$37B Russian Financial Scandal

Investors still wondering why the Russian economy collapsed despite massive injections of bailout money from international donors have a new bone to chew on.

Former Russian Central Bank and government officials have confirmed allegations that at least $37 billion of the country's hard currency reserves have been moved, over the course of seven years, through an obscure offshore company thought to be controlled by private Russian business interests.

The revelation has all the drama of a Cold War spy novel, but its climax is more hard hitting, considering the more than $20 billion in aid money the International Monetary Fund and other donor countries have given Russia to prop up the country's economy and currency. In August, the government froze the $40 billion domestic debt market, leaving hundreds of investors and the IMF with nothing but emptier pockets.

Offshore Shell

Prosecutor General Yuri Skuratov revealed two weeks ago in a scathing report that the central bank in 1991 had established through its Paris-based subsidiary, Eurobank, a company called Financial Management Co., or FIMACO, registered in Jersey, a tax haven on the Channel Islands off the coast of England. The company was used to "manage" the nation's hard currency reserves, Skuratov charged.

Former Central Bank Deputy Chairman Sergei Alexashenko has confirmed that shareholders in FIMACO include oil majors Yukos and Rosneft, diamond giant Almazy Rossii-Sakha and other private companies. But far from adopting an apologist attitude, he sought to defend the practice of outside management for a central bank as "normal."

When asked why these companies specifically were allowed to benefit from such an unorthodox scheme of handling a country's money, Alexashenko answered that it was Russia that actually benefited. He said the arrangement with FIMACO was necessary to defend Russia's "economic national security" from foreign creditors seeking to seize Russia's assets. He would not elaborate.

Alexashenko also said that, to the best of his knowledge, all of the Central Bank reserves entrusted to FIMACO for management were returned "to the last kopeck." He insisted FIMACO did not take an excessive commission, but would not say what it was.

Curious Illness

Curiously, Skuratov, the prosecutor, has disappeared from public view since he released the report. Moments after he made it public, the Kremlin reported he had fallen ill and had submitted his resignation. Calls to his spokesperson are referred to the Kremlin, where press people then dictate updates on Skuratov's health.

More curiously, the Moscow political establishment - which is usually as splintered as a piece of unfinished wood - has closed ranks around the scandal. The Communist Party has stayed mum, while Finance Minister Mikhail Zadornov and current Central Bank Chairman Viktor Gerashchenko keep insisting the issue "is not in the public interest."

The IF seems to believe this, too. Phone calls to IMF offices in Moscow and Washington have gone unanswered, and the lending agency has yet to make an official statement about the issue.

A lone voice denouncing the arrangement has been former Finance Minister Boris Fyodorov, who, when asked about FIMACO at a news conference last week, said he had known something was up.

Fyodorov said he had challenged Gerashchenko and then Prime Minister Viktor Chernomyrdin over the practice of parking Central Bank reserves offshore but had been brushed off.

"I was finally told by some people in the government that it was not my business," Fyodorov said. "They were simply allowing friends to earn handsome profits."

With this kind of management running Russia, it appears that only government insiders, and not investors, will be making money here any time in the near future.

Written By Margaret Coker, CBS MarketWatch Moscow correspondent