Russia's Audit Chamber - with the help of the Swiss
authorities and their host of dedicated investigators - may
be about to solve a long standing mystery. An
announcement by the Prosecutor's General Office is said
to be imminent. The highest echelons of the Yeltsin
entourage - perhaps even Yeltsin himself - may be
implicated - or exonerated. A Russian team has been
spending the better part of the last two months poring over
documents and interviewing witnesses in Switzerland,
France, Italy, and other European countries.
About $4.8 billion of IMF funds are alleged to have gone
amiss during the implosion of the Russian financial
markets in August 1998. They were supposed to prop up
the banking system (especially SBS-Agro) and the ailing
and sharply devalued ruble. Instead, they ended up in the
bank accounts of obscure corporations - and, then,
incredibly, vanished into thin air.
The person in charge of the funds in 1998 was none other
than Mikhail Kasyanov, Russia's current Prime Minister -
at the time, Deputy Minister of Finance for External Debt.
His signature on all foreign exchange transactions - even
those handled by the central bank - was mandatory. In
July 2000, he was flatly accused by the Italian daily, La
Reppublica, of authorizing the diversion of the disputed
funds.
Following public charges made by US Treasury Secretary
Robert Rubin as early as March 1999, both Russian and
American media delved deeply over the years into the
affair. Communist Duma Deputy Viktor Ilyukhin jumped
on the bandwagon citing an obscure "trustworthy foreign
source" to substantiate his indictment of Kremlin cronies
and oligarchs contained in an open letter to the Prosecutor
General, Yuri Skuratov.
The money trail from the Federal Reserve Bank of New
York to Swiss and German subsidiaries of the Russian
central Bank was comprehensively reconstructed. Still,
the former Chairman of the central bank, Sergei Dubinin,
called Ilyukhin's allegations and the ensuing Swiss
investigations - "a black PR campaign ... a lie".
Others pointed to an outlandish coincidence: the ruble
collapsed twice in Russia's post-Communist annals. Once,
in 1994, when Dubinin was Minister of Finance and was
forced to resign. The second time was in 1998, when
Dubinin was governor of the central bank and was, again,
ousted.
Dubinin himself seems to be unable to make up his mind.
In one interview he says that IMF funds were used to prop
up the ruble - in others, that they went into "the national
pot" (i.e., the Ministry of Finance, to cover a budgetary
shortfall).
The Chairman of the Federation Council at the time,
Yegor Stroev, appointed an investigative committee in
1999. Its report remains classified but Stroev confirmed
that IMF funds were embezzled in the wake of the 1998
forced devaluation of the ruble.
This conclusion was weakly disowned by Eleonora
Mitrofanova, an auditor within the Duma's Audit
Chamber who said that they discovered nothing "strictly
illegal" - though, incongruously, she accused the central
bank of suppressing the Chamber's damning report. The
Chairman of the Chamber of Accounts, Khachim
Karmokov, quoted by PwC, said that "the audits
performed by the Chamber revealed no serious procedural
breaches in the bank's performance".
But Nikolai Gonchar, a Duma Deputy and member of its
Budget Committee, came close to branding both as liars
when he said that he read a copy of the Audit Chamber
report and that it found that central bank funds were
siphoned off to commercial accounts in foreign banks.
The Moscow Times cited a second Audit Chamber report
which revealed that the central bank was simultaneously
selling dollars for rubles and extending ruble loans to a
few well-connected commercial banks, thus subsidizing
their dollar purchases. The central bank went as far as
printing rubles to fuel this lucrative arbitrage. The dollars
came from IMF disbursements.
Radio Free Europe/Radio Liberty, based on its own
sources and an article in the Russian weekly "Novaya
Gazeta", claims that half the money was almost instantly
diverted to shell companies in Sydney and London. The
other half was mostly transferred to the Bank of New
York and to Credit Suisse.
Why were additional IMF funds transferred to a chaotic
Russia, despite warnings by many and a testimony by a
Russian official that previous tranches were squandered?
Moreover, why was the money sent to the Central Bank,
then embroiled in a growing scandal over the
manipulation of treasury bills, known as GKO's and other
debt instruments, the OFZ's - and not to the Ministry of
Finance, the beneficiary of all prior transfers? The central
bank did act as MinFin's agent - but circumstances were
unusual, to say the least.
