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. Last Updated: 07/27/2016

EDITORIAL: Insider Deals Blight IMF's Russia Loans

When the International Monetary Fund organized a $22.6 billion bailout package for Russia in July 1998, the money was meant to rescue Russia by propping up the ruble and restoring confidence in the country's battered economy.

As suspended Prosecutor General Yury Skuratov revealed in an interview published in Wednesday's issue of The Moscow Times, what the IMF's money mostly did instead was to "rescue" a handful of Russian insider banks, without ever reaching Russia itself.

The Central Bank's reported justification for these back-room deals was that it protected the currency markets and therefore the ruble by keeping down the volume of currency trades on Russian exchanges.

This claim flies in the face of economic logic - the way to defend a currency is by intervening on the open market, thereby influencing general expectations regarding exchange rates. It also flouts IMF strictures that a truly convertible currency should have only one exchange rate, and no more.

As the PricewaterhouseCoopers report into the use of last year's bailout shows, the dollars were sold to the favored banks at a cheaper average rate than that used for the foreign exchange markets inside of Russia.

The report claims that "no material exceptions" were found in these cases. However, until a more detailed investigation into these transactions is carried out, it is fair to assume that the insider banks had one exchange rate when swapping rubles for dollars while everybody else had another.

And it appears that those insiders had a very good idea that it was time to get out of the doomed Russian treasury bill market.

So, the IMF loan didn't bail out Russia, it bailed out a handful of GKO holders.

If the Fund wishes to retain any shred of credibility, it needs to admit that the Russian authorities have consistently acted in a murky and corrupt manner - not just once.

It also needs to go beyond merely quarantining fresh loans to Russia, or even suspending them. The only way it can save itself and the Russian people from further harm is to insist on root and branch reform of the Russian Central Bank.

The top management at the bank must be cleared out. A proper, independent investigation into the bank's activities must be performed - one that has the authority to effectively subpoena documents and witnesses and place the latter under oath.

Of course, only President Boris Yeltsin has the power to make such an inquiry happen, and he may well look askance at yet another corruption probe.

If he declines, then the IMF should suspend Russia's membership in the Fund until such time as the country has a Central Bank worthy of the name.