... if the notion of billions of barrels of proven oil reserves and billions of tons of gold fills your dreams with visions of red-hot cash flow and ice-cold vodka, then Boris Yeltsin just might find some work for you. - Paul Hofheinz, Fortune Magazine, 23 September 19911
The foregoing article is an excerpt from Chapter 3 of my book Grand Deception: the Truth about Bill Browder, Magnitsky Act and Anti-Russian Sanctions. Part 1 is here. Part 2 is here.
russia 90s
© Viktor Korotayev/ReutersA street vendor feeds a stray dog at an illegal food market in the outskirts of Moscow, January 1997.
Shock therapy gave Russia one of the worst and longest economic depressions of the 20th century, an unprecedented humanitarian catastrophe for a peacetime crisis, and a criminally inequitable privatization of public assets. The reasons why things happened this way in Russia generally aren't well understood in the west. Even among better informed intellectuals, the failure of shock therapy is often thought to be vaguely related to some sinister flaw in the Russian society. It is what Bill Browder characterized as "the dirty dishonesty of Russia," or "Russia's evil foundation," which spawned corruption and criminality of staggering proportions. In this toxic environment, the sweet fruits of western democracy and capitalism simply could not grow in spite of the generous benevolence of Russia's western friends.

Such a credulous version of events was never based on any coherent analysis of what transpired in Russia during the 1990s. Rather, it was based on purposeful perception management in the Western media. As late as April 2015, Washington Post provided a good example of this perception management. In an editorial board article, Washington Post informed its readers that in the 1990s, "thousands of Americans went to Russia hoping to help its people attain a better life. The American and Western effort over the last 25 years - to which the United States and Europe devoted billions of dollars - was aimed at helping Russia overcome the horrid legacy of Soviet communism, which left the country on its knees in 1991. ... The Americans," write Washington Post editors, "came for the best of reasons. ... a generous hand was extended to post-Soviet Russia, offering the best of Western values and know-how."2

Indeed, western role in Russian transition is almost invariably represented as generous benevolence. While many among Russia's western helpers did come with sincere and honorable intentions, the whole project, insofar as it was determined by its command and control structure, was simply a massive, bald-faced criminal enterprise.

IMF's Policy Dictate

When Jeffrey Sachs drafted his shock therapy recommendations, he estimated that for the reforms to succeed, Soviet Union would need financial support of about $15 billion per year for many years. This money was needed for the state to continue administering essential social services like pensions, health care and food aid for the country's population. But while the IMF and U.S. government insisted that Moscow abidingly implement the draconian shock therapy measures, they stubbornly refused to provide the needed financial aid. Sachs also advocated debt relief for the USSR which, before its collapse in 1991 was already $60 billion behind in payments to foreign creditors.

When he advised the Bolivian (1985-1986) and Polish (1989-1991) governments in implementing their own shock therapies, Sachs was able to negotiate a 50% debt write-off for Poland and a 90% write-off for Bolivia. By contrast, Russia would get no debt relief of any kind. To the contrary, at the G7 summit held in Moscow in November 1991, representatives of the seven leading western powers insisted that Soviet Union had to continue servicing its external debts at all cost, even menacing Yegor Gaidar that "any suspension of debt payments would result in the immediate suspension of urgent food aid and that the ships nearly arrived at the Black Sea ports would turn around."3 Moscow's endeavor to comply with these payment obligations completely depleted the government's treasury within only three months' time (by February of 1992).

