Where Did Russia?S Money Go?

The banks: A big part of the Bank of New York affair, investigators believe, almost certainly has its roots in the crash of August 1998. Nearly all of Russia's banks at that point were insolvent. Today, a year later, what were once the country's largest banks--they were also those most politically connected to the Yeltsin government--owe $800 million to private account holders like the Grinyova family. They further owe foreign creditors billions.

But those same banks managed to move billions of dollars abroad in the months following the crash. According to sources familiar with the investigation, $4.2 billion poured through Benex into a single account at the Bank of New York from October 1998 to late February 1999. Another $1 billion more flowed from February to July--monitored by law-enforcement authorities. That money came from different sources; among them, investigators believe, were assets Russia's "insolvent" banks were able to move abroad in order to hide the cash from creditors. "In my mind it's outright theft," says Max Gutbrod, an attorney at Baker & McKenzie in Moscow who represents creditors at Bank Menatep, a now bankrupt bank once owned by oligarch Mikhail Khodorkovsky.

The IMF controversy: One of the central political controversies about the Bank of New York scandal is whether the International Monetary Fund's July 1998 $4.8 billion loan was siphoned off illegally. It's the wrong question. The scandal is not what was illegal. Almost certainly, nothing was. The scandal is what happened legally. The bulk of the IMF's loan--$3.8 billion--went to the Central Bank's reserve account, held at the Republic National Bank of New York. The point was to increase the amount of dollars the Central Bank had to support the ruble. A recent review by the accounting firm PricewaterhouseCoopers shows that the money did in fact show up in the Central Bank's account, as the IMF said it did. The IMF can therefore say, as its managing director Michel Camdessus did again last Friday, that there is "no evidence" that the money was used improperly. The Central Bank in turn sold more than $9 billion in hard currency in return for rubles. About 20 of Russia's largest banks were net purchasers of $4.1 billion of those reserves.

The more important question for the IMF--and for the Clinton administration, which pressured the fund into making the loan--is clear: Why did it feel a $4.8 billion bailout would avoid a ruble collapse? How much money did it think Russia's banks would pay to their foreign creditors using the hard currency the banks had purchased? And didn't it know that a large chunk of the hard currency would simply get stashed in the bank's overseas dollar accounts?

The IMF gave $1 billion of the tranche to the Finance Ministry, which used it to pay off some of Russia's bond debt. Mikhail Zadornov, then the Finance minister, told NEWSWEEK in a recent interview that he urged the IMF to give his ministry more, arguing that debt repayment would stabilize Russia's markets--and its currency. The IMF refused, saying that the $1 billion allotment was already an exception to policy.

The rest is history. The Central Bank blew a total of more than $9 billion in a fruitless attempt to prop up the ruble. Russia's major banks were able to pay six rubles for every dollar; by mid-August, the price was nearly 20 rubles. Those banks paid only $1.2 billion on their debt to foreigners. And according to Moscow economist Andrei Illarionov, $2.9 billion of the net hard-currency purchases are effectively unaccounted for. Some of it almost certainly remains in offshore accounts. And some may have gone to help capitalize new "bridge banks" that SBS Agro, Uneximbank and Bank Menatep have since set up. Many creditors owed money by the three believe that the new bridge banks now house performing assets that were shifted from the old insolvent banks. If true, those assets are now effectively--and illegally--shielded from stiffed lenders and depositors. (The banks have denied the allegations.) Nothing the IMF did was illegal or improper. "But the policy stunk," says Vladimir Konovalov, chief strategist at Credit Suisse First Boston in Moscow.