Loans Keep Crisis Alive

Although it is tempting to support the current government, we must realize that incessant loans will prolong the current crisis.

Just as in the Perils of Pauline, the International Monetary Fund has once more come to the rescue of the Russian economy. By putting together a package of almost $23 billion in loans, the IMF has managed to immunize Russia from the Asian financial flu, at least temporarily, and more importantly, provide some breathing space for the new government of Sergei Kiriyenko.

Prime Minister Kiriyenko, who has been in charge only three months, is probably the best prime minister Russia has had since the 1890s.

It is unfortunate that he and his team find themselves besieged by the legacy of the misbegotten reform efforts of his predecessors. If that were not enough, the drop in commodity prices due to the crisis in Asia has hit Russia's most important export earners -- its oil and gas. Even if Russia's domestic economy were not in such disarray, the drop in export earnings would have complicated Mr. Kiriyenko's task.

Right now, it is unclear whether Mr. Kiriyenko, even with the IMF's help, will be able to cure his country's maladies or, for that matter, even satisfy the conditions that the IMF attached to the loan.

Russia's difficulties today have been centuries in the making. Even in tsarist times, the Russians felt a certain mixed pride in their ability to mislead their governments. From the false facades and the waving peasants in the Potemkin villages to the use of Dead Souls and fraudulent inspector generals, the sense of civic responsibility and rule of law has never taken deep root. Seventy years of the Leninist party-state, with all power emanating from the top down, has enhanced a culture in which thwarting the state is a major indoor sport.

Given this background, international financial institutions should not have been surprised to find that only about 4 million out of the 60 million or so in the Russian work force submit tax returns. The new chief collector of taxes, Boris Fyodorov, has mounted an impressive effort to round up some of the most flagrant tax evaders. The richest 1,000 individuals and the oil and gas companies have become his special targets.

But already, almost all of the oil companies, as well as the natural-gas monopoly Gazprom, have already found one loophole or another that allows them to avoid most of their taxes as before. Moreover, Mr. Fyodorov is just the latest in a series of tax collectors determined to uproot such a deeply held culture. After all, it was just this past December that a Fyodorov predecessor, Anatoly Chubais, declared his intention to rein in the same tax delinquents.

To demonstrate how serious he was, he decided to create a new tax collection agency: the Extraordinary Tax Commission, which in Russian has the same initials as the predecessor of the KGB.

Consequently, there can be no assurance that, unlike the existing situation, this new government will be able to generate an increase in tax revenue -- a key condition for the loan from the International Money Fund. Nor should we expect a significant drop in government expenditures, another IMF condition.

Not only must Mr. Kiriyenko find the funds to pay the back wages of workers and the bills of unpaid contractors, he must also find new money to cover the debt service on Russia's new loans.

If debt service now amounts to 36% of the national government's budget expenditures, the $23 billion increase in new loans, which is equal to 5 percent of gross domestic product, will push up debt service to as much as 45 percent to 50 percent.

Ideally, the conditions imposed by the IMF will facilitate the Russian government's efforts to hammer home the structural reforms that so far the State Duma and the country as a whole have resisted.

However, as dire as the underlying situation may be, even if the Duma gives its assent to these changes, assent is not the same thing as implementation. In fact, a review of past IMF loans and accompanying conditions reveals that, even when the IMF insisted on parceling out loans step by step in tandem with performance, more often than not, it was the IMF that blinked as a succession of Russian leaders begged for just one more chance.

Because they are so intractable, few if any of the country's fundamental problems are likely to be resolved, and we can expect that it will not be too long before the Russians again find themselves in financial difficulty and President Boris Yeltsin finds himself pleading with Bill, Helmut, Tony and Jacques to lean on the IMF just this last time.

But if we are honest, we should recognize that as long as the alternative to Kiriyenko seems to be either a far-right or a far-left government, we will back off, just as we did several times when Viktor Chernomyrdin was prime minister, a much less deserving and committed reformer.

At some point, we have to ask whether we will ever insist on reform first and loans later. The longer we avoid facing up to this challenge, the more serious the next crisis is likely to be and the more painful the ultimate climax.

Marshall I. Goldman is a professor of economics, Wellesley College and associate director of the Davis Center for Russian Studies at Harvard University. He contributed this comment to The Moscow Times.