Audit Shows Russia Misled IMF on Loan
By David Hoffman
The audit, carried out by the international accounting firm PricewaterhouseCoopers, was made in part to satisfy IMF demands for full disclosure of Russia's connection to the offshore firm during the IMF's recent negotiations with Moscow on whether to resume lending to debt-laden Russia.
The issue is important to the IMF because it put billions of dollars into the Central Bank's reserves in recent years as part of a program designed to bolster economic reform in Russia. Evidence that the IMF money was misplaced or mishandled could further complicate Russia's efforts to attract new lending.
Analysts said Russia was unlikely to be cut off from IMF loans, because the fund is more interested in changing Russia's ways than in penalizing it. But the case may represent a clear breach of Russia's promises to the fund, and could fuel criticism of IMF support in Congress and elsewhere.
While the results of the audit have been presented to the IMF and the Central Bank, Central Bank Chairman Viktor Gerashchenko has vigorously resisted making the document public, according to the well-informed sources. Gerashchenko classified previous audits on the same subject.
An IMF delegation held talks in Moscow this week on whether to lend a fresh $4.5 billion to Russia, enough for Russia to repay what it owes the IMF this year from earlier loans. A decision is expected in July.
The specific case in which Russia misled the IMF involved a $1 billion internal loan that the Central Bank had made to the Russian government in mid-1996, sources said. In return for the loan, the Central Bank was given a promissory note. The note was then quietly dispatched to an offshore firm, apparently without the IMF's knowledge. This skewed the reports that Russia is supposed to make truthfully to the IMF about the size of its hard currency reserves.
It was earlier reported that the Central Bank in recent years funneled billions of dollars in Russia's hard currency reserves through a little-known offshore firm, Financial Management Co., known as Fimaco, based in Jersey, Channel Islands. Documents disclosed by The Washington Post showed that some of the money was then pumped back into Russia's high-flying government bond market in 1996, in the months before President Boris Yeltsin's reelection.
It is not unusual for a Central Bank to park reserves abroad in safe currencies of other countries, but it was highly unusual for the Russian Central Bank to entrust these reserves to Fimaco, a little-known firm that had an initial capital of only $1,000.
Earlier this year, the scheme was disclosed in a letter to parliament by Russia's embattled federal prosecutor. Documents since made public show that, starting in 1993, the country's foreign currency reserves were sent through a hidden network – sometimes using code words from an official at the Central Bank – that included Fimaco and affiliated banks in Paris and Moscow.
Nicholai Gonchar, a Russian legislator, has raised questions about what happened to the profits from the use of the offshore funds. Another mystery has been who received the commissions and fees for handling Russia's billions of dollars in reserves, and why such an unorthodox and potentially risky channel was used.
Under Article 7 of the IMF's Articles of Agreement – which Russia pledged to follow when it became a member in 1992 – the "minimum necessary" information it should provide the fund is "official holdings at home and abroad" of gold and foreign exchange. Members are supposed to provide the IMF information "in as detailed and accurate manner as is practicable and, so far as possible, to avoid mere estimates."
In addition to the Fimaco audit, sources said a separate investigation is also underway of a $4.8 billion IMF loan made last summer, just before the Aug. 17 ruble devaluation and domestic debt default. The contents of this second investigation are not known, but some U.S. and Russian officials have questioned why the infusion of funds failed to avert a crisis, and what happened to the money.
Asked for comment today about the findings of the Fimaco audit, the Central Bank requested a list of questions by fax, but then failed to respond. PricewaterhouseCoopers had no comment.
In Washington, an IMF spokeswoman said, "We have seen the draft report, not the final report. We would like to see the report published and we expect that they will [do so] in due course." U.S. officials are also pressing for publication.
A controversy over the audit could be problematic for Gerashchenko, who was appointed to his second term as Russia's central banker after last August's ruble crash. Gerashchenko was head of the Central Bank in 1993 when the first offshore dealings with Fimaco began. He has repeatedly claimed there were no "financial infringements" in the bank's dealings with Fimaco and that the money was returned to Russia. Gerashchenko is considered close to the Communists who control the lower house of parliament, and Kremlin officials have signaled recently that they are considering replacing him.
The Fimaco audit, according to the sources, reveals that Russia's reports to the IMF of its hard currency reserves in mid-1996 were skewed by the dealings with Fimaco. The sources said the $1 billion discrepancy was not accidental. "This was not an accounting error," said one source with first-hand information.
The source said overall the audit found no criminal activity but "there are some transactions there that one should question whether a Central Bank should be doing."
Russia had about $12 billion in hard currency reserves (excluding gold) in mid-1996. The IMF watches these reserves closely as a sign of how a country is managing its economy.
But what Russia failed to tell the IMF was that $1 billion was not actually reserves, but a promissory note issued by the Russian Finance Ministry for the loan from the Central Bank, the sources said. The Central Bank apparently hid the fact that it sent the note offshore, to Fimaco. It is not clear what eventually happened to the note. IMF officials have said previously that while they were aware the Central Bank had some overseas financial dealings, they did not specifically know about Fimaco.
According to the sources, the Finance Ministry needed to take a large loan from the Central Bank in the weeks between the first round of the 1996 Russian presidential election, June 16, and the second round, in early July. The ministry had overspent to fulfill Yeltsin's election promises and help get him elected, but revenues had fallen off. Without a loan, the Russian government might have been thrust into an embarrassing budget crisis right before the election. Within limits, the Russian government is allowed to borrow from the Central Bank.
In the months before the presidential election, the Central Bank had been sending money offshore to Fimaco which then re-invested it in the short-term Russian government bonds known as GKOs – then paying up to 200 percent interest. The Fimaco investments were secret and carried out through a Moscow-based commercial bank, Eurofinance, which has specialized in the GKO market. According to documents earlier disclosed by The Post, $855 million was transferred to Fimaco from the Central Bank for investing in these bonds between Feb. 29 and May 28, 1996.
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