Gerashchenko on currency, CBR policies

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Viktor Gerashchenko spoke with Valery Virkunen of the newspaper Argumenty i Fakty

Viktor Gerashchenko has been the chairman of the Russian Central Bank through some of the most turbulent economic times. During his current term, he has faced violent criticism from Western media while being widely praised within Russia. He speaks about CBR policy and other issues in this interview.

Q: Why has the Central Bank not yet made any statements on the Bank of New York scandal?

A: The Central Bank of Russia has not been mentioned in connection with the scandal. The Finance Ministry has normally dealt with IMF loan money. The only exception was the so-called "Chubais tranche" worth $4.8 billion, remitted to the Central Bank in July 1998. By agreement between the Russian government and the IMF [International Monetary Fund], $1 billion from the tranche went to finance budgetary expenses, while the remaining $3.8 billion went to replenish our gold and hard currency reserve.

When State Duma Deputy Viktor Ilyukhin complained about the money, we hired auditors from PricewaterhouseCoopers. Later, we sent copies of the auditor's report to the IMF, Russia's General Prosecutor's Office and the State Duma. The report clearly states that during July and August 1998, the Central Bank spent $9.1 billion on supporting the ruble. However, this did not help, and the ruble, as you know, still tumbled on Aug. 17, 1998.

Q: Was it expedient to spend a huge amount of money on supporting the ruble when it was clear that the ruble was doomed? Many suspect the Central Bank of acting deliberately in order to let certain people buy dollars cheaply and smuggle them out of the country.

A: It was definitely a blunder to set a three-year semi-fixed ruble/dollar rate in late 1997. Many commercial banks that trusted the Central Bank were let down. But it is incorrect to accuse the Central Bank of misusing IMF loan money.

Beginning in 1993, the Bank of New York became the de facto primary clearance bank for Russia's commercial banks. My opinion is that the scandal around the Bank of New York is just hot air.

Q: Why did the delegation that visited the United States in connection with the scandal not include representatives of the Central Bank? Did they refuse you an invitation?

A: Even if we had been invited, we would not have gone. That delegation comprised high-ranking officials from the Federal Security Service [FSB], Interior Ministry, General Prosecutor's Office and tax police. In the United States, they apparently met with representatives from appropriate American services and agencies. There is a relevant cooperation agreement between Russia and the United States. Anyway, we would not have been permitted to investigate the operations of an American bank. We are not even entitled to receive information from our overseas bank (in which the Central Bank holds a major stake) on its relations with clients. It is confidential information.

Q: What are your views on the problem of capital flight? Assessments of its scale range from $150 billion to $400 billion.

A: A presidential decree of November 1991 allowed all Russian businesses to become involved in foreign trade. But it was not until three years later that a relevant monitoring organ, the Federal Agency for Foreign Currency and Export Control, began to function properly.

We have a well-established system to monitor foreign trade. The Customs Office functions properly and monitors commodity flows. But we cannot examine each contract and figure out whether or not its value is correct. It is no secret that Russian companies often sign bogus export contracts with offshore companies - understating the price of commodities to be supplied - with the aim of smuggling capital out of Russia. Another scheme involves fake import contracts.

Q: You know these mechanisms fairly well. Why don't you take measures to curb the schemers?

A: We fight this crime as much as possible. Regrettably, we have limited powers. ... A genuine free market should contain as few restrictions as possible. Recently, Russia joined Article Eight of the IMF Charter, giving our currency the status of unlimited convertibility for current operations. On one hand, this is good because it helps us avoid discrimination on the capital market. On the other hand, it may be bad because at this point Russia is unable to effectively compete with the world's industrialized countries.

Q: How would you assess the rate of capital flight from Russia?

A: Experts from the Central Bank's Foreign Currency Control Department assess capital flight from the country at $1 billion per month.

Q: How far is the Central Bank determined to go in supporting the ruble at the expense of the gold and hard currency reserves?

A: Talk about the Central Bank pouring its reserves down the drain has no connection with reality. During the last year, the Central Bank has managed to maintain its gold and hard currency reserve holdings... We are currently on the foreign currency exchange markets, and our primary goal is to prevent sharp oscillations of the exchange rate. Our position is that the ruble/dollar exchange rate should be such that our exporters can operate with profit. Otherwise, the country will not have enough hard currency to repay its debt.

Q: Is it possible for the ruble to slump again as it did a year ago?

A: There are no prerequisites for a ruble collapse unless people panic and rush to buy dollars. Even if that happened, they would need rubles, which the majority of people lack. Now, many people are forced to sell the dollars they had saved in their private coffers. But it is a tradition with our people to make savings for a rainy day. Although people's income has declined, statistics indicate growth in the amount of savings.

Q: What is needed to revive Russia's banking system, and where could money be found for the task?

A: World practice is that governments, not central banks, must find solutions. The Central Bank does not have money to help the commercial banks. The Agency for Restructuring Crediting Organizations (ARCO), which is a government organ, was set up for this purpose. The money allocated by the government during the last year was insufficient.

We have repeatedly informed the government and the Finance Ministry that additional funds in next year's budget should be earmarked for restructuring the banking system. As a rule, it is up to shareholders to support their banks if they want them to survive. The problem is that the economic situation in the country is such that investors, including foreigners, are in no hurry to risk their capital.

Q: Is it expedient to spend millions of dollars to save, for example, SBS-Agro or Inkombank?

A: We have not given anything to Inkombank. As regards SBS-Agro, it is a major and important bank with a large number of branches, and is a significant issue for the country and government to take care of. Since October 1998, the Central Bank has granted SBS-Agro credits to a total of 6.5 billion rubles. We monitored the spending. The bulk of the money has been spent on urgent payments and on repaying the bank's debt to the state, while a smaller part has been invested in the harvesting campaign. We are aware that SBS-Agro needs rather significant funds in order to overcome its problems and return to normal operation. ARCO is considering additional fund allocations for SBS-Agro.

Q: Rumors have circulated about your possible resignation.

A: They are just rumors, nothing more. I was appointed to head the Central Bank a year ago - by presidential nomination. Ac-cording to the law, I can be dismissed due to bad health, personal request, disagreement with the government's economic course and for committing blunders in office. So far, I do not see any blunders... Domestic auditors and IMF experts have not found any serious drawbacks in the Central Bank's performance. So I see no reason for my removal from the post.

A year ago, it required two weeks of persistent requests to persuade me into swapping a cushy position in a commercial bank for the post of Central Bank chairman, with a salary of 10,000 rubles a month. But I do not plan to serve the entire four-year term as prescribed by law. This is not because I do not like the job - it is an important and significant post. But being chairman of the Central Bank imposes certain restraints on me. These restraints are especially painful for a creative person. I feel more satisfaction working in a commercial bank.

Q: Could you recommend somebody for the post of Central Bank chairman?

A: I know for certain whom I would not recommend. For example, I would not recommend Boris Fedorov or Alexander Lebedev. There are many professional bankers - both in the Central Bank and in other banks - whom I could recommend, if not with pleasure, then at least with a clear conscience. I repeat, I am not going to hold the post for the whole four-year term. It is always good to make way for youth when the time is right.