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. Last Updated: 07/27/2016

A YEAR AFTER THE CRASH:A Glimpse Through the Looking Glass




Here's a puzzler from the above report:


When the FIMACO company was set up in November 1990, something called the Royal Bank of Scotland Trust Company (Jersey) Ltd. was hired to provide "secretarial and administrative services." Then, after the Soviet Union collapsed, the people making decisions about FIMACO decided to change the ownership structure. So FIMACO and the RBSTC(J) parted ways, and the RBSTC(J) was paid $850,000 - for about two years of "secretarial and administrative" work on behalf of a company that had "no ... employees."


Being the secretary of an office with no employees certainly cuts down on the typing and photocopying, so $850,000 might seem quite generous. But alas, it's easy come, easy go - this $850,000 was, it seems, "further distributed to one international and four Russian charitable foundations, including schools and hospitals."


Huh?


The above excerpts from a report by PricewaterhouseCoopers about the Jersey-based FIMACO provides only the briefest of glimpses into the through-the-looking-glass offshore empire of the Russian Central Bank. From FIMACO to Eurobank to Evrofinance to the Lavoisier Trust and the RBSTC(J), the shenanigans of this empire have irked parliament, have been targeted by the Russian prosecutor general and have provoked the International Monetary Fund to complain that Russia "lied" to the West.


Like the American Iran-Contra arms-for-hostages scandal or the collapse of the CIA's pet bank, BCCI, the FIMACO story is likely to be remembered as one of those great political-financial tangles of the late 20th century. And if the above report raises more questions than it answers, the auditors are eager to note that this isn't exactly their fault.


"IMPORTANT NOTICE," reads the cover of the audit obtained by The Moscow Times. "This report was prepared by PricewaterhouseCoopers at the request of the Central Bank of Russia and solely for its use and benefit.


"The report is based solely on financial and other information provided by, and discussions with, the persons set out in the report. The accuracy and completeness of the information on which the report is based is the sole responsibility of those persons. ... PricewaterhouseCoopers have not carried out any verification work which may be construed to represent audit procedures."


The Central Bank says Eurobank set up the FIMACO shell company in 1990 in the British Channel Islands. The bank has admitted to churning roughly $50 billion through it - including, according to the PWC report, IMF loans and Central Bank currency reserves - over several years.


Central Bank chief Viktor Gerashchenko in February told parliament that FIMACO was set up because, in the early days of Russian capitalism, the Central Bank did not feel competent to invest the nation's currency reserves itself. (No one in the Duma bothered to ask how setting up a shell company in an international money-laundering haven improved matters). Both Gerashchenko and his predecessor, Sergei Dubinin, have also said FIMACO was needed to hide assets from Russia's potentially hostile Western creditors.


Not even the IMF found these explanations amusing. The Fund demanded an investigation, duly performed by PricewaterhouseCoopers. The result was the above report. Among other things, it confirms that the Central Bank sent IMF loans and its own currency reserves through FIMACO and then back into Russia, to speculate on the Russian GKO market - earning profits that have not been publicly accounted for.


The Central Bank has kept some of the profits in-house, allowing it to pay fat salaries to a staff of 86,000 - Russian Central Bank chiefs are generally paying themselves twice what U.S. Federal Reserve Chairman Alan Greenspan pulls down.


The report also says that when the Central Bank wasn't playing the GKO market, it was loaning the nation's reserves to Russia's "oligarch" commercial banks. In 1994, the report says, the Central Bank extended an unspecified number of credit lines, each ranging as high as $300 million, to various commercial banks (the report doesn't say which ones). And in 1996, the report says, Eurobank kept $450 million in IMF loans to maintain its own liquidity.


Central Bank officials say the PricewaterhouseCoopers report exonerates the FIMACO arrangement. But on the contrary, even this cursory report confirms many of the worst allegations and raises a score of new questions.


But few officials in either Washington or Moscow seem interested in delving deeper. The IMF has selected one narrowly technical accounting violation - a 1996 misreporting of the Central Bank's reserves by $1 billion - and, at least publicly, has ignored the rest.


In response, the Russian government has been gratefully contrite - in what looks like a gentlemen's agreement to confess to the 1996 misreporting of reserves, while ignoring questions about GKOs, IMF money loaned to oligarchs and strange payments to "charitable foundations, including schools and hospitals."


"It was an inadmissable thing," agreed Finance Minister Mikhail Zadornov about the misreported reserves. "But it was owned up to by the Central Bank and the government, and the Central Bank clearly promised never to repeat such a thing."