An International Monetary Fund mission flew into Kyiv on Feb. 14 entering a brewing scandal over Ukraine's alleged misuse of money previously lent by the fund.
Three days before its mission arrived in the Ukrainian capital to resume talks on further loans, the IMF confirmed that it had asked the government to investigate allegations made in the Financial Times that the central bank had misused foreign currency reserves.
Government officials, struggling to limit the impact of the latest allegations on crucial loan talks with the international lender, resolutely denied any misuse of IMF money.
Other officials blamed unspecified domestic foes of the government for orchestrating a smear campaign in the international press just when Ukraine was desperately trying to avoid a debt crunch.
The new probe, originally planned as an audit of National Bank activity and its reserves, will now review claims that the government placed reserves in high-risk ventures, using Credit Suisse First Boston bank to channel the cash, an IMF spokeswoman said.
'Such a transaction would clearly violate the spirit [of Ukraine's IMF loan agreement] because it would have enabled the National Bank of Ukraine to give an inaccurate picture of its external position,' she said.
'Our staff will examine all these issues carefully and have asked the authorities to include investigation of the Credit Suisse transaction in November 1997, and any other allegations, in the special audit of the [NBU] that is already under way to look at the earlier allegations.'
The earlier allegations, made last month by the Financial Times and attributed to former Prime Minister Pavlo Lazarenko, centered on claims that IMF funds had been misappropriated.
The newspaper said Lazarenko, who is in U.S. custody pending court hearings on his extradition to Switzerland on money laundering charges, would soon air his allegations in the U.S. congress.
The new charges, also outlined in the Financial Times on Feb. 10, said some $600 million of the NBU's reserves had been moved through Credit Suisse.
'In at least one instance the money was used to buy the government's own treasury bills, helping prop up the domestic debt market,' the newspaper said. 'In another, the central bank shuffled $150 million through several accounts to make its reserves seem larger than they were.'
The NBU invited international auditors PricewaterhouseCoopers to conduct an audit of its relevant transactions after the first Financial Times story – with Lazarenko's allegations – appeared at the end of January.
Lazarenko, for his part, sought to distance himself from the scandal.
'Mr. Lazarenko regrets the publication of the [Financial Times] article and considers such articles to be tremendously harmful to the economy of Ukraine,' Lazarenko's lawyer Michael Handwerker said in a statement last week.
'In future all such articles which contain reference to Mr. Lazarenko should be considered false, unless Mr. Lazarenko's personal approval or that of his counsel has been obtained regarding the information contained therein.'
It was not clear how the new allegations of the misappropriation of IMF funds would impact the government's talks with the IMF mission on unfreezing a $2.6 billion loan to Ukraine.
Ukrainian officials said they would discuss the allegations with the fund delegation along with the originally planned issues, such as reviewing progress on approval of the 2000 budget draft, reforms in the energy sector and privatization.
The IMF froze lending to Ukraine last September over a controversial exports tax and stalled reforms ahead of the presidential election. Several fund missions that have visited Kyiv since have failed to recommend the resumption of aid.
Ukraine, which faces $3.1 billion in foreign debt payments this year, desperately needs IMF cash and support to avoid default and replenish its scarce hard currency reserves, which presently stand at about $1 billion.
Stanley Fischer, first deputy managing director at the IMF, said last month that the fund had learned of previous instances of irregularities in the reporting of Ukrainian reserves as far back as mid-1998, when the government and the fund were in negotiations on the latest loan facility.
After the initial allegations surfaced, the IMF amended its loan agreement with Ukraine to tighten requirements in the reporting of central bank reserves and to demand quarterly external audits of the central bank's accounts.
Ukrainian officials, meanwhile, vehemently denied that the government had breached its agreement with the IMF and placed reserves in high-risk ventures.
Prime Minister Viktor Yushchenko, speaking at the launch of Ukraine's debt rescheduling program in London on Feb. 14, said Ukraine had carried out audits of all NBU transactions covering the period referred to in the latest allegations, and the findings had been passed on to the IMF.
'There were no secret operations,' said Yushchenko, who headed the NBU before becoming prime minister.
'All financial operations were audited for the period beginning September 1998. We have passed five audit reports to the IMF,' he said.
Finance Minister Igor Mityukov told the same conference in London it was important the allegations did not derail Ukraine's $2.6 billion bond swap.
The rescheduling offer aims to exchange bonds maturing over the next two years into longer-term bonds and is crucial in preventing Ukraine from declaring itself in default.
Back in Kyiv, officials alleged that it was not accidental that the latest allegations in the Financial Times appeared just when Ukraine began talks with the IMF on debt rescheduling and on resuming lending.
National Security Council Secretary Yevhen Marchuk said 'certain persons in Ukraine' may have been behind the publication of the story. He did not elaborate.
Allegations of misuse of IMF loans by the NBU have been a feature of the Financial Times' coverage of Ukraine over the past several weeks, during which time three articles on the issue have been published.
In reference to the latest Financial Times stories on Ukraine, Presidential chief-of-staff Volodymyr Lytvyn also accused unspecified domestic forces of undermining the government's reputation by promoting incriminating reports in foreign media. – (Compiled from staff, wire reports)
