Katya Gorchinskaya is the managing editor for investigative programming at Radio Free Europe/Radio Liberty (Ukraine Service). She served for seven years as the Kyiv Post's deputy chief editor from 2008-2015. Follow her on Twitter @kgorchinskaya.
The controversy over Ukraine's alleged misuse of International Monetary Fund loans reached new levels after the IMF accused Ukraine's central bank of intentionally misrepresenting the country's currency reserves in the late 1990's.
The IMF accusation drew an angry response from Ukraine, spawned a new round of contentious Western press reports and touched off a public relations battle in the United States between pro-Ukraine and anti-IMF lobbyists.
The IMF on March 14 accused the National Bank of Ukraine of engaging in a number of transactions worth almost $1 billion to generate a falsely optimistic picture of its reserves from 1996 to 1998.
'These transactions might have caused the IMF to disburse money earlier or in larger amounts than it otherwise would have done,' the IMF said in a statement on March 14.
The National Bank acknowledged that it had deposited a significant amount of its hard currency reserves in the Cyprus branch of Credit Suisse First Boston investment bank, but sharply rejected the claim that it had tinkered with those deposits to inflate its reserves. The NBU proceeded to blame the problem on Soviet-era accounting standards.
'One of the reasons for the misunderstanding was that before 1998, Ukraine's banking system employed an accounting system that had been in use in the former Soviet Union and which significantly differed from the one used by the IMF,' the National Bank said in a statement on March 14.
Some Ukrainian leaders put the blame for the controversy on the upcoming presidential elections in the United States, which is the single largest shareholder in the IMF, with a 17.4 percent stake.
The Republican Party is expected to hammer the Democrats on the current Ukraine scandal and a similar scandal in Russia. Ukrainian President Leonid Kuchma believes the Republicans are already doing that.
'Unfortunately, Ukraine is being used by certain political forces,' Kuchma said on March 17 during a trip to Azerbaijan. 'You understand very well that this is connected with the presidential campaign in the United States.'
Back in Kyiv, Ukrainian media finally jumped on the scandal. Previously, reporters had ignored the controversy even as stories about Ukraine's alleged financial machinations were appearing in the Financial Times and the Wall Street Journal.
The Kievskie Vedomosti daily reversed that trend with a story in its March 20 issue, which quoted an unidentified NBU official expressing surprise over the IMF's statement that the central bank had misled the fund.
'Both we and the IMF know very well that since 1995 [when Ukraine began receiving IMF aid], we have been providing them with our account balance information on a daily basis. Moreover, a fund mission comes here every month and checks the size of [NBU] reserves on its own, so they are aware of all major transactions. This has been going on for five years,' the paper quoted the NBU official as saying.
'Then why is the fund saying that our reserves had not been audited before September 1998? It's not a good sign,' the NBU executive said.
Meanwhile, officials from the Swiss banking regulator, the Federal Banking Committee, said on March 20 it has questioned Credit Suisse Group about the participation of CSFB, its investment banking subsidiary, in the transactions in question.
The announcement came days after Credit Suisse said it would send its representative to testify before the U.S. House Banking Committee at a hearing on money laundering and possible misuse of IMF funds.
CSFB has denied any wrongdoing in handling the transactions with Ukrainian reserves.
IMF officials could not be reached for comment on the affair.
International auditors PricewaterhouseCoopers is presently conducting an audit of NBU transactions over the period in question, which the government requested soon after the allegations of IMF loans misuse first surfaced.
Prime Minister Viktor Yushchenko, who headed the National Bank for nearly six years before being appointed prime minister last December, also has repeatedly rejected the allegations, insisting that they were politically motivated.
However, he has said he will not elaborate until PricewaterhouseCoopers announces the results of its audit at the end of March.
'Commenting on political statements means joining political battles. I want to stay away from such comments,' Yushchenko told a press conference March 17.
Amid the suspense surrounding the NBU's previous activities, Ukraine got a helping hand from an American ally.
The U.S.-Ukraine Foundation, a non-government organization, circulated two letters on March 16 claiming the scandal was orchestrated by unspecified Russian culprits.
'The purpose of this manipulation is to force Ukraine to accept what would then be the only remaining option, reconstituted entanglements with the Kremlin - favorable energy deals, debt accommodations, credits, in return for subservient positions to the Kremlin,' read one letter.
The letters, signed by the Foundation's president, Robert McConnell, called on its partners 'to write, fax, e-mail, call [U.S. Congress] representatives, urging support for Ukraine's reform programs and its new prime minister.'
Yushchenko's wife, Katherine Chumachenko, is vice president of the U.S.-Ukraine Foundation, which is financed by the U.S. Agency for International Development.
The Foundation later disavowed the letter as McConnell's personal opinion, but it still remained posted on the Foundation's Web site.
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