Foreign Assistance

As the Soviet Union crumbled, the United States sought to help Russia and the other newly independent states become free market democracies. The U.S. supported various reforms, including the development of democratic institutions, the privatization of state-owned property, the establishment of legal codes, and the creation of mechanisms to operate a private capital market. The U.S. Agency for International Development, (USAID) the lead U.S. agency to provide transition assistance, lacked the contacts and expertise to accomplish this unprecedented task. Therefore, it turned to private organizations, including the Harvard Institute for International Development, to provide direct technical help to Russian reformers. The Institute was also expected to help oversee U.S. contractors in USAID's Russian economic restructuring project. The Institute had preexisting relationships with Russian officials and had already helped establish several Russian institutions to sustain reforms, including the Russian Privatization Center, which helped restructure business enterprises and facilitated land reform. Members of Congress had raised concerns about the noncompetitive nature of the awards to the Institute and about the Institute's effectiveness. This report assesses (1) how USAID awarded assistance agreements to the Institute to carry out work in Russia and Ukraine and (2) the Institute's role and accomplishments in implementing assistance agreements to develop a Russian capital market and devise a legal reform program. GAO also evaluates the effectiveness of the Russian Privatization Center in implementing USAID post-privatization and land reform projects.

GAO found that: (1) Russia has made progress in many areas where it received U.S. assistance, but some expectations have not been met; (2) a significant portion of U.S. assistance to Russia was provided through cooperative agreements involving oversight and strategic guidance from HIID and task execution by U.S. contractors; (3) between December 1992 and September 1995, AID, through a noncompetitive cooperative agreement and amendments to the agreement, provided HIID with $40.4 million to undertake a number of activities in Russia; (4) the noncompetitive awards to HIID reflected its existing relationships with Russian reformers, and the awards were consistent with applicable laws and AID guidelines; (5) In 1995, AID held a competition for assistance in connection with four projects in Russia, Central Asia, and Ukraine but used erroneous scores to select the winning proposal for one of the projects, which was later rejected by the Russians; (6) with the assistance of HIID and U.S. contractors, Russia has made significant progress in developing a capital market and has established: (a) a Securities and Exchange Commission (SEC); (b) a national company for registering trades; (c) a Russian stock trading system; and (d) a self-regulatory organization for market participants; (7) the goal of setting up fully functioning national clearing and settlement organizations that handle stock trades had not been realized due to political resistance; (8) recent political maneuvering to downgrade the Russian SEC's status from ministry to state committee have to date proved unsuccessful; (9) HIID's work has supported reformers' legislative agendas and contributed to the development of key commercial laws, the establishment of the Russian Institute for Law-Based Economy to carry out the legal reforms, and the development of strategies that enabled Russia to obtain a loan from the World Bank to implement legal reform; (10) due to the political situation that developed in Russia after the 1995 parliamentary elections, most of the legal reforms that have taken place since then have been by executive decrees, rather than the passage of laws; (11) notwithstanding HIID's accomplishments, GAO found that AID exercised minimal oversight of HIID; (12) with HIID support, the Russian Privatization Center (RPC) has assisted with the privatization and restructuring of state-owned enterprises and promoting land reform; and (13) while efforts to provide policy advice and facilitate post-privatization were generally successful, AID's land reform projects were less successful, and the RPC may not be sustainable without further donor assistance.