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Russia: Bank President Denies Misuse Of Government Funds

Moscow, 16 July 1997 (RFE/RL) - When former deputy finance minister Andrei Vavilov left Moscow for a vacation abroad last week, many Russian observers said they doubted he would come back anytime soon. But, in a surprise move, Vavilov cut short his holiday, and at a news conference in Moscow yesterday he denied charges of misuse of government funds, leveled in an unprecedented statement by Central Bank Chairman Sergei Dubinin.

Vavilov, one of Russia's most controversial officials, had survived several government reshuffles after joining the Finance Ministry in 1992. But, he lost his cabinet post this Spring, shortly after Anatoly Chubais was named First Deputy Prime Minister and Finance Minister.

Vavilov became president of MFK (International Financial Corporation), one of Russia's largest commercial banks and a subsidiary of one of Russia's most powerful financial groups, Uneximbank. Vladimir Potanin, Uneximbank's head and founder, was a first deputy prime minister when the misuse of government funds Dubinin alleges took place, and Potanin also lost his post in the March government reshuffle.

At the beginning of this month, Dubinin told reporters that a Central Bank inspection had discovered that two commercial banks authorized to handle state funds had defrauded the budget of more than $400-million. At that time, Dubinin did not name the banks, but said that details had been sent to the General Prosecutor's office for investigation.

Immediately after Dubinin's statement, Deputy General Prosecutor Mikhail Katyshev said authorities had launched a criminal investigation into one of the alleged embezzlements, involving the maker of MIG-fighter aircrafts, MAPO, and several commercial banks, including Unikombank and MFK. Katyshev said the Prosecutor General's office intended to question Vavilov, Potanin and MAPO chairman Aleksandr Bezrukov, but added that no charges had been filed.

In a move that surprised many analysts as unusually strong for somebody holding the politically sensitive position of Central Bank Chairman, Dubinin again took center stage in the scandal Monday, publicly accusing Vavilov and Unikombank of embezzling the money.

In a written statement, Dubinin said Vavilov had ordered the Finance Ministry to pay about $500 million in government funds to several commercial banks, which were to convert them into domestic hard-currency bonds. He said the bonds ended up in the accounts of Unikombank, which sold them, but kept the proceeds. Dubinin appeared to refute charges against MFK, saying that "other banks involved in the securities operations seem to have carried out orders by their clients faithfully." Dubinin said in his statement that, while checking information on Unikombank's securities transactions, he had been confronted "with clear symptoms of an illness called corruption."

Unikombank, reported to be financially troubled, yesterday issued a statement dismissing the charges as "absurd." Without elaborating, the bank accused Dubinin of using them for "political ends." The statement also said the Central Bank had previously conducted six audits, without finding any legal violations.

Dubinin said Vavilov, from 1996 to 1997, had approved two Finance Ministry payments that disappeared. Dubinin said the first case involved 275-million dollars meant to pay back wages to public sector employees of Moscow's regional government. In the second case, according to Dubinin, Vavilov approved advancing $237 million in bonds to MAPO for a contract to produce MIG-fighter aircraft for India. Dubinin said the funds never reached the intended recipients, and in the first case remained in Unikombank's accounts.

Dubinin said former finance minister Aleksandr Livshits and current Minister Chubais had been unaware of the transactions. However, he noted, "numerous breaches of accepted procedures and rules were committed at the Finance Ministry when handing out budget funds."

During his news conference, Vavilov said all accusations against him were "groundless," since they lacked "proper documentation." He added that their authors "got carried away with conjecture." Reporters pressed Vavilov to respond to Dubinin's assertions, but Vavilov said he did not want to accuse anybody, adding that he was sure the investigation would clear his name. However, he added, all transactions had been included in the budget and approved by his superiors, and that all the money had reached the intended recipients.

Vavilov noted that the use of securities as a substitute for cash is an accepted procedure, and mentioned three cases in which it had been authorized in the past, including the Yukos oil company, the gas monopoly Gazprom and Russia's public television ORT. And, in statements that many observers saw as a counter-attack, Vavilov made allegations of his own about two other banks. Vavilov said that as deputy finance minister he had considered that two other banks, National Reserve Bank and Vneshekonombank, had been earning "profits far too high" on transactions where securities were substituted for cash. Vavilov said he had previously reported this information to top government officials, but is unaware of any action taken. And he added he had just given documents in his possession to the General Prosecutor office yesterday, with a request to look into the cases.

Russian media have suggested the scandal is far from having only a financial character, but also has political overtones. Until recently, Vavilov was seen as close to Prime Minister Viktor Chernomyrdin, who reports say is at odds with Vavilov's new ally, Potanin. Articles in the Russian press suggested Vavilov might have been sacrificed by both Chernomyrdin and Potanin, as they represent conflicting financial and industrial lobbies in the fight for influence and control ahead of the next presidential election, scheduled for the year 2000. Other Russian commentators say Dubinin, also seen as close to Chernomyrdin, in leveling the charges against Vavilov and indirectly against Potanin, is acting on the side of other financial groups who feel that Uneximbank has grown too aggressive and independent.

"Nezvisimaya Gazeta," a daily seen as influenced by Deputy Security Council Secretary Boris Berezovsky, yesterday published a long article on the scandal, with the title "He Who Does Not Win -Loses." The paper also published what it said were copies of part of the contract signed by Vavilov and MAPO, and of Vavilov's authorization of a money transfer of $95-million to a MFK account in an American bank. According to "Nezavisimaya Gazeta," if the Prosecutor's investigation proves the scandal is not based on conjecture, but on real, unauthorized deals, "the end of this story may be a sad one...if not for the firms included, at least for their top managers." Berezovsky, a businessman, has vast oil and media interests, including a large stake in ORT television, and, through his holding company, Logovaz, also controls shares in airlines Aeroflot and Transaero.

Several Russian and Western analysts interpreted Vavilov's words at yesterday's news conference as a warning that he has compromising materials that, if needed, he is ready to use in his defense. They noted Vavilov chose to give documents on banking misuse of budget funds to the Prosecutor's office - only, following Dubinin's public and direct accusations.

A Western analyst cited by our Moscow correspondent says it is unlikely Dubinin, considered an extremely cautious and serious person, would level such charges without having the necessary documentation. The Western analyst said it is possible the government is trying to use Vavilov, a powerful but very controversial figure, as an example it is serious in its proclaimed fight against corruption.

As the scandal unfolded last week and Vavilov went on holiday, Uneximbank's Potanin announced MFK was teaming up with the brokerage company Renaissance Capital, to create Russia's largest investment bank. Analysts said Potanin's aim was to create a partnership with a firm, enjoying international reputation and a growing network of Western clients, that would strengthen his financial group in the upcoming battle to control some of Russia's most sought after companies, including the oil company Rosneft and the telephone network Svyazinvest. Potanin said Vavilov would not take part in the new bank, but would be in charge of Uneximbank's holding company Interos. However, Vavilov yesterday said he intends to continue his work as MFK president.