• ACI Russia

08/05/1998 11:02:38 FEATURE - Russia, IMF both under test with new rescue deal

By Janet Guttsman

WASHINGTON, Aug 5 (Reuters) - A new rescue package to shore up the rouble

and give Russia's government a fighting chance of economic success will be a

test, not only for Russia, but also for the International Monetary Fund.

The IMF, already under fire for using the wrong recipes to help Asia's

troubled economies, will lose yet more credibility if Russia fails to respond to

a new $11.2 billion loan, money which makes Moscow the IMF's biggest borrower to


The lenders, aware of Russia's wobbly record on economic reform, admit there

is no guarantee new IMF money will pull the heavily indebted country back from

the economic brink.

But Russia's politicial significance is such that they see no realistic

alternative to helping it.

"Our interest in successful political and economic reform in Russia is

compelling," U.S. Treasury Secretary Robert Rubin wrote last week in a letter to

Newt Gingrich, the leader of the Republican controlled House of Representatives.

"A collapse of the rouble would undoubtedly strengthen Russian opponents of

reform, who include ultra-nationalists and communists as well as oligarchs who

want to protect their special interests."

The stability of the rouble is one of Russia's few economic success stories

since it started on the zig-zag path towards a market economy. If the rouble

crashes, inflation takes off again, creating new problems for millions already

struggling to survive.


Rubin said a non-reformist Russia could become closed and protectionist,

more likely to oppose U.S. foreign policy interests. Crisis in Russia could

spread across central and eastern Europe, and economic or political troubles

there could hurt U.S. firms and workers, he added.

"This is the wrong time for the IMF to withdraw from this strategically

important country," he said. "We have a significant opportunity to use the

leverage of IMF financing to help the Russian government finally take the myriad

steps needed to put its finances on a sustainable path."

The big IMF loan -- the fund's third largest credit ever -- was agreed two

weeks ago after tough and nail-biting talks and after Russia's

communist-dominated parliament approved most of a string of tough demands on tax

reforms and spending cuts.

President Boris Yeltsin signed the package into law last Friday, hours

before a constitutional deadline, and ministers want parliament to meet again

later this month to discuss the additional measures needed to unlock the next


The extra money, part of it topping up an existing loan and part of it to

compensate Russia for lower oil revenues, means Russia has received three of the

IMF's biggest seven loans.

It brings total IMF promises to Russia to some 22.6 billion Special Drawing

Rights, the quasi currency used by the IMF for accounting and lending. That is

about $30 billion at current exchange rates.

Mexico, the IMF's second biggest borrower, won IMF promises of 21.3 billion

SDRs over a far longer period dating back to the 1950s. Russia only joined the

IMF in 1992.


But Russia has already failed to meet the conditions for several instalments

of cash from the previous $9 billion loan, raising concern that the latest deal

could also go off track.

"It's not a happy situation," one U.S. administration official admitted.

Concern about the loan centres in part on Russia's ability to meet its

promises and in part what economists describe as moral hazard -- the idea that

governments or commercial lenders can be reckless because the international

community will always step in to bail them out.

"There is undoubtedly a perception...that Russia is too large to fail," IMF

chief economist Michael Mussa said last month. "There is a moral hazard problem

for Russia that actually has affected capital flows."

Washington experts admit that if the latest Russia loan does fail to revive

the economy, or if Russia comes back for even more cash, it will provide extra

ammunition to those opposed to IMF rescue deals.

The U.S. House of Representatives has balked at an administration request to

provide $18 billion to replenish IMF resources drained by last year's rescue

deals in Asia, and most of the money for the latest Russia loan came from an

emergency lending facility which has not been used for 20 years.

Conservatives in Congress say IMF rescue packages encourage moral hazard.

Liberals say the austerity measures included in IMF-sponsored reform programmes

neglect the needs of the poor or ride roughshod over workers' rights.


The IMF says it is trying to take account of such criticism, allowing the

maintenance of subsidies on basic goods in some troubled Asian countries or

encouraging other borrowers to curb military spending.

It wants Russia to do more to unravel a tangled web of non-payments across

the economy -- a process which starts with wages and taxes and which often

includes the state.

Many workers have not been paid for months and disgruntled miners are

camping out near the White House parliament building, bitter at the wage delays.

But IMF First Deputy Managing Director Stanley Fischer said the latest

crisis could force Russia to act on long-standing problems, including its

inability to collect taxes.

"Crises are also opportunities and this crisis was an opportunity to get

action on Russia's critical problems by the Russian government...in the context

of financial support from the IMF," he said soon after the deal was announced.

Fischer flew to Moscow for urgent talks last weekend and said he was pleased

with government efforts on belt-tightening and tax collection. "Good progress

has been made, and if it continues that way the outcome will be good," he said.

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