Russia Plays Loose With IMF Billions

When the International Monetary Fund lent Russia $4.8 billion in July, Russian officials said they hoped the emergency funds would sit unspent in the Central Bank’s reserves, bolstering the wobbling ruble.

But within weeks of the money’s arrival, economists and government critics say, it was spent on questionable fiscal measures that provided a windfall for Russian bankers and foreign investors but did little to help the struggling economy.

Some critics contend that part of the emergency loan--pushed by the White House to save Russia from economic collapse--ended up in the Swiss bank accounts of investors and wealthy Russians, draining the country of much-needed cash and leaving average Russians empty-handed.

“The money has evaporated,” said Alexander P. Smolensky, one of Russia’s most powerful bankers. “I am really surprised to watch the IMF doling out money so easily, without any actual response or concern. How can they keep pumping money into a black hole?”

Some members of the U.S. Congress are asking the same question. In particular, they want to know how much of the IMF loan went to banks linked to Russia’s notorious organized-crime groups.

And Russia’s prosecutor general has begun looking into the activities of the Central Bank, including its handling of money from the IMF. In addition, the prosecutor’s office is examining the Central Bank’s administration of a government bond program widely viewed as a pyramid scheme, Central Bank spokeswoman Irina Yasina confirmed. It is unclear whether the bank’s handling of the IMF money figures in the inquiry.

Yasina defended the Central Bank’s operations and said it acted properly in its administration of the IMF loan.

Of the $4.8 billion from the IMF, she said, $1 billion was transferred to the federal budget, where much of it was spent to pay off investors who had bought the controversial short-term government bonds, known as GKOs, at interest rates of up to 200%. The payments came just before the bond market collapsed.

The remaining $3.8 billion was kept in the Central Bank’s reserves and cannot be distinguished from other money deposited into the account, Yasina said. While an equivalent amount was spent to stabilize the ruble after the loan was received, she said, the Central Bank still has reserves of about $13 billion.

“Of course, the Central Bank of Russia spent about the same amount [as the IMF loan] and more,” Yasina said. “But since money doesn’t smell, as they say, and the same sum is still sitting in our reserves, it’s a loan we have to pay back.”

July Payment Went to Prop Up Ruble

Despite her assertion that the Central Bank still has the money, independent banking analysts in Russia and the United States say the bank spent the IMF loan almost as soon as it arrived, squandering most of it trying to prop up a ruble that was vastly overvalued.

Sometimes, the Central Bank spent $500 million in a single day to buy unwanted rubles--in effect subsidizing banks and investors seeking to unload Russian currency.

“It’s conventional wisdom that a lot of that money they lent found its way to banks and that the banks took it out of the country,” said Robert A. Litan, a Brookings Institution banking expert. “We assume that part of it is in Switzerland. I’d be surprised if any more than a tiny fraction of it is still in Russia.”

IMF officials in Washington acknowledged that they do not know what the Central Bank has done with the money. Once Russia received the loan, there were no restrictions on how it could be spent, and the lending agency has no way to trace where it went, they said.

“We don’t know exactly what the Russian Central Bank, dollar for dollar, did with the money we gave them,” said one IMF official who asked not to be identified.

Dmitri V. Vasiliev, chairman of Russia’s Federal Securities Commission, said the IMF loan was ripe for abuse because of the Central Bank’s potential conflict of interest.

While the Central Bank was responsible for administering the GKO bond market, it also had bought GKOs on the secondary market through subsidiary banks it controls. Vasiliev charged that the Central Bank itself was one of the beneficiaries of payments from the IMF fund that it controlled.

“The [IMF] money is all spent,” Vasiliev said in an interview. “It went to foreigners and Russian speculators, including the Central Bank. They got payments from their GKOs, converted the rubles into cheap dollars and took them out of the country.”

Yasina denied that the Central Bank has any conflict of interest, noting that it is not a profit-making enterprise.

IMF officials say they have a “very good relationship” with officials of the Central Bank and believe they are trustworthy. Some of those bank officials have now been dismissed with Russia’s change of government and the appointment of a new Central Bank chief. Some, including the former acting head of the bank, also have been interviewed by the prosecutor general’s investigators.

Last week, the IMF sent a team to Moscow to discuss Russia’s economic recovery and the prospects for another loan installment, this time for $4.3 billion, that had originally been scheduled for this month.

The IMF, created more than half a century ago to help struggling economies around the world, is funded largely by the United States. In the past 18 months, it has lent $37 billion to bail out countries such as Indonesia, Thailand, South Korea and Russia. Since the Soviet Union collapsed in 1991, the IMF has lent Russia $18.8 billion.

