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. Last Updated: 07/27/2016

The Commercial Empire Of the Central Bank

Viktor Gerashchenko is sour on the IMF these days. The International Monetary Fund "doesn't keep its promises." It wants the Central Bank that Gerashchenko heads to perform a "striptease" every three months. The Fund is treating Russian officials "like whipping boys." In general, as Gerashchenko summed matters up recently, "There is a fundamental question here. How will we develop further? ... Do we want to eat our own buckwheat kasha, or American kasha from a box?"

Gerashchenko is going on grumpily about kasha because the IMF, after years of winking at the enormous commercial empire of the Central Bank, is finally demanding some information. Rattled by an audit of the Jersey Island-based shell company FIMACO, the IMF has demanded new audits of FIMACO's sisters - other financial structures abroad that answer to the Central Bank. The IMF has asked for a PricewaterhouseCoopers audit of the Central Bank's daugther structures: London-based Moscow Narodny Bank; Paris-based Eurobank; Frankfurt-on-Main-based Ost-West Handelsbank; Vienna-based Donau-bank; and Luxembourg-based East-West United Bank, among others.

What are these daughter banks? How does this relationship work - between private companies and the Central Bank? Is it not a conflict of interest when, for example, the Russian Central Bank's daughter companies sell forward contracts - essentially "bets" on what the future ruble-dollar rate will be - when the Central Bank is in charge of setting those exchange rates with its policies?

The IMF has delayed a $640 million loan tranche and has put forward new conditions: quarterly audits of the Central Bank's reserve operations; removal of part of the Central Bank's reserves from its five European subsidiary banks; and Gerashchenko's promise to sell off that European empire.

On Monday, First Deputy Prime Minister Viktor Khristenko told a news conference in Moscow that Gerashchenko and Prime Minister Vladimir Putin had agreed to those terms and would this week send a letter to the Fund making that formal. Gerashchenko himself has only offered that he will sell his daughter banks provided that someone offers enough money - which, he and other Central Bank officials have been quick to add, will never happen in this market.

Such reluctance is perhaps not surprising. Both FIMACO and the August 1998 ruble meltdown (and its aftermath) have raised dramatically troubling questions about how the Central Bank uses the almost unlimited public trust that has been laid on its shoulders. It is quite likely that the dealings of the Central Bank - whether when ruled by Gerashchenko from 1992 to 1994, or by Dubinin from 1995 to 1998, or back in Gerashchenko's hands since the ruble crash - can never stand up to a public study of its affairs.

But even if everything is aboveboard, there is still a strong reason to resist surrendering those offshore private banks: They list Gerashchenko and other top officials on their payrolls, letting the Central Bank chief and his cronies beef up their salaries dramatically.

What's more, if we start divesting the Central Bank of its daughter banks, other hard questions quickly follow.

For example:

- Why does the Russian Central Bank have such a collossal and quietly obtained real estate empire - with holdings worth a staggering $5 billion, according to a report released in May by the Audit Chamber, the parliament's budgetary watchdog. The Audit Chamber also says the Central Bank seems to frequently and dramatically overpay for its real estate.

- Why does the Central Bank employ such an enormous staff - of 86,000 people? That's a staff more than 30 times as large as that of the Bank of England, for example; and even the U.S. Federal Reserve, which is handling monetary policy for the world's largest economy, last year employed just 23,271 people.

Nor are these just $60-a-month dvorniki, drivers and other low-maintenance support staff; the payroll of the Central Bank in 1997 was about $1.4 billion, and in 1998 another $1.2 billion. The Bank of England's 1999 payroll, again, is a fraction of that at pounds 85 million (about $142 million).

For further comparison, the Russian national budget these days is around $22 billion. The United States federal budget for 1998, meanwhile, is $1.65 trillion - 75 times that of Russia's. But when it comes to paying salaries for the national bank, Russia and the U.S. are shelling out 1:1. The U.S. Fed spent roughly as much on payroll last year as did Dubinin and Gerashchenko's banks - $1.3 billion.

- And yet another question, of many: Why does the Russian parliament not approve the Central Bank's budget every year?

Independence at All Costs

Those who love central banks argue that they need to be above the passions of the political moment in order to adopt long-term monetary policy strategies. Otherwise, the argument goes, politicians mighty, say, crank up the printing presses - which will kick off initial growth and happiness - perhaps enough to get through a re-election season - before slipping into destructive inflation.

In Russia, until very recently, the IMF and other Western lending institutions strongly resisted any attempt to infringe upon the independence of the Russian Central Bank. What the IMF and others only now seem to be recognizing is that the Russian Central Bank's independence is almost unlimited.

Not even the German Bundesbank - seen by many central bank fans as the ultimate in technocratic efficiency - is as autonomous as the Russian Central Bank.

