Russian Roulette | Page 8

were caught
in potentially criminal conflicts of interest.
Are we to believe that such gargantuan transgressions have been
transformed into new-found market discipline and virtuous dealings?
Putin doesn't. Last year, riding the tidal wave of the fight against terror,

he formed the Financial Monitoring Committee (KFM). Ostensibly, its
role is to fight money laundering and other financial crimes, aided by
brand new laws and a small army of trained and tenacious accountants
under the aegis of the Ministry of Finance.
Really, it is intended to circumvent irredeemably compromised extant
structures in the Ministry of Interior and the FSB and to stem capital
flight (if possible, by reversing the annual hemorrhage of $15-20
billion). Non-cooperative banks may lose their licenses. Banks have
been transferring 5 daily Mb of encoded reports regarding suspicious
financial dealings (and all transactions above 600,000 rubles - equal to
$20,000) since February 1 - when the KFM opened for business. So
much for Russian bank secrecy ("Did we really have it?" - mused
President Putin a few weeks ago).
Last month, Mikhail Fradkov, the Federal Tax Police Chief confirmed
to Interfax the financial sector's continued involvement in bleeding
Russia white: "...fly-by-night firms usually play a key role in illegal
money transfers abroad. Fradkov recalled that 20 Moscow banks
inspected by the tax police alone transferred about $5 billion abroad
through such firms." ITAR-TASS, the Russian news agency, reports a
drop of 60% in the cash flow of Russian banks since anti-money
laundering measures took effect, a fortnight ago.
V. The Foreign Exchange Market
Russians, the skeptics that they are, still keep most of their savings (c.
$40-50 billion) in foreign exchange (predominantly US dollars), stuffed
in mattresses and other exotic places. Prices are often quoted in dollars
and ATM's spew forth both dollars and rubles. This predilection for the
greenback was aided greatly by the Central Bank's panicky advice
(reported by Moscow Times) to ditch all European currencies prior to
January 1, 2002. The result is a cautious and hitherto minor
diversification to euros. Banks are reporting increased demand for the
new currency - a multiple of the demand for all former European
currencies combined. But this is still a drop in the dollar ocean.
The exchange rate is determined by the Central Bank - by far the
decisive player in the thin and illiquid market. Lately, it has opted for a
creeping devaluation of the ruble, in line with inflation. Foreign
exchange is traded in eight exchanges across Russia but many exporters
sell their export earnings directly to the Central Bank. Permits are

required for all major foreign exchange transactions, including currency
repatriation by foreign firms. Currency risk is absolute as a 1998 court
ruling rendered ruble forwards contracts useless ("unenforceable bets").
VI. The International Financial Institutions (IFI's)
Of the World Bank's $12 billion allocated to 51 projects in Russia since
1992, only $0.6 billion went to the financial sector (compared to 8
times as much wasted on "Economic Planning").
Its private sector arm, the International Finance Corporation (IFC)
refrained from lending to or investing in the financial sector from
March 1999 to June 2001. It has approved (or is considering) six
projects since then: a loan of $20 million to DeltaCredit, a smallish
project and residential finance, USAID backed, fund; a Russian
pre-export financing facility (with the German bank, WestLB); Two
million US dollars each to the Russian-owned Baltiskii Leasing and
Center Invest (a regional bank); $2.5 million to another regional bank
(NBD) - and a partial guarantee for a $15 million bond issued by
Russian Standard Bank. There is also $5 million loan to Probusiness
Bank.
Another active player is the EBRD. Having suffered a humiliating
deterioration in the quality of its Russian assets portfolio in 1998-2000,
it is active there again. By midyear last year, it had invested c. $300
million and lent another $700 million to Russian banks, equity and
mutual funds, insurance companies, and pension funds. This amounts
to almost 30% of its total involvement in the Russian Federation.
Judging by this commitment, the EBRD - a bank - seems to be
regarding the Russian financial system as either an extremely attractive
investment - or a menace to Russia's future stability.
VII. So, What's Next?
No modern country, however self-deluded and backward, can survive
without a banking system. The Central Bank's pernicious and
overwhelming presence virtually guarantees a repeat of 1998. Russia -
like Japan - is living on time borrowed against its oil collateral.
Should oil prices wither - what remains of the banking system may
collapse, Russian securities will be dumped, Russian debts "deferred".
The Central Bank may emerge either more strengthened by the
devastation - or weakened to the point of actual reform.
In the eventuality of a confluence between this financial Armageddon

and Russia's entry to the WTO - the