There isn't enough to connect the IMF funds with the
money laundering affair that engulfed the Bank of New
York a year later to the day, in August 1999 - though
several of the personalities straddled the divide between
the bank and its clients. Swiss efforts to establish a firm
linkage failed as did their attempt to implicate several
banks in the Italian canton of Ticino. The Swiss - in
collaboration with half a dozen national investigation
bureaus, including the FBI - were more successful in Italy
proper, where they were able to apprehend a few dozen
suspects in an elaborate undercover operation.
FIMACO's name emerged rather early in the swirl of
rumors and denials. At the IMF's behest,
PricewaterhouseCoopers (PwC) was commissioned by
Russia's central bank to investigate the relationship
between the Russian central bank and its Channel Islands
offshoot, Financial Management Company Limited,
immediately when the accusations surfaced.
Skuratov unearthed $50 billion in transfers of the nation's
hard currency reserves from the central bank to FIMACO,
which was majority-owned by Eurobank, the central
bank's Paris-based daughter company. According to PwC,
Eurobank was 23 percent owned by "Russian companies
and private individuals".
Dubinin and his successor, Gerashchenko, admit that
FIMACO was used to conceal Russia's assets from its
unrelenting creditors, notably the Geneva-based Mr.
Nessim Gaon, whose companies sued Russia for $600
million. Gaon succeeded to freeze Russian accounts in
Switzerland and Luxemburg in 1993. PwC alerted the
IMF to this pernicious practice, but to no avail.
Moreover, FIMACO paid exorbitant management fees to
self-liquidating entities, used funds to fuel the speculative
GKO market, disbursed non-reported profits from its
activities, through "trust companies", to Russian subjects,
such as schools, hospitals, and charities - and, in general,
transformed itself into a mammoth slush fund and source
of patronage. Russia admitted to lying to the IMF in 1996.
It misstated its reserves by $1 billion.
Some of the money probably financed the fantastic
salaries of Dubinin and his senior functionaries. He earned
$240,000 in 1997 - when the average annual salary in
Russia was less than $2000 and when Alan Greenspan,
Chairman of the Federal Reserve of the USA, earned
barely half as much.
Former Minister of Finance, Boris Fedorov, asked the
governor of the central bank and the prime minister in
1993 to disclose how were the country's foreign exchange
reserves being invested. He was told to mind his own
business. To Radio Free Europe/Radio Liberty he said, six
years later, that various central bank schemes were set up
to "allow friends to earn handsome profits ... They
allowed friends to make profits because when companies
are created without any risk, and billions of dollars are
transferred, somebody takes a (quite big) commission ... a
minimum of tens of millions of dollars. The question is:
Who received these commissions? Was this money
repatriated to the country in the form of dividends?"
Dubinin's vehement denials of FIMACO's involvement in
the GKO market are disingenuous. Close to half of all
foreign investment in the money-spinning market for
Russian domestic bonds were placed through FIMACO's
nominal parent company, Eurobank and, possibly, through
its subsidiary, co-owned with FIMACO, Eurofinance
Bank.
Nor is Dubinin more credible when he denies that profits
and commissions were accrued in FIMACO and then
drained off. FIMACO's investment management
agreement with Eurobank, signed in 1993, entitled it to
0.06 percent of the managed funds per quarter.
Even accepting the central banker's ludicrous insistence
that the balance never exceeded $1.4 billion - FIMACO
would have earned $3.5 million per annum from
management fees alone - investment profits and brokerage
fees notwithstanding. Even Eurobank's president at the
time, Andrei Movchan, conceded that FIMACO earned
$1.7 million in management fees.
The IMF insisted that the PwC reports exonerated all the
participants. It is, therefore, surprising and alarming to
find that the online copies of these documents, previously
made available on the IMF's Web site, were "Removed
September 30, 1999 at the request of
PricewaterhouseCoopers".
The cover of the main report carried a disclaimer that it
was based on procedures dictated by the central bank and
"...consequently, we (PwC) make no representation
regarding the sufficiency of the procedures described
below ... The report is based solely on financial and other
information provided by, and discussions with, the
persons set out in the report. The accuracy and
completeness of the information on which the report is
based is the sole responsibility of those persons. ...
PricewaterhouseCoopers have not carried out any
verification work which may be construed to represent
audit procedures ... We have not been provided access to
Ost West Handelsbank (the recipient of a large part of the
$4.8 IMF tranche)".
The scandal may have hastened the untimely departure of
the IMF's Managing Director at the time, Michel
Camdessus, though this was never officially
acknowledged. The US Congress was reluctant to
augment the Fund's resources in view of its controversial
handling of the Asian and Russian crises and contagion.
