Russia and the IMF: A sordid tale of moral hazard

And Deputy Prime Minister Alexander Shokhin, one of the early "reformers," suggested that Russia's debts to the Paris Club of creditor governments should be netted out against the $100 billion Russia was owed by former Soviet client states such as Nicaragua, Angola, North Korea, and Iraq. Claiming that it had been a mistake for Russia to join the Paris Club in 1997, he went on to propose an outrageous new deal:

I think now that we should try, within the Paris Club, to negotiate mutual offsets of the Russian obligations to the Paris Club and the obligations to Russia of the countries with which the Paris Club has conducted negotiations on rescheduling debts. I do not rule out that we may come up with a zero option.50

There were also allegations of serious fraud at the Central Bank. Shortly after the August crash, the Federal Audit Chamber, the Russian parliament's budgetary watchdog, claimed that part of the $4.8 billion paid out by the IMF in July as the first installment of the $22.6 billion rescue package quite simply had been stolen.

Although such allegations were denied, Prosecutor General Yuri Skuratov decided to initiate criminal proceedings. During the following months, Skuratov's investigations broadened to include a number of previous privatization deals as well as other high-level cases of alleged corruption. In early February 1999, Skuratov suddenly announced his resignation and had himself admitted to a hospital for heart trouble. Few doubted that the real disease was of a political nature, but even fewer could have anticipated what Skuratov would leave behind. In a letter to the speaker of the Duma, dated I February, he laid out accusations of a series of abuses at the Central Bank, which even by Moscow standards were sensational.

Leaving some minor issues aside, the main accusation was that during the period 1993-98 the Russian Central Bank had operated a secret fund in the offshore tax haven of Jersey. The fund, called FIMACO, had been entrusted with handling a total of about $50 billion dollars (a detailed list of various amounts in different hard currencies was presented). The initial reaction was that the story simply had to be false, if nothing else because of the size of the amounts involved. Russia's Central Bank had never had more than $24 billion in reserves (July 1997), and the IMF had strictly monitored the movement of its funds. How, then, could the FIMACO scam be even technically possible?

A few days later, those who had hoped that the story would just go away were grossly disappointed, as Central Bank chairman Viktor Gerashchenko was called before the Duma to explain. He not only admitted that FIMACO existed; it had been set up in 1990 by a bank subsidiary in Paris, the Eurobank, and had a registered capital of no more than $1,000. The real stunner lay in his motives: The main reason for starting the scheme had been to maximize the return to Central Bank reserves by avoiding payment of Russian taxes! When asked to comment, Central Bank governors in other countries vaguely admitted that this was an "unusual practice."