By Sam Vaknin
UPI Senior Business Correspondent

3rd July 2002

SKOPJE, Macedonia, July 1 (UPI) -- 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 regarding billions of dollars from
International Monetary Funds.

An announcement by the Prosecutor's General Office is said to be imminent;
the highest echelons of the Yeltsin entourage, perhaps even former
president Boris 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 astray during the
implosion of the Russian financial markets in August 1998. They were
supposed to prop up the banking system and the ailing and sharply devalued
ruble. Instead, the funds ended up in the bank accounts of obscure
corporations -- and, then, incredibly, vanished.

The person in charge of the funds in 1998 was 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 Repubblica, of authorizing the
diversion of the disputed funds.

Following public charges made by U.S. 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 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 PricewaterhouseCoopers, 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 that 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 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, 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 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".

Sam Vaknin advises governments in their negotiations with the International
Monetary Fund. Send your comments to: svaknin@upi.com

Russia's missing billions-II 

By Sam Vaknin
UPI Senior Business Correspondent

SKOPJE, Macedonia, July 2 (UPI) -- Former Russian Central Bank Gov. Sergei
Dubinin and his successor, Viktor Gerashchenko, admit that FIMACO, the
central bank's Channel Islands offshoot, was used to conceal Russia's
assets from its unrelenting creditors, notably the Geneva-based Nessim
Gaon, whose companies sued Russia for $600 million. Gaon succeeded in
freezing Russian accounts in Switzerland and Luxemburg in 1993.

PricewaterhouseCoopers alerted the IMF to this practice, but to no avail.

Moreover, FIMACO paid exorbitant management fees to self-liquidating
entities, used funds to fuel the speculative GKO -- Russian domestic
government bonds -- 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 fattened the overblown salaries of Dubinin and
his senior functionaries. He earned $240,000 in 1997 -- when the average
annual salary in Russia was less than $2,000 and when Alan Greenspan,
chairman of the Federal Reserve of the United States, 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 the country's foreign
exchange reserves were 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 Sept. 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
billion 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 U.S. 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 Rep. 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 went out of his way to defend his record and reacted in an
unprecedented manner to the allegations. In a letter to Le Monde, dated
Aug. 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 Aug. 6, 8, and 9 on the content of the
PricewaterhouseCoopers 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 -- interviewed 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 about $500 million of
the $4.8 billion was ever used to stabilize the ruble. Even George W. Bush,
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 U.S. 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."

(Sam Vaknin served in various senior capacities in Nessim Gaon's firms and
advises governments in their negotiations with the International Monetary
Fund. Send your comments to: svaknin@upi.com )

• Article originally from Johnson's Russia List