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. Last Updated: 07/27/2016

The $50Bln Question

Three weeks have passed since Prosecutor General Yury Skuratov accused the Central Bank of mishandling $50 billion via the previously unknown offshore firm FIMACO, but the Central Bank has not properly answered the $50 billion question, nor has it creditably defended its reputation.

The promises of the Central Bank are literally money. If there is any question that it abuses this power to create money from thin air, if there are any stains on the bank's reputation, the economy will be in a continual state of crisis. If nothing else, the Central Bank has failed in its duty to inform its creditors and the public of its handling of the nation's reserves.

A series of current and former Central Bankers have made incomplete statements on the scandal, including chairman Viktor Gerashchenko and his deputy, Oleg Mozhaiskov, former chairman Sergei Dubinin and his former deputy, Sergei Alexashenko, and former press secretary Irina Yasina. Between them we can still only guess what was going on.

The most disturbing revelation so far has been that FIMACO was intentionally used to hide assets from creditors' lawsuits and that similar schemes are being considered for the near future. To me, this is just a fancy form of theft.

Yasina went so far as to justify it in a column published last Tuesday in The Moscow Times, writing that, "in the financial world it's always thus - he who is quickest and bravest gets to eat." She should have added, "and he who admits to hiding assets from his creditors never gets another loan."

The combined announcements of the Central Bankers have provided a few hard numbers, which are more or less consistent between announcements. The facts as I understand them are as follows: Starting in 1993 and continuing for three or four years, FIMACO managed Central Bank reserves amounting to a maximum of $1.4 billion held at any one time, with a "turnover" of $50 billion ($13 billion of which was in nondollar hard currencies). A commission of $1.7 million was paid, amounting to one-sixteenth of a percent per year on average assets managed.

Some back-of-the-envelope calculations show that the average balance in the account must have been $680 million to $907 million, with a weekly turnover of $250 million to $333 million (not the $100 million per week suggested by Alexashenko). On average, the whole account turned over slightly more frequently than every three weeks.

But what exactly is meant by turnover? According to Alexashenko, turnover means "the assets that passed through" FIMACO, which suggests that the Central Bank and FIMACO passed back and forth a quarter billion dollars or more each week. Unfortunately, I can't think of any reason that the Central Bank would have to shuffle this much money around, unless it was aiding capital flight or money laundering.

Another possible meaning of turnover is the number of trades FIMACO made with the money, once it received it, times the average size per trade. Say, for example, the Central Bank sent FIMACO $1 billion for one year. If FIMACO then invested this money each month in one-month eurodollar deposits, the second definition would give a $12 billion turnover, not $1 billion as in the usual meaning. This second definition of turnover, with its extreme multiple counting of the same money, is likely what the Central Bank and Skuratov mean by a "$50 billion turnover," but we can only guess.

Using this second definition actually makes the FIMACO operation seem rather boring - other than the part about hiding money from creditors. The Central Bank may have made a few deposits into FIMACO totaling perhaps $1.4 billion, and then FIMACO likely deposited this money in well-known banks in three-week eurodollar deposits. Risk and return would both be very low under this scenario. FIMACO's traders might not even have had anything to do for weeks at a time.

The only questions this scenario raises is why the Central Bank didn't conduct such simple operations itself from Moscow, and why they wouldn't explain these operations immediately once the $50 billion question was raised by Skuratov.

Skuratov might have used the second definition of turnover in order to embarrass the Central Bank. If so, the bankers' criticism of Skuratov - that he was using the investigation to reduce the Bank's independence - seem justified. Nevertheless, the bankers seem to have fallen into the trap by refusing to give adequate information on FIMACO.

A public relations disaster seems ready to hit the Central Bank, with its management just sitting on their hands. It's difficult to imagine the IMF extending any loans to Russia with this type of scandal brewing and likely to get worse each day. The best response to this PR problem should be to get out all the information about FIMACO as soon as possible, no matter how bad it might make the Central Bank look in the short term.

The Central Bank's duties to fully answer Skuratov's charges have not been fulfilled just because we might be able to figure out one reasonable explanation for FIMACO from the few numbers that have been made public. This simply is not good enough for a central bank. There are many other possible explanations of FIMACO's activities, such as former Finance Minister Boris Fyodorov's suggestion that the firm was used to funnel low-interest loans to well-connected insiders.

We still don't really know anything about FIMACO, and the Central Bank still owes the public a full, transparent and detailed explanation.

Peter D. Ekman is professor of finance at the American Institute of Business and Economics, an MBA program in Moscow.