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. Last Updated: 07/27/2016

Macroeconomic Pilfering Won't Work

Yet another scandal has hit Russian financial circles. According to a probe headed by Swiss Magistrate Laurent Kaspar-Ansermet, Prime Minister Mikhail Kasyanov may be linked to possible misuse of an IMF loan tranche transferred to Russia on the eve of the August 1998 crisis.

According to a letter sent by Kaspar-Ansermet to various banks, the IMF funds left the U.S. Federal Reserve system for a Central Bank correspondent account in an unidentified bank. From there, they reportedly were transferred to an account at Creditanstalts-Bankverein, managed by Ost-West Handelsbank, a subsidiary of the Russian Central Bank. From there, the funds apparently went elsewhere: to banks in Australia, England, Switzerland and the United States, including the Bank of New York.

First, a disclaimer: There is no sin in transferring money from account to account. That’s what banks are for — to transfer money from one account to another.

So what should have happened with the IMF funds? They were intended to bolster the ruble rate. That means that when a Russian bank sells rubles and buys dollars, the rate doesn’t fall because the Central Bank has a lot of dollars. Technically, how does this happen? Very simple: Funds sit in a correspondent account of the Central Bank in a foreign bank, and after the Russian bank has bought dollars, they go from the Central Bank correspondent account to a correspondent account in a domestic, Russian bank — that same bank.

Did something criminal happen with the IMF funds? The answer is simple: The allocation of the IMF tranche was itself criminal. At the beginning of July 1998, internal Russian debt was three times greater than tax revenues. And the ruble rate was artificially inflated fourfold.

The country was allocated $4.8 billion from the IMF. As soon as the money landed in the Central Bank correspondent account, higher-ups in Russian banks and their clients, all of whom were expecting a default, started selling their GKOs on the market. With the rubles they received, they bought dollars. Runaway bond sales pushed up interest rates, leading to the default. The IMF funds were shifted among correspondent accounts, leaving an ultimately fuzzy trail.

The IMF essentially played the role of depositors who arrive at a bank as it is being burglarized. The police are standing around, the place is roped off, reporters are hovering. "There’s a burglary going on in there," they are told. "There are only burglars in there — no honest people."

"That’s not important," the depositors respond, driving up to the entrance where they unload their bags and start to leave, saying, "We were told to replenish the hard-currency reserves." And then they are surprised that their bags are grabbed along with everything else.

It is improbable that anyone will ever show the IMF tranche was stolen. But the problem in this country is not that someone has pocketed these funds. The problem is that theft has been transformed into a macroeconomic process capable of provoking anything, including default. And the threat that this possible pilfering will be discovered places Russia on its knees: Each time the nation wants to write off even a part of its debt, it is politely reminded where the loans may have gone. That’s how it is. Taking has come to mean stealing; paying off has come to mean writing off.

But it won’t work that way, folks.

Yulia Latynina writes for Sovershenno Sekretno.