Please excuse if the lines wrap funny. I wanted to retain the format with
the sidebar advert links to "Invesco" juxtaposed to the story of Russian
foreign currency reserves funneled into a offshore shell company, "Fimaco".
[The Washington Post[CyberLearning Center]
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Enter symbols Central Bank Hid Investments of Russian Funds
separated by a
space: By David Hoffman
Washington Post Foreign Service
[getquotes] Monday, March 8, 1999; Page A1
Look Up
Symbols MOSCOW – The Russian Central Bank sent billions of
Portfolio dollars of foreign currency reserves out of the country
[ ] and into a secret offshore network during the past five
Made Possible years, and profits from the investments appear to have
by: been concealed from the Russian authorities, according
[E*Trade] to an internal audit of the bank's activity.
Moreover, documents show, part of the hidden flow of
money was clandestinely directed back into Russia's
[www.scottrade.cohigh-flying government treasury bond market in 1996 in
a move that may have been illegal.
[Vanguard Group]
[Invesco] The documents are part of an internal audit of the
Central Bank for 1997. The audit has been disclosed to
[Strong Funds] parliament, but the internal documents have not. The
documents, contents of which were disclosed to The
[Partners:] Washington Post, suggest unorthodox and possibly risky
management of Russia's precious foreign currency
reserves between 1993 and last year, as Russia
struggled with a difficult transition to a market
economy.
A leading member of the Russian 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 is 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 complex, 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 five 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 Post, saying that it would have no
comment until another audit is 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 and freeing of prices from controls in 1992,
hyper-inflation gripped the country, fueled in part by
easy credits from the Central Bank during
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 long-running 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. At a news
conference and in an interview, 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. Ltd., known as Fimaco, which
handled Russia's foreign currency reserves. Its
existence was revealed in a letter that chief
prosecutor Yuri Skuratov sent to parliament Feb. 1,
followed immediately by his abrupt and still
unexplained resignation. The firm was set up in 1990 in
Jersey, Channel Islands, with initial capital of
$1,000, according to registration documents there.
Fimaco has not responded to the latest charges although
former Central Bank officials have defended it.
Dubinin, the former bank chairman, and his deputy,
Sergei Aleksashenko, 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. They recalled that a Swiss businessman
had seized Russian government bank accounts in Europe
in 1993.
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.
When questions were first raised, Gerashchenko told
parliament that Fimaco was a wholly-owned subsidiary of
Eurobank, a Paris-based bank in which the Central Bank
has a majority share. However, the registration
documents for Fimaco list the shareholders as Ogier
Nominees Ltd. and Ogier Secretaries Ltd., and it is not
clear who they represent.
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, German 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."
Gonchar, who has been probing the origins of Fimaco,
made public an internal Central Bank document
suggesting that an attempt was made to keep some
transactions off the books. According to the document,
"Instruction No. 181" dated Dec. 27, 1993, says the
amount of money in the Central Bank account with Fimaco
"is not disclosed on the balance sheet of the Bank of
Russia." A Central Bank spokesman refused to comment on
the document.
Alexander Khandruyev, first deputy of the Central Bank
until last year, said decisions about Fimaco "were not
made in the board of directors." Khandruyev, who was a
member of the Central Bank board, added, "These were
quiet decisions."
Questions also persist about the volume of Russia's
currency reserves that Fimaco handled. 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, according to the documents. "Having
concealed the profits on operations with Fimaco in
1993-94, the Central Bank has distorted financial
reports and could use the received currency for illegal
operations," the internal documents report.
The internal documents also confirm a charge leveled by
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 internal documents also confirm that the
investments in the GKO market were channeled through a
Moscow-based commercial bank, Eurofinance, which has
specialized in the GKO market. The two largest
shareholders of Eurofinance are the Central Bank's own
subsidiaries – Eurobank in Paris, with 45 percent, and
Fimaco, with 35 percent. Eurofinance refused to respond
to repeated written requests for comment. The bank's
annual report for 1997 says it placed $4.5 billion in
the government bonds that year, and $3.5 billion in
1996.
The bonds later played a significant 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.
Dmitri Vasiliyev, chairman of the Russian federal
securities commission and a long-time critic of the
Central Bank, said in an interview that the Central
Bank had a major conflict of interest in the government
securities market, which it partially regulates while
also was playing for profit. "Obviously this is an
unfair game, with marked cards," he said.
© Copyright 1999 The Washington Post Company
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regards,
Tom Walker
http://www.vcn.bc.ca/timework/covenant.htm
