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Russia: IMF Comes To Moscow To Discuss Reforms

Moscow, 17 June 1998 (RFE/RL) -- An International Monetary Fund delegation is to arrive in Moscow next week (June 22) to review Russia's implementation of measures designed to stabilize the economic situation. The delegation is to discuss additional IMF aid to Russia as well, but only on the condition that Russia follows through on a stabilizing program.

The market rebounded on the news, apparently reflecting investors' hopes that the IMF will provide a bailout package for Russia.

While much of the blame for the current economic turmoil clearly rests with the Russian government's inability or unwillingness quickly to implement stabilizing reforms, and the inevitable shock waves coming from Asia, some economists believe the IMF has made matters worse through a combination of poor advice and bad public relations.

Al Breach, an economist with the Russian-European Center for Economic Policy says: "Since the crisis began, the IMF has been positively unhelpful."

The IMF has been criticized for holding back on providing a stabilization fund that investors say is needed to end speculation against the ruble. Some analysts have also said the IMF made an error by not insisting that the government cut its short-term treasury bill borrowings -- the key problem over the past few months.

Officials from the IMF and U.S. administration have said they do not think extra aid is needed now, although they will support Russia if needed. The IMF maintains that the government should follow through on promises to introduce tough new austerity plan to slash spending and weed out tax evasion should be enough to calm financial markets.

As a source close to the IMF negotiations put it: "You've got to put the horse before the cart. They've got to bring the fiscal situation firmly under control first."

The fund's strategy so far has been to use the crisis to keep the pressure on the government, which has frequently failed to follow through on reform promises in the past.

Some analysts insist, however, that help is needed now. Eric Kraus, chief strategist at Regent European Securities in Moscow, says: "We're currently in a situation of crisis management. The patient is in intensive care. It does us no good to get them signed up for a gym and stop smoking if we can't get them out of the hospital first."

Those analysts believe a stabilization loan for Russia would help restore the confidence of foreign investors who worry that the Central Bank will not be able to defend the ruble. The Central Bank's cash reserves minus gold stand at about $10 billion, not enough if foreign investors holding more than $20 billion in ruble-denominated Treasury bills decide to leave the market, taking dollars with them.

With reserves backed up by such an "insurance policy," the thinking goes, investors will return to the market and yields on T-bills will come down. The larger the package and the sooner it comes, the less likely it will need to be used.

But the IMF, which has been criticized for bail-outs in Asia, is concerned that an emergency loan would create a "moral hazard" by rewarding investors for making risky decisions. A source put it: "No one is going to abandon Russia. But it is not the IMF's business to be underwriting the bad decisions of domestic or foreign investors."

Some analysts remain confused about what additional steps Russia needs to take to qualify for additional aid. Since the latest crisis struck in mid-May, they say, the IMF has issued contradictory signals, both admonishing the government for failing to adhere to reforms and backing its fiscal tightening measures.

Charles Blitzer, head of emerging markets research at Donaldson, Lufkin & Jenrette says the IMF's "fence-sitting" may have contributed to the crisis.

The IMF's top Russia expert John Odling-Smee was dispatched to Moscow late last month. While he said the IMF planned to unlock a delayed 670 million dollar payment under its existing 10 million dollar loan, he said additional aid to help the Central Bank was not needed.

Adding to market uncertainties, Odling-Smee criticized the government's plans to restructure its short-term debt by arranging cheaper long-term hard currency loans from Western commercial banks. The IMF fears the government will take advantage of the "breathing space" such a plan would allow by piling up short-term debt again.

Meanwhile, the government is being forced to refinance T-bills at interest rates between 50 and 70 percent, which is compounding its fiscal problems. And some analysts maintain that Russia cannot improve its public finances, as the IMF demands, without foreign funds.

Peter Boone, co-head of research at Brunswick Warburg, a Moscow-based investment bank, says: "The main fiscal problem facing Russia now is high interest rates. Unless Russia solves its debt structure problem, it cannot resolve its fiscal problems."

But for now the IMF has decided that no more money will be provided until Russia delivers on reforms.