#8 | May 22 - June 4, 1997  

By Matt Taibbi

Whenever they travel overseas, most Americans are aware that the locals hate them, but few know why. Usually Americans ascribe bad blood to jealousy. Iranian flag-burning mobs? Uneducated, unfortunate and misguided people, afraid of progress. Okinawans? Sore losers, still mad that we invented the bomb first. Russians? A gang of layabouts, too used to the security of communism, afraid of the hard work and responsibility necessary in the free enterprise system.

Russians' hostility to us, we think, couldn't have anything to do with our foreign policy; after all, we're donating hundreds of millions of dollars in aid, and you can't expect more than that.

Or can you? Just as Americans are quick to forget that their government once propped up the brutal Shah of Iran-that there is a reason why Iranians are constantly blowing up their planes and taking them hostage-they're very quick to avoid the reality of their foreign aid policy to Russia.

New reports have revealed that the American way of distributing aid has become a process so corrupt, inefficient and shortsighted that in Russia, at least, it has achieved exactly the opposite of America's stated objectives. It has fostered broad anti-American sentiment and meddled heavily in domestic politics while lining the pockets of scores of American consultants and achieving next to nothing in building lasting democratic and free-market institutions.

In fact, if a recent report by George Washington University scholar Janine Wedel is to be believed, the U.S. government in Russia has done even worse than that: it has energetically pursued a policy of circumventing Russian parliamentary processes to bring about the rise of a small group of politicians who have ushered in a corrupt new oligarchical government, one that has stripped the ordinary Russian of what little political and economic power he had before 1991.

The thrust of Wedel's report, entitled "Clique-Run Organizations and U.S. Economic Aid: An Institutional Analysis," is that the United States government's Russian aid policy has been limited to supporting Anatoly Chubais and his "St. Petersburg mafia"- a team of reformers which includes Maxim Boyko and consists mainly of people Chubais knew during his university days in Leningrad.

The report argues that in giving financial support for Chubais' reform programs, most notably the voucher program and privatization, the U.S. has actually intended to finance not reform, but the advancement of Chubais' personal political career.

Wedel's report, which first reached Russian readers when it was mentioned in an article in "Obshaya Gazeta" in March, argues that foreign aid allowed the St. Petersburg "mafia" to seize political power by distributing aid as communist leaders had once distributed goods and materials:
"By serving as the chief recipients and hence distributors of foreign aid, the new political leaders would consolidate their positions, just as the communists had done. More than mere assistance, aid became a political resource for certain Russian reformers."

Claiming that exclusively supporting one group of reformers was more effective than supporting many, aid directors steadfastly refused to investigate the possibility of searching out reformers other than Chubais, choosing instead to put all of their eggs in what would turn out to be one tremendously flawed basket.

"We have a limited amount of money," explained aid coordinator William Taylor. "You can go in as a sprinkler and spread out over a lawn, or go in as a fire hose."

The "fire hose" mentality helped Chubais attain the political power to blast U.S.-sponsored reforms into reality without having to face parliament or other voter-accountable structures. The chief method of circumventing the Russian popular will was the establishment of pseudo-governmental "private" organizations that received foreign aid and implemented "pro-western" reforms. These organizations were a huge source of income for American academic consultants, a large number of whom came from Harvard University and worked for the Harvard Institute for International Development, which over time became Chubais's closest ally in the U.S. aid program.

These pseudo-governmental bodies, like the Russian Privatization Center (RPC), its offshoot Local Privatization Centers (LPC), and the Institute for a Law-Based Economy (which drafts legislation and decrees for the Russian government) were created by presidential decree-secured by the peculiarly-positioned Chubais-meaning that they never had to be approved by parliament and were never subject to ministerial control.

These think-tanks, all of which were run or heavily influenced by Chubais, were well-funded. The RPC alone received $41 million from USAID alone. The result was that Chubais, while receiving his political mandate to enact reforms from Boris Yeltsin, was given a political machine that was funded not by Yeltsin but by Western, and largely American, aid. While other Russian politicians had to struggle to build their power base at home, Chubais had a golden fish in Washington that made sure he was tens of millions of dollars ahead of his nearest political rival.

