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Russia: Questions Flash On Secret Off-Shore Money Firm

  • Robert Lyle

Washington, 12 February 1999 (RFE/RL) -- Questions and warning lights began flashing through global financial circles Thursday after the International Monetary Fund (IMF) said it did not know about the Russian Central Bank's private off-shore operation on the Island of Jersey.

Almost unnoticed last Friday, Russian Central Bank Chairman Viktor Gerashchenko confirmed to the Duma that the bank had indeed set up and used a company called FIMACO to handle a significant part of the country's foreign currency reserves from the early 1990s.

Sources within the global financial community quote Gerashchenko as saying they set up the company because the Central Bank did not have the "management capacity" at that time to handle Russia's foreign currency reserves and because there were some "tax benefits."

But according to the sources, and accounts published by the Moscow Times, Gerashchenko also said it was used to "protect" Russia's assets from creditors in the London and Paris clubs.

The London club is an organization of creditor nations, including Russia itself, while the Paris club is a gathering of creditor banks. Each deals with handling debt for nations with problems.

The Moscow Times quotes Gerashchenko as saying Russia was "involved in difficult negotiations with the creditors, and there was a probability that the country's foreign property could be seized (so) FIMACO was set up to avoid complications."

Word of the situation first surfaced in a letter circulated in the Duma from former General Prosecutor Yuriy Skuratov, who charged that between 1983 and 1998 the Central Bank transferred at least 50,000 million dollars worth of Japanese yen, French francs, British pounds, German marks and American dollars -- including funds from IMF loans -- into the Jersey firm.

The Island of Jersey, which is in the English Channel close to the French coast, is a part of the United Kingdom but has an entirely independent -- and very secretive -- banking and financial system. It is among a number of such places where clients may keep their deposits and financial moves secret from outside auditors and foreign tax authorities.

Skuratov charged that in using the private company the bank itself had set up, various officials made handsome profits.

Gerashchenko, according to the sources, denied any improprieties.

But when the IMF said it did not know about the operation and has demanded answers from Moscow, financial experts, analysts and bank officials around the globe started paying attention. Most say there are still more questions than answers.

Philip Poole, the director of Emerging East European Markets for ING Barings, the global banking group in London, says it is perfectly normal for Central Banks -- especially those in less developed countries -- to use private financial firms to help invest foreign reserves.

Poole says the reserves have to be invested in markets abroad depending on the currency involved and that is usually handled through an intermediary. But it's difficult to see why that intermediary would be set up in a market like Jersey or why one was set up from scratch.

Poole said in a telephone interview with RFE/RL's economics correspondent that there are dozens of skilled, highly professional investment firms available around the globe to handle the investment of a country's foreign currency reserves.

Poole says investment banks have many central banks as their clients and the money moves through as it does with any other investor to be put where they want it invested. But this sounds to be something different.

Just how different the FIMACO operation was from most investment banks is an important question, according to American experts. U.S. Treasury and Federal Reserve (Central Bank) officials are understood to be placing their own queries to find out exactly what was done and whether in fact some or all of the money was hidden from creditors, including the IMF. But U.S. officials would not discuss the situation.

Poole says it would normally be very difficult for a central bank to hide such large sums of money.

Poole says it's difficult to see how those transactions could be hidden because they should show up somewhere in the central bank's balance sheet and in its financing operations for the government. That would come to light in the normal course of IMF evaluations of a country's performance required for disbursements of IMF loans to be made.

But, other experts note, given the lack of reliable accounting systems in a country still struggling to handle the transition to a market based economy, it might not be so difficult to hide significant amounts of funds. That would be doubly true in Russia's case because the flight of private capital from the country continues to be very high.

Hiding assets from creditors is considered fraud under bankruptcy laws in most western countries. In the case of sovereign nations, the IMF is expected to be the official institution ultimately able to ferret out such attempts.

Sources at the IMF are anxious to hear what Russian officials have to say. "This is highly unusual," said one, adding: "But it is possible in those early years they did seek outside help when they didn't have the experience and that might be a mitigating factor."

However, the source also asked rhetorically , of course, if that is the case, why didn't they hire an experienced firm?

Russian officials, who had seen a small ray of hope in their last round of negotiations with the IMF towards resumed borrowing, must now first answer some hard questions about their past actions.