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. Last Updated: 07/27/2016

$50Bln in Reserves 'Managed' Offshore




Russia's Central Bank, instead of managing Russia's foreign currency reserves itself, placed almost $50 billion over five years with a little-known offshore asset management company, the prosecutorgeneral has told parliament.


Prosecutor General Yury Skuratov revealed the practice in a letter


Feb. 1, a day before he resigned, news agencies reported.


From 1993 to 1998, Skuratov said, Russia's critically important foreign currency reserves - used to defend the ruble on currency markets - were turned over to a company called Financial Management Company Ltd., or FIMACO, registered in the Isle of Jersey, an offshore tax haven that is part of the Channel Islands of the United Kingdom. The company listed a start-up capital of $1,000.


According to the letter, the Central Bank, instead of managing the government's money itself as state banks generally do, paid a commission to FIMACO to do it. The letter did not say what the amount of the commission was, but even a tiny commission charged on $50 billion could mean enormous profits.


It wasn't clear whether FIMACO handled all or part of Russia's reserves.


Despite its apparent five-year relationship with the Central Bank, State Duma deputies and banking analysts interviewed Thursday had never heard of FIMACO. It could not immediately be learned who owned or managed the company. The Central Bank declined to comment for the record.


According to the letter, whose contents were reported by Prime-Tass and Interfax and confirmed by Duma deputies, FIMACO handled $37.3 billion, 9.98 billion Deutsche marks, 379.9 billion yen, 11.98 billion French francs and 862.6 million British pounds on behalf of the Central Bank. This amounts to almost $50 billion at current rates of exchange, and includes funds from multibillion-dollar loan packages from the International Monetary Fund.


Foreign central bankers were reluctant to criticize the powerful Central Bank on the record, but said the practice was unusual.


"This is not the kind of practice I have heard of. We manage our funds ourselves," said a spokesman for the Federal Reserve Bank of New York.


Skuratov's letter was a reply to a Duma inquiry two weeks ago asking whether the Central Bank should be audited by a Russian firm or by one of the big international auditing firms. Skuratov said a Russian company should do it for reasons of national security reasons and lower cost, then launched into criticism of bank practices.


Skuratov resigned the day after he sent the letter, claiming ill health though he is widely assumed to have been fired by President Boris Yeltsin. It's not clear if there's any connection between the letter about the Central Bank and his resignation.


The letter revealed other practices Skuratov said were questionable, such as the sale by the bank on its own initiative of a 51 percent stake in Vienna-based Donaubank to Vneshtorgbank and a 5 percent stake in Swiss-based Urasco Bank AG to National Reserve Bank (NRB). NRB is controlled by natural gas monopoly Gazprom, Russia's biggest company. Former Central Bank head Sergei Dubinin is deputy chairman of Gazprom.


The Central Bank also sold off real estate worth 20.5 million rubles in 1995-1998, violating existing legislation, the letter said.


Sell-off of assets requires participation of the State Property Ministry and must be conducted by auctions, Skuratov said.


Central Bank officials may face questioning about FIMACO when the Duma's Central Bank subcommittee convenes Feb. 11 to hear a report on bank financial results from 1997.


Subcommittee chairman Georgy Luntovsky said the panel would probe the matter before making conclusions the practice was not justified.


"We shall first have to see how efficiently these assets were managed," says Deputy Georgy Luntovsky. "Personally, I don't understand why money was sent offshore and not trusted to a prime European bank."


He did not exclude the possibility that criminal charges would be sought. But Luntovsky insisted that the issue was complicated and required a cautious approach. "It is premature to draw any conclusions," he said.


A Central Bank official, speaking on condition of anonymity, said that current Central Bank head Viktor Gerashchenko was not involved since the offshore cash management began before he headed the bank.


But the report of the Prosecutor General says that violations refer to 1993-1998, and Gerashchenko's first term lasted from 1992 to 1994.


Another Central Bank official denied there had been any impropriety, saying the investigators from the Prosecutor General's Office "were very unprofessional. We laughed at them," commented an official at the Central Bank. "Current accusations may be based on the unprofessional conclusions that were made."