IMF says Kyiv supplied misleading information on financial reserves (03/19/00)

IMF says Kyiv supplied misleading information on financial reserves

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Just as Ukraine completed a successful foreign debt restructuring on March 15 that it hoped would allow the International Monetary Fund to grant it a badly needed financial help, the international organization threw a large wrench in the country's plans when it announced it had discovered that Kyiv had been supplying it with misleading information on the state of its financial reserves - to the tune of nearly $1 billion.

"On the basis of the information currently available to the IMF staff, it appears that a numbers of transactions in 1996-1998 gave the impression that Ukraine's reserves were larger than was actually the case," stated an IMF statement released late on March 14. It went on to say that the international financial organization would not have disbursed three previous tranches had the true state of the currency reserves been known.

The allegations, which suggest that Ukraine may have manipulated its foreign reserve fund to convince IMF officials to release loans needed to keep the Ukrainian economy afloat, have led to a call by a top U.S. official in the Clinton administration for a complete investigation.

According to the Associated Press, Edwin M. Truman, assistant treasury secretary for international affairs said the United States was "deeply concerned" with the revelations.

The National Bank of Ukraine has been embroiled in controversy since a series of articles appeared in the Financial Times alleging gross improprieties and unethical procedures in the central bank's financial dealings. The most notable was an allegation by a person close to former Ukrainian Prime Minister Pavlo Lazarenko that some $613 million in IMF loans had been embezzled in December 1997 - $200 million of which were alleged to have been diverted to the private accounts of politicians close to the president.

The NBU and the IMF agreed at that time that an independent private auditing firm should audit the bank's books. An Interfax-Ukraine press release stated that the basis for the latest allegations came from the audit, which was carried out by the international auditing firm of PricewaterhouseCoopers.

Among the charges are that $360 million was lent to commercial banks in Ukraine only to be redeposited with the central bank, which then once again counted the deposit as part of its reserve.

It is also alleged that some $275 million was deposited illegally in foreign banks to stimulate artificial demand for government bonds and treasury bills. An additional $300 million is believed to have been involved in credit swaps and options.

Although Ukraine had earlier told the IMF that certain inconsistencies in the numbers were a result of the old Soviet accounting system used until recently in Ukraine, after the allegations were leveled officially it released a statement calling the charges serious.

Prime Minister Viktor Yuschenko, who led the NBU until his appointment as head of government in December of last year, was not, however, ready to admit guilt on the part of the NBU. "We held six audits two years ago and made all the operations public," said Mr. Yuschenko. "These operations are not a secret. The operations were audited."

The NBU said it was cooperating with the IMF to resolve all problems. "The government and the NBU are determined to carry on economic transition and hope the measures carried out in Ukraine jointly with the IMF will boost cooperation," said an NBU press release. One measure already agreed upon will be that any future financial aid to Ukraine will remain in the bank accounts of the IMF.

The government's latest financial crisis arose just as Ukraine was successfully bringing a $2.7 billion debt restructuring offer to a close. Realizing it would be unable to service a huge foreign debt on treasury bonds that came due this month, the Ministry of Finance had offered foreign commercial banks an exchange of bonds maturing in 2001 for seven-year depreciable Eurobonds with an average maturity of 4.4 years and quarterly interest rate coupons of 10-11 percent. Some 88 percent of foreign bond holders have accepted the new terms.

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