Sachs later reported that in December of 1991 he held discussions with the IMF urging its representatives to advance the financial support needed for Russia's transition, but they insisted that Russia didn't need any such assistance and told him that they had instructed the G7 accordingly. Sachs found the methodology on which the IMF had based their decision "primitive beyond belief," which led him to assume that the IMF was simply "parroting the political decisions already decided by the United States." He was right, of course: as we now know, US aid policy for Russia was indeed determined by two key US government agencies: the Treasury Department run by Robert Rubin with Lawrence Summers in charge of Russian affairs, and the National Security Council.4

To be sure, IMF did advance some loans to Russia during its transition period, but the amounts in question were too small and came too late to provide any meaningful economic or social relief. In all, between 1993 and 1999 the IMF lent Russia between $30 and $40 billion, a far cry from the $15 billion per year that were thought necessary to support her economic reforms. Furthermore, the bulk of IMF loans were given to the oligarch-owned private banks which used them to fund capital flight, bond market speculation and betting against the ruble.5

There were further problematic aspects to the IMF loans: in 1995, with hardly any conditions attached, IMF advanced Russia a $6.7 billion loan through its Systematic Transformation Facility. Practically the entire $6.7 billion sum was used to finance Yeltsin's military assault on Chechnya.6 That operation was a disaster but domestically it served the purpose of distracting the public attention from economic problems and political corruption. IMF's very next loan to Russia was a thinly veiled mission to rescue Yeltsin and his government from Russia's democracy. Namely the Chechen misadventure cost Yeltsin dearly in the December 1995 parliamentary elections and his party suffered a devastating defeat to the Communists.

The president himself had become deeply unpopular. With his approval ratings languishing between 4% and 6%,7 Yeltsin was in real danger of losing the June 1996 presidential elections, which again risked reversing Russia's transition and nullifying the privatization of its economy. To avert this, Yeltsin's cabinet hired a team of American political strategists with ties to the Clinton administration to advise his election campaign. As the Americans got to work in March of 1996, one of the first things they realized was that the Russian people were furious about the government's failure to pay state salaries and pensions for months on end. Washington got the signal and the IMF took action: it promptly released a $1 billion tranche of its next, $10.2 billion loan so that Yeltsin could pay all the salaries and pensions his government owed. The loan served the purpose of improving Yeltsin's unpopularity and making the rigged election appear a bit less suspect.

IMF approved its largest, $22.6 billion loan to Russia as late as 20th July 1998 as its bankrupt government slid inexorably toward default. The loan served two key purposes: a large part of it was a gift to the oligarchs who helped themselves to the funds to convert their hoard of rubles into USD. Within four weeks they bought $6.5 billion and transferred most of it to foreign banks.8 Most of the rest of IMF loan was a stealth bailout for western financial institutions which had some $200 billion worth of loans and investments in Russia. The banks feared the prospect of Russian default which would leave them with crippling losses. These risks became even more acute in the aftermath of the 1997 East Asian financial crisis that would engulf Russia in 1998.

In a testimony before the U.S. Congress, veteran investor Jim Rogers characterized IMF's assistance to Russia as follows: "The activities of the organization are gussied up in sanctimonious prose about aiding the poor and raising the living standards of the third world. Don't be fooled. These bailouts are really about protecting interests of Chase Manhattan, J.P. Morgan, and Fidelity Investments."9

In addition to loading Russia up with unproductive debt, IMF also engineered Russia's hyperinflation and liquidity crisis. After eliminating price controls, IMF obliged Russia to maintain the ruble as the common currency for all Soviet Union successor states, giving each of the 15 new countries the incentive to issue ruble credits for their own benefit while fueling inflation for all others. Sachs reported that he strenuously argued with the IMF against this measure but "for inexplicable reasons," he was consistently rebuked. The result was a one-year delay in the introduction of national currencies for the former Soviet republics, pushing Russia into hyperinflation and needlessly prolonging its economic depression. At this same time, the IMF engineered Russia's staggering liquidity crisis that made it almost impossible for enterprises to pay their suppliers and workers. Under IMF's dictate, Russian economy struggled along on less than one sixth of the currency required to operate an economy of its size.

