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Russia: G-7 Strives To Inspire Confidence In Spite Of Financial Crisis

  • Robert Lyle



Washington, 17 August 1998 (RFE/RL) -- Global financial experts agree that Russia is experiencing a "crisis of confidence" and that no amount of money, by itself, can end it.

A basic foundation of confidence is essential to draw and keep investors' and savers' money. But that confidence is what is lacking now in both domestic Russian citizens and their savings and in the larger foreign investors around the globe. Emerging market strategist at the Morgan Stanley investment firm in New York, Jay Pelosky, sums it up, saying: "I'd rather sit on the sidelines and wait to see how it settles out."

Understanding that fundamental concept of a crisis of confidence is what is driving the G-7 group of major industrial nations -- the U.S., Great Britain, Germany, France, Italy, Canada and Japan -- to work so closely with Moscow in seeking ways to restore at least an underpinning of confidence in Russia's very shaky financial situation.

The International Monetary Fund (IMF), which put together the $22.5 billion rescue package for Russia a few weeks ago, is also intimately involved in this effort. But sources at the IMF say there should be no talk of another loan package.

Without the reforms promised for the first package, said one fund source, "there will be no more money for Russia -- period."

The IMF's own loans for the rescue package, $11.2 billion worth, were divided into two drawings -- $4.8 billion released immediately because the government's anti-crisis program was being implemented -- and the remaining $6.4 billion to be disbursed once an agreed set of reforms are approved by parliament and put in place.

That tranche was expected to be approved in late September, but sources say IMF First Deputy Managing Director Stanley Fischer told Russian officials in Moscow two weeks ago that there will be no second disbursement without the reforms. The Duma is still balking at an August special session to take up the required measures.

One source at the IMF explained that in a confidence crisis, money flows out of a country faster than it can be pumped in, so there is no value in merely approving further loans. "It's like a huge drain has been opened in a bathtub," said one source, "no matter how hard the water is running, there is no way to keep the tub full." A crisis of confidence is like opening up a huge drain, the source continued, and the only way to stop the drain is to plug the hole by reestablishing a basic confidence. They must convince thousands upon thousands of investors, bankers, and even ordinary savers, that there is a future in the ruble and a Russian market economy.

Even without a crisis of confidence, IMF sources say, the fund has no new money to give Moscow, even if it carries out its reforms.

A new quota (membership fee) increase, which would double the fund's resources, has not yet been approved by 85 percent of the membership's voting power. Even to finance the July Russian rescue package, the IMF had to tap the GAB (General Agreements to Borrow), a special borrowing facility from the fund's richest members.

Sources at the IMF suggest that the core of that group, the G-7 nations, may in fact turn out to be the most valuable in helping Russia avoid a complete economic collapse.

That is because the confidence crisis is as much psychological and political as financial. U.S. Treasury Undersecretary for International Affairs, David Lipton, was in Moscow last week acting as a kind of point man for the G-7 in trying to find ways to help.

He returned to Washington on the weekend, but he and other senior American treasury officials are staying in close contact with their counterparts in Bonn, London, Paris, Rome, Tokyo and Ottawa.

The IMF is also involved. The head of the IMF department that covers Russia, John Odling-Smee, was expected to quietly travel to Moscow on the weekend. The fund's managing director, Michel Camdessus, and First Deputy Stanley Fischer are both on holiday in Europe but could quickly travel to Moscow if needed.
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