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Analysis: Russia's Missing Billions - I

By SAM VAKNIN, UPI Senior Business Correspondent

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.

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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.

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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.

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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.

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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.

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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".

Part 2 of this analysis will appear Tuesday.

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Sam Vaknin advises governments in their negotiations with the International Monetary Fund. Send your comments to: [email protected]

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