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. Last Updated: 07/27/2016

Russia and IMF on verge of a split

The Russian government is on the verge of a break with the International Monetary Fund, according to officials close to the negotiations.

The Russian and IMF teams meet for a new round in Moscow in a few days. A decision on making a dramatic, public rejection of IMF terms for financial assistance to the Russian economy has not yet been made by President Boris Yeltsin, and his advisers are divided on the advisability of such a move.

Yeltsin has issued a number of statements in the last week warning the IMF to be more flexible in its terms for freeing energy prices and cutting government expenditures.

"We may lose control of the political situation if we do", the president said. "If we get beyond the critical point, we'll set off a general disaster. This would be a fatal step to take".

In Moscow last month, the IMF negotiators, led by John Odling-Smee, expressed a strongly negative reaction to the Russian government's decision to limit the rise in oil and gas prices, and lower the revenue target which the government intends to obtain from taxing energy prices.

The IMF was also angry at moves by the government to introduce tax cuts for individuals and enterprises, and toreintroduce subsidies from the state budget to stimulate production of basic foodstuffs.

The government moves are in response to continuing evidence of a sharp decline in production. By the beginning of May, oil production was down by 13 percent on the same period last year.

This is causing a reduction in supplies of fuel, particularly petrochemicals, to the agricultural sector, where spring crop sowing is down by 19 percent. Food supplies to the state distribution network for the neediest consumers have dropped sharply also: meat by 28 percent, milk by 30 percent, and eggs by 21 percent.

The government has commissioned a revised economic plan to be tabled at talks with the IMF next week. The document, details of which have been made available to The Moscow Times, was drafted by the economist Yevgeny Yasin, who is associated with the Russian Union of Industrialists and Entrepreneurs.

Yasin argues that hyperinflation, driven by IMF insistence on raising energy prices, and credit curtailment, also demanded by the IMF, are ruining production. He has recommended greater flexibility in the government's economic targets and more time in which to achieve them.

The optimists among Yeltsin's advisers believe that the president's warning to the IMF makes it more likely that Yasin's proposals will be approved. They include the chief Russian negotiator, Konstantin Kagalovsky, and the American advisor to the Russian team, Jeffrey Sachs.

Sachs does not advocate a public break with the IMF. But he has clashed with IMF officials over his recommendations that the Russian government take full control over monetary emission and credit in the ruble zone, and ignore those republics which issue their own currency. The IMF position - backed by the Russian Central Bank - is to preserve the ruble zone with less Russian control and more consensus, managed by the IMF itself.

The IMF reached agreement with the republican central banks on its proposal on May 20. Since then Estonia has announced it will introduce the kroon and leave the ruble zone by the end of this month. Ukraine has announced its plan for introducing the grivna by August 1.

A faction of Russian officials does not regard Sachs's advice as credible, and are skeptical as to whether Yeltsin's warning will be enough to soften the IMF's terms. They believe that the president should authorize the Russian negotiators to break off the talks if there is no agreement on the Yasin plan.

These Russian officials argue that modification of the IMF terms cannot be decided at technical economic discussions, and that a major political decision is required from the IMF board of directors, particularly from the United States and Japan.

Yeltsin is due in Washington in a fortnight to meet with President George Bush. He will follow that with a trip to the Munich summit of the G-7 in the first week of July, and is planning to visit Tokyo on September 14.

A break with the IMF now, the Russian president is being urged, will strengthen Russia's bargaining position at these meetings and relieve the building domestic pressure on Yeltsin.