The Grinyova story seems far removed from the so-called Russian money-laundering scandal. That investigation–centered, for now, on nine accounts at the Bank of New York–was the focus of hearings that opened last week in the U.S. Congress. “Money laundering” is a loaded phrase; it conjures up images of gangsters, drug smuggling, casino owners and prostitution. And the international investigation now underway has its share of straight-out-of-Central-Casting figures. Semyon Mogilevich, a reputed Russian organized crime figure, remains a primary focus of the investigation. So, too, do his alleged links with Benex, a company–run by the husband of a Bank of New York executive–that specialized in arranging clandestine import deals for Russian companies.
NEWSWEEK has learned that two major investigations in the United States relating to Russian money laundering are now reaching critical stages. In one case, the district attorney in New York’s Manhattan Borough is trying to extradite two lawyers from Britain in connection with a suspected scheme to launder money for the Benex group through transactions involving obscure companies traded on America’s penny stock market. Separately, the U.S. Customs Service is looking into a mysterious Russian emigre based in Philadelphia who over the last two years has run an estimated $500 million through accounts in 15 to 20 banks located in the Northeastern United States. Officials say there is evidence that at least some of the money comes from “quasi-governmental” organizations in Russia.
But as the Bank of New York inquiry proceeds, what will likely become clear is that the investigation is not just–or even mainly–about organized crime. Nor is it, as Russia’s oligarchs and the current government have argued, simply a story about capital flight, or about legitimate businessmen trying to cope with a ridiculously complicated tax system (though all of that is partly true). Under scrutiny now is nothing less than the fleecing of Russia, the many ways in which its citizens as well as many foreigners who have invested in the country have been burned during the last years of the Yeltsin era. The methods by which the fleecing took place are myriad and complex. But as the investigation moves forward, the key mechanisms are likely to become clear:
The tax scams: Benex (and other companies like it) routinely arranged schemes by which Russian businesses were able to pay for imports offshore in hard currency. By reporting a lower, phony price in Russia, companies were able to avoid confiscatory tax and custom duties. Benex was well known among Russian businesses and financial authorities, and openly advertised its ability to move dollars in and out of the country for a service charge. The schemes were endless, Russian businessmen say, and, according to authorities, many of them were completely fraudulent. Central Bank chief Viktor Gerashchenko told NEWSWEEK in a recent interview that the scams often included the purchase of the passports of dead people, in order to draw up phony import contracts that allowed dollars to move offshore–with no goods ever going to Russia in return.
The sole purpose for many of the phony deals was to get money offshore. “Every company has a secret department that deals solely with getting cash in and out of the country,” says one businessman who says he routinely used Benex’s services. These deals cost the Russian budget billions of rubles in an era when Russian soldiers, teachers and doctors are routinely going unpaid. For years, in fact, the International Monetary Fund has hounded Moscow to improve its tax collection. That some members of the Russian government–though not the Tax Police–now dismiss the schemes as business as usual is extraordinary.
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.
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.
