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Russia: Scandal Reveals Government's Murky Finance Schemes

Moscow, 21 July 1997 (RFE/RL) -- Russia's latest financial scandal, involving a former government official and a commercial bank accused of siphoning off state funds, has cast a spotlight on myriad complex schemes the government uses to manage its finances.

Saddled with an unrealistic budget and low tax collection, the government has responded to the web of non-payments in the economy by devising often murky methods to manage both expenditures and revenues. These schemes are criticized as exacerbating the payments crisis and filling the pockets of well-connected banks.

In the latest scandal, Central Bank Chairman Sergei Dubinin said last week that former First Deputy Finance Minister Andrei Vavilov had authorized a deal to transfer Finance Ministry bonds to a chain of commercial banks. The banks were supposed to sell the bonds and deliver the proceeds to budgetary recipients. Instead, Dubinin said, the bonds ended up with Moscow's troubled Unikombank. And Unikombank, he said, sold the paper and kept the proceeds.

Vavilov maintains that the money went where it was supposed to and argued that the scheme was within the Finance Ministry's rules. He said it was one of numerous methods the government has used to meet its spending obligations given the lack of tax revenues. As an example, he pointed to Russian television ORT, which was financed last year by selling Finance Ministry bonds, known as MinFins, through commercial banks.

Several economists said using MinFin bonds to finance budgetary items was highly unusual. Alexander Morozov, an economist at the World Bank's Moscow mission, called the scheme "a violation of sound budgetary regulation."

It is unclear why the Finance Ministry would not have sold the bonds itself and used the cash to finance budget expenses. Charles Blitzer, chief emerging markets economist at Donaldson, Lufkin and Jenrette in London, said the method has been used in the past, mostly to the benefit of select banks that sold the bonds for a profit.

It is just one of several methods the government has used to make budget payments that have allowed commercial banks to pile up huge profits.

However, the government has recently moved to cut commercial banks out of budget operations altogether. A presidential decree in May banned the Finance Ministry from guaranteeing short-term loans made by commercial banks to budgetary organizations. One Western economist who asked not to be named said government guarantees for commercial loans involved what he called "a certain amount of corruption and lack of transparency." He said transactions have been extremely profitable for banks.

Another decree in May called for phasing out the system of authorized banks making government payments, mostly to regional budget recipients. Due to Russia's undeveloped treasury system, the Finance Ministry sometimes makes payments through commercial banks, which have a more extensive network of regional branches. Some banks, however, have been accused of delaying payments and investing the funds in the high-yield government securities market.

he federal government also has been trying since July 1 to install order on the revenue side of its finances by outlawing monetary offsets as tax payments. Monetary offsets consist of the government canceling debts owed various enterprises and in return crediting the canceled sums as tax payments. Actual cash isn't involved. Offsets are criticized for aggravating Russia's wage arrears crisis.