Why Russia Can Live Without IMF Largesse

By Matt Taibbi and Alex Whiting, InterPress Service, 3 September 1998

MOSCOW, Aug 31 (IPS)—The West warns Russia not to allow Communist-led opposition in parliament to force a backtrack on free market reforms — lest the West be forced in turn to cut Russia off from foreign bailout loans.

But the terms and targets of the last bailout package, 22.6 billion dollars in new loans in July, played their own part in the present crisis, say some.

Though the International Monetary Fund's (IMF) led loans were ostensibly intended to stabilise the rouble, the actual effect was to keep it far above its true market value. This benefited foreigners more than anyone else.

The overvalued rouble, its exchange rate subsidised by the IMF, made foreign products cheaper and Russian exports, hard to sell at the best of times, especially unpalatable.

The predictable result of this situation was sharply reduced industrial growth, a consumer goods market dominated by foreign products, but until this month, a ‘stable’, market-proof rouble.

“By devaluing the rouble so late, the situation was worsened,” says David Dyker of the School of European Studies at southern England's University of Sussex. “But there was a lot of pressure from the IMF not to devalue—because of the Asian crisis—- and this was bad advice.”

The devaluation eventually forced on Russia despite the spending of eight billion dollars of its reserves, much of it IMF loaned, will have many negative effects. But at the very least it may now force Russia to make the kind of meaningful changes in its economy that was postponed, if not deterred, by IMF funding.

IMF funds came with an emphasis on currency stability, the protection of investors in government bonds and demands for more taxes from an already tax-burdened populace. Russians have plenty of reasons to disregard such strictures.

Russia collects plenty of taxes. Earlier this year, the Centre for Economic Performance, a London School of Economics think tank, found that Russia's overall government revenue in 1997 accounted for 33.3 percent of its gross domestic product (GDP). That was a full percentage point above both the U.S. and Japan, which were at 32.1 percent.

But in an economic system where barter rules and everybody owes everybody else, much of this income is declared to the state by companies that ‘offset’ what they owe against what is owed them. Then various tiers of the state system shaved off their share from the income, keeping it rather than sending it up to Moscow for it to hopefully send back later.

For example, a lot of customs revenue never entered the budget, but was allocated instantly to the Customs Committees for their own uses. As result of its reliance on these and other non-cash revenue sources, the state was left with very little cash in h and, just plenty of redistributed wealth.

“Russia's problem isn’t that it doesn’t bring in enough revenue to meet its obligations,” says Robert McIntyre, Fullbright scholar and an economist for the United Nations University's Wider Institute. “Its problem is that it doesn’t have enough cash t o deal with all of its financial market obligations. That's why the IMF has emphasised tax collection.”

Western investors and the IMF weren’t satisfied with Russia's level of revenue collection mainly because much of the state's “revenue” doesn’t come in cash.

If keeping the rouble high solved one western problem, stepping up direct taxation would have solved another—it would have provided the cash to keep paying out on some 40 billion dollars worth of high-yield short-term Treasury bills, the so-called GKO s.

This satisfied both western investors, stuck into GKOs to the tune of 18 billion dollars, and Russia's new millionaire class, the so-called ’oligarchs', nearly all of whom owned banks heavily exposed to investments in GKOs.

“I have great respect for the professionalism of the IMF economists, but I don’t think they see the whole picture,” added Edwin Dolan of the American Business and Economics Institute. “Russia needs growth more than it needs currency stability.”

But Westerners with GKOs, unlike the Russian nation, needed currency stability more than growth. Now the rouble has crashed, if Russia now grows, Westerners with rouble investments will still lose.

“If you want to take a dark view of the IMF,” says one Western economist, who asked not to be named, “you can say that they’ve never shown any evidence that its goal is economic development, and you could instead look at them merely as bill collectors for the world financial community.”

As it turned out Russia decided to effectively default on the GKOs by suspending their repayments. Taking the most positive spin on this decision, this is saving money that was either going to Western investors or Russian banks owned by the Russian oliga rchs' mega-corporations.

The former are hardly likely to starve without it—unlike some Russians—while the latter are overdue for a tapping.

According to the CEP, the 100 largest tax evaders account for over 40 percent of Russia's tax arrears. Those same 100 corporations were also among the chief beneficiaries of cheap property sell- offs and other state favours.

Although anti-corruption measures were a major component of the IMF's recent East Asian bailouts, they were conspicuously absent from the Russia bailout.

“It was fine to privatise but you needed to bring in very muscular privatisation rules, such as you see in the United States,” says Dyker.

“Monopolies were handed over to old government party members who didn’t understand the concept of a level playing field. “What has happened is that they have created a new rich class and left the ordinary people with nothing. Monopolies have simply cha nged hands.”

“(One) reason for high interest rates and low growth in Russia (apart from the IMF austerity program) is a lousy investment climate,” says Dolan. “Neither Russians nor foreigners want to put their money in Russia. So fixing the problems of corruption, bad corporate governance, etcetera, need to have a higher priority than the IMF gives them.”

Now that this cash has effectively been taken away from them, there may now be money to pay the millions of miners, teachers, bakers, and factory workers who have been waiting for their salary arrears to be paid, some for more than a year.

The value of their wages will be substantially less, but they will be able to start buying again—and domestic products too, as imported goods will be priced off the market.

IMF managing director Michel Camdessus has informed reporters that he has warned acting Russian Prime Minister Viktor Chernomyrdin against extending state controls on trade, prices and foreign exchange.

Camdessus has personally warned Chernomyrdin against reversing reform. “I had to leave him without any illusion that such polices would benefit from any help from the outside world.” But given the way that this outside help has been used in the past, R ussia may be able to better manage without the IMF billions.

“The (last) IMF bailout was really a subsidy for the oligarchs, for the Russian banks, and for investors in the financial markets,” says McIntyre. “And it was undertaken in a way that only made real economic problems worse.”