An inconvenient history

After all, everybody knew, or so they imply, that corruption is
rampant in contemporary Russia. What could self-advertised market
wizards or earnest public servants possibly do to restrain the Russians’
destructive behavior? Conveniently — just days before the revelations
of Aug. 19 — a profusion of well-tailored journalistic memoirs
recalling seven years of Russian reform inspired by the anniversary of
Russia’s Aug. 17, 1998, meltdown appeared. All the big papers ran major
articles. Two of these efforts in particular deserve a close look.

The Washington Post trotted out eminence grise, Robert Kaiser,
the Post’s Moscow bureau chief in the early 1970s, whose piece did get
its headline right, “Pumping Up The Problem.” The New York Times
shrewdly hired the job out and imported a Brit for their write up. John
Lloyd, who was the Financial Times’ Moscow bureau chief from 1991-1994,
delivered a drab story with no new information, a real disappointment
coming as it did from one of journalism’s most astute observers of
Yeltsin’s Russia.

Worse, the Time’s story showed just how clever Western handlers were
to keep their “eager young reformers” available to potentates of the
self-reverential “quality press.” Ironically, the one Lloyd selected
for his story’s bittersweet coda turned out to be none other than
Konstantin Kagalovsky, a well-known opportunist and Russia’s first
representative to the IMF, whose connection to the $15 billion Bank of
New York money laundering operation the Times was compelled to report on
its front page just four days later.

Kaiser, however, being an eminence grise, did contact two now
retired State Department officials, E. Wayne Merry and Thomas Graham,
who reported sordid details regarding U.S. policymakers’ ends over means
approach to Russia. They told how cables filled with information of
what was really going on in Moscow were blocked by higher-ups at the
Moscow embassy and by emissaries from Washington. Lloyd reminded the
public of Albert Gore’s nixing of CIA reports detailing Russian
corruption involving his best Russian pal, Viktor Chernomyrdin, and that
Sweetheart of Harvard Yard, Anatole Chubais. Thomas Graham told Kaiser
that the Gore-Chernomyrdin Commission was “Sovietized” immediately,
meaning its success was declared mandatory. Diplomats, policymakers,
pundits, aid consultants and contractors were told to put a happy face
on all aspects of U.S. policy.

Western journalists in Moscow played along, using the government’s
basic methodology; any information that questioned the success of the
reform effort was squelched, ignored or downplayed. Any alarming
developments were massaged away by members of the “aid community” in
Moscow, and by assistance/policy/government retreads stashed at various
think tanks in Washington and Moscow. Journalists built their stories
based on quotes and information from these active players and shapers,
from whom their editors, in turn, sought their views in published
editorials. Russian dissenters were tagged with the “Communist” label
and dismissed. In these ways, the party line was woven into a web of
almost seamless propaganda despite none of Russia’s complicated reality
actually corresponding to the parallel universe U.S. policymakers,
Washington pundits and collaborating journalists inhabit.

But the Post’s and the Times’ stories were important as signals; it
is now permissible to discuss U.S. failure and the collapse of the
“Washington Consensus.” About bloody time. Having been given many
billions and years of freedom to pursue their ideas without scrutiny or
accountability, Clinton’s foreign policy apparat has delivered the world
a debacle. But citizens should be cautious in evaluating today’s
increasingly unavoidable revelations; many shoes are left to drop. As
one CIA man put it, “Clinton made sure they all got something and then
they all stole something more, so nobody wants to get to the bottom of
what really happened.”

The current spin is to fob blame onto the banking oligarchy whose
members the “reformers” in the Kremlin selected and whose development
Western lending fed and nurtured. It’s helpful too to hurry past the
crime of voucher
privatization, which Harvard economist Jeffrey Sachs and his team
designed in cahoots with Anatole Chubais in 1992. Better to focus on
the secondary stage of privatization, the loan-for-shares scheme, an
insiders’ feast of Russia’s juiciest assets, which was cooked up mostly
by the Russians themselves. Most especially, a wise memoirist skips any
discussion of Russia’s market in short-term government bonds, GKO
instruments.