Did USAID help propel Chubais into top positions in government? Wedel quoted AID official Thomas Dine as saying: "As an observer, I would say yes." The U.S. believed that its faith in Chubais had been vindicated after 1994, when as Deputy Prime Minister he pushed through Russia's mass-privatization program. Widely cited by USAID officials as an example of U.S. foreign aid success, the program was said to have made 40 million Russians property owners. In fact, ordinary Russians saw little or no benefit from privatization. For instance, the "voucher" program, the brainchild of the State Property Committee (GKI) which Chubais headed at the time, was underwritten by $58 million in U.S. Aid money; while it may have redistributed ownership of factories, it did nothing to prevent the halting of production in those factories all over the country. Workers were in most cases left with worthless pieces of paper in return for their investment.

Privatization was, however, a success for a certain section of Russian society-the small clique of bankers and businessmen which by 1997 even conservative slow-on-the-draw Western publications like Newsweek were openly calling an oligarchy. The most notorious example of property redistribution to this group was the "Loans-for-Shares" program enacted in late 1995.

Under this program, which was created by the same RPC-advised State Property Committee that handled the voucher and mass privatization programs, shares for state enterprises were auctioned off to private banks (who would then place them in trust) in exchange for cash loans made to the government. In theory, it was a short-term method of raising money for the state budget; in reality, it was a means of redistributing huge chunks of state property into the hands of a tiny group of investors at virtually no cost.

The state mineral magnate Norilsk Nickel, for instance, fell into the hands of Uneximbank for a bid of just $171 million, or $100,000 above the auction starting price. The company, which controls 35% of the world's nickel reserves, is worth a great deal more: it is said to clear more than a billion dollars every year in exports.

The most startling thing about the deal, though, was that Uneximbank was assigned by the GKI to regulate the auction. The bank was therefore given license to exclude a much higher bid for Norilsk by Bank Rossissky Kredit on the grounds that it had "insufficient financial guarantees." Bank Menatep, given license to regulate the tender for the oil firm Yukos (a tender it later won), excluded a Bank Rossissky Kredit bid on the grounds that its representatives were 24 minutes late for the auction.

Worse still, the State Accounting Chamber later found that Uneximbank, Menatep and other loans-for-shares winners had used government funds to purchase the auctioned shares. How? Well, as "authorized" banks, Uneximbank and company were holding government funds designated for other purposes-like the payment of state worker salaries. Menatep, for instance, bought its controlling stake in Yukos during the same period that Academy of Sciences workers-whose salary funds were held by Menatep-stopped receiving their pay.

The loans-for-shares program paved the way for a fundamental political change in Russia. It placed direct control over Russia's industries in the hands of a small banking oligarchy closely tied to the government. Ordinary Russians, the people we Westerners were supposed to be enriching through our financing of the voucher program, lost out as their salaries were used to effect the mass theft of state property.

Was the U.S. government opposed to the program? You'd never know it by our USAID spending record. Even if U.S.-created pseudo-governmental bodies like the RPC did not directly create the loans-for-shares mechanism-and it would be difficult to argue, given their proximity to the GKI, that they did not have a strong advisory role-they were at least indirectly responsible for the great train robbery through its propulsion of Chubais to the mantle of the "czar of economic reform," a title USAID itself used to describe him during the loans-for-shares period.

Why didn't the United States protest once Chubais became, at the very least, a serious public relations problem? Chiefly, because the very nature of the U.S. foreign aid program dictates an unwillingness among AID officials to recommend cutbacks in aid money-which, after all, pay their salaries. In fact, the collusive relationship between the United States and Chubais mirrors the one that existed between Chubais' government and Russia's loans-for-shares-winning authorized banks. Indirectly, AID officials receive kickbacks from the AID money, since a large part of America's foreign aid in fact goes towards the salaries of highly-paid, per diem-dependent Western consultants. An admission that their policies were wrong from the start would derail the gravy train.

Furthermore, the people the United States entrusts to enact its policies often had a demonstrated lack of the moral instinct that would be needed to recognize that Chubais is not the kind of partner America should be seeking. For instance, the United States paid the infamous private public relations firm Burson-Marstellar, to handle Chubais' privatization p.r. campaign.

This is the same firm which worked to clean up the image of the Argentinian government during the reign of the generals between 1976 and 1981, when over 35,000 people were "disappeared." The list of other B-M clients reads like something out of the chamber of horrors in Madame Tussaud's wax museum: the Indonesian government (hired during its violent suppression of the independence movement in East Timor), the Three Mile Island nuclear plant, Union Carbide (responsible for the deaths of 400,000 people following a chemical plant explosion in India), Exxon (following the Valdez oil spill), Dow-Corning (after its breast-implant foul-up), A.H. Robbins (after the Dalkon Shield I.U.D. disaster), and the Mexican government, who paid B-M $8 million during the Chiapas rebellion to shield American and Canadian voters from the fact that the Zapitistas were rebelling against the planned passage of NAFTA.

