Jonathan Hay is a Harvard-educated lawyer who is widely known for his involvement with the Harvard Institute for International Development (HIID) and his role in privatizing the Russian economy during the early 1990s. The efforts of the HIID to privatize the Russian economy are some times referred to as the “Harvard Project” or "Harvard Project in Russia". Hay’s involvement in the Harvard Project eventually led to allegations of wrongdoing by the U.S. government, a lawsuit, and a financial settlement. The actions of Hay and his associates have had long term impacts on Russia and its inability "to confront economic and financial challenges" since the economy was privatized.[1]
Contents |
Hay was born in Idaho in the early 1960s. He excelled academically and was awarded a Rhodes Scholarship. He later graduated from Harvard Law School.[1] Shortly after receiving his law degree, Hay began his professional career as an advocate of open market policies consulting for the World Bank in the 1980s. At this time, Hay also began to develop his close relationship with Harvard University professor Jeffrey Sachs. Hay actively participated in economic reform projects led by Sachs' consulting firm, Jeffrey D. Sachs & Associates.[2]
The Harvard Project in Russia was initiated by the efforts of Mikhail Gorbachev and Boris Yeltsin prior to the fall of the Soviet Union. It entailed the conversion of the Soviet Union’s communist-run economy into a market-based economy. A plan, called the "500 Days" plan, was developed to guide the conversion of the economy quickly. The new Russia partnered with the United States Agency for International Development (USAID) to direct this conversion process. USAID, without specific expertise in this area, contracted with the Harvard Institute for International Development (HIID) to lead the conversion.[1]
Jonathan Hay was selected to "supervise the day-to-day operations of the Russia Project."[1] Hay mixed personal fiscal interests with his professional endeavors. He formed close relationships with other individuals, both in the U.S. and in Russia, including Andrei Shleifer and Anatoly Chubais. His relationships and personal interests resulted in numerous "conflicts of interest" with his work on the Harvard Project.[2] USAID distributed tens of millions of dollars to the HIID for use in the Harvard Project in Russia. There was little to no oversight on the disbursement of those funds and Hay used some of those funds to pursue his own personal interests.[1]
Hay also breached his contract with USAID as he failed to produce the required progress reports of his activities in Russia. After years of Hay and his colleagues failing to produce the requisite progress reports, the United States General Accounting Office began auditing the activities of the Harvard Project.[1]
After collecting sufficient evidence of malfeasance, the United States federal government filed a lawsuit against Hay, Shleifer, and several other people involved in the Harvard project (including Hay's wife). In the United States of America v. The President and Fellows of Harvard College, Andrei Shleifer, Jonathan Hay, et al., Hay, Shleifer, and their wives were accused of "11 counts, including fraud, breach of contract and making false claims to the federal government." Hay and the others claimed they were innocent throughout the trial.[1]
With the fall of the Soviet Union in the 1980s the last general secretary of the Communist Party, Mikhail Gorbachev, attempted to introduce economic and political change. Gorbachev’s initiatives would be short lived, however, as Boris Yeltsin was elected chairman of the Russian Republic's Parliament in May 1990. Within a month of Yeltsin’s election, Russia declared its independence from the Soviet Union. Gorbachev and Yeltsin sought to adopt Western economic policies as the economies of the Soviet Union and Russia were converted to market economies based on the right to hold private property. This economic system conversion process became known as the "500 Days Plan".[1]
The “500 Days” plan became the primary initiative of Yeltsin when Gorbachev resigned. Yeltsin appointed economist Yegor Gaidar to the positions of deputy prime minister and minister of Economics and Finance. With these positions Gaidar formulated a set of principles to guide the reform of Russia’s economy. Gaidar collaborated with economists Anatoly Chubais and Dmitri Vasiliev, who were also strong advocates of open market economies and their complimenting policies. Under the guidance of Chubias and Vasiliev, Yeltsin established the Russian securities market, which was formally named the Russian Federation Commission on Securities and the Capital Market. Russian lawyer Albert Sokin was appointed to supervise this commission. Together Gaidar, Chubias, Vasiliev, and Sokin played prominent roles in the privatization of Russia's economy.[1]
Gaidar, Chubias, and Vasiliev studied Western models of capitalist economies and similar economic reform efforts, specifically the reform efforts of economist Jeffrey Sachs in Poland. Sachs had implemented “shock therapy” programs and policies in his efforts to convert the Polish economy to a market based economy. His shock therapy programs involved the rapid conversion of all property and assets to private ownership. Shortly after learning about Sachs's rapid conversion programs, Gaidar invited Sachs to advise Yeltsin’s new economic team, which Sachs quickly accepted.[1]
With the collapse of the Soviet Union, one of the highest ranking individuals in the U.S. Treasury, Lawrence Summers, was called upon to facilitate the transition in Russia's economy. Summers had close ties with Harvard University as an alumnus and professor. He also had close ties with Andrei Shleifer, an economist at Harvard. Shleifer was sent to Moscow by the World Bank to facilitate the conversion of the Russian economy. Additionally, Shleifer directed key elements of the reform effort of the Harvard Institute for International Development.[1]
