IMF comes to the rescue of Russia’s economy

Empowering Weak & Oppressed

Abul Fadl

Rabi' al-Thani 23, 1419 1998-08-16


by Abul Fadl (World, Crescent International Vol. 27, No. 12, Rabi' al-Thani, 1419)

The International Monetary Fund (IMF) has once again come to the rescue of Russia as it teeters on the edge of a precipice of financial meltdown. On July 22, the 24-member IMF executive board approved a US$11.2 billion rescue package to help Russia bolster the value of the ruble and calm panicky foreign investors in order to ease a financial crisis that had threatened to cripple its wobbly economy. The IMF decision will pave the way for further loans from the World Bank and other international lenders, namely Japan, who have pledged an additional total amount of about $17 billion.

The bail-out package includes a $4.8 billion slated for an immediate first installment. Originally, the IMF had pledged $5.6 billion in immediate payments. But this tranche was scaled back after Russia’s lower parliament, the State Duma, rebuffed President Boris N Yeltsin’s efforts to enact laws on key economic measures tied to the release of the emergency aid. Stanley Fischer, the IMF’s managing director, said in Washington that the scale-back reflected the unwillingness of the Fund ‘to send a signal, particularly to the Duma, that everything was hunky-dory.’ However, the withheld money is to be added to a disbursement slated for September, provided that the Russian government delivers on its promises.

The IMF package will be used to replenish the depleted foreign currency reserves of the Russian central bank, which had dwindled in May, due to extreme pressures on the country’s financial markets, to $13.7 billion as the bank battled to shore up the ruble. A fair share of these reserves is in the form of illiquid gold.

But the Russian government is not the sole beneficiary of the bail-out. A host of western financial institutions, especially German, French and American banks, who have more than $72 billion of loans outstanding to Russia (i.e., more than 50 per cent of the country’s total hard currency debt of $140 billion), stand also to benefit. Inevitably, a significant share of the IMF cash injections will be used to repay these banks.

The Fund has demanded that Russia implement certain austerity measures to stir the economy from its torpor, mainly restructuring the tax code and cutting back on government spending, as a condition of getting the money. Stung by the Duma’s refusal to enact laws on these measures, Yeltsin resorted to his preferred method of autocratically implementing government revenue-raising measures by decree and fiat. Over the weekend of July 18-19, he signed an assortment of decrees that aim to increase the tax on most land fourfold, to establish a new sales tax of 5 percent and a minimum small business tax, to allow precious metals producers to export their products directly, and to regulate more strictly the production and sales of alcohol.

The announcement of the package succeeded in calming fears of an imminent devaluation of the ruble and triggered an upward surge on the Russian stock market, thus stabilizing Russia’s financial markets after two months of free fall. But the Russian economy remains fragile. Investors, officials and workers alike continue to show concern that the budding recovery is not robust enough to withstand the test of time.

In an interview with a Russian television station, Russia’s chief negotiator with the IMF Anatoly Chubais indicated that the bail-out package could be just another temporary fix. He warned that if major economic reforms are not implemented, Russia’s ability to arrest another similar vertiginous slide in the value of the ruble will be eroded. ‘We have bought time, which can be wasted together with the money we have borrowed, or we can use it to carry out the work we need to do,’ he said.

For years Russia has relied on high-yield, short-term treasury bills (known as GKOs) to finance its budget deficits. This rickety policy drove Russia’s short-term borrowing obligations ever higher into the

stratosphere. Yet cash continued to be extremely short. Consequently, the recent years saw the living standards of millions of Russians spiraling down quickly. Russian workers have gotten used to going for months on end without getting paid. Pensioners also have been going months without pay. Tax collections have also been another stumbling block. According to reports released by the Russian finance ministry, tax collections fell about 25 per cent short of budget targets in the first five months of this year. The locus of a significant part of this shortfall lies in corporate taxes and in getting tax debtors to pay up.

The resulting indebtedness, combined with the fallout of the Asian crisis which has hurt all commodity-producing countries, a wave of labour militancy by unpaid workers and miners, a fall in oil prices, and drastic budgetary cuts, threatened to push the economy into a financial abyss. In a bid to scrape up much-needed cash, the government tripled interest rates to nearly 150 percent. But investors lost confidence and balked at even such sky-high rates, forcing a run on the ruble as capital reserves scrambled to pay off maturing paper that in the past has been covered by new issues.

The grave perils of "moral hazard" are all the more salient in the IMF’s effort to bail out Russia, however. The prevalent thinking among IMF officials and western leaders is that Russia is too big and too important to be allowed to collapse. Pre-empting the political implications of an economic implosion are thought to be worth the financial risk of throwing good money after bad at Russia. As one American official put it simply, yet somehow acopalyptically, Russia is like "Indonesia with 10,000 nuclear warheads."

On the surface, much of this reasoning makes sense. But a deeper look reveals that it is based on woolly economic thinking. Although the bail-out might be successful in treating the immediate symptoms of the Russian economic crisis, it is highly doubtful that the package will be a panacea for the deep structural problems lying at the core of the crisis, namely Russia’s inability to build a sensible system of public finance.

The bigger problem is that as the IMF keeps protecting governments, businesses, investors and lenders from the consequences of bad investment decisions and destructive economic policies, the Russian economy, along with numerous other "emerging markets", keeps inching closer towards a time when the spiral spins out of control. That is especially worrisome in the light of the fact that the IMF appears to be running out of money after a series of financial botch-ups to deal with the Asian crisis. The recent Russian bail-out brought this reality into sharp focus. The increasingly cash-strapped Fund found itself in the uneasy position of having to finance the Russian bail-out by drawing on an emergency credit line that has not been used since 1978. Obviously, this situation does not augur well for the possibility of future bail-outs whether in Russia or elsewhere.

Muslimedia: August 16-31, 1998

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