The extent of IMF's iron-fisted control over the Russian economy was exemplified in a letter from the IMF's representative Yusuke Horaguchi to Russia's central bank chairman Sergei Dubinin. The letter specified the precise schedule of Russia's ruble supply along with "harshly worded" instructions regarding bank credits, the state budget, energy policy, price levels, trade tariffs and agricultural policies. Horaguchi's letter even included a warning that any acts of the parliament contravening the IMF mandates would be vetoed by president Yeltsin.10

It is clear that shock "therapy" was little more than a relentless, cruel strangulation of Russia's economy to facilitate looting of her vast industrial and resource wealth. Nonetheless, most Western-published analyses of this episode tended to treat it as failure of good intentions. While lamenting the outcomes and certain questionable practices, most analysts essentially attribute the failure of Russian transition to honest errors, Russia's endemic corruption, and perhaps inexperience in many of the drama's protagonists. In New York Review of Books, Robert Cotrell provides a typical example: "One cannot really fault the youthful democratic movements for this failure. They were amateurs and innocents with a hazy grasp at best of what they wanted to achieve and no grasp at all of how concretely to achieve it."11 Goldman Marshall of Harvard and the Council of Foreign Relations wrote: "To be sure, there were unsettling reports of shady dealings during the takeovers, but most observers explained them away as inevitable side effects of such a far-reaching transformation."

Naturally, Marshall fails to detail how or where he polled these "most observers," but his message to the readers is unmistakable: move along folks, there's nothing to see here - especially pay no attention to the fact that many of those thousands of Westerners who came to Russia "for the best of reasons," including Bill Browder, Andrei Schleifer and Jonathan Hay,12 returned from Russia as multi-millionaires. Financial reporter Anne Willamson, who covered Russia for the New York Times and Wall Street Journal rightly remarked in her Congressional testimony that, "Americans, who thought their money was helping a stricken land, have been dishonored; and the Russian people who trusted us are now in debt twice what they were in 1991 and rightly feel themselves betrayed."

  1. The quote from Fortune magazine is exact, but a correction is in order: neither Russia nor the rest of the planet Earth for that matter have billions of tons of gold. Perhaps Hofheinz didn't think millions of ounces sounded enticing enough.
  2. (Hiatt 2015)
  3. (Sachs 2012)
  4. (Wedel 1998)
  5. As Dr. Michael Hudson explained in his 1999 testimony before the Russian Duma, the banks traded currency forward contracts, exchanging rubles for dollars at some future date, usually three months. As the ruble's exchange rate reliably declined, the banks made huge profits on these trades. The IMF justified financing this practice as supporting the ruble, but it was in effect a simple giveaway to the banks at the expense of the Russian people (Hudson 1999).
  6. (Sailer 2014)
  7. By the time Yeltsin handed the presidency over to Vladimir Putin, his popularity had sunk to barely 2% - making him possibly the most unpopular leader in the history of mankind!
  8. (Browder, Red Notice 2015)
  9. From Jim Rogers'10th September 1998 testimony before U.S. Congress (Lindgren 1999)
  10. (Williamson, Russia's Fiscal Whistleblower 1998)
  11. (Cottrell 2001)
  12. During his time managing the HIID's Moscow operation, Andrei Schleifer and Jonathan Hay took advantage of their position and relationships to make personal investments in Russia. An investigation by the FBI and U.S. Justice Department found evidence of fraud and money laundering by Harvard's consultants. In 2004, Schleifer was found guilty of fraud and he agreed to pay a $31 million fine to settle the case. Not only did Harvard University persist in defending Schleifer over the 8 years of investigations and trials, it paid the bulk of Schileifer's fine and kept him on university's faculty.
About the author

Alex Krainer is a hedge fund manager and author. His book, banned by Amazon in September 2017, is now available in pdf, kindle, and epub formats at the following link: Grand Deception: Truth About Bill Browder, the Magnitsky Act and Anti-Russian Sanctions. Paperback version is now available here (and on Amazon). EU-based readers can purchase it hereAlex also wrote one book on commodities trading.
Originally published at The Naked Hedgie.