#13 | July 31 - August 13, 1997  smlogo.gif

Feature Story

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Feature Story


Loans for Squares

by Matt Taibbi

Even before he knows the awful truth, the average Russian hates you-the Western consultant. He hates watching you walk into Le Gas to blow your per diem on lunch while he brings kefir and chicken legs home to his dreary family. He hates your chauffeured car and your $5,000 apartment, for which he would need a lot more than the few vouchers you helped provide for him. Without any prodding at all, he hates your looks, he hates your broken Russian, he hates everything about you, because you've got everything, and he's got nothing.

Just imagine what would happen if he found out that he was the one who'd paid for all those perks you've got. There'd be hell to pay!

And there might be. Because the truth is that, over the last few years, Russia has signed on to millions of dollars of World Bank loans which were granted on the condition that Western consultants be hired at exorbitant salaries to implement programs.

Not only that, but part of the conditions of the World Bank loans were implementation of World Bank economic policies, which insisted on an end to energy and agricultural subsidies. In other words, the World Bank insisted that meager salaries to some Russians were stopped, and that exorbitant salaries to their own consultants were begun.

These are loans, not grants. In essence, Russia went into debt to pay for the fast-lane lifestyles we've all observed among various friends of ours. Russia is broke; it cannot pay its police, its army, its scientists, or its teachers living wages, but somehow it has been cajoled by the World Bank into paying for the upkeep of an army of Western rakes.

This is a complicated story, with conflicting assertions all over the place, but it pays to keep in mind that the one thing nobody disputes is that Russia has borrowed "millions of dollars, and possibly tens of millions of dollars," as former Moscow WB chief Charles Blitzer put it, to pay for the salaries of Western consultants.

To go into more depth, however, we can concentrate on one specific IMF loan: a $31 million allotment that went to finance the so-called "Program for Investor Protection." This is the one that aroused the most attention-and anger-of the increasingly anti-Western Russian State Accounting Chamber.

The State Accounting Chamber was created on January 11, 1996 by Presidential Decree. It is unique among government agencies in that it technically answers to no one. It sends the findings of its investigations to the Duma, but it does not take orders from the Duma. Like the General Accounting Office in the United States government, it is charged with making sure that government money is sent to the programs it has been budgeted for, and beyond that to ensuring that government money is spent wisely and efficiently.

The Accounting Chamber's attempts to clamp down on corruption and waste have met with varying success. Among other things, they succeeded earlier this year in convincing President Yeltsin to block the privatization of the insurance magnate Rosstrakh, whose tender they said was being arranged on a noncompetitive basis.

Their other great success was in leaking details of the mechanics of the loans-for-shares auctions to the public. Although they failed to have those auctions reversed, they managed at least to make public some of the more sinister aspects of those tenders-for instance, that the winners frequently used government money that they were holding as authorized banks to make their bids. In other words, the Accounting Chamber was the first to reveal that the government had effectively loaned money to private organizations (i.e. Uneximbank, Menatep) in order that they might buy up state enterprises at rock-bottom prices-proof that the state was sponsoring the creation of an oligarchical class.

In its efforts to trace the results of privatization, it was inevitable that the Chamber would cross paths with Western consultants, who were instrumental in creating the structure of many privatization programs. According to chief inspector Yevgeny Nikulishyev, one of the first things that caught the Accounting Chamber's attention was an order (no. 188) signed by then-State Property Committee chief Anatoly Chubais on October 5, 1992 which named Jonathan Hay, an American national, the deputy head of an expert commission within the property committee. The order gave Hay and and commission head Maksim Boyko veto power over all Property Committee projects.

Intrigued and somewhat disturbed that an American citizen would be given such an important official role in the redistribution of Russian state assets, Nikulishev and his colleagues made a point to keep an eye on Hay-influenced organizations in the future. By summer of this year, they had begun to notice a strange pattern in the distribution of some international assistance money. One example centered around an organization called the State Fund for the Defense of Investors.

Created in the wake of the MMM scandal with the aim of providing a sort of Federal Insurance system for victims of investor fraud, the Fund was supposed to take a fraction of all privatization revenues and hold that money in escrow until it was needed to pay off defrauded applicants. Salaries for Fund employees, which the Accounting chamber said included Western consultants, would be paid as part of a $31 million World Bank loan earmarked for a broad-based investor protection program. In addition, those Western consultants from the Institute for a Law-Based Economy (where Hay worked) who worked on the fund would be paid with World Bank loan money.

So far, so good. The Chamber, though, found a number of oddities surrounding the Fund. For one thing, in the ten months since its inception in September 1996, "not a single kopek" had been paid out of the Fund to anyone, according to Nikulishin.

