IMF Acting Under US Pressure in Russia Deal

By Abid Aslam, InterPress Service, 14 July 1998

WASHINGTON, Jul 14 (IPS)—International Monetary Fund (IMF) measures to shore up Russia's sagging economy reflect lingering Western fears about the former Soviet Union—and could backfire, according to political analysts here.

Under an agreement reached Monday, Russia will receive some 17.1 billion dollars in additional loans over the next two years; some 12.6 billion dollars this year and 4.5 billion dollars in 1999. Combined with existing international assistance, this would bring total lending to Moscow to about 22.6 billion dollars.

Most of the new money will be lent by the IMF, which has been under U.S. pressure to increase the loans it was willing to make and quicken the pace of negotiations.

IMF loans for the rest of 1998 would amount to 11.2 billion dollars, with another 800 million dollars from the World Bank and 600 million dollars from Japan, according to senior IMF sources. The United States, France, Germany, and Saudi Arabia also are expected to provide loans.

Some 2.2 billion dollars in previously approved IMF and World Bank loans also remain to be disbursed, bringing the total reaching Moscow this year to 14.8 billion dollars. Next year's disbursements would include 7.8 billion dollars in new financing and 3.3 billion dollars in previously agreed loans.

IMF executive directors will decide next Monday whether to begin distributing the new loan and their decision will hinge on Russian parliamentary approval of the deal. Previously, the Fund had argued no bail-out would be necessary then, following financial market turmoil in May and June, sought to limit its share to 5.6 billion dollars.

The IMF increased that sum under pressure from the administration of U.S. President Bill Clinton. Officials in recent months have voiced fears a devaluation of the ruble would not only weaken the Russian economy and perhaps threaten others, but also would shake the nation's political establishment some seven years after the collapse of the Soviet Union.

Russian President Boris Yeltsin played to those fears, suggesting that “extremists” might use further economic collapse to launch a coup.

Russia “always is going to be bailed out somehow,” observed Clifford Gaddy of the influential Brookings Institution. “The Russians have 30,000 nuclear weapons, and that's 30,000 reasons why they won’t be allowed to go under.”

That argument also was made two years ago, when the IMF faced embarrassing charges that it bent over backwards to help Yeltsin beat back a Communist challenge in run-off elections.

The Fund in February 1996 approved what was then the second- largest loan in its history and, according to critics, turned a blind eye to Russian violations of its terms until after Yeltsin won the ballot. In the interim, Yeltsin garnered votes by making billions of dollars in spending promises.

Senior US and Russian officials at the time agreed the IMF had bowed to pressure from Washington to approve the loan and make disbursements during an election year in order to thwart resurgent communism and nationalism and boost capitalism. Two years later, the Clinton administration now has thrown its weight behind Russian Prime Minister Sergei Kiriyenko, considered thoroughly committed to reforms favoured by Washington.

The bail-outs ultimately could back-fire, warns Peter Reddaway, professor of political science at George Washington University here.

Reddaway, citing Russia's tortured history since Yeltsin dissolved parliament in 1993, argues the new loan “would solve nothing…(and) only increase the rising anti-westernism in Russia - and the scale of the violence, when, as may eventually happen, the Russian masses cannot bear their poverty and humiliation any longer.”

Reddaway would rather “choose a lesser evil by rejecting Mr. Yeltsin's loan request, thus causing some short-term pain…but also, the crucial point, increasing the chances that the Russians will soon be able to select better leaders who…will doubtless make mistakes, can try fresh approaches, and, if necessary, be voted out.”

As with the 1996 loan—which remains subject to ongoing wrangling between IMF and Russian officials over what targets should be set and Moscow's record in meeting them—release of the new money will be strictly conditioned on improving tax collection, lowering tax rates, stimulating investment, and implementing new budget procedures.

To raise the new money, the IMF will tap—for the first time since 1978—a back-up line of credit known as the ‘General Agreements to Borrow’ (GAB). Under GAB, the United States and the IMF's ten other wealthiest shareholders can provide the IMF with up to 23 billion dollars in emergency loans, which must be repaid at market interest rates. The IMF will seek 8.4 billion dollars from GAB, according to IMF Managing Director Michel Camdessus.

The United States, with a 25-percent share of GAB, is expected to lend 2.1 billion dollars to the IMF. Approval of the U.S. share likely will be quick, officials here say, since the measure does not require Congressional approval.

Clinton urged Congress Tuesday to approve his request for some 18 billion dollars in new funding for the IMF. The request will be taken up this week by an appropriations subcommittee of the House of Representatives. Of that sum, 3.5 billion dollars would be for ’New Arrangements to Borrow’, an expanded version of GAB, and 14.5 billion dollars would fund the U.S. portion of a 45-percent increase in quotas.

The Congressional outcome will not affect the Russian loans but could spell trouble for the IMF's hopes of financial expansion. The agency risks receiving not a penny in increased dues from other members if the United States, its largest shareholder, does not pay up its share of the quota increase.

IMF and U.S. administration officials say the IMF has been forced to turn to GAB because its resources have been depleted by the Asian financial crisis. On Monday, the Fund's ‘usable’, or hard-currency resources—mostly raised from membership dues or ’quotas'—stood at 31 billion dollars and its liquid liabilities amounted to 70 billion dollars.

The Russian loan and financing for other countries currently pending approval will drive down resources to around 17 billion dollars, says an IMF source. That figure does not include the IMF's gold reserves, estimated at about 30 billion dollars, nor its ability to borrow on financial markets.