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. Last Updated: 07/27/2016

Central Bank, Zadornov in Feud




At the height of Russia's market crisis in mid-July, the Central Bank froze the Finance Ministry's main accounts in a dispute over repayment of an 8.7 billion ruble ($1.4 billion) debt, according to documents obtained by The Moscow Times.


The move by the Central Bank forced the Finance Ministry to complain to President Boris Yeltsin and Prime Minister Sergei Kiriyenko, saying that it was unable to meet interest payments on its other debts or pay government workers during the week of July 20, according to letters from Finance Minister Mikhail Zadornov.


The prime minister's office denied having received any letters and questioned the authenticity of the documents obtained by The Moscow Times.


The Finance Ministry and the Central Bank declined to comment specifically on the letters, but acknowledged in a joint statement that they disagreed on certain issues during the financial crisis. Kiriyenko's spokesman also said there had been differences between the Central Bank and the Finance Ministry last month.


The Central Bank and the Finance Ministry said in a statement that they will sue the newspaper Nezavisimaya Gazeta, which referred to one of the letters in a story published Thursday. The newspaper, controlled by business tycoon Boris Berezovsky, accused Central Bank chairman Sergei Dubinin of "deliberately bankrupting" the government by blocking the Finance Ministry's accounts.


The documents obtained by The Moscow Times are three letters signed by Zadornov to Kiriyenko, Dubinin and Yeltsin that complained of the "negative consequences" of the Central Bank's actions. Zadornov wrote that the Finance Ministry was unable to redeem maturing coupons on government bonds or make payments to the coal sector and the army. The letters, together with Central Bank documents, show that the Central Bank withdrew 8.7 billion rubles from the Finance Ministry's accounts beginning July 20 as part of repayments for treasury bills that had matured during the previous week. Zadornov in his letter said the move violated a 1993 agreement that gives the Finance Ministry up to 10 days to settle debts to the Central Bank. He said the Central Bank's board had amended the agreement unilaterally on July 16.


The dispute came as the government was experiencing a cash crunch and was eagerly awaiting a decision from the International Monetary Fund on the release of funds under a $22.6 billion aid package. The IMF decided to disburse a first installment of $4.8 billion on July 21.


It is unclear why the Central Bank would have urgently needed such a large sum of rubles, but one economist speculated that it may have needed to provide some liquidity to the banking sector.


"It definitely speaks to urgency for ruble resources on the Central Bank side," said one economist who asked to not to be named. "It is very strange and worrisome."


Other analysts said the conflict was a sign of the debilitating financial crisis that has increased the government's cost of borrowing and put a strain on budget resources. The government has been struggling to repay maturing treasury bills while the Central Bank has been forced to dip into its hard currency reserves to defend the ruble. Striking miners, meanwhile, have been stepping up protests to demand payment of back wages.


The Central Bank and the Finance Ministry in their statement acknowledged that there had been "differences in approach" to financial problems arising towards the middle of July, but said the two were now in agreement. "The positions of the Bank of Russia and the Finance Ministry are now completely in accord and a single point of view has been worked out on all issues," the statement said.


It did not specifically deny the authenticity of the letters, but said that facts contained in the Nezavisimaya Gazeta article "do not correspond to reality." A Central Bank spokesman acknowledged that the some of the facts were not being disputed, but refused to comment further.


Nezavisimaya speculated that Yeltsin interrupted his vacation in Karelia on July 29 in response to the Central Bank's blocking of government accounts. Yeltsin said at the time that he was returning to Moscow in order to attend to "urgent business."