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Russia: IMF Troubled By Cost Of Operations In Chechnya

Boston, 7 October 1999 (RFE/RL) -- The International Monetary Fund has voiced concern about Russia's spending on the war in Chechnya at a time when it is considering another installment of a loan to keep the country's economy afloat.

An IMF official in Washington told RFE/RL that the fund is troubled by the economic cost of the Chechnya operation, although the fund steered clear of any statement about the merits of the war. So far, there have been no firm estimates of the costs of the conflict or assurances that Russia can continue fighting within the limits of its budget targets.

"Yes, we're concerned that it could undermine the progress in improving public finances," said the IMF official in a prepared response to questions about the Russian offensive.

The official did not say whether the fund would approve Russia's next loan installment of $640 million if the Caucasus campaign continues. But the statement may be enough to send a message that Western governments could become reluctant to support further financing if Moscow squanders its limited resources on an open-ended military engagement.

During the last war in Chechnya, between 1994 and 1996, the IMF came under heavy criticism for continuing its lending to Russia. Some economists, including Harvard University's Jeffrey Sachs and Marshall Goldman, charged the IMF with indirectly subsidizing Russia's role in the war.

Fund officials rejected the charges, noting that the IMF has previously supported economic reform for countries in conflict. The IMF aided programs in Morocco, for example, despite Morocco's occupation of the Western Sahara in the late 1970s. But the record is mixed. In the 1990s, the fund delayed loans to Armenia for several years because of concerns that they could be diverted during the fighting over Nagorno-Karabakh.

The issue of what the IMF calls "fungibility" is a tough one. The term refers to the fact that any money lent for one purpose can be used to offset the costs of any other activity, whether the IMF approves or not. As a practical matter, loans to support Russia's economy or its budget may have little effect if the government is incurring large unbudgeted costs to pursue the Chechnya war.

In July, the fund approved a credit of $4.5 billion for Russia over 17 months, but so far it has only paid the first tranche of $640 million, all of which was used to service previous debts to the IMF. The next tranche has been delayed until a second independent audit of central bank subsidiaries and transfers is complete.

So far, the IMF's lending conditions have had nothing to do with Chechnya. Although it has been over three years since the last war, it is still unclear how Russia paid for it. Some of the unplanned cost of the operation came out of the existing military and security budgets. At the time, Russian officials said that some funds would also come out of future budgets. In many cases, the troops were left unpaid.

Late last month, an IMF team returned from Russia and gave a generally upbeat report on its economic progress, citing a recovery in industrial output, a strong balance of payments position and other indicators. But the team is not believed to have taken Chechnya's costs into account. The next loan tranche has also been delayed until a second audit of central bank subsidiaries and transfers is complete.

The IMF may also take a dim view of Russia's plan to offer a tax break to an ambitious pipeline project to cross the Black Sea to Turkey. Last Friday, the State Duma voted to back tax exemptions for a joint venture to be called Trustco, which plans to build the deepest underwater gas line in the world. The Blue Stream project, undertaken by Russia's Gazprom and ENI of Italy, is expected to cost at least $2.7 billion.

"We are generally in opposition to this sort of tax exemption," the IMF official said.

As Gazprom's largest shareholder with over 38 percent of the company, the Russian government appears to be making a twofold investment in Blue Stream by both supporting the expenditure and providing tax breaks.

So far, it is unclear how IMF officials will deal with the tax issue. The Russian government pledged in a letter of intent signed in July that it would improve tax collections and increase collections from Gazprom, which frequently settles its bills in barter instead of cash. Last week, Russian officials said Gazprom would start making all its tax payments in cash by next March, three months ahead of schedule. But the letter of intent said nothing about tax breaks or investments in big projects like Blue Stream, which could reduce the amount that Gazprom would owe.

In August, Gazprom reported that it lost $147 billion rubles last year, the equivalent of $5.9 billion. The company has pledged to avoid any more long-term borrowing until 2003, citing annual debt service costs of $1.5 billion. But it has made an exception for Blue Stream because of its importance. The government claims that the project could earn Russia $3 billion to $4 billion a year.

But industry analysts have doubts about the returns because of the growing number of suppliers for the Turkish gas market. The United States also supports a competing line that would cross the Caspian Sea from Turkmenistan.