IMF Poised to Approve $10.3 Billion Loan

The International Monetary Fund was poised Tuesday to formally award Russia a three-year, $10.2 billion loan, with the first tranche of funds likely to drop into government coffers before the end of the month.


The expected cash infusion comes at a time when the Russian government has been borrowing heavily on the financial markets, sending yields on state treasury bills sharply upward at a time when tight monetary policy has left a scarcity of rubles on the domestic market.


IMF Moscow representative Thomas Wolf indicated that no stumbling blocks remained ahead of the fund's board meeting in Washington.


"Our overall assessment is that they're very much on track, both in terms of fiscal and monetary policy," Wolf said in an interview. Although recent Russian threats -- since retracted -- about raising import tariffs "gave us some cause for concern," he suggested that the IMF's worries had now been satisfied.


Among a score of prior actions which the IMF required Russia take before securing the money was the elimination ready by late March to mid-April. The loan, which will be disbursed in monthly tranches of $340 million, aims to maintain budgetary and monetary reforms initiated under a one-year, $6.5 billion IMF loan that expired in February.


German and French banks are extending another $3.1 billion in loans to Russia, Bonn and Paris announced earlier this month, giving a major financial boost to President Boris Yeltsin ahead of his battle for re-election in June.


A key element of Russia's macroeconomic stabilization program under the fund has been a tight monetary policy to soak up excess rubles floating around the Russian economy and fueling inflation.


That policy's success is among the factors that drove T-bill yields up by 26.6 percent Monday to an annualized 121.4 percent on the secondary market. Just a month ago, yields stood at 53.33 percent, according to Skate-Press Consulting Agency.


The reason for the jump, analysts say, is simple supply and demand -- little ruble supply in the market at a time when government spending demands revenue.


"The banks don't have the money to invest in GKO [treasury bills] ... for 3 percent per month -- but they will find the money to invest for 10 percent per month," said Dmitry Falcovich, head of the macroeconomic department with Alliance-Menatep. "They're buying the additional tranches."


Russia's monetary expansion under the IMF agreement is not to exceed 3 percent, compared with 9 percent in December, Falcovich said.


Combined with promises by Yeltsin to repay wage arrears and ease the impact of reforms on the social sphere, that tight policy has forced the government to raise yields as a lure to banks to loan the government money.


Further fueling the government's need for money was last week's redemption of 8 trillion rubles in prior T-bill sales, according to Tom Reed, an analyst with AIOC Capital.


In a related matter, the government called off Wednesday's auction of 7.6 trillion rubles ($1.6 billion) to foreigners when a deal fell through with placement agent Merrill Lynch, Central Bank Chairman Sergei Dubinin told a press conference.


"Talks with this company have not been completed," Dubinin said. "The ball is now in Merrill Lynch's court, and if this company wants to participate in this deal and keep its good name, it will reach agreement based on the reasonable conditions discussed with them from the start."


Merrill Lynch officials contacted by Reuters declined to comment on Dubinin's statements.


But despite the immediate loss of 7.6 trillion rubles in revenue, Russia is not likely to be hurt by the deal's cancellation, according to Reed. The government is expected to move forward Wednesday with a second auction worth 5 trillion rubles in 154-day paper.


"I don't think it has far-reaching implications simply because this is not a crucial portion of the auction," Reed said. "This would have been pure revenue raising ... and they had the luxury of canceling if they didn't like the terms."


Dubinin also announced that foreign access to T-bills may increase from the current 10 percent of an auction to 15 percent in September, yet another indication of the government's need for cash.


"The board of directors of the Central Bank has decided to broaden the limit for foreign investors," he said. "We will try not to go beyond the share of foreign investors in the market, the share which we previously fixed at 10 percent and which may be increased to 15 percent after August." While the paucity of rubles has driven up T-bill yields, it has had a stabilizing effect on currency markets, where the ruble has fallen slowly against the dollar amid low volumes.


One analyst attributed the illiquidity to pre-election jitters and inflation fears among Russian banks.


"Despite the shortage of liquidity among commercial banks, they don't want to sell foreign exchange, dollars especially," said Igor Doronin, an analyst with the Moscow Interbank Currency Exchange. "Maybe elections on one hand, and on the other I should think inflationary expectations."


And while election concerns may rank among the reasons Russian banks are hanging on to their dollars, foreign investors have found renewed interest in securities markets.


In five days of trading, the Moscow Times dollar-adjusted index has jumped from an all-time low of 54.33 to 59.42, a surge some traders attribute to Yeltsin's strengthening position in polls before June's presidential election.


The rally was initiated after a large drop in Mosenergo's stock prompted buying, traders said, followed Friday by a stock purchase of 3.3 percent of LUKoil by an unknown buyer and a $3 billion cooperation agreement announced Monday between LUKoil and U.S.-based Atlantic Richfield Co.


At the same time, the fact that the market hit an all-time low as reflected by the MT Index last Tuesday may have signaled a buying spree to many investors trying to time the market's pre-election slump.