/RL) -- Is the era of Western aid to Russia coming to an end? It would seem so, judging from a bitter scandal that, for weeks, has involved Harvard University's Institute for International Development (HIID), the U.S. Agency for International Development (USAID), Russia's first deputy Prime Minister Anatoly Chubais, as well as Russia's Central Bank and Federal Securities Commission.

The British weekly, the "Economist" has called the scandal a "sorry story that smacked more of confusion than of conspiracy," and that "has proved a costly mess for all concerned."

The U.S. Government is canceling a $ 14 million contract with the Harvard Institute for a major aid-program for Russian economic and financial reform. The contract was suspended last month, after USAID concluded in a preliminary investigation, that two of the institute's leading employees had used their positions and USAID resources for personal gain. The two employees are Andrei Shleifer and Jonathan Hay, two of the most successful and influential foreign advisers to the Russian Government.

USAID alleges that investments in Russia by Shleifer, HIID's Russian project director and Hay, its Moscow General Director and adviser to Russia's Federal Securities Commission, indicate a conflict of interests and an abuse of their positions, while working for U.S. Government-funded programs. The two were accused of violating the terms of their contract - not of violating any U.S. or Russian law.

Perhaps more importantly, as a result of the investigation, HIID is set to loose its financially attractive and prestigious contract. It represents the last of more than $ 50 million in grants awarded by USAID to Harvard since 1992. The director of HIID, economist Jeffrey Sachs, called the case "unparalleled in 40 years of HIID activities." Sachs and the Harvard institute, which had hoped to replace the consultants and continue its USAID-funded programs in Russia, appear the most hard hit by the scandal. Sachs and HIID appear to have suffered a severe blow not only in the U.S., but also in Russia - while Hay and Shleifer, accused of wrongdoing by U.S. authorities, found personal and public support among Russian officials whom they had closely advised. One day before Hay and Shleifer were dismissed by HIID, Chubais wrote a letter to USAID director Brian Atwood, asking him to cut off financing of the Harvard program. In his brief letter, Chubais wrote that "because of changing conditions, continuation of these agreements is not consistent with Russian interests." However, during a news briefing in Moscow, Chubais not only highly praised the work of Hay and Shleifer, calling it "fantastically important," but also said the two consultants would most likely continue to advise the Russian government. Yury Kotler, a spokesman for Russia's Securities Commission, later said that Hay would likely resume his work as an adviser, regardless of the USAID investigation.

However, the HIID case appears to have affected the outcome of a major turf war in Moscow. As the HIID scandal unfolded last month, Russia's Federal Securities Commission lost a long-term struggle with the Central Bank over which agency should grant licenses for operating on the security markets. The Russian daily "Kommersant" called a deal on the issue, brokered by Chubais, a "Waterloo" for the Security Commission Chairman, Dmitry Vasilev. He had worked closely with Chubais since the beginning of his career in St. Petersburg. The Commission, set up and chaired by Chubais in 1994, was handed over to Vasilev in 1995.

Vasilev had also worked closely with Hay, who advised the Securities Commission and is reported to have supported Vasilev's stand in favor of a U.S.-style system, in which a wide range of depositories and mutual funds is a major vehicle for channeling investments into the market.

In opposition to Vasilev's view, the Central Bank and its chairman, Sergei Dubinin, have long supported the so-called German and Japanese models, in which banks are the central players.

The "Economist" weekly observed that the Securities Commission has "lost what may prove decisive ground in his struggle to keep the markets free from domination by a clique of big banks."

In a conciliatory statement, the Securities Commission said it welcomed the Government move, saying it would lead to clearer and more effective regulation. And the British "Financial Times" newspaper said investors broadly welcomed the regulatory change, hoping it would stimulate the market infrastructure, and end damaging public rows between government institutions.

Several Western observers have said that Chubais' apparent shift of loyalties toward Russia's powerful banks has undermined his own ally, Vasilev, and at the same time has prompted the ousting of "useless" Western advisers. But the Russian weekly "Itogi" noted that not only advisers, but Chubais himself had been considerably damaged by the scandal. According to Itogi, Chubais, if necessary, could have ousted Vasilev and the Western consultants, without provoking such a big echo in the West. Itogi also noted Vasilev retains his position at the Commission, which continues its work, and that the consultants have been invited to continue advising the Russian Government.

Moreover, economic analysts argue the Security Commission always had limited political influence, and, therefore, never really had a real change to shape the future of Russia's markets.

Gary Peach, who runs the weekly newsletter "Capital Markets Russia," wrote in the "Moscow Times" that, in retrospect, "the Central Bank had the upper hand in the conflict from the very beginning." He says the Securities Commission has limited funding and a staff of only 99 employees. Peach says "Russia's gradual inclination toward a financial-industrial, groups-based economy seems natural." He says that "in some sense Russia is in the same position as Germany and Japan were in 1945, and so it will continue developing along the same lines."