The Incredible Fleecing Of Russia

In July 1998 the International Monetary Fund was preparing a new "tranche" of financial aid to Russia. It amounted to $4.8 billion, and in a departure from its usual practice, the IMF planned to send $1 billion directly to the Russian Finance Ministry for use in the country's budget. The rest would be added to Russia's hard-currency reserves, where it would be available to privately owned banks trading rubles for dollars in an effort to defend the ruble's value. The Russian Finance minister at the time, Mikhail Zadornov, had what he thought was a better idea. Recently he told NEWSWEEK that he asked the IMF to give more of the money directly to his ministry. Zadornov thought that debt repayment was the best way to stabilize Russia's precarious financial situation. The IMF refused, and the $3.8 billion was added to the hard-currency reserves of Russia's Central Bank. The rest is history.

The next month, Russia defaulted on much of its foreign debt, and the ruble collapsed. The IMF insists that its money was handled properly, and it appears to be right. But some portion of the IMF loan is effectively unaccounted for (chart), since Russia's banks moved billions of dollars abroad in the months after the crash. According to sources familiar with the investigation, $4.2 billion alone poured through Benex, a company that specializes in funneling Russian money offshore, into the Bank of New York. Meanwhile President Boris Yeltsin and his family are being dragged deeper into the unfolding financial scandal. In the end, probes in the United States and Switzerland are likely to show that Russia has been comprehensively fleeced. At the heart of the scandal is a tale of the many ways in which Russia's citizens--and foreign investors--have been burned during Yeltsin's final years.

Already the investigation of alleged Russian money laundering through the Bank of New York and other American and European banks has turned into a political issue in the United States. As Congress began hearings on the matter last week, Republicans blamed the Clinton administration for allowing the Russians to waste--or loot--billions of dollars in aid. Rep. Dick Armey, the House majority leader, called the administration's handling of Russia "the biggest foreign-policy failure since Vietnam."

NEWSWEEK has learned that two major U.S. investigations related to Russian money laundering are now reaching critical stages. In one, the Manhattan district attorney in New York City is trying to extradite two lawyers from Britain in connection with a suspected scheme to launder money for Benex. In a separate case, the U.S. Customs Service is monitoring the activities of a mysterious Russian emigre based in Philadelphia (officials won't divulge his name). Over the past two years, sources say, the Russian has moved an estimated $500 million through accounts in 15 to 20 banks in the Northeast. The money comes from Russia, spends a day or two in American banks and then is transferred to tax havens offshore. Sources told NEWSWEEK that some of the funds handled by the Russian may have been diverted from the Kremlin's coffers.

The Yeltsin family is connected to the scandal partly through a Swiss construction company called Mabetex, which is owned by businessman Behgjet Pacolli, an Albanian Kosovar. Swiss investigators are looking into charges that Mabetex paid $10 million in bribes in exchange for $300 million in contracts to renovate the Kremlin and other official buildings in Moscow. Last January Swiss authorities raided Mabetex's headquarters in Lugano and found records documenting credit-card purchases in the names of Boris Yeltsin, his daughter and close adviser Tatyana Dyachenko, and her older sister, Yelena Okulova. The bills for the American Express card in Yeltsin's name were small, but the Eurocards purportedly held by the daughters ran up charges of nearly $600,000 in 1993 and 1994. The bills allegedly were paid by Pacolli. He has denied doing so, but concedes he did pay credit-card charges for some Kremlin officials. The Kremlin calls the entire Mabetex story "fictitious."

Investigators also discovered a mysterious account called "Dean" at Switzerland's Banca del Gottardo. According to documents obtained by the Italian newspaper Corriere della Sera, the Dean account was held in the names of three people: Pavel Borodin, the official in charge of Kremlin renovations; Borodin's daughter, and Behgjet Pacolli. (Borodin denies that he ever had foreign bank accounts.) Documents obtained by NEWSWEEK show that on Dec. 5, 1995, $1 million went into the Dean account from Pacolli's personal account. That day, $1 million was transferred to an account at the Central European Bank in Budapest.

On the day of the raid on Mabetex, Swiss prosecutor Carla del Ponte asked Pacolli where the money went from there. To "the electoral campaign," he replied. Whose campaign? "President Yeltsin's," sources quoted Pacolli as saying. Since then he has denied publicly that he paid anything to Yeltsin, his family or Borodin. Pacolli now claims the $1 million was paid to a Hungarian company called Trinlo for "public relations" services to Mabetex. Yet no such company is registered in Hungary. The Kremlin denies that Yeltsin or his daughters have foreign bank accounts. But U.S. investigators have learned that Tatyana's husband, Leonid Dyachenko, had $2.7 million in an account with the Bank of New York branch in the Cayman Islands, plus another account of undetermined size with Chase Manhattan.

There is no sign that any laws were broken in the disposition of the vast sums received from the IMF. The purpose of the July 1998 loan was to increase the amount of dollars Russia's Central Bank had on hand to support the ruble and pay creditors. A recent review by the accounting firm PricewaterhouseCoopers shows that the $3.8 billion went, as planned, to the Central Bank, which later sold $4.1 billion of hard currency to about 20 of Russia's major private banks, though most of them were virtually insolvent by then. Apparently the IMF--and the Clinton administration, which pressured the IMF into making the loan to Russia--were naive enough to think that it would stave off devaluation of the ruble. With the West sending good money after bad, Russia's wealth was simply frittered away.