After successfully painting the Mayan insurgents as economic ignoramuses who didn't understand free trade, B-M was able to watch NAFTA pass into law, causing still more natural wealth to flow out of Chiapas and bringing an end to agricultural subsidies that had kept the Mayan population alive.

Burson-Marstellar, then, could hardly have been expected to flinch when Chubais and his cronies (often loosely known as the "St. Petersburg Mafia") devastated Russian workers with their loans-for-shares scheme.

But what about USAID itself? Surely the government of the United States must be concerned about its image overseas-and be reluctant to misspend government money?

No, not really. USAID in fact has a long record of supporting policies detrimental to U.S. interests. In the late 1980s, the U.S. spent nearly a $100 million on an "Export and Investment Promotion Project" which helped the government of Haiti attract U.S. investors seeking low-wage offshore locations for assembly work. Ostensibly trying to improve the working conditions of Haitian laborers, the U.S. was actually helping American employers leave home (taking jobs away from American workers in the process) and take advantage of cheap labor. Incredibly, after Jean-Baptiste Aristide's democratic government came to power in 1991, USAID even protested when the new leader attempted to raise the minimum wage to 50 cents an hour so that his population could afford to eat.

"Wage systems," the USAID report noted coldly at the time, "should not be the forum for welfare and social programs."

Therefore there is no surprise that USAID was quiet about the damage programs like loans-for-shares did to salary-collecting Russians. Its history has suggested that the United States' is seldom interested in raising the standard of living of populations in foreign countries. In fact, its chief end is political; it seeks to ingratiate itself with highly-placed people in government and help those people stay in power, in return for political support in the international arena.

Even if we admit that this policy is immoral and evil, it's fair to ask if it is at least effective. Americans seeking an answer to that question can find it next time they go to an Iranian embassy in search of a visa. Certainly, there are a whole range of Russian opposition politicians who are beginning to see Shah-like traits in the Russian recipients of U.S. aid.

"During WWII, America sent us aid, and it was real aid," said Aleksei Bogatov, spokesman for Vladimir Zhirinovsky's Liberal Democratic party. "Now, all U.S. aid is doing is helping us sink further down and helping a small group of corrupt politicians line their pockets."

He added: "I used to work in Africa, and there the U.S. aid policy was the same-support one government figure, and damn the consequences. America wants to turn Russia into one of those dependent African countries."

Mikhail Molodtsov, spokesman for the Communist Party, said U.S. aid had achieved nothing in terms of practical gains, and had instead gone solely to influence internal politics. "Just before the Presidential Elections, the U.S. helped engineer a $500 million I.M.F. loan to Russia to help reform its coal industry and pay workers. Workers never saw at least $250 million of that money. Coming as it did during the presidential campaign, we can guess where that money went."

The United States' best defense to all of this seems to be ignorance. One of the striking points in Wedel's report is the suggestion that the United States chose to place its bet on Chubais simply because he looks Western. "The identity markers donors appear to recognize most often," she wrote, "are pro-Western orientation; ability to speak English and to converse in the donor vernacular of 'markets,' 'reform,' and 'civil society.'"

Is it possible that the United States actually gave one person the license to spend hundreds of millions of dollars just because he speaks good English? Absolutely, observers say.

"America probably looks at Russia as such a tangled, dark, mysterious mess that they're relieved to find someone who looks and sounds like their own," said analyst Andrei Piontkowsky. "Chubais speaks English and he carries a laptop computer, although God knows what he uses it for. But that's enough for the U.S. to place their trust in him."

Wedel quoted a spokesman for Alexander Lebed as saying that the United States identified reformers on the basis of whether or not they had "camera appeal" and are"west-oriented and young."

Piontkowsky added that it is typical of the United States to make its foreign policy decisions based on the appearance or personality of one figure. "Before Chubais, there was Gorbachev in the late 1980s," he said. "America was so wrapped up with Gorbachev that it couldn't pay any attention to Yeltsin. Now they're fixated on Chubais."

When will the fixation end? Well, the U.S. didn't give up on Gorbachev until he was out; the same holds for the Shah, Batista, Mobutu, and a host of other shady strongmen. If Chubais continues with his policies, he too may soon have a revolution on his hands. But unlike the one which ousted Gorbachev, the next one won't be pro-Western, and ex-pats living here won't get off so easily. And when that happens, we can thank USAID, its Harvard cronies, and profiteers like Burson-Marstellar for the trouble.