By David Hoffman
Washington PostMarch 23, 1999 Moscow - Former Central Bank director Sergei Dubinin said today that a secret offshore firm now under investigation was used to manage some of the funds the International Monetary Fund lent to Russia in 1993. Dubinin claimed that no laws had been broken, but his explanation differed from a previous one and raised new questions on the eve of Prime Minister Yevgeny Primakov's trip to Washington on a mission to win renewed IMF lending -- which was suspended after the Kremlin devalued the ruble and defaulted on domestic debt last August. Primakov's trip, perhaps the most important he has undertaken in his six months in office, could be clouded by questions about how previous Western aid was used, as well as by a host of other issues, including looming conflict in the Balkans.
Dubinin said the Central Bank told the IMF that "operations with part of the reserves were conducted through that financial company; it was a known fact. It was not news for the IMF." He was speaking in an unusual television interview devoted to questions about the secret firm, Financial Management Co., known as Fimaco, based on the largely autonomous British island of Jersey.
In Washington, an IMF spokeswoman said that while the Fund knew the Russian Central Bank was managing much of its international reserves through European subsidiaries, it did not know about Fimaco in particular.
The Washington Post has reported that internal documents show billions of dollars of the Central Bank's foreign currency reserves were funneled through Fimaco starting in 1993 and that some of the profits from investments of that money appear to be missing. Part of the reserves were secretly reinvested in Russia's high-flying treasury-bill market through Fimaco and a related company in Russia, Eurofinance, the documents show.
Russia's embattled prosecutor general, Yuri Skuratov, who is caught up in the aftermath of a sex and videotape scandal, has said the Central Bank's handling of the reserves is under investigation.
In an open letter published Feb. 11, Dubinin defended the use of the offshore firm, saying a Swiss businessman was seeking to seize Russian currency reserves in a legal dispute and the money had to be hidden. He said at the time that it was appropriate for Fimaco to remain secret.
Today, Dubinin offered a different explanation. He said that Russia was not part of the international financial system in the early 1990s, and "there appeared a necessity to manage the reserves" outside of Russia. "We needed a channel of management. It was not hiding money from anybody; everything was legal, clear and in line with international practice."
Nikolai Gonchar, a leading independent member of the lower house of parliament, the State Duma, and a member of its budget committee, has raised questions about whether Russia's currency reserves were used for private gain. He has said that profits from investing the overseas money may not have been returned to Russia. It is not clear yet where they wound up. According to the internal documents, $1.7 billion was transferred through Fimaco in 1993; part of it was to be reinvested from abroad into Russia's nascent short-term treasury-bill market. More funds continued on that path in 1994, '95 and '96. In the months before President Boris Yeltsin's reelection campaign -- from Feb. 29 to May 28, 1996 -- hundreds of millions more were pumped through the secret overseas channel back into the treasury-bill market, which at the time was yielding more than 200 percent interest annually. Dubinin said the money was withdrawn from Fimaco in 1997.
Dubinin also lashed out at the prosecutor's office, saying it was under the influence of "blackmailers," whom he did not name, and asserted that the Central Bank never violated Russian laws. Prosecutor General Skuratov is facing demands from Yeltsin that he resign and has offered to do so, but the upper house of parliament has rejected his offer.
In Washington, Primakov will be seeking IMF agreement to borrow enough to cover $4.5 billion in Russian loan repayments due this year to the lending agency. Russia's total debt due this year is $17.2 billion, or 80 percent of its national budget. It has already missed some payments on debt that dates to the Soviet era. As Primakov prepared to leave for Washington, Russian officials have been trying to lay the groundwork for talks that will focus not only on Russia's IMF debt but also on a host of other issues, such as Russian cooperation with Iran, conflict in the Balkans, the stalled START II arms-control treaty and the endangered 1972 Anti-Ballistic Missile treaty. Primakov also met today with American Jewish leaders and pledged to fight antisemitism in Russia.
The chief reason for Primakov's trip, however, is to win approval for resumption of the IMF loans. "Primakov must prove to the United States that Russia is making headway with reforms and that Russia is a partner that can be trusted," said analyst Andrei Kortunov. "He also must get United States support on this issue, concerning credits from the IMF." President Clinton has said he would like to help Russia but wants to make sure the money is properly used. The IMF has made it clear that Primakov's chances of cinching new funding on this trip are remote. While Russian officials have shown more willingness to cut the country's massive budget deficit, they said, the two sides are still far apart. "It would be premature to say we're on the verge of inking a new deal," an IMF spokesman said.
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