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Russia: IMF Battles Entrenched Financial System

Boston, 2 August 1999 (RFE/RL) -- As the International Monetary Fund tries to shed light on Russia's shady financial dealings, it may be forced to battle a system that has remained in place since Soviet days.

New details of the links between the Central Bank of Russia and the Jersey-based offshore operation FIMACO have emerged in the past week as a result of the IMF's decision to resume lending under strict conditions.

So far, the IMF has said that it was deceived as to the true state of Russia's hard-currency reserves as a result of the central bank's hidden transactions. Some loan payments in 1996 might have been delayed if officials had known about the transfers, the fund said.

A clearer picture may emerge from the release of an audit by Pricewaterhouse Coopers, but there are already questions about what happened to the huge profits from the indirect investment in Russia's own high-yielding treasury bills through FIMACO.

An even more serious concern is whether such secret operations may have led to the 1994 collapse of the ruble, known as Black Tuesday, and the massive devaluation of last August 17. In both cases, the central bank was reportedly speculating in government securities, as in the FIMACO case.

The temptation to chase easy money is enormous because of the high interest rates for ruble-denominated debt, as well as the central bank's ability to exchange dollars at will. In addition to inflation, political risk adds to the premium in Russian interest rates, giving the bank a potential conflict of interest. Officials are in a unique position to profit from the instability they may help to create.

Opportunities for manipulation raise suspicions among Russian consumers, who suffer both from the periodic plunges of the ruble and the tight-money policies that are aimed at keeping further devaluation in check. But that suspicion may shift increasingly to the IMF and its program as the fund takes a stronger hand than ever before in the Russian economy.

The issue of blame for Russia's hardships seems certain to surface in upcoming elections for the State Duma and the presidency. Populist forces may well seek to make the IMF the target, particularly if its demands for new safeguards fail to prevent another ruble surprise.

But in tackling the FIMACO problem, the IMF may have to deal with one of Russia's oldest and murkiest financial structures. As a subsidiary of Paris-based Eurobank, FIMACO appears to be part of the central bank's foreign network that dates back to Soviet times.

By dealing through offshore affiliates like Eurobank and Moscow Narodny Bank in London, the Soviet central bank was able to enjoy the best of both worlds for decades. With operations also in Frankfurt, Vienna, Luxembourg and Singapore, the bank could profit from their Western transactions using Moscow's good credit rating without the direct burden of their liabilities.

As a result, the Soviet Union was free to be a player in the dollar-denominated markets while maintaining a ruble economy that had no links to the dollar's value. Since the Soviet demise, current account convertibility has brought an end to the separation of the ruble from the dollar but not to the system of foreign branches that can still be used to profit from unregulated transfers.

According to a New York Times report Friday, Eurobank also served as a gatekeeper to the GKO market for foreign investors, placing 40 percent of the purchases from abroad in the lucrative securities during 1996. The role suggests that the central bank and the government tried to make a market for GKOs by controlling both the supply and the demand with a questionable level of reserves. The IMF plans to deal with the problems by requiring a greater degree of transparency in central bank dealings, including more frequent reporting of reserves. But the bank already reports reserves weekly, and it is hard to see how integrity can be assured without virtual supervision.

That level of involvement could be politically unacceptable for Russia and could fly in the face of the IMF's own demands for central bank independence. Given the problems, there is little wonder that the IMF has decided that its latest loan will not leave Washington but will be used only to help pay Russia's debt.

But if another crisis erupts, the IMF may be blamed, either if its oversight goes too far or not far enough. Ultimately, the IMF cannot save Russia's central bank system, and it cannot be saved from itself.