The improbable yields (290 percent on three-month paper at one point)
on Russian GKOs were paid with U.S. taxpayers’ money via IMF loans.
Guess where all investment went? By yielding those kind of non-market
returns, the bond market insured that all the country’s resources and
all that it was capable of attracting went to the support of the state,
just as Czarism and Communism had done previously.

So lush were the bond market’s rewards that dubious market
participants included the Russian Central Bank itself through an
off-shore firm known as Fimaco. The involvement of the Harvard Institute
of International Development’s (HIID) honchos in the same
conflict-of-interest activities has already been admitted publicly and
remains the object of a Boston grand jury’s scrutiny. The Harvard
Management Corporation, which invests the university’s endowment, was
also an avid purchaser of Russian bonds, a dubious and unsettling
history since there is no legal separation of HMC and the university
itself. According to the Russian Interior Ministry’s Department of
Organized Crime, Western employees of Russian banks, Western bankers and
consultants, Russian bankers and anecdotal evidence, other likely
participants include certain employees of the U.S. Treasury, of the
multilateral agencies (most especially the World Bank’s Moscow offices),
of bilateral aid agencies, and policy and program consultants acting
through accounts established in their wives’ maiden names with non-U.S.
reporting brokerages in Moscow. Even the Ford Foundation’s Moscow office
sponsored its own internal Russian bond shop for which the unthinking
Russian managers once asked this reporter to drum up U.S. investors.

But Russia needed direct investment, not speculative debt traders.
Why then did international lending and bilateral aid programs work
overwhelmingly to the international debt merchants’ benefit? Actually,
all aid programs are meant first to advance globally the Fed’s money
monopoly through IMF lending and the private banking sector and
secondarily, the subsidized expansion of U.S. firms into foreign
markets.

Unsurprisingly, it was George Bush who got the money monopoly’s ball
rolling in Moscow. In early 1992, the “Bankers Forum” project was
wheeled into place by a former New York Fed chief, Gerald Corrigan, who
at George Bush’s direction sent in a group of experts from the Fed,
commercial banks and the Volunteer Corps on an off-the-books mission to
teach the Russians at the Central Bank the bond game. The Western banker
who explained the project’s background remarked, “Basically, when
Corrigan asks, I guess no one turns him down, because people reacted
instantaneously. It was done by private investors, who were
doing a public service, who were asked by a person you can’t
say no to” (my emphases).

But from the first day of Clinton’s presidency, the new president’s
administration worked aggressively to capture the political support of
the financial sector, offering up heretofore unseen gobs of government
favor. (A disproportionate number of firms receiving Overseas Private
Investment Corporation guarantees, Export-Import bank lending, and
participation from International Finance Corporation and Russian
Enterprise Fund were high-dollar contributors to both Clinton campaign
coffers and the DNC.) The basic formula was simple, it’s not rocket
science as Russia’s Harvard advisers would like the public to believe:
The bread and butter of all equity markets are bonds. Wall Street
wanted a debt market. You build it and we’ll come, they said.

The aid program delivered best it could what was in reality a flimsy
contrivance, which — in turn — was really only an exotic venue through
which to pass public funds to select Russians of the Clintons’ and
HIID’s choosing and to Wall Street investment banks the Clintons hoped
to entice permanently into their orbit of supporters and contributors.
In short, the
Russian bond market was influence peddling at the highest levels,
not unlike the Arkansas Development Finance Authority, a public fleecing
machine the Clintons built to benefit their political supporters and
contributors years ago in their home state.

The Clintonites’ new spin admits that many Russians have the idea
their current misfortunes are the intentional work of the U.S. Allowing
that the Russians’ theory “is built on a certain logic,” Kaiser still
managed to conclude that the “catastrophe was probably made inevitable
by the policies adopted by the last Soviet government, but Russians
rarely grasp the subtle points of economics.”

