08/06/1998 08:27:51 Rouble will be a test not only for Russia but the IMF
FEATURE - Russia, IMF both under test with new rescue deal
By Janet Guttsman
WASHINGTON (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 theheavily 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.
WRONG TIME TO PULL OUT OF RUSSIA, RUBIN SAYS
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.
POOR TRACK RECORD ON PROMISES TO IMF
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.
WEB OF NON-PAYMENTS MAKE RUSSIAN LIFE DIFFICULT
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.