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Russia: Analysis From Washington -- Fungibility

Washington, 1 November 1999 (RFE/RL) -- Moscow's simultaneous use of funds to stage its current campaign against Chechnya and its continuing efforts to extract new loans and other assistance from the West highlight a fundamental and potentially troubling fact about money: its fungibility.

That financial term refers to the fact that once money from various sources is mixed together in a single account, it is difficult if not impossible to specify where every particular unit of those funds came from and even more to say where every unit of that combined account is going to.

When individuals make transactions to hide the source of various funds or to allow such money to be spent for other purposes, this process is sometimes called money laundering. That is what appears to have happened with at least some of the Russian funds passing through the Bank of New York and other Western financial institutions.

But when governments do it with money they have obtained from various sources, there is no applicable term beyond fungibility, a fact that has major consequences both for those who receive such money as well as for those who give it.

For those governments who receive such funds, this aspect of the nature of money means that they may be able to get funds for projects they want to carry out by asking donor countries for assistance on projects the latter support and then by diverting the money after they are given it.

For those governments and international agencies, the challenge arising from this aspect of finance is much greater. All of them have an interest in promoting particular programs and even more particular outcomes from such programs.

Thus, these donors are likely to be loathe to cut back or end assistance lest they undermine the possibility that their favored programs will be carried out. But because money is fungible, these aid sources know that their assistance almost inevitably allows those who receive it to shift funds to other programs which the donors may oppose.

Thus, money intended to promote health care programs or fundamental economic reform may end up being used for military purposes -- even military purposes directed against those giving the assistance.

At the level of nation states, such political diversions of funds are far more serious and usually far larger than the corrupt diversion of assistance by individuals and groups seeking to benefit themselves.

It is more serious because it is something donor countries can do little or nothing about without subverting their own purposes in giving assistance. And it is larger because the amounts of money involved are in virtually every case far larger.

This problem has confronted donor countries for many years, but in the past, most Western aid went to smaller and weaker countries who were seldom in a position to use the fungibility of financial assistance against the donors, even if those receiving money were personally corrupt.

But now in the case of the Russian Federation, the West faces precisely this challenge. Neither the major Western countries nor the principal international financial institutions are prepared to reduce or cut off assistance of various kinds to Moscow lest such a reduction in aid undercut Russia's transition toward free markets and democracy.

At the same time, however, Moscow in the past has been prepared to divert financial assistance it does receive -- be it direct assistance or the rescheduling or canceling of debt -- in ways that it sees fit and often for purposes far different than Western donors clearly intended.

That is likely to become the next financial crisis between East and West, one reflecting less the personal corruption of some Russian leaders than their ability to make use of the fungibility of money.