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Russia: Financial Maneuvers Recall 'Bad Old Days' Of 1998

Reports of financial maneuvers at the Central Bank of Russia and the gas monopoly Gazprom have clouded its year-end review of reform progress in 2001. A huge loan for tax payments may be a sign of hidden weakness in the budget, the monetary system, and the economy.

Boston, 28 December 2001 (RFE/RL) -- The year 2001 is ending with high praise for the Russian economy and a report of at least one strange financial scheme that smacks of the bad old days of 1998.

According to the newspapers "Vedomosti" and "The Moscow Times," Russia's biggest financial institution worked hand-in-hand with its biggest taxpayer to create an illusion of budgetary health at the expense of the monetary system and the currency.

If the details prove true, the maneuver could be one of the worst misadventures at the Central Bank of Russia since the ruble crisis of August 1998.

The story, which has fallen between the cracks of the holiday season, involves the Russian gas monopoly Gazprom, which was reportedly caught short in its tax payments after its board decided to put off a Eurobond issue valued at $750 million.

To meet its tax commitment in early December, Gazprom took out a loan of 15 billion rubles ($500 million) from Vneshtorgbank. Gazprom's deputy chairman, Vitalii Savelyev, said the loan was for more than a year "at lower rates than Western banks."

This is where the story gets complicated, but also potentially damaging. Vneshtorgbank (VTB) had enough money to lend Gazprom because the Central Bank transferred $700 million to VTB just before the loan was made, Russia's Investor Protection Association reported.

The papers quote a Central Bank source as saying, "The Central Bank deposited the money in a currency account at VTB. The same day, VTB sold the dollars back to the Central Bank. Then Gazprom received the loan and paid its taxes, and the money ended up in the Finance Ministry's accounts at the Central Bank."

There are so many things wrong with this alleged financial sleight-of-hand that they are difficult to enumerate.

In the first place, it suggests that neither the Russian budget nor its biggest single contributor, Gazprom, are as financially sound as reports from the past year have made them out to be. Within the past month, both the government's debt and that of Gazprom won upgrades from Wall Street bond-rating agencies.

But also in December, the government rejected Gazprom's plan to invest $5.2 billion in capital projects next year on the grounds that it could not raise the funds. On 27 December, Gazprom reported record-high export revenues of $14.5 billion and net profits of 100 billion rubles ($3.32 billion) for 2001.

But those results are likely to be lowered by Western accounting and taxes. Gazprom has also glossed over the fact that its export volume has fallen 4 percent short of targets and 3 percent from 2000.

The second big blow from the Central Bank tax maneuver is to transparency. Currency traders were fooled by the shift as they struggled to understand a sudden drop in Central Bank reserves, while the bank was quietly buying back its $700 million deposit at VTB.

It seems that the lessons of the 1998 ruble crisis were lost in the process of an elaborate paper chase that may recall the worst practices of Central Bank Chairman Viktor Gerashchenko three years ago.

The difference is that the bank has now accumulated $38 billion in reserves to protect itself from monetary damage. But the padding may not shield Gerashchenko from "The Moscow Times" charge that the bank "ran the ruble presses" to make the Gazprom loan, watering down the currency in what the paper called a "micro-devaluation."

The incident may be tinged with suspicions of conflicts of interest, since both the Central Bank and VTB also own stakes in the Moscow Interbank Currency Exchange.

Confidence in the system may suffer more than the ruble if Gerashchenko has gone back to his inflationary habits. The Central Bank has supposedly stopped lending money for the budget, but the Gazprom episode suggests that it has done much the same thing.

The value of the entire exercise for Russia's economy and the average taxpayer is doubtful, considering that Gazprom is 38 percent state-owned, while 99.9 percent of VTB is owned by the Central Bank. One of the owners of the remainder of VTB is Gazexport, the export arm of Gazprom, according to VTB's website.

The final blow from the circular payment scheme is that it may remind the international investors of the scandals that followed the 1998 ruble collapse, since some of the same players seem to be involved.

VTB officials came to the defense of their Central Bank counterparts in 1999, after they were accused of hiding profits by running loans from the International Monetary Fund (IMF) through an offshore entity known as FIMACO since 1993. But in February 1999, former Prosecutor-General Yurii Skuratov told the State Duma that the Central Bank's sale of its Austrian subsidiary to VTB was the result of "grave legal violations."

VTB has since been taking over other foreign holdings of the Central Bank in a move aimed at meeting IMF demands for a cleanup. Ownership links between VTB and the Central Bank are supposed to be severed by 2003 under a reform plan approved by the government in 2000 to appease the IMF.

But the tax loan may lead analysts to examine the reform progress made this year and to retrace the Central Bank's steps, which now seem to lead back to the dark days of 1998.