Say what? Subtle points of economics? Looting and political
racketeering are hardly subtleties apt to confuse any Russian, though
American taxpayers were certainly misled successfully.

The Clinton apparat is quick to whine that somebody had to keep the
communists at bay. But there were no communists in Russia by late 1991,
only nascent investment bankers looking to nail down a stake any which
way. Communism had evaporated by late 1987, the year in which the
Russian people were allowed to hold convertible foreign currencies.
Overnight, the power of money displaced the power of ideology.

Bill Clinton’s foreign policy is best understood not as a collection
of new era efforts at “nation building,” but instead as an utterly
irresponsible form of colonialism. It’s mind-boggling just how
opportunistic U.S. economic policies were in Russia.

What a free lancing Harvard economics professor, Jeffrey Sachs, and
his team of flying graduate students managed to set in motion in 1992
insured that absolutely nothing was ever going to work to the
Russians’ benefit no matter what they tried. The possibly intentional
sabotage of Russian reform was the result of three egregiously
wrong-headed policies; a forced inflation, tariff reductions and voucher
privatization.

In late 1991, vast amounts of gaseous blathering were published
regarding something called “the ruble overhang,” describing the burden
of it and the urgent necessity of doing something about it. This was
all nonsense, of course, since the dreaded ruble overhang was nothing
more insidious than the collective national savings held by Russian
households. The Soviet economy focused almost entirely on the defense
sector, leaving nothing for the people to buy. Therefore, the Russian
people had accumulated a large stock of savings.

In July 1991, the Supreme Soviet passed legislation mandating the
privatization of the Russians’ national legacy. Despite that, the
Harvard-connected advisers reasoned just months later that since there
was nothing to buy immediately, the national savings — that pesky
“ruble overhang” — would have to be eliminated. Free market types went
blue in the face pointing to the national property fated for the auction
block as the most useful and appropriate sponge for the people’s
savings, but to no avail.

Hang on, free market economics Harvard-style gets even nuttier.

Yegor Gaidar insists to this day, John Lloyd was good enough to
remind us, that “he had no choice but to let prices rise to increase
supply and to scrap trade barriers so that foreign commodities could
begin to fill store shelves.”

Say, huh? The Soviet Union was economically self-sufficient except
for bananas, coffee and coconuts. Foreign commodities weren’t required
to fill Soviet shops. And even though the ruble was not convertible,
that characteristic had nothing to do with the sudden shortages in late
autumn 1991, which were only slightly worse than those normally
encountered in the last sputtering years of Gorbachev’s
perestroika.

No one had stopped producing, so why were shops suddenly nearly
empty? Producers had begun hoarding, as had fearful consumers, but why?
Yeltsin did announce in November 1991 that the government intended to
free prices, but he also announced the exact date on which prices
would be freed. Predictably, producers withheld their product from
market and rubbed their hands together like flies awaiting the coming
feast which Yeltsin’s newly announced policy guaranteed. Within a week
of the ill-considered speech, Muscovites’ needs were being rationed.

However, Gaidar really was under pressure, but the pressure was
coming from the West to open Russia to unrestricted imports in return
for multilateral lending. Gaidar soon delivered a trade policy that was
100 percent back-to-front, accommodating as it did the self-serving
demands of both the West and Russia’s nascent banking oligarchy; Russian
manufacturing was to take the brunt of unrestricted foreign competition,
but domestic banking was to be protected from competition! Even Russian
Central Bank Chairman Viktor Gerashchenko protested, but Yeltsin’s boys
got what they wanted and the IMF continued lending. So much for the
“leverage” foreign policy elites claim foreign assistance programs
provide the U.S.

In 1991, there was no hope whatsoever that wheezebag Soviet
industries could compete with the West’s shiny, alluringly-packaged and,
to Russians, exotic products. For decades, prices were set by
Gosplan (State Ministry of Central Planning), any enterprise
profits were claimed as Soviet tax revenues, all customer bases were
guaranteed and therefore no enterprise had a financial incentive to
compete. Without competition, there was never any need to improve
quality.

