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Thursday, September 2, 1999 Published at 12:52 GMT 13:52 UK

Business: The Economy

Russia says IMF loans were not misused

Illegal foreign currency dealing begins on the streets

Russia has not misused the loans it got from the International Monetary Fund, first deputy Prime Minister Mr Viktor Khristenko said.

The BBC's North America Correspondent Richard Quest : "IMF said it was looking into it whether it's loans was involved"
"The Russian government is able to issue guarantees that the loans were not misused," Mr Khristenko said, adding that Russia would issue such guarantees for all future IMF loans.

Mr Khristenko's comments follow calls for safeguards to be put in place before Russia receives more money.

French President Jacques Chirac earlier added his voice to the chorus of those demanding an explanation.

"If investigations confirm, which has not been done yet, that the funds were misused, France would discuss what should be done with its partners, particularly those in the IMF and the European Union," Mr Chirac said.

The US Treasury Secretary, Lawrence Summers, said the US could block future loans by the IMF to Russia unless safeguards are in place to prevent further financial scandals.

The BBC's Katty Kay: "Since the news broke, the Clinton administration has been sharply criticised"
"The United States will not support disbursement of the next tranche (instalment) without adequate safeguards, to assure that any funds disbursed are used properly, (and) without adequate accounting," Mr Summers told the USA Today newspaper.

"As these investigations continue .. we'll have to make judgements about what constitutes a satisfactory accounting for the use of the past funds," he added.

[ image: US Treasury Secretary Summers: unanswered questions]
US Treasury Secretary Summers: unanswered questions
But a US Treasury spokeswomen said that the US was not calling for a delay in the next IMF payment, due in September.

Investigators in New York believe that more than $10bn in funds from Russia was illegally deposited in the Bank of New York, and some of it may have come from the $20bn that the International Monetary Fund has paid to Russia since 1992 to help stabilise the economy.

The IMF recently agreed a $4.5bn aid package for Russia, and has a mission in Moscow discussing whether to release the next instalment of $640m in the next few weeks.

The aid is crucial in ensuring that Russia can balance its budget, pay its international debts, and regain international credibility.

The head of the IMF, Michel Camdessus, said this week that although Russia had lied about its foreign currency reserves, the fund would continue lending.

An investigation for the IMF by accountants PriceWaterhouseCoopers said there was no evidence of misappropriation of funds, but said that that the Russian central bank's procedures were unorthodox.

Russian fury

Russian negotiators reacted with fury and incomprehension to the US announcement.

"I do not see objective obstacles to the receipt of the second (IMF) tranche. There are no reasons to refuse it," Alexander Livshits, Russia's envoy to the Group of Eight, said.

"He (Mr Summers) wants adequate measures, we need further explanation. Is PriceWaterhouseCoopers not adequate? I simply do not understand what he wants," he added.

First Deputy Finance Minister Oleg Vyugin accused the United States of playing politics.

"Wholly political steps might be taken on lending to Russia by the IMF under this pressure, steps not linked to fulfilling the programme agreed with the Fund," he said.

In the United States, Republican presidential candidate Steve Forbes has been campaigning for the US to cut off all aid to Russia.

UK bank implicated

Meanwhile there is evidence that the corruption scandal involved UK financial institutions.

The Royal Bank of Scotland is believed to have been the subject of a Bank of England inquiry into accounts run by a Russian businessman at the centre of current allegations of money laundering.

A 1995 police report established that £31.3m ($50m) passed through accounts at the bank that were linked to Semyon Moglevich, whose involvement in an alleged $10bn laundering operation through the Bank of New York is currently being investigated, according to reports.

The Royal Bank of Scotland (RBS) would not confirm the Bank of England inquiry had taken place, but a spokesman for the bank told the BBC: "The bank fully co-operated with all the authorities concerned."

He said there had been an investigation "related to activities in the early 1990s" but there was no suggestion that the bank had acted improperly in any way.

The Financial Times newspaper reported that the 1995 police report said that profits from "large-scale extortion, prostitution, arms dealings and drugs trafficking" were being laundered through accounts at RBS.

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