The Russian Central Bank invested billions of dollars (through an offshore entity) in the infamous Russian GKO (dollar-denominated bonds) market, thus helping to drive yields to a vertiginous 290%.
Staff members and collaborators of the now dismantled brainchild of
Prof. Jeffrey Sachs, HIID (Harvard Institute of International
Development) - the architect of Russian "privatization" - 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)