-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Russian Follies Audit Shows Russian Central Bank Hid Vast Sums Offshore The Joy of Money, Money, Money What it did with the IMF funds is top secret MOSCOW - The Russian central bank sent billions of dollars of foreign currency reserves out of the country and into a secret offshore network during the past five years, and profits from the investments appear to have been concealed from the Russian authorities, according to an internal audit of the bank's accounts. Moreover, documents show, part of the hidden flow of money was clandestinely directed back into Russia's high-flying government Treasury bond market in 1996 in a move that may have been illegal. The documents are part of an internal audit of the central bank for 1997. The audit has been disclosed to Parliament, but the internal documents have not. The documents, contents of which were disclosed to The Washington Post, suggest unorthodox and possibly risky management of Russia's foreign currency reserves between 1993 and last year, as Russia struggled with a difficult transition to a market economy. A leading member of Parliament has raised further questions about whether the foreign currency reserves were used for private gain, although there is no evidence of who got the money. In particular, the documents say that data about profits from the offshore investments are missing, that information was concealed from Russia's investigating authorities and that the central bank lacked control over billions of dollars it sent overseas. The questions about the offshore network come at an awkward time for Russia. The government is hoping to persuade Western creditors to provide billions of dollars in further debt relief, and that decision could be complicated if it is established that earlier aid was misused. Another unanswered question is how much Western donors may have known about the hidden flow of funds set up by the central bank, which has handled major infusions of aid from the International Monetary Fund. At the same time, the central bank is facing renewed demands in Parliament to curb its independence. The central bank has responded to questions about the issue with brief explanations and silence. Viktor Gerashchenko, the current chairman, who served a previous term when the offshore network was started, has classified as a state secret parts of a report on the central bank's activities prepared by the Auditing Chamber, a parliamentary investigating body. Among the subjects stamped secret are the bank's use of hard currency reserves, its payroll, its pension fund and its use of IMF money. The central bank refused to answer questions submitted in writing by The Washington Post, saying that it would have no comment until another audit has been completed. The Russian Central Bank is a powerful, largely autonomous institution that has played a key role in the successes and failures of Russia's struggle to establish a market democracy. After the Soviet Union's collapse in late 1991 and the end of price controls in 1992, hyper-inflation gripped the country, fueled in part by easy credits from the central bank during Mr. Gerashchenko's first term. Later, it reversed course under Sergei Dubinin and played a key role in bringing down inflation, although critics said he was too rigid in 1998 when a devaluation crisis loomed. Last Aug. 17, Russia devalued the ruble and defaulted on its domestic debts, triggering the worst economic crisis since the Soviet collapse. The central bank has potent tools for influencing the economy, including buying and selling government bonds, and setting foreign currency exchange rates and interest rates. Moreover, the bank holds a majority share in Sberbank, the state savings bank, and controls parts of other former Soviet state banks. Aside from its economic policies, the central bank also has been involved in several disputes over its independence and autonomy. One issue has been whether - and how much - the bank should share its financial gains with the government. Under an April 1995 compromise law, half the bank's profits were to be turned over to the government. But the central bank is being accused of bypassing the agreement. Nikolai Gonchar, an independent member of the lower house of Parliament, the State Duma, and a member of its budget committee, has charged that the central bank hid profits from the government. Mr. Gonchar said Russia's foreign currency reserves were invested offshore, and then the profits disappeared. ''I want to know, what is the real income?'' he said. ''I do not know it, and I should know it, according to the law.'' At the center of the controversy is the offshore firm Financial Management Co., known as Fimaco, which handled Russia's foreign currency reserves. Its existence was revealed in a letter that the chief prosecutor, Yuri Skuratov, sent to Parliament on Feb. 1, followed immediately by his abrupt and still unexplained resignation. The firm was set up in 1990 in Jersey, Channel Islands, according to registration documents there. Fimaco has not responded to the latest charges although former central bank officials have defended it. Mr. Dubinin, the former bank chairman, and his deputy, Sergei Alexashenko, have claimed in an open letter published here that the offshore haven was needed to protect the currency reserves against seizure in a legal dispute. It is not unusual for countries to park their currency reserves abroad in safe securities or bonds of other countries. But it is highly unusual for a country to turn over its reserves to a small, little-known management company. ''If you are going to shelter central bank assets, you don't set up a Jersey shell company, which any bright divorce lawyer could crack open in an afternoon,'' said Eric Kraus, head of fixed-income securities for Dresdner Kleinwort Benson, an investment firm here. The use of an offshore haven goes to the heart of Russia's economic woes. Many Russians and overseas investors have been reluctant to keep money in Russia because of legal, political and