Russian Central Bank Accused of Scheme
By David Hoffman
Nikolai Gonchar, an independent member of the lower house of parliament and of its budget committee, raised new questions at a news conference about the conduct of the Central Bank, although many details are still unclear.
Gonchar charged that the Central Bank had set up an intricate scheme to exploit billions of dollars in Russia's national reserves by investing them secretly in high-yield Russian government bonds known as GKOs and concealing the profits from the parliament and government.
Earlier, it was disclosed that the Central Bank had set up an offshore firm, Financial Management Co., known as Fimaco, based in Jersey, the Channel Islands, to handle Russia's foreign currency reserves. By one estimate, the offshore fund managed $37 billion between 1993 and 1998. The firm was a subsidiary of Eurobank of Paris, which is 78 percent owned by the Central Bank.
The disclosures have stirred controversy because it is highly unusual for a Central Bank to turn over management of a country's reserves to someone else. Moreover, questions have been raised about whether the offshore accounts were used to mislead the International Monetary Fund and other international financial organizations about the size of Russia's reserves. The case is the subject of a criminal investigation, but Russia's chief prosecutor resigned after disclosing the existence of the offshore fund and has not yet been replaced.
The scandal also could affect decisions expected this spring on whether to continue aid to Russia. Moreover, the State Duma, parliament's lower house, is engaged in a debate about whether to impose stronger controls on the Central Bank.
Gonchar said the Central Bank had, in effect, found a hidden method to take advantage of soaring yields on Russian government bonds. He said the Central Bank reaped large profits on these security trades. By law, the Central Bank is supposed to donate 50 percent of any profits it receives to the Russian federal budget.
Gonchar claimed that Eurobank and its subsidiary, Fimaco, had created a third company to carry out the scheme -- a Russian bank called Eurofinance. He said the major shareholders in Eurofinance were Eurobank and Fimaco. He further claimed that Eurofinance then served as the back door by which investments were made in the GKOs.
In one series of transactions, he said, Fimaco earned $38 million in net profits. "I want to stress that under the existing laws, they were supposed to transfer half of this sum to the budget," he said. "This information was thoroughly concealed. Where has the profit gone to? The issue is a concrete one: We can and must find this money."
The GKOs were high-yielding, short-term bonds that piled up so large that eventually the government could no longer refinance them, leading to the Aug. 17, 1998, devaluation of the ruble. It is known the Central Bank had GKOs in its portfolio. But Gonchar said it was using the hidden approach to invest the foreign currency reserves in the GKOs because of legal restrictions to its open participation in the primary market.
He said the Central Bank was essentially an insider and should not have been allowed to invest as it did. "What we got was not a market, but a group of insiders," he said.
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