Harvard in Russia: Conflicts of Interest

The key role that the Harvard Institute for International Development (HIID) has played in U.S. efforts to help Russia restructure its economy is effectively over. The U.S. Agency for International Development (USAID) in late May suspended a $14-million grant to HIID, pending the conclusion of an investigation into whether two leading figures in the institute's Russia program abused the public trust by using their positions for private profit. On June 6 USAID canceled the grant and said it would terminate all its Harvard-run economic-reform programs in Russia by year's end. The government agency has channeled more than $40 million for the Russia program into HIID since 1992.

USAID alleged that Jonathan R. Hay, J.D. '92, the institute's program director in Moscow, violated USAID conflict-of-interest regulations when he invested in Russian government bonds. The agency reportedly said it had also investigated whether Hay used his influence to help his companion, Elizabeth Hebert, set up a mutual fund in Russia. Economics professor Andrei Shleifer '82, HIID's project director in Russia, was alleged to be at fault because his wife, Nancy Zimmerman, a professional money manager, invested heavily in Russian government bonds with her husband's knowledge and used Harvard resources and employees paid for by the U.S. government when making her investments. Through their lawyers, both Shleifer and Hay denied wrongdoing.

In response to the charges, HIID dismissed Hay and Shleifer from their work on the Russia programs, saying that it did so "without regard to government allegations that have not been proved, or to matters of internal Russian politics," but because the two had violated HIID rules. (Shleifer remains a tenured professor at Harvard.) "We have zero tolerance for anybody associated with HIID projects investing in the countries to which they are advising," HIID's director, Jeffrey D. Sachs, told the Wall Street Journal. Sachs, the Stone professor of international trade, helped bring capitalism to Russia as an adviser to Boris Yeltsin. He became director of HIID in 1995. A statement released by the Harvard news office on May 27 explained that the HIID policy "is meant to avoid any possible appearance of impropriety." The statement concluded that "HIID looks forward to the continuation of normal project activities in Moscow and to building on its longstanding, collaborative relationship with USAID."

But shortly after the firings, Anatoly B. Chubais, Russia's deputy prime minister and minister of finance, who has worked closely with Hay and Shleifer for years, praised both men and announced that he would no longer have dealings with HIID. "The investigation which was made upon the Harvard researchers had political roots," said Chubais at a Moscow press conference, according to a report in the New York Times by correspondent Alessandra Stanley '77. "I guess those roots were produced by those in the United States who do not support the idea of Russia's radical reform." "Chubais was probably choosing a popular scapegoat, Western interference," wrote Stanley, "to protect the consultants and himself from further scrutiny at home from his Russian critics, of which he has many."

On June 6 the Wall Street Journal reported that the World Bank had ordered a special audit of a $31-million loan to the Russian Federal Securities Commission, widening the inquiry into the behavior of HIID's leaders in Moscow. The loan, meant to help Russia develop its capital markets, was managed by a satellite organization of HIID in Moscow run in part by Hay. The audit reportedly will focus on whether the loan was used improperly to benefit either Hay or Shleifer.

The Journal reported on June 2 that Dmitry Vasiliev, Russia's chief securities regulator, had told the World Bank that he was no longer entertaining a bid by HIID to manage an $89-million loan from the bank.

David Warsh '66, an economics columnist for the Boston Globe, wrote that the USAID action came as a result of "smoldering rivalries that burst into flames"--rivalries within the U.S. government's foreign-aid establishment. HIID had come to be used, wrote Warsh, "as the principal, if unofficial, instrument of U.S. macroeconomic policy in Moscow, responsive to instructions from the White House in ways that the well-entrenched AID mission in Russia never was."

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