How could freeing prices alone change this equation? Free prices
only work to the benefit of consumers when producers compete with one
another in the marketplace to satisfy customers’ demands, leaving
consumers positioned to reap the most benefit at the lowest price.
Clearly, an equitable and transparent privatization that would have
delivered property widely to Russia’s many eager hands should have
preceded the freeing of prices. And during privatization, native
producers should have enjoyed some protectionism at least, as did
developing American industry and manufacture in the 19th century.

But why was banking alone protected from foreign competition? Could
it have been because the former Communist Youth League or “Komsomol”
leaders who’d been selected to become the captains of Russian banking
were the private-sector allies and beneficiaries of Yeltsin’s “eager
young reformers” and their HIID advisers?

Competent advisers would have known Russia never did develop an
effective banking sector and system of credit in 1000 years of her
history. The story of Russian banking — ancient and modern — always
has the same plot, only the names and the dates change. S.Y. Borovoi’s
easily obtained history of 18th century banking outlines a typical
episode involving a certain “Suterland, who received 2 million pounds
for transfer to London, but instead lent the sums to Prince Potyomkin
(800,000), Finance Minister Vyazemsky, Foreign Minister Bezborodko and
even to the future emperor Pavel. The debt of these honorable people
was, according to the custom, forgiven and paid by the state.”

Certainly eager Western banks should have been given admission to
Russia. By working initially with more developed and well-capitalized
Western banks and later by competing with them, Russian banks could have
developed quickly and today be mediating capital responsibly and
profitably. No good economic purpose was achieved by foisting subsidized
billion dollar loans onto Russia for the purchase of Western consumer
goods and the sustenance of Yeltsin’s Komsomol pirates and parasites.

When Chubais and his Harvard pals belatedly turned their attention to
privatization, no one asked how it would be possible to privatize
property in a country without property rights. (A similar error was
once made by the Soviet aid establishment, which trained railroad
engineers for Laos, a country with no railroads.) In fact, it wasn’t
possible.

There was no privatization, but instead a very expensive, exhausting
and destructive program of paper title transfers. At best, a manager
could gain personal control of an income stream, but he could not
function as a responsible proprietor. Consequently, asset-stripping was
and is rampant. And Yeltsin, a Soviet usurper masquerading as a
democrat, saw to it that the paper property titles were transferred to
key citizens, institutions and long-term cronies so they would have a
vested interest in sustaining his power.

But what about that troublesome “ruble overhang”? Jeff Sachs let the
cat out of the bag on a spring night in 1991 when he told a colleague
from the Hoover Institution and his wife that it was his and Yegor
Gaidar’s intention to remove from the market all “competing claims,”
meaning the people’s savings. How then to do it?

Easy. In the Soviet Union’s monopolistic economy, freeing prices
guaranteed that state monopolists would raise prices without restraint.
On Jan. 2, 1992, Yeltsin freed prices throughout all of Russia. Poof!
The subsequent 2,500 percent inflation Russians suffered in 1992
dissipated those noisome “competing claims” with an efficiency that the
Russians hadn’t seen since Adolf Hitler’s blitzkrieg 50 years
earlier. Tellingly, property auctions gained steam only in 1993.

The only investment capital of which any country can be
certain is the national savings. Why then did Harvard-connected advisers
set about building a market economy by first removing the only money
Russians had to participate, thereby leaving foreign and Russian
criminal wealth to command the new market? And why was the follow-on to
put the Russian Federation’s property, the legacy of the long-suffering
Russian people, up for sale to a population made kopeckless by the
four-digit annual inflation the Harvard advisers’ first reform
initiated?

Imagining the consequences isn’t necessary; impoverished Russia is
reeling still.

Yabloko leader Gregory Yavlinsky once mused aloud, “Any child could
see what would happen. Why then didn’t the Harvard professor?” Good
question.