Where Did Russia?S Money Go?

The story doesn't end there. On Aug. 20, after $9.1 billion in reserves had been wasted and Russia devalued, the top Russian bankers gathered at Russia's White House and insisted that the government back off from threats that it was going to bankrupt them. Instead, they argued, they should get special credits. Boris Berezovsky, a part owner of SBS Agro, told then Prime Minister Sergei Kiriyenko that the oligarchs would exert extreme pressure to get their way. "Our position was clear," says Kiriyenko. "Insolvent banks should be legally bankrupt. Giving them credits would just help them withdraw more and more money from the country."

And that's exactly what happened. The Kiriyenko government was dismissed. Over the next three months, under new Prime Minister Yevgeny Primakov and new Central Bank chief Gerashchenko, the government gave 19 billion rubles--about $1 billion at the prevailing exchange rate--in cheap loans to a handful of insolvent but politically powerful Russian banks. Smolensky's SBS Agro got the biggest chunk of the special ruble loans. According to documents obtained by NEWSWEEK, he twice put up as collateral the same shares in his bank--as well as property that the bank does not own. How did he get away with it? According to Gerashchenko, "Smolensky was very smart." SBS had the accounts of the key governmental agencies in Russia, including law-enforcement agencies, the presidential administration and the Duma. Arkady Kulik, whose father was then deputy minister in charge of agricultural policy, was--and remains--deputy chairman of the bank. "We gave money to SBS realizing the importance of this bank," said Gerashchenko. One current senior government official says the Central Bank had little choice: "They are dead afraid of Smolensky."

What happened to the 19 billion rubles paid out to the banks from September through November remains something of a mystery. Former Finance minister Zadornov, who recently resigned as special representative to the IMF and World Bank, believes that 2 billion to 3 billion rubles went to "support Russian agriculture." But he concedes that he cannot offer a full accounting of where the rest of the money went. Neither can the Central Bank, which has led to suspicions in Moscow that some of this money also ended up converted into dollars and sent offshore.

How ostensibly bankrupt banks may have managed to shuffle money offshore--and where that money might have gone--will be extraordinarily difficult to figure out. But the Bank of New York investigation shows that it takes two to tango. Western banks, and not by any means just the Bank of New York, know well that the amount of money pouring out of Russia over the past two years was extraordinary--by some estimates $36 billion overall. The idea that it was mostly simple flight capital is willfully naive. The reason the money-laundering investigation has got as far as it has, in fact, is because Western law-enforcement agencies simply "got fed up"--as a senior law- enforcement official put it. Russians like Gela Grinyova are too educated in the ways of Russian capitalism to think that they will ever see their money again. But a fair accounting is the least they deserve.