economic risks. This has given rise to a debilitating flight of capital, which many experts have identified as one of Russia's biggest economic problems. According to the internal documents, the central bank initially set high standards for Fimaco's investments in Western currencies - specifying the amount to be put in dollars, French francs, Deutsche marks and so on. But later, the standards were dropped. The internal document concludes: ''There is a lack of control over Fimaco's administrative and financial activity from the central bank. The central bank does not have at its disposal information about the shareholders of Fimaco. In reality, the central bank did not exercise control over the quality of management of the currency reserves and, in fact, jeopardized them.'' Questions persist about the volume of Russia's currency reserves that Fimaco handled. Mr. Dubinin said it never exceeded $1.4 billion at any given time. The prosecutor said it was $37 billion over five years. Russia's gold and foreign exchange reserves now stand at about $11.4 billion, down from a peak of $24 billion in mid-1997, before the global economic crisis. The internal documents raise questions about what happened to the profits and interest earned on the central bank's investments in Fimaco. They conclude that profits must have been earned, but it is not clear where they went. Some may have remained at Fimaco, but the central bank's records ''lack data'' about the use of the profits, the documents say. The internal documents also confirm a charge leveled by Mr. Gonchar that the foreign currency reserves of the central bank were channeled into Russia's high-yielding, short-term government bonds, known as GKOs, in 1996 when it may have been illegal. Russia, chronically strapped for cash, began floating these bonds in 1993. They have often been a barometer of risk. At times of turmoil, the yields rose to more than 200 percent annually. Foreigners originally were banned from investing in GKOs but in late 1996 the market was opened to overseas investors. However, before the market was legally opened, according to the internal documents, the central bank was using Fimaco to secretly invest in the bonds from overseas, which would have been illegal. According to the documents, $855 million was transferred to Fimaco for investing in the bonds between Feb. 29 and May 28, 1996. The bonds later played a role in the Russian economic crisis because the government reached a point where the interest payments were so high that it could no longer meet them. The Russian government defaulted on Aug. 17 on about $50 billion in these bonds. International Herald Tribune, March 9, 1999 German Socialism Bundesbank Blames Euro's Fall on Lafontaine The infighting is getting nasty THE Bundesbank launched a high-level campaign yesterday to discredit Oskar Lafontaine, the German finance minister, blaming him for the rapid eight per cent decline in the value of the euro against the dollar. The private and public attacks were evidence of mounting tension between euro-zone politicians and bankers over how best to run the currency, which has headed relentlessly downwards since its triumphal launch 10 weeks ago. Board members at the German central bank made known their anger at what they described as Mr Lafontaine's "unprofessional" behaviour in calling for the European Central Bank (ECB) to cut interest rates. They said they were "shocked" by his failure to honour promises not to attack the ECB in public; and Hans Tietmeyer, the Bundesbank president and a member of the ECB's board, had Mr Lafontaine in his sights when he said politicians were closing off the ECB's options by applying pressure to cut rates. "The more intensely these discussions are led in public, the less scope it leaves for monetary decisions," he told Handelsblatt newspaper. With worries about the euro's performance now beginning to spread to the financial markets, Bundesbank members said they were appalled that Mr Lafontaine had ignored their views and failed to consult them. Above all he had refused to learn from their experience in building the German mark into a leading currency by keeping the Bundesbank independent from political influence. Many Frankfurt bankers believed after Mr Lafontaine came to office that he would soon begin to understand that by calling on the ECB to cut interest rates he actually prevents it from doing so, since it cannot be seen to yield to political pressure. Meanwhile, the European Commission insisted that the new currency should not be judged merely on its record since its launch on Jan 1. Its performance should be assessed since last May, when the bilateral rates at which the 11 member currencies are now converted to euros, were set. It was then that the financial markets started to treat the 11 member currencies as one "bloc". "In early May you will find the value is similar against the dollar to what it is now," said one official. "In the autumn, the value increased markedly after economic difficulties in the Far East and Russia when the euro became a safe haven. "What we are seeing now is a correction, coupled with the effects of very strong economic data from America. We are not worried by the current value." Opinion among financial analysts on the euro's outlook is divided. Some predict the weakness in the European economy, combined with strong US growth, could drive the currency to under $1 by the end of this year; others say a cut in US interest rates is likely in the medium term which, coupled with signs of recovery in Europe, will help the euro to recover. The difficulties of running a "one size fits all" interest rate policy in a euro zone whose economies have not converged are clear. While Germany's economy shrank by 0.4 per in the last quarter of 1998 and, according to Mr Lafontaine, badly needs an interest rate cut, Ireland saw growth of almost nine per cent a year and needs to cool the economy. The London Telegraph, March 9, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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