Secondly, the Fund's money (i.e. the privatization revenues it held) was being managed by a private mutual fund under American management called the Pallada. Those who follow the news carefully may recall that Pallada is headed by Hay's girlfriend, Beth Hebert. It was Hay's investments in Pallada that caused him to be dismissed from the Harvard Institute for International Development (HIID). In any case, what was unusual about Pallada's management of Fund money was that they had, according to the Chamber, won that contract on a non-competitive basis.

Thirdly, the Chamber asserts that the Fund holdings under Pallada's management (some 20.5 billion rubles, or about $3.5 million dollars) have increased in size by only 2.9% over the course of the Fund's ten-month existence. The bank rate for that time period was 18%, while the Russian stock market has been one of the world's leading performers.

Hebert declined to be interviewed for this story, but Pallada press secretary Vadim Soskov denies the Chamber's charges, saying that Pallada actually increased Fund holdings by 36%. Nikulishin stands by his story and says the full results of his investigation will likely be released this Fall.

As for Pallada winning the contract on a non-competitive basis, Soskov denies that as well, saying that "there was a tender last year and Pallada won because it offered the lowest commission fees." The only problem is, Soskov does not recall who Pallada's competitors were in this quite sizable contract bid.

Already, a general picture begins to emerge: a program designed to provide guarantees for ordinary Russian is created, but the only people who actually see any of the money designated for that program are the Fund's Russian and Western employees, the private, American-managed mutual fund Pallada, consultants in the HIID-created ILBE, and the Western-managed First Depository, which holds the securities for Pallada. And every dollar that Westerners in this system earn comes out of the Russian budget, either through World Bank loan money or through privatization revenues.

First Depository founder Julia Zagachin and Fund head Yevgeny Kovrov both declined to be interviewed for this article. Larissa Saladukhina, who as head of the Collective Investment Center oversees all projects under the auspices of the Investment Protection Program, said she knew nothing about the details of any of these matters.

What other Western consultants are being paid with this $31 million? Some from the public relations firm Burson-Marsteller, according to B-M's Kristin Staples, who acts as a press secretary to Dmitri Vasiliyev of the Federal Securities Commission. Staples confirmed that B-M currently has a World Bank contract, although she said she didn't know the particulars. The particulars proved impossible to learn, as Burson-Marsteller management in Moscow declined to answer eXile questions about the size of their World Bank contract, and the number of employees working under that contract.

Saladukhina, who incidentally would not admit that any Western consultants had been hired under the Investment Protection loan until she was told that B-M had already admitted to having a World Bank contract, said that there were "only three B-M consultants, all Russians." Two sources close to B-M who declined to be named, however, said that B-M has at least a few Western consultants working on the World Bank contract.

The fact that B-M has a World Bank contract is fortuitous, for it allows us to get a sense of what kinds of salaries and perks are involved. An expose published last month in Harper's magazine by current St. Petersburg Times editor Matt Bivens, who worked for B-M as a "National Media Coordinator" for the Privatization program in Kazakhstan, showed B-M to be expert at finagling benefits and salaries out of international aid organizations.

For one thing, Bivens reported that B-M had a so-called "cost-plus" contract with the United States Agency for International Development. The contract stipulated that USAID covered all of B-M's costs, and added 7 percent on top of that-B-M's profit margin. "In other words, the more we spent, the more we earned," he wrote.

Bivens, at 26, with just a few years' experience as an AP and LA Times reporter and stringer, was hired by B-M on the basis of one phone call and given a $70,000 package that would grow to $90,000 in the space of just a few months. He described his experience as having having almost nothing to do with promoting privatization and everything to do with insuring the steady flow of AID money. The tangible result of B-M's work in Kazakhstan amounted to little more than producing privatization "soap operas," or making 5 million pocket "Privatization calendars" B-M had printed for $69,000; Bivens recalled the one moment of true B-M effectiveness as being the time he and his colleagues banded together to secure the $94 per-diem other AID contractors were entitled to. "For the first time," he wrote, "I felt like a doer."

All of which may or may not be relevant to Moscow and the World Bank loan. But consider the following two pieces of information: first, Blitzer bragged that the World Bank, unlike AID, is "willing to pay top dollar" for consultants and therefore attracts better talent, leading one to conclude that it is unlikely that B-M employees under the World Bank in Moscow make less and have smaller per diems than B-M employees under AID did in Kazakhstan.