Any economic activity of the Bundesbank that is not directly related to the setting of monetary policy is open to public scrutiny. If the Bundesbank earns revenues in routine buy-sell operations aimed at influencing monetary supply or monetary policy, those revenues must be shared at the end of each month with the German national coffers. And earlier this decade, when the Bundestag's budgetary watchdog judged that the Bundesbank had obtained excessive real estate holdings - more space than was needed to carry out monetary operations - the Bundesbank had to sell off property.

By contrast, the Russian Central Bank has to pay 50 percent of its profits into the federal budget - but that figure is based on a non-transparent, one-off, end-of-the-year calculation. Otherwise, the bank seems to do as it pleases and spend what it pleases. Often - to the ire of the State Duma and its watchdog Audit Chamber - this has included deciding whether to give loans or other goodies to its own daughter commercial banks; it has certainly included the setting of salaries and other expenditures.

There has been no public scrutiny of this process until very recently. The Audit Chamber, for example, was denied information about and access to the financial data of the Central Bank's commercial subsidiaries. Some of the commercial subsidiaries put out miserly annual reports and other limited information about themselves; but others offer next to nothing, and only the Singapore-based subsidiary of Moscow Narodny Bank has a website. Contacted repeatedly for this article, the Russian Central Bank refused to disclose even the telephone numbers of its subsidiaries - a common response to queries about them throughout the Russian financial world.

National Reserve Bank, for example - which last year (while it employed Dubinin's wife) acquired a 5 percent stake in Urasco Bank AG, a Zurich-based financial house with limited Russian Central Bank ownership - staunchly refused to offer even a telephone number for Urasco.

'Top Secret' Details

The Audit Chamber has gone so far as to allege that the Russian Central Bank has been busy "legalizing illegal foreign exchange operations" - in other words, that it has been directly involved in money laundering.

Gerashchenko's response? He has classified parts of the report "top secret." The Audit Chamber questions whether he has that authority, and has filed suit in Moscow City Court to free up the report.

In summer this year the Audit Chamber, which thinks Gerashchenko's decision to classify their report was illegal, filed a case in Moscow City Court against the Central Bank. Hearings are expected to begin later this month.

Yet even though information is often disjointed and sketchy, there is much on the public record already. In 1996, for example, Ost-West Handelsbank paid out a total of $95,000 to members of its supervisory board - an oversight body - as bonuses to those who attended meetings. Who got how much is not known. But Gerashchenko was a member of that supervisory board from 1992 to 1996; from 1993 to 1994 he was also a member of the supervisory board of Moscow Narodny Bank.

Gerashchenko is not alone; other "supervisory board members" at various Central Bank daughters over the past years include such top Central Bank officials as Sergei Alexashenko, Andrei Kozlov, Alexander Khandruyev and Alexander Potyomkin.

Conflict of Interest?

"There is some conflict of interests in owning these stakes that the Central Bank has admitted to," said former first deputy finance minister Oleg Vyugin, in a telephone interview Monday.

"But there are two reasons why the Central Bank has not sold off the foreign banks before," he said. "Firstly the general financial situation is such that there is very little interest in buying these banks. And secondly, local regulatory authorities [in the host countries] have said that if the [Russian] Central Bank withdraws its participation from these banks, they might insist on their liquidation."

That is a staggering admission, and it comes up again and again: The Central Bank freely admits it pumps money into these foreign banks to keep them alive.

"Yes, we've had to pay out [to support the foreign daughter banks,]" said Gerashchenko's deputy, Oleg Mozhaiskov, in an interview in June with Kommersant. He said that just since the ruble devaluation, the Central Bank has sunk $800 million into keeping the foreign banks afloat. When Kommersant pointed out that subsidizing a foreign empire of banks rarely fell into the duties of a central bank, Mozhaiskov conceded the point, but then added: "In this case it's a particularity of our historical development."

He also said the expense was justified because "if we did not have the [foreign daughter banks] today, then we wouldn't have a banking system today." Mozhaiskov told Kommersant the Central Bank's daughter banks, along with state-owned Sberbank and Vneshtorgbank, were the only financial houses left standing post-August 1998. In particular, he said, Eurobank and the Moscow Narodny Bank are funding trade operations.

In fact, Mozhaiskov so enthusiastically talked up the so-called roszagranbanki, or Russian-foreign banks, that Kommersant point-blank asked whether the Central Bank wasn't thinking of lobbying their business interests more actively.

"We don't have the right to lobby for such things," Mozhaiskov responded. But sometimes, he added, "we try to help. For example, when [the Finance Ministry] was asked by representatives of the military-industrial complex for a document about the condition of these and those banks, we replied: If the banks agree, then we will give you that information. However, we'd like to turn your attention to the fact that we have these roszagranbanki, which are sufficiently capitalized and able to handle foreign trade operations."


Amount (in $mln) CB share %

of CB participation

Moscow Narodny Bank (London) 792 88.9

Eurobank (Paris) 154 77.8

Ost-West Handelsbank (Frankfurt) 27 82.0

Donau Bank (Vienna) 38 49.0

East-West United Bank (Luxembourg) 16 49.0

Source: The Audit Chamber