A look inside beleaguered IMF

SUN JOURNAL

Scandals: Allegations involving the misappropriation of loans to Russia put new pressure on an agency some experts say should be abolished.

September 26, 1999

WASHINGTON -- Water lubricates the marble outside the International Monetary Fund's headquarters here, trickling across coin-shaped stairs into a reserve pool before circulating back to the top.

It's an apt symbol for the IMF itself, a fount of money for needy nations. But there's a difference. The fountains at H and 19th streets are water-tight. The institution inside may not be.

Already on the defensive for its handling of the Asian economic crisis, the IMF has recently been jolted by allegations that its funds on loan to Russia's central bank were siphoned off by criminals.

In one inquiry, auditors have focused on $1.2 billion in IMF money that Russia transferred in 1996 to the island of Jersey, a loosely regulated tax haven in the English Channel. In a separate, money-laundering case that has gained more attention, investigators are seeking the origins of $10 billion that passed through Bank of New York accounts with Russian ties.

IMF officials have said that there is no evidence that their money was diverted for illegal purposes. But the huge sums gushing through Russian-linked accounts and the IMF's own lax controls have prompted widespread suspicion that the organization was looted. Congress is investigating. So are criminal authorities in several countries.

The scrutiny has piled pressure on an agency that many experts already believed had outlived its utility and should have been closed or revamped. Jay Hancock, The Sun's diplomatic correspondent, offers some background.

How much of my tax money goes to the International Monetary Fund?

Plenty. The United States is the IMF's biggest contributor, accounting for $35 billion in current fund assets and controlling 18 percent of its votes. This year the United States contributed $18 billion -- the equivalent of $70 from every citizen.

What's the IMF's job?

Its main job is lending money to central banks running low on cash, although its functions have widened and multiplied in recent years.

It was founded to supervise the gold-based global money system installed after World War II. Enforcing firm rules among member nations, it promoted stable currencies and easy convertibility.

The gold system was scrapped in the early 1970s. But the IMF lived on, acquiring a bureaucracy of 2,600 employees and periodically floating emergency loans to troubled central banks among its 182 member nations. IMF credit has allowed countries such as Mexico and South Korea to avoid defaulting on bond payments.

What's wrong with that?

Critics argue that the IMF money bailed out Wall Street lenders and other financiers who made foolish foreign bets and should have paid for their folly. By shielding profligate investors in developing nations, critics say, IMF money has delayed crucial reforms and boosted the chances of even bigger speculative crashes later.

At the same time, the IMF stands accused of inexcusable policy blunders. Many analysts charged the organization with sparking the Asian crisis by advising Thailand to devalue its currency in mid-1997. The Thai baht's sudden plunge sparked a round of further currency devaluations and stock-market crashes across the hemisphere.

Later the IMF insisted that troubled Asian recipients of its bailout packages should raise their interest rates and cut government spending. As numerous economists have pointed out, that contradicts 50 years of wisdom. When America veers toward recession, authorities here cut interest rates. They don't raise them.

What did the IMF do in Russia?

Russia was touched by the economic contagion last year. The IMF, which has lent the country $22 billion since 1992, wired $4.8 billion in the summer of 1998 in an unsuccessful attempt to stabilize Russia's economy.

Who got the $4.8 billion after it left the IMF?

Russia's central bank, the Moscow equivalent of the Federal Reserve in Washington.

The bank said it used $1 billion to pay off government bonds and the other $3.8 billion to buy rubles in an unsuccessful attempt to support the currency's value. Critics said the infusion merely allowed a grace period for wealthy Russian insiders to convert into dollars and deutsche marks before the ruble's inevitable devaluation.

Why do people think money may have been stolen?

For one thing, Russia hasn't been fully forthcoming to the IMF in the past.

The central bank lied about the size of its reserves in 1996 to encourage continued fund lending, a report by PricewaterhouseCoopers found last month. Russia's wire transfers to Jersey and other offshore accounts, which were part of the reserves deception, are irregular and increase opportunities for embezzlement, analysts say.

At the same time, pervasive Russian corruption reinforces suspicions that IMF assets are at risk. The fund has admitted that it does little monitoring after money leaves its accounts.

The accounts under investigation were handled by Natasha Kagalovsky, the wife of Konstantin Kagalovsky, who was Russia's representative to the IMF from 1992 to 1995. She has denied wrongdoing.

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