Secondly, when Staples was asked what the rationale was for hiring Western consultants at high salaries with Russian government funds, she answered, "Well, it's not like all they're getting is our time. There are also tanglible things which go back into the Russian population."

Like what?
"Well, like brochures, and booklets. We also manage a radio program."

Radio? Brochures? Can that be significantly different than calendars and soap operas? The only difference is that Kazakhs, at least, had the pleasure of milking U.S. taxpayer money for its actors, and printers, etc. In this case, Russians are footing the bill for B-M's consultant magic. With interest accruing.

You might ask: what fool on the Russian side signed off on these loans giving Westerners these salaries? It's probably no surprise that the Duma isn't involved; in loans less than $100 million in size, no parliamentary approval is needed. In fact, a special council of ministers approves these loans, and that council, according to Blitzer, was headed by Chubais at the time the $31 million was granted. Chubais is unlikely to balk at Western loan initiatives; he owes the West one after having received hundreds of millions of dollars in political support for his privatization initiatives. He's had his back scratched a lot over the years. Apparently the aid community, once grant money started to dry up, figured it was Russia's turn to pay them back.

The Rationale
"Millions of dollars, and possibly tens of millions of dollars. That's about how much was spent on Western consultant salaries," conceded Blitzer, as he defended his former bank's policies.

Discussions about any aspect of international aid with aid people inevitably disintegrate into political name-calling and an Us or Them Red Baiting. Blitzer dismissed the entire matter of Western consultants receiving Russian government aid as an issue raised by political opponents of reform for political reasons.

"Look at your sources," he said. "The State Accounting Chamber. They have a political agenda, well-known to be associated with the communist line."

Accusing anyone who criticizes aid inititiatives of aiding the communists is a common tactic. Soskov at Pallada played the same card when presented with the Accounting Chamber charges. It didn't seem to matter to either of them that a key figure in the Accounting Chamber is Yuri Boldarev, a well-known liberal anti-communist.

Blitzer wasn't finished. He said that this article, should it appear, would play "right into the hands of oligarchs like Chernomyrdin and Potanin and Berezovsky" who opposed the free-trade, law-based policies of Vasiliyev. Did he include Chubais, who has enjoyed broad support of the World Bank and USAID over the years, among the "oligarchs" he named?

"Well, I suppose Chubais in the last year and a half has gone about 90% with Uneximbank, and 10% with Vasiliyev," he admitted.

Blitzer then said that it actually made more sense to make Russians pay for consultants, since it is then more likely that they would listen to them.

So, Russia didn't listen to consultants who were paid with grant money?

"Not as much," he said.

Then how did Jonathan Hay hold a position giving him an official veto over privatization programs? Was he not listened to?

"Jonathan was one individual," he said. "And I never heard of him vetoing anything."

Making Russia pay for Western services was, furthermore, logical, according to Blitzer, since contracts are always awarded on a competitive basis, guaranteeing the best quality at the best price.

When asked how that gibed with accusations that Pallada had won its contract without competition, Blitzer answered, "Well, of course, in some cases, contracts are awarded directly, usually if the size of the award is limited." Blitzer admitted that Western consultant fees are a "potential P.R. problem," but said it was a problem that rested in appearances only. "The real question is, if Russia doesn't want an economy like Sweden's or Japan's, if it prefers to have an economy like Turkey or China, then it shouldn't hire Western consultants. But if it wants our kind of economy, advice is an investment that will bring a definite return."

Of course, Russia wouldn't want an economy like China's, which has been growing at a rate of about 10% a year for the past twenty years. And Russian farmers certainly are glad the state stopped subsidizing them, as the World bank insisted they do last year (according to a memo from then-deputy Economics Minister Sergei Vasiliyev to then Vice-Premier Vladimir Potanin given to the eXile by the Accounting Chamber); obviously subsidizing Western consultants made more sense. In fact, in the years since Russia has been inundated with influential Western consultants, it has been gripped by one of the deepest economic depressions observed in this century-a long cry from the "Sweden or Japan" model that Blitzer boasts his consultants are leading Russia towards.

At what point will Russians stop listening to this Western line and react violently? The West threw its weight behind Chubais, giving Westerners wide influence over Russian government policy, which has been a disaster of epic criminal proportions; now it's deifying Dmitri Vasiliyev, asking Russians to swallow the huge cost of Western consultants in order to further his policies, which or may not continue to be in their interests. How can we look them in the eye and tell them they should pay our salaries, but not their own?

"The big problem, from your point of view," said Nikulishin, "is that this kind of thing, with these consultant fees, and World Bank interference, is going to create a situation where it will be difficult for foreigners to stay here. The trust will be completely gone."

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