Revelations that Russia's Central Bank duped the International Monetary Fund and other foreign creditors by hiding billions of dollars of currency reserves in a tax haven abroad have turned up the heat on the world's premier lending body.
The notion that Russia thumbed its nose at Western creditors does not surprise many international investors, who long complained of corruption.
And scrutiny of the IMF already had been stepped up by its having failed to anticipate the crash of Asia's markets, or repair them.
But many observers are shocked by the fact that the IMF, which had poured $19 billion into Russia over the past decade, lost track of the money.
"It's outrageous," says Eric Kraus, a debt analyst in Moscow with the German investment bank Dresdner, Kleinwort Benson. The emerging scandal is certain to impact world response to Russia's renewed calls for cash.
More broadly, it is likely to play into an accelerating debate among the Group of Seven (G-7) industrial nations to craft a code of conduct - as well as common accounting standards - in international lending.
The bombshell dropped earlier this month when the prosecutor general's office claimed the Central Bank had squirreled away $50 billion from 1993 to 1998 in an obscure tax shelter called FIMACO (Financial Management Co.) located in Jersey, in England's Channel Islands.
Central Bank officials have since confirmed they used FIMACO to protect assets from foreign lawsuits and that some of the money originated from the IMF. But officials have offered glaring discrepancies over the sum involved.
The bank's deputy chairman, Oleg Mozhaiskov, says $1.4 billion was parked there at the height of its activity in 1994. But a predecessor of Mr. Mozhaiskov, Sergei Alexashenko, confirmed the prosecutor's citation of $50 billion. Also unclear is where the profits earned on commission went. Current and former Central Bank officials deny wrongdoing.
The IMF insists that FIMACO's existence came as a surprise. "Nothing was known about it," says a spokesman in Washington. The Fund demanded an explanation from the Central Bank, which was provided last week.
But some investors want explanations from the Fund itself. Why, they ask, did it not investigate reports by international and Russian accountants advising the Central Bank to stop sending money overseas to offshore accounts?
"There was a deluge of Russian scandals over the past few years, but this is the most astonishing one I have seen," says Ed Dolan, president of the American Institute of Business here.
Aside from the issue of hiding money from creditors, many questions have been raised over whether FIMACO served as a conduit for capital flight, estimated at $150 billion over the past decade. That sum is equal to the country's entire foreign debt.
Skeletal details that have emerged indicate that FIMACO was not the sleeping fund where money was merely parked, but part of a network established before the Soviet collapse in 1991 whose raison d'etre was to do secret deals.
Analysts believe FIMACO's relationship with other Central Bank subsidiaries - a circle of companies that own parts of each other - could enable it to be used as a sluice for channeling capital abroad. The Central Bank, via these daughter companies, invests commercially - a highly unusual practice.
For example, FIMACO was fully owned by the Paris-based Eurobank, which is 77.75 percent owned by Russia's Central Bank. Other Eurobank shareholders include some of Russia's giants - diamond firm ALROSA and oil companies Yukos and Rosneft. In turn, the Monitor has learned that FIMACO owns 35 percent of another Eurobank subsidiary, Eurofinance, which holds stakes in Russian banks and firms.
The FIMACO revelations come at a delicate moment in Rus-sian-IMF negotiations, which may explain the IMF's reluctance to comment further. Moscow, in the throes of a severe economic crisis, is seeking more loans because it says it can not repay $17.5 billion of debt falling due this year. Central Bank reserves are dangerously low for such an indebted country - $11.3 billion dollars, of which only $7 billion is held in cash.
The IMF has said it will not hand over another cent until Russia makes progress on corruption, tax collection, and restrained spending. However, the IMF is under intense political pressure not to abandon Russia, still a nuclear power.
Russia's political-financial elite has closed ranks across the political spectrum over the FIMACO affair. The lone voice of criticism came from former Finance Minister Boris Fyodorov, who believes FIMACO was used by a small circle for personal gain. All others seem to think the Central Bank was justified in its actions.
"The West could seize assets because it does not understand the situation here. So it's a good idea to manage funds overseas," summed up Pavel Medvedev, head of the banking subcommittee at the Duma (lower parliamentary house).