Does Russia Need Another Loan From the IMF?
Knight-Ridder/Tribune Media Services, March 23, 1999
Russian Prime Minister Yevgeny Primakov was two hours away from Washington when he turned his plane around. Vice President Al Gore had informed him that NATO was likely to bomb Serbia, and Primakov headed back to Moscow in protest.
The Prime Minister was to meet with President Clinton and the International Monetary Fund (IMF), in the hopes of obtaining the next $4.8 billion installment on an IMF loan. Most experts saw the loan as vital to Russia's economic recovery, and were predicting a worsening crisis if it didn't come through.
But the experts have been wrong before about Russia--in fact, about as wrong as they could be, for most of the last decade. First Western economists helped reduce the Russian economy to ruins: after 5 years of IMF led economic "reform," Russians had lost about half of their national income. Amazingly, income per person in Russia is now little more than half as much as that of Mexico.
The economy was still a wreck last August when the IMF presided over the collapse of the ruble. This sent shock waves through the international financial system, with fallout as far away as Brazil. Most observers predicted that the Russian economy would fall apart, since they had defaulted on about $40 billion of Treasury debt, some of it owed to foreigners. Foreign banks could be expected to stop lending to Russia, and they did.
But the cataclysm didn't occur. Inflation shot up (it reached 40% for the month of last August), but the predicted hyperinflation did not set in. Last month's inflation was down to 4%. The economy is contracting, but not nearly as much as anticipated. The projected decline of 2.3% for this year is not much compared to the disasters of previous years, when foreign lending was abundant.
This raises the question of whether Russians--or the world, for that matter-- should fear the prospect of the country's growing isolation from the West.
The IMF loan that Primakov now seeks would be spent entirely on repaying the IMF, with no net benefit to the Russian economy. Russia will have to come up with about $17.5 billion in payments on its foreign debt this year--an amount equal to about three quarters of its government budget.
So why not default? It is difficult to imagine any punishment that would be greater than the burden of Russia's foreign debt. They have never gotten any significant amount of foreign direct investment-- that is, the kind of investment, such as the building of factories, that can most easily contribute to economic growth. They are even less likely to see anything in this realm in the foreseeable future. The potential exception would be in the energy sector, but foreign investors will probably be willing to make deals there, regardless of what happens to Russia's debt.
Policy makers here worry about the dangers of Russia's political disintegration, given its vast nuclear arsenal. But it is not clear that Russia would be less stable outside of the West's orbit than in it. The biggest cause of instability there has been the destruction of the economy, which is mostly a result of the failed economic experiment designed in Washington.
According to the extremist economic theory applied to Russia's economic "reform," an industry that could not compete internationally was considered inefficient. So most of Russia's industrial base was scrapped. Combined with the IMF's "shock therapy," which turned out to be mostly shock and little therapy, Russia became the victim of the worst peacetime economic decline in history.
Extremism breeds extremist responses, and it is not surprising that right-wing nationalism, anti-Semitism, and other social ills would flourish in the fertile soil created by this economic disaster.
So Russia would probably be better off without further "help" from the IMF or the West generally. But that is not a likely outcome right now. Washington does not want any further default on Russia's foreign debt, lest it set an example for the dozens of other countries that might also be economically better off with the default option. Russia already set a subversive and unprecedented example a few weeks ago when it forced Chase Manhattan and Deutsche Bank to break ranks with 17 other foreign banks and accept about 5 cents on the dollar on their debt.
This kind of "debt relief" dwarfs most of the proposals currently under consideration by governments and international financial institutions for the world's poorest countries. It shows how much bargaining power a sovereign government can have when it is willing to use it.
The Clinton administration does not want to see any more of this heresy, so the IMF will probably find a way to give Russia the money. But don't expect the Russian people to get anything out of the deal.