Financial scams dupe inflation-weary Russians

June 12, 1994|By Los Angeles Times

MOSCOW -- Hey, friend, looking for a good hedge against inflation? How about 30,000 percent interest -- you heard right, 30,000 percent -- in five years on the rubles you invest today?

Or wait, you've got dollars, you say? We can give 120 percent a year! Guaranteed. Insured. You bet.

Or how about this: You buy a car from us at a slightly inflated price and in a year we'll give you back the entire ruble sum you paid. How's that?

Sound good? Such a deal sounded good to Valentina Belova, too. The retired laboratory aide took the money she and her husband, a plumber, had saved over the years by working overtime and invested it last January in the solid-sounding Independent Oil Concern for three months at a promised 223 percent interest.

She never got the interest. She also never got her money back, and probably never will because the firm's director has reportedly disappeared. What she got was an arrest record and a fine for blocking Moscow's central thoroughfare, Tverskaya Street, in a protest with hundreds of others who were cheated.

"The investment came to nothing," she sighed, standing amid a crowd of bilked comrades who meet every Monday evening across from the mayor's office to discuss their plight. "We'll never see our money again."

"Where's the KGB when you need them?" asked fellow victim Galina Karamysheva, who lost her laid-off husband's severance pay even though the couple had carefully checked the firm's credentials. "There are financial inspectors. Where are they?" she wondered aloud. "Someone should be controlling this. We've just been thrown out into a sea of lawlessness and abandoned."

Post-Communist Russia is anarchic in many ways, but among its wild institutions, one of the wildest is its fledgling financial market.

Virtually unregulated, new investment funds, quasi-banks and joint-stock companies promising fabulous returns on every ruble are multiplying furiously, filling the airwaves and advertising pages with promises. Even the phone service that gives the correct time has added a paid pitch for a financial company.

And the public, inexperienced, already impoverished by reforms and fighting inflation that runs at 10 percent a month, is buying.

The longest lines in Moscow these days are to purchase shares, deposit money or collect dividends at investment funds with catchy one-word names such as Tibet and Chara or at the 30 offices of a giant conglomerate called MMM, which claims 5 million shareholders. Demand for MMM shares rose so high that a Soviet-style secondary market developed -- people started selling their places in the line to buy shares for almost as much as the price of a share itself.

Many of the new funds are legitimate, authorities say, and -- so far, at least -- have been making good on their pledges. But because Russia lacks both an equivalent of the Securities and Exchange Commission and a truth-in-advertising law, it is hard to tell what is a scam and what is not.

The Moscow City Council, which has formed a special panel on the problem, believes that perhaps 300,000 investors already have lost their money here alone -- and that is only the beginning. Eleven criminal investigations are reportedly under way and well over a dozen shady financial firms have folded.

"It was reaching the point that it was becoming politically explosive, so we had to get involved," said Moscow Council Deputy Vladimir Platonov, who is working to find ways to get investors back at least some of their money from banks where what assets could be found have been frozen. "Crowds can become unpredictable. . . ."

The government, aware that the collapsing funds could prove destabilizing and serve as powerful weapons for the political opposition, has appeared lately to be trying a bit harder to crack down on the bigger firms. Tax inspectors last month demanded about $3 million in back taxes from Chara and are accusing MMM of a variety of violations.

But the situation appears to already be out of control. MMM's president has responded to attempts to clamp down with a counterattack that caused a brief panic among shareholders: If the government presses too hard, he may have to close down his operation, he warned, and he cannot answer for the possible reaction by 5 million disappointed investors.

Among suggestions on how to stem the spread of phony firms, the loudest and most likely to be acted upon soon is the call to regulate advertising.

In a Moscow all-ads paper called Extra-M, the Mosimportbank offered30,000 percent interest on five-year ruble deposits. It took the Sevodnya newspaper to disclose that the ad was largely an arithmetic trick playing on the difference between simple and compound interest. The interest actually amounted to less than 13 percent a month, not bad but not much more than inflation.

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