World Perspective : Money : Savvy Russians Find Variety of Ways to Spirit Cash Out of Ailing Nation

MOSCOW —  For years, it’s been common knowledge that Russia’s sickly economy was bleeding billions of dollars overseas. What hasn’t been clear is who was doing it--and how.

The enormity of the sums involved raises suspicions of wrongdoing; estimates of capital flight from Russia over the past seven years range from $50 billion to $150 billion. But it still hasn’t been determined whether the money flows have been legal, quasi-legal, or outright illegal.

“In this area, there is a pretty fine line between legal and illegal,” says Margot Jacobs, a banking analyst with United Financial Group.

A number of investigations now underway in the United States, Switzerland and Russia may eventually help answer these questions.

Capital flight, while unfortunate for the affected country, is often legal. In Russia’s case, Russians who want to hold foreign bank accounts or transfer money overseas must seek permission or licenses from the Central Bank. Most banks and many businesses have such permissions, and those that don’t can find easy ways around them. And Russia’s punitive tax system creates powerful incentives to spirit profits out of the country.

“If money isn’t comfortable in Russia, if there is no safe place to invest it, no bureaucratic measures can make it stay,” says Irina Y. Yasina, an economist and former Central Bank official. While concerned about the money drain, the West has for the most part pressed Russia to loosen its controls on money flows, not tighten them, because the existing rules complicate operations for foreign firms trying to do business in Russia.

Moreover, in a country with primitive oversight, unreliable banks and a weak court system, even those who want to play by the rules often can’t.

The scandals described below differ from one another in significant ways. All involve transfers of money into and out of Russia. But some focus on organized crime, others prominent businessmen and still others Kremlin officials. In several, Western officials are accused of turning a blind eye to unscrupulous activity by the Russian government, bankers or businesses.

In none is the outcome or final assessment certain.

Bank of New York

The FBI is investigating suspicious money flows through accounts in Bank of New York--one of the nation’s oldest and most venerable banks. Investigators say that as much as $10 billion moved through accounts in the bank since early last year. If confirmed, it would be the largest money-laundering operation in U.S. history.

So far it isn’t clear whether some or all of the money is illegal. But the sums are huge--$10 billion is nearly half Russia’s annual federal budget and about the size of the Central Bank’s total reserves.

U.S. banks are required to report “suspicious” account activity to the Treasury Department’s Financial Crimes Enforcement Network, but a person familiar with the situation said Bank of New York did not file such a report until after the probe began.

Three bank employees responsible for the suspicious accounts have been disciplined. Natasha Kagalovsky, director of the bank’s Eastern European division, has been suspended. Lucy Edwards, who handled the accounts from the bank’s London office, has been fired for falsifying documents and what the bank termed “gross misconduct.” Svetlana Kudryavtsev, an associate handling Eastern European accounts, was fired for failure to cooperate in the bank’s internal review of the situation, sources said.

Kagalovsky and Edwards are married to prominent Russian businessmen, which has raised further questions about the provenance of the money. Edwards’ husband, Peter Berlin, was a director of Benex International Co., which processed $4.2 billion of the suspicious funds through its Bank of New York account. Benex is believed to have had financial transactions with a firm founded by a reputed mobster, Semyon Mogilevich.

Kagalovsky’s husband, Konstantin Kagalovsky, is a central figure in the Menatep business conglomerate and sits on the board of its two business component companies: Bank Menatep and Yukos Oil.

Like many Russian businessmen, Konstantin Kagalovsky has moved in and out of the public and private sector. From 1992 to 1995, he served as Russia’s representative to the International Monetary Fund, although he has not been accused of mishandling IMF funds or abusing his office.

All those mentioned in connection to the investigation deny any wrongdoing.

International Monetary Fund

Since 1992, the IMF has lent Russia $21 billion, of which about $16 billion still needs to be repaid. Russia’s use of two loan installments--in 1996 and 1998--has been called into question.

The 1996 payment of about $3.5 billion came during a hard-fought presidential election between President Boris N. Yeltsin and his Communist opponent. In the months leading up to the ballot, with Russians angry over late wages and pensions, government officials spent billions of dollars to reduce the arrears. Most of the IMF funds went straight into the federal budget to make up the difference. IMF officials say that was a proper use of the money, but critics allege that, in effect, the loan financed Yeltsin’s reelection.

In 1998, the Russian Central Bank was rapidly spending its hard-currency reserves to support the ruble, then trading around 6 rubles to the dollar. In July, the IMF released a $4.8-billion tranche earmarked to restock the reserves and steady the financial markets. But spooked investors continued to cash in rubles at a rapid rate. The Central Bank spent the entire installment in a matter of weeks before giving in. The ruble quickly plummeted to about 25 to the dollar, where it remains.

Rumors quickly arose that the Central Bank had doled out the cash to favored banks and insiders, but an audit by PricewaterhouseCoopers found no evidence that the money was improperly siphoned off. Some officials say all of it was spent on the currency market and maintain that it benefited anyone who cashed in rubles for dollars, whether they were pensioners or bankers.

Fimaco

While the IMF insists that Russia has not misused loan funds, it has complained about a 1996 incident in which the Central Bank deliberately misreported the state of its reserves.

The issue concerns an offshore investment firm named Fimaco that was set up by the Central Bank through a subsidiary. In 1996, the Central Bank transferred $1.2 billion from its reserves to Fimaco but kept the money on its books.

IMF directors say they probably would have delayed disbursement of loan money in late 1996 had they known that $1.2 billion of the reserves was parked offshore. They have denounced the incident as “a serious violation of Russia’s obligations to the fund.”

It has yet to be determined what Fimaco did with the money. Some news reports suggest it might have been invested in high-risk Russian treasury bonds, which were paying extraordinary rates of up to 250% at the time. If so, it is not clear where the profits went.

While it is unusual for central banks to operate offshore subsidiaries, it is not illegal. But if it is determined that Fimaco used the reserves to speculate in Russian securities markets, that would be considered a breach of ethics.

Mabetex

The only scandal to directly implicate the Kremlin is an allegation that Mabetex, a Swiss engineering firm, paid bribes or kickbacks to the Yeltsin family in return for renovation contracts.

Some news reports have suggested that the gifts included yachts and real estate.

Yeltsin’s aides deny that the president or any members of his family have foreign bank accounts or accepted such gifts. The head of Mabetex denies providing credit cards or cash.

Nonetheless, Swiss investigators say they are reviewing transactions in about two dozen bank accounts in the name of Russian officials, including the head of the department that awarded the Mabetex contracts, Pavel P. Borodin. He denies any wrongdoing.

Andava

Investigators in Russia and Switzerland are looking into allegations that profits earned by Russia’s international air carrier, Aeroflot, were skimmed off by a Swiss-based firm named Andava for the benefit of officials close to Yeltsin.

Swiss investigators have frozen some bank accounts linked to controversial financier and Yeltsin confidant Boris A. Berezovsky, who is reported to control Andava. Russian prosecutor Nikolai Volkov says Berezovsky is believed to have set up Andava to process $250 million in Aeroflot’s foreign earnings, of which a portion was redirected to other Berezovsky-linked companies. A warrant was issued for Berezovsky on money-laundering charges, but the tycoon has avoided arrest by cooperating with investigators.

Aeroflot director Valery Okulov, who is Yeltsin’s son-in-law, and Berezovsky deny any wrongdoing.

* NEW CONCERNS

Banks report more “suspicious activity” that may be linked to Russian organized crime. C1