This reluctance persisted well into the new millennium. A
congressional delegation, headed by James Leach (R,
Iowa), Chairman of the Banking and Financial Services
Committee, visited Russia in April 2000, accompanied by
the FBI, to investigate the persistent contentions about the
misappropriation of IMF funds.
Camdessus himself went out of his way to defend his
record and reacted in an unprecedented manner to the
allegations. In a letter to Le Mond, dated August 18, 1999
- and still posted on the IMF's Web site, three years later -
he wrote, inadvertently admitting to serious
mismanagement:
"I wish to express my indignation at the false statements,
allegations, and insinuations contained in the articles and
editorial commentary appearing in Le Monde on August
6, 8, and 9 on the content of the PricewaterhouseCoopers
(PWC) audit report relating to the operations of the
Central Bank of Russia and its subsidiary, FIMACO.
Your readers will be shocked to learn that the report in
question, requested and made public at the initiative of the
IMF ... (concludes that) no misuse of funds has been
proven, and the report does not criticize the IMF's
behavior ... I would also point out that your representation
of the IMF's knowledge and actions is misleading. We did
know that part of the reserves of the Central Bank of
Russia was held in foreign subsidiaries, which is not an
illegal practice; however, we did not learn of FIMACO's
activities until this year--because the audit reports for
1993 and 1994 were not provided to us by the Central
Bank of Russia.
The IMF, when apprised of the possible range of
FIMACO activities, informed the Russian authorities that
it would not resume lending to Russia until a report on
these activities was available for review by the IMF and
corrective actions had been agreed as needed ... I would
add that what the IMF objected to in FIMACO's
operations extends well beyond the misrepresentation of
Russia's international reserves in mid-1996 and includes
several other instances where transactions through it had
resulted in a misleading representation of the reserves and
of monetary and exchange policies. These include loans to
Russian commercial banks and investments in the GKO
market".
No one accepted - or accepts - the IMF's convoluted post-
facto "clarifications" at face value. Nor was Dubinin's
tortured sophistry - IMF funds cease to be IMF funds
when they are transferred from the Ministry of Finance to
the central bank - countenanced.
Even the compromised office of the Russian Prosecutor-
General urged Russian officials, as late as July 2000, to
re-open the investigation regarding the diversion of the
funds. The IMF dismissed this sudden burst of rectitude as
the rehashing of old stories. But Western officials -
interviews by Radio Free Europe/Radio Liberty - begged
to differ.
Yuri Skuratov, the former Prosecutor-General, ousted for
undue diligence, wrote in a book he published two years
ago, that only c. $500 million of the $4.8 were ever used
to stabilize the ruble. Even George Bush Jr., when still a
presidential candidate accused Russia's former Prime
Minister Viktor Chernomyrdin of complicity in
embezzling IMF funds. Chernomyrdin threatened to sue.
The rot may run even deeper. The Geneva daily "Le
Temps", which has been following the affair relentlessly,
accused, two years ago, Roman Abramovich, a Yeltsin-
era oligarch and a member of the board of directors of
Sibneft, of colluding with Runicom, Sibneft's trading arm,
to misappropriate IMF funds. Swiss prosecutors raided
Runicom's offices just one day after Russian Tax Police
raided Sibneft's Moscow headquarters.
Absconding with IMF funds seemed to have been a
pattern of behavior during Yeltsin's venal regime. The
columnist Bradley Cook recounts how Aldrich Ames, the
mole within the CIA, "was told by his Russian control
officer during their last meeting, in November 1993, that
the $130,000 in fresh $100 bills that he was being bribed
with had come directly from IMF loans." Venyamin
Sokolov, who headed the Audit Chamber prior to Sergei
Stepashin, informed the US Senate of $2 billion that
evaporated from the coffers of the central bank in 1995.
Even the IMF reluctantly admits:
"Capital transferred abroad from Russia may represent
such legal activities as exports, or illegal sources. But it is
impossible to determine whether specific capital flows
from Russia-legal or illegal-come from a particular
inflow, such as IMF loans or export earnings. To put the
scale of IMF lending to Russia into perspective, Russia's
exports of goods and services averaged about $80 billion a
year in recent years, which is over 25 times the average
annual disbursement from the IMF since 1992".
DISCLAIMER
Sam Vaknin served in various senior capacities in Mr.
Gaon's firms and advises governments in their
negotiations with the IMF.