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Russia: Central Bank Under Scrutiny For Hiding Assets

Moscow, 15 February 1999 (RFE/RL) �- Russia�s Central Bank is under close scrutiny following allegations that it channeled some $50 billion of hard currency reserves to a tiny, offshore company from 1993 to 1997.

Former prosecutor-general Yury Skuratov outlined the corruption scandal in a letter to the State Duma just before he resigned over a week ago. His letter notes that the transferred reserves included loans from the International Monetary Fund �a revelation that could influence talks on IMF credits and on restructuring Russia' foreign debt.

Skuratov also said that the Central Bank committed numerous irregularities when it allowed Financial Management Co. (FIMACO), a firm registered at the Channel Island of Jersey, to handle Russia's hard-currency reserves. He said the Central Bank paid an undisclosed and illegal commission to FIMACO.

The Director of the Moscow-based Center for Strategic Studies, Andrei Piontkovsky, says the scandal illustrates how Russian corporate interests, whatever their political orientation, have operated since the end of the Soviet era.

Former finance minister Boris Fedorov told journalists last week that, after he took office in 1993, he asked Central Bank Chairman Viktor Gerashchenko and then-prime minister Viktor Chernomyrdin how the bank's reserves were being managed. Fedorov said he was told that he was meddling in affairs that were none of his business. He now says said that the scheme was used by top state officials to "allow friends to earn handsome profits."

"As I understand, they allowed friends to make profits because when companies are created without any risk, and billions of dollars are transferred, somebody takes a commission. The result is that the commission is quite big. And of course, it's a minimum of tens of millions of dollars. The question is: Who received these commissions? Was this money repatriated to the country in the form of dividends?"

Central Bank Chairman Viktor Gerashchenko offered a different explanation to Duma deputies. He said that Skuratov's letter lacked substance and that the issue "should have been handled more quietly." But Gerashchenko confirmed the existence of FIMACO. He said it was set up in 1990 with $1,000 in start-up capital and was controlled by the Paris-based Eurobank, a Soviet-era subsidiary of the Russian Central Bank.

Gerashchenko said FIMACO was set up to earn high revenues from investments and to avoid taxation. He said the move also sought to avoid the seizure of assets during talks with foreign governments and private creditors on the restructuring of Moscow's Soviet-era debts.

Gerashchenko's first term as Central Bank chairman, from 1992 to 1994, included the period when the alleged irregularities began. He was replaced in 1994 by Sergei Dubinin, who continued at the post until Russia�s political and economic crisis last August.

Dubinin and his former deputy Sergei Aleksashenko also have confirmed and defended the existence of FIMACO in an open letter to President Boris Yeltsin, Prime Minister Primakov and parliamentary leaders. Their letter was published by "Vremya-MN," a daily newspaper founded last year by several financial institutions controlled by the Central Bank. Dubinin and Aleksashenko said they are convinced that FIMACO was needed to defend Russia's economic security.

They also confirmed that the agreement on FIMACO's handling of Central Bank reserves had been signed in 1993. FIMACO, their letter said, protected the Central Bank from at least one foreign creditor who had started legal actions seeking the seizure of Russian assets abroad.

Both Dubinin and Gerashchenko said it is a common practice for central banks to contract external managers who place funds in offshore accounts. They also argue that the practice is not illegal under Russian law.

But international experts say the practice usually involves well-known financial organizations that have highly transparent and accountable policies. Moreover, they say that hiding assets from creditors is considered to be fraud in most Western countries.

Dubinin and Aleksashenko said they continued to use FIMACO because, their letter said, of "a certain Western businessman, Mr. Gaon," who --through court rulings in Switzerland and Luxembourg-- managed to freeze some overseas Russian accounts.

Dubinin and Aleksashenko may have been referring to the case of NOGA, a Swiss company that in 1993 managed to freeze some Russian assets abroad. The case accelerated approval of a 1994 law that gave the Central Bank independence from the government.

A Russian financial analyst (unnamed) told RFE/RL that it is important to understand why both Gerashchenko and Dubinin cite economic security to justify the use of FIMACO. Until the Central Bank became an independent body, he said, any funds held by the Central Bank technically belonged to the government. That meant creditors could launch legal action to freeze, and possibly seize state assets within the Central Bank. But since 1994, the situation has been different.

Dubinin and Aleksashenko both criticized former prosecutor-general Skuratov. They said that his letter compromised Russian state security at a moment when the Central Bank could need FIMACO to protect its reserves from foreign creditors.

They also questioned the $50 billion figure reported by Skuratov. They said $1.4 billion was the most FIMACO ever managed at one time, in 1994, and that "the last of Russia's currency reserves were removed from FIMACO in 1997."

But none of the central bankers explained who actually managed the money or how it was invested. Nor did they disclose how much FIMACO charged as a commission for the service, or who received the profits. Observers say these questions demand an answer.

Political analyst Piontkovsky told RFE/RL that in 1990 FIMACO probably was set up by the financial department of the Soviet Communist Party's Central Committee. He said it "could have been one of the many off-shore vehicles set up to finance Communist parties in other countries, as well as to accumulate funds for Communist Party nomenklatura."

The Russian press, usually quick in publicizing scandals, has so far given very limited coverage to the story. Piontkovsky and other Russian analysts say this confirms the scandal involves such a broad spectrum of political and financial figures that none of the interests controlling Russia's media want to dig up details.

The Communist-dominated Duma, expected next week to debate amendments to the law on the Central Bank, has shown concern. But the Chairman of the Duma's banking sub-committee, Georgy Luntovsky, says the issue is difficult and requires what he calls a "cautious approach."

Elena Mitrofanova, a member of the Duma's Audit Chamber, told Interfax that Gerashchenko is trying to prevent a report on the Central Bank by the budgetary watchdog from becoming public.