Officials Admit Bonds Were Pyramid Scheme

In July, Russia found itself in serious financial trouble because it had relied for two years on a dubious system of issuing the GKO bonds, then paying off the bonds with the proceeds of new bond sales. Government officials acknowledge now that the bonds were a classic pyramid scheme.

“You may call it a pyramid or something else, but the fact remains that in the conditions of crisis, the government could no longer service this debt,” Finance Minister Mikhail M. Zadornov said.

The debt from the GKOs, which get their name from the Russian initials for Government Short-term Obligations, had grown so large by this summer that it could not be financed through either the sale of more GKOs or the diversion of money from the government’s operating budget.

Facing pressure to devalue its currency, Russia appealed for help from the international community. The IMF was reluctant to provide more aid to the beleaguered nuclear power because the country had not made the fundamental changes in its economy that had been a condition of previous loans. But the Clinton administration, after a personal appeal from President Boris N. Yeltsin, urged the IMF to lend Russia more money.

On July 13, Russia, the IMF and the World Bank announced agreement on a loan package promising Russia $14.8 billion in addition to $7.8 billion in loans previously promised. Russian officials said they hoped that the money would remain in the Central Bank reserves, where it would discourage attacks on the ruble.

They also announced a plan to eliminate GKO bonds and to restructure the debt into longer-term loans under terms to be negotiated with the GKO bondholders. Anatoly B. Chubais, Yeltsin’s representative in the negotiations, stressed that only GKO owners would have the right to decide how their investments would be converted into longer-term loans.

“The government guarantees this,” Chubais said at the time. “The plan has been worked out quite professionally.”

The first, $4.8-billion installment was approved by the IMF on July 20. The money was placed in the Central Bank’s reserves, but it didn’t do much to calm investors.

Foreign and domestic investors began pulling their money out of the Russian market in larger and larger numbers, exchanging their rubles for dollars and, in many cases, sending their money out of the country.

The Central Bank, trying to prevent devaluation of the ruble, continued its policy of spending its reserves to prop up the ruble--an increasingly expensive exercise.

While some economists argued that the ruble was worth only 15 or 20 to the dollar, the Central Bank continued to set the exchange rate at about 6.2 to the dollar--thus buying rubles at what these economists said was three times their true value.

The number of banks and investors trying to sell rubles far outstripped the number wanting to buy them, so the Central Bank kept the exchange rate steady by buying up the surplus at the official rate.

The Central Bank spent about $9 billion buying rubles in July and August. Critics contend that the $4.8-billion IMF loan was included in this amount and that it quickly vanished into the murky world of Russia’s commercial banks.

When the IMF loan arrived, the Central Bank’s reserves jumped from about $13 billion to $18 billion. Less than four weeks later, the reserves had dropped back to about $13 billion.

“This tremendous sum was not spent by the Central Bank to restructure the debts and not even to pay overdue wages,” said Andrei A. Nechayev, a former economics minister and currently co-chairman of the Russian Business Round Table, which unites the financial oligarchy. “All this money was squandered.”

On Aug. 17, four weeks after the $4.8-billion loan was approved, the Russian government reneged on its promise to restructure the GKO bonds and pay foreign investors. Instead, it announced that it would freeze international debt payments, pay GKO investors pennies on the dollar and abandon the effort to prop up the ruble. The ruble went into free fall, reaching a low of more than 20 to the dollar.

Vasiliev of the Federal Securities Commission said he personally warned the IMF in July of the Central Bank’s potential for mishandling the money.

“To me, the huge surprise is not the appearance of such a scam in the country,” he said. “But I cannot explain why the Western financial institutions and the government didn’t pay serious attention to the presence of such things. More than once, I mentioned this in my meetings with my Western counterparts.”

At a hearing of a House banking subcommittee earlier this month, members of Congress questioned officials about allegations that the $4.8 billion from the IMF had ended up in the hands of Russian and Western financial dealers who led the run on the ruble while pulling out of the GKO market.

David Lipton, a U.S. Treasury undersecretary, testified that the Central Bank policy of buying up the ruble was a justified attempt to stabilize Russia’s economy and prevent devaluation.

“There’s no way to know exactly who got how much money,” Lipton told the committee. “There were ordinary Russian citizens in that category. There were Russian businessmen. There were Western businessmen who had brought money into Russia and decided to take money out.”

But Rep. Bernard Sanders (I-Vt.), a member of the committee, questioned whether U.S. taxpayers’ money was being used wisely by the IMF when a recent report had found that half of Russia’s 256 major banks were linked to organized crime. He also questioned whether it was right for wealthy investors in Russia to get their money when ordinary workers do not.

“If you’re a miner in Russia,” Sanders said, “and you haven’t been paid for six months, and you’re reading that American banks and Japanese banks are getting 100% rate of return on their loans, you might feel a little that something is not quite right.”

Times staff writer Art Pine in Washington contributed to this report.