HIID advised the Russian government on privatizing its economy and on how to create capital markets, as well as how to develop the necessary laws and institutions to regulate them those markets. This project, which was contracted to HIID by USAID became known as the "Harvard Project". Though USAID contributed more than $40 million of U.S. government funds to the activities of HIID in Russia, there was little supervision of activities by the United States government.[1]
While Andrei Shleifer technically led the Harvard project on behalf of HIID, his presence in Moscow was limited as he supervised the project from HIID’s headquarters in Cambridge, Massachusetts. Shleifer’s wife, Nancy Zimmerman, a hedge fund manager, became involved in the project, reflecting some of the conflicts of interest.[1] Unable to spend the necessary time needed in Russia, Shleifer appointed Jonathan Hay to supervise the day-to-day operations of the project. Hay had been an associate of Shleifer, as well as an associate of Sachs. It helped that Hay was fluent in Russian. Though Hay appeared a valid candidate for the vital position as HIID supervisor of activities in Russia, he lacked practical experience.[1]
As part of their contract, Shleifer and Hay were required to submit regular progress reports of their activities. Hay failed to produce these reports as he grew increasingly interested in the fiscal opportunities available. In addition to being required to submit reports to the United States government, Hay was also prohibited from using his position for his personal financial gain. According to contracts signed by USAID and HIID in December 1992, everyone assigned to the project, their families and people acting on their behalf were prohibited from making investment of personal funds in Russia. Additionally, they were prohibited from personal involvement in Russian businesses.[1]
Shleifer and Hay violated these prohibitions by offering "free" legal services to companies who were benefiting financially from their advice on privatization. Additionally Shleifer and his wife invested in Russian companies. Shleifer pressured his colleague into doing the same, and Hay did just, investing $66,000 into Russian oil stocks.[1]
While supervising HIID activities in Moscow, Hay grew especially close with his colleagues Dmitri Vasiliev and Albert Sokin. Hay’s personal relationship with Vasiliev and Sokin, however, directly interfered with their professional relations as Hay served as the pipeline to the millions in U.S. government money that had been set aside for Russian reform. These government funds directly funded the extravagant lifestyles and social lives of Hay, Vasiliev, and Sokin.[1]
Given the financial opportunities in Russia, various securities and investment firms sent people to Russia to take advantages the changing market. Robert Fleming & Co. sent Elizabeth Hebert as its representative. Hebert developed an intimate relationship with Hay, who spent USAID funds on Hebert and even helped Hebert establish a mutual fund.[1]
By March 1996, the House International Relations Committee noticed the missing progress reports of HIID. The Committee then directed the U.S. General Accounting Office to audit the program. In response, Shleifer and Hay hired a lawyer, Michael Butler. Shleifer and Hay did not cooperate with the audit and instead withheld information from the investigators.[1]
Though aware of the government investigations, Hay and the others continued their prohibited activities, including investing their personal funds in Russia. Hay and his father invested hundreds of thousands in Russian government bonds.[1]
Investigations by the United States government prompted USAID to contact Sachs concerning their concerns. Sachs admitted that a senior HIID official in Moscow, (Hay), had a close relationship with the manager of a Russian mutual fund company (Hebert). Sachs also admitted that funds had been used for personal gain.[1]
Hay was interrogated by investigators. Shortly after, Sachs requested the discharging of Hay from the Russia Project. Following these events, Chubais demanded that USAID terminate HIID programs in Russia, which they promptly did.[1]
As stated by USAID, Hay and Shleifer were guilty of the following:
In September 2000, the United States government filed a lawsuit against Harvard University, Andrei Shleifer, Jonathan Hay, Nancy Zimmerman and Elizabeth Hebert on 11 counts, including fraud, breach of contract and making false claims to the federal government. The suit was entitled “United States of America v. The President and Fellows of Harvard College, Andrei Shleifer, Jonathan Hay, et al.”. It was estimated that the government had been defrauded of tens of millions. Additional lawsuits were presented against Harvard University, Andrei Shleifer, and Jonathan Hay by private companies. Hay and his colleagues denied all charges and pled innocent.[1]
Four years later, in June 2004, the judge in the case ruled against Shleifer and Hay. Specifically, Hay was convicted of attempting to launder $400,000 through his father and girlfriend. Additionally, Hay had conspired to defraud the U.S. government by submitting false claims. Hay was then forced to pay between $1 million and $2 million for his actions.[1]
Following the termination of the Russia project, Jonathan Hay married his former colleague Elizabeth Hebert, who had sold her mutual fund firm.[1] Though he was found guilty of fraudulent behavior, he was later employed by the Cleary Gottlieb Steen & Hamilton London-based law firm. It appears the lawsuit against Hays by the United States government did little to tarnish his professional reputation. Hays is currently employed by a real estate development company in the Ukraine.[2]