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Russia: IMF Renews Lending

Boston, 29 July 1999 (RFE/RL) -- After nearly a year, Russia has mended its damaged ties to the West as the International Monetary Fund renewed lending Wednesday for the first time since the crisis of last August 17.

The approval of an IMF loan program totaling $4.5 billion may have little direct effect on Russia's economic problems in the near term. Moscow will not actually receive the first installment of $640 million because the entire credit line will be used to pay the debt obligations to the IMF that Russia has already incurred.

But the loan has set the stage for a series of compromises that could put Russian finances back on track. Both the Paris Club of official lenders and the London Club of commercial creditors will meet this week to deal with the problems of Russian debt. The World Bank has prepared a series of loans that could be worth some $2 billion over the next 18 months and about $600 million this year. Japan is also ready to resume lending.

"Everybody has been waiting for the IMF," said Keith Bush, director of the Russia and Eurasia program at the Center for Strategic and International Studies in Washington.

But the IMF action also follows a series of compromises that have already taken place. For months after the August default, IMF officials were adamant that they would not permit further financing that would amount to a simple rollover of past loans, although analysts say it appears they have now done exactly that.

The IMF also insisted that a series of measures would have to be passed by the State Duma and implemented before there could be more loans. The Duma passed some measures but recessed with more work to be done. The Russian government has agreed to call the Duma back into special session in August to reconsider at least one rejected measure, while President Boris Yeltsin pledged to impose a four-fold increase in the land tax by decree.

Russia has committed itself to new safeguards after an audit of central bank practices involving the offshore Jersey firm FIMACO and the loss of the IMF's last loan of $4.8 billion during the August collapse. The decision to resume lending was taken only after a full day of deliberation ending in the evening hours Wednesday, although an IMF official declined to characterize the process as particularly long or difficult.

The flexibility on both sides may reflect the West's broad agenda with Russia and the judgment that the country cannot simply be lost. Russia's engagement with the United States is of particular importance, as demonstrated this week during the Washington visit of Prime Minister Sergei Stepashin.

The Stepashin meeting with Vice President Al Gore produced no landmark agreements, but the two sides were clearly eager to renew their relations in all their difficult dimensions following the rift over Kosovo. It is notable that NATO's bombing of Kosovo, which lasted 78 days, produced a diplomatic freeze between the United States and Russia which lasted only 48 days since Serbia agreed to withdraw its troops on June 9.

The needs on both sides are too great to be ignored. Perhaps the proof of that lies in the decision to begin new arms control talks in August. President Yeltsin has previously agreed to consider a START-3 pact for further cuts in nuclear arsenals, even though the Duma has already delayed ratification of the START-2 treaty, signed in 1993. The talks are unlikely to alter the Duma's reluctance, but they could provide a venue for re-negotiating the Antiballistic Missile Treaty of 1972, an issue of high importance to Washington. Although Stepashin conceded that both countries may be threatened by rogue nations, it is the United States that has repeatedly pressed for amendments to the ABM accord.

Some U.S. lawmakers have threatened to scrap the ABM treaty altogether, unless allowances are made for a limited antimissile defense system in the United States. Any move to annul the treaty would set a poor precedent for arms control pacts and efforts to stem proliferation. Cooperation may also hold the key to the problem of Theater Missile Defense (TMD).

Events unfolding in East Asia could raise pressure on the United States for both antimissile and TMD systems to irresistible levels. Persistent reports that North Korea is preparing to test a long-range missile have prompted calls for a TMD system in Japan. Taiwan may also seek TMD protection if its row with Beijing over "one-China" policy escalates. In both instances, Washington has only limited leverage to shape events.

Russia may be able to help by showing flexibility on the ABM issue, even if no TMD systems are ever built. The option of missile defense may at least serve to increase U.S. leverage until diplomatic solutions can be found.

Russia's cooperation on security may be balanced by its own economic needs. In such a relationship, Russia may seek Western flexibility in financing for years to come. Neither side is likely to be successful without the other. If such an understanding is the outcome of the Stepashin visit, then the trip may well be seen as a success.