Russia: IMF book-loan to prevent defaults - to IMF!

by Abid Aslam

Washington, Jul 29 (IPS) -- The International Monetary Fund (IMF) has approved its first loan to Russia in nearly 12 months, saving the former Soviet state - and itself - from certain default.

IMF executive directors approved a $4.5 billion standby loan after day-long talks Wednesday to keep Russia from disintegrating economically and gave it access to three billion dollars in new financing from the World Bank and Japan.

They allowed the 17-month loan despite misgivings that "there had been little progress in structural reform since last August, with some reversal in important areas," according to an IMF statement.

Moscow would have to maintain strong political commitment to effectively implement conditions attached to the new loan.

The Fund "urged the authorities to promote broader support for, and understanding of, the programme in Russia."

The deal also cleared the way for talks in Paris aimed at rescheduling some $10 billion owed by Russia to wealthy nations' bilateral lending agencies. The 'Paris Club' negotiations were to be followed Aug 3 by a meeting of Russia's commercial creditors from the 'London Club', who would be asked to restructure $30 billion in Soviet-era debt.

Immediate release of the first instalment, some $640 million, prevented Russian non-payment of debts to the IMF - and permitted the Washington-based international financial institution to retain leverage over its largest borrower.

Subsequent loan instalments would be released exclusively to service Russian debts falling due to the IMF this year and next - but only if the government in Moscow survived quarterly reviews of its performance against economic targets and structural benchmarks, according to an IMF statement.

"In view of Russia's extremely difficult economic and financial situation, the directors underscored the need for full and timely implementation of the envisaged reform measures," said IMF First Deputy Managing Director Stanley Fischer.

In exchange for the new loan, Russia had to agree to increase tax revenues, combat corruption, overhaul the banking system, and further open domestic assets to international investors.

Russia's State Duma, the lower house of parliament, already had approved some of these measures but pursuing them in practice would be politically difficult, the IMF acknowledged.

Revenue-collection targets, for example, "would not be achieved without strong political support to enforce large enterprises' compliance with statutory tax obligations," its statement said. Under the programme, tax-delinquent oil companies would be cut off from the country's oil pipelines.

Additionally, "political resolve to advance bank restructuring would require the authorities to resist what undoubtedly would be fierce opposition from vested interests, and would be a key test of the commitment to structural reform in general."

Russian Prime Minister Sergei Stepashin, visiting Washington, on Tuesday sought to assure US, IMF and World Bank officials that Russia would "fully implement our obligations."

According to political analysts, bringing tax evaders to book would involve confronting Russia's 'oligarchs' - or the small clique of economic and political power brokers who chiefly benefitted from the billions of dollars that Western donors ploughed into Russian privatisation schemes after 1992, when the new federation joined the IMF.

"US economic aid unfortunately has helped to deform the Russian economy and exacerbate the situation we're now seeing," George Washington University professor Janine Wedel told IPS recently.

Russian debts to the IMF reached 18 billion dollars before the agency cut off loans last August, after Moscow defaulted on sovereign debt and devalued the rouble, abandoning a Fund- approved stabilisation strategy.

The IMF also was incensed by reports that - unbeknownst to the international financial institution - its loans had been diverted to an offshore company set up to manage some of the central bank's reserves.

"Without these indirect transactions and the inaccurate reporting of foreign reserves, it is possible that one or more of the disbursements of IMF funds to Russia in 19996 would have been delayed," Fischer said after the board meeting.

He added that the central bank had been asked not to let this happen again. As a condition of the new loan, the IMF also asked the government not to meddle with the central bank.

Just to be safe, however, no money from the new loan actually would go to Russia. Instalments would be transferred from one IMF account to another in a book-keeping exercise designed to service the Fund's claims against the former superpower.

Default would have plunged Russia into financial chaos, officials here said.

For the IMF and its largest shareholder, the United States, this would have signaled the failure of their efforts to nurture market capitalism in the former Soviet Union, said Oleg Ostrukhov, senior researcher at Moscow's Institute of World Economic and International Relations.

In any event, Russia "always is going to be bailed out somehow," according to Clifford Gaddy, a Russia expert at the Brookings Institution here.

"The Russians have 30,000 nuclear weapons, and that's 30,000 reasons why they won't be allowed to go under."

The above article by the Inter Press Service appeared in the South- North Development Monitor (SUNS) .