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. Last Updated: 07/27/2016

Was the July '98 IMF Aid Diverted?

The ghosts of the August 1998 financial crash are coming back to haunt the new Kremlin administration, as Swiss prosecutors have launched a probe into long-dormant allegations that a $4.8 billion IMF loan on the eve of the crash was misused.

Former government and Central Bank officials deny the International Monetary Fund loan, disbursed a month before the ruble devaluation and domestic debt default, was used improperly.

But Swiss law enforcers f acting on information from Swiss banks, who say several transactions over that period seem fraudulent f are checking claims that some of the loan tranche was funneled through Swiss banks into accounts abroad, including into the Bank of New York.

"The Bank of New York [money-laundering investigation] case is now linked to the IMF because it seems part of that loan was transferred to that bank's accounts," said Laurent Kaspar-Ansermet, the Swiss magistrate in charge of the probe, in a recent telephone interview.

Kaspar-Ansermet confirmed that 11 days ago, he sent an order to all banks in the Swiss canton of Ticino demanding they provide information on transfers of funds from an account opened Aug. 14, 1998, in the names of Creditanstalts Bankverein and Ost-West Handelsbank, the Frankfurt-based subsidiary of the Russian Central Bank.

A copy of Kaspar-Ansermet's order cited Wednesday by The New York Times asserts that on Aug. 14, $4.8 billion in IMF money was deposited into that account in Ticino. Immediately afterward, transfers totaling almost $7 billion were made from the account to banks in England, Switzerland, Australia and the United States, including $1.4 billion into the Bank of New York, The Times reported.

Kaspar-Ansermet in an interview said Swiss law enforcers were acting on earlier "communications" from Swiss banks that some transactions over that period "could be fraudulent."

Kaspar-Ansermet would neither confirm nor deny Russian press reports that the Swiss want to call in Prime Minister Mikhail Kasyanov, as an official in 1998 who was in charge of the funds, for questioning.

The Italian newspaper La Repubblica, in a report on the Swiss investigation last week, asserted flatly that Kasyanov had approved the diversion of the IMF loans but did not indicate a source for the allegation.

At the time of the crash, Mikhail Zadornov was finance minister and Kasyanov a deputy finance minister in charge of external debt, while the Central Bank was run by Sergei Dubinin and his deputy, Sergei Alexashenko.

A senior aide to Zadornov confirmed in an interview that Kasyanov had then been in charge of signing off on all hard-currency operations, even in those cases where the Central Bank was managing the funds.

"All foreign exchange operations had to be approved by the hard-currency department, which was under his control," said Oleg Zhukov, who said he worked with Zadornov in the government that year.

Former deputy chairman of the Central Bank Alexashenko said in a telephone interview he could not remember if the Central Bank had transferred funds to accounts at Ost West Handelsbank. Officials at the Frankfurt-based bank refused to comment.

But Alexashenko strongly denied the loan had been used improperly.

"There's a well-known Russian saying: Money does not smell. You can never tell exactly where it came from or who it belongs to," Alexashenko said. "The Russian prosecutors desperately wanted to find a guilty party [to blame for the August crash] and they failed. Now the Swiss are taking up their case, and they'll fail, too. All the dollars were sold in accordance with our agreement with the IMF. They went toward propping up the ruble."

In a written reply to questions from The Moscow Times, former Central Bank chairman Dubinin said the Swiss investigation was part of a "black PR campaign." He said they were "a lie."

The Swiss investigations echo charges by Communist Duma Deputy Viktor Ilyukhin, who claimed in March 1999 he had information "from a trustworthy foreign source" that the July 1998 IMF loan had been squirreled away into the bank accounts of the Kremlin's favorite oligarchs. Ilyukhin then described in an open letter to former prosecutor Yury Skuratov a scheme that sounded identical to the one the Swiss investigators are now tracking.

Ilyukhin alleged that on Aug. 14, the $4.8 billion IMF loan was transferred from account No. 9091 of the U.S. Federal Reserve Bank of New York to the Ost-West Handelsbank account, also listed as account No. 9091, in Creditanstalts Bankverein, via an unnamed bank in Lugano.

That same March f which was also the month the Clinton administration says it first learned of the now-famous Bank of New York money laundering investigation f U.S. Treasury Secretary Robert Rubin said he suspected much of the loan "may have been siphoned off improperly."

The Central Bank hired accountants PricewaterhouseCoopers to investigate those claims at the request of the IMF. The PricewaterhouseCoopers report, published late last year on the Fund's web site, appeared to lay the charges to rest f at least as far as the IMF was concerned.

"The Fund is satisfied that the [July 1998] loan went toward its intended purpose f supporting the ruble f and the PWC report backs up these conclusions," said an IMF spokeswoman in a recent telephone interview from Washington. She said Swiss authorities had not contacted the Fund over their investigation.

Kaspar-Ansermet refused to comment on the findings of the PricewaterhouseCoopers report. But PWC itself wrote across the cover of the report that it was based on procedures dictated by the Russian Central Bank, PWC's client, and added: "Consequently, we make no representation regarding the sufficiency of the procedures described below."

After the crash, Dubinin resigned, and the Central Bank was taken over again by Viktor Gerashchenko, who had held the job from 1992 to 1994 f and then lost it as a result of the 1994 Black Tuesday ruble crash. Gerashchenko promptly suppressed a report by the Audit Chamber, the Duma's budgetary watchdog, on the fate of the July 1998 IMF loan.

Eleonora Mitrofanova, an auditor with the Audit Chamber, later told the press their probe uncovered nothing strictly illegal.

But Nikolai Gonchar, a Duma deputy who has made a crusade of poking into the Central Bank's offshore commercial empire and the government's financial dealings, said in an interview he had seen a copy of the report and it alleged IMF money had been transferred directly to the accounts of commercial banks, including foreign banks.

Former prosecutor Skuratov has added his voice to such allegations. He said last year an analysis of Central Bank hard-currency sales had showed the Central Bank sold up to $4 billion of the loan directly to insider banks.

Some analysts and former government officials counter that Skuratov and Gonchar are ignorant, and there was nothing illegal or improper in selling IMF dollars to Russia's commercial banks f that in fact it was a valid way of supporting the ruble by buying rubles from banks for dollars.

In this regard, however, a second Audit Chamber report from last year makes even more troubling allegations. The report, a copy of which has been obtained by The Moscow Times, says that the very same days the Central Bank was selling dollars for rubles to a handful of chosen commercial banks, it was printing rubles to extend short-term ruble loans to those same banks.

Banks would receive these short-term ruble loans from the Central Bank and then buy IMF dollars, the report says. They would then ship those dollars abroad and seek f and get f new short-term ruble loans. Later, repayment terms on its previous short-term ruble loans were extended and more ruble loans were disbursed. This procedure, the report says, accelerated the currency collapse as it sank ever lower in the fall of 1998.

"These mechanisms seriously aggravated the country's financial and socio-economic crisis," the report says. "The bank did not carry out one of its most important tasks f the defense of ruble stability."

The report lists banks that benefited under this scheme as Avtobank, Alba-Alyans, Alfa Bank, Menatep, Bank of Moscow, Vneshtorgbank, Vozrozhdeniye, Yevrofinans, Inkombank, MMB, Mezhkombank, Mosbiznesbank, MOST-Bank, National Reserve Bank, Rossiisky Kredit, Sberbank, SBS-Agro and Chase Manhattan Bank International.