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. Last Updated: 07/27/2016

Loan Deal Ready, but IMF Feels Political Jitters

The negotiations over a $9 billion International Monetary Fund loan to Russia have reached a critical stage, with neither side ready to sign an agreement given a clash between the need for austerity economics and the government's prime aim -- to win re-election.


IMF and government officials have virtually completed their work on the three-year loan which is vital to the country's budget and the future of reforms, economists close to the negotiations said Friday.


All that is left, they said, is for the political heavyweights on both sides to give their approval.


Anders ?slund of the Carnegie Endowment for International Peace, speaking shortly after a meeting with a top IMF official, said the 100-plus page document was ready for signing.


"The document is done," ?slund said. "It's a question of what kind of political authorization" the IMF will require. The question is "whether a signature by [Prime Minister Viktor] Chernomyrdin is enough, or if they need something more."


That something more may entail President Boris Yeltsin's signature, ?slund said. However, a source close to the negotiations said satisfying the IMF may not be so simple.


Instead, Fund officials may wait to see exactly how recent economic actions by Yeltsin -- some populist, some apparently erratic -- work themselves out. Likewise, the fund wants to learn more about Vladimir Kadannikov, a political unknown who Yeltsin appointed as his economic tsar Thursday.


"It is true that what is really needed is a definite, credible sign of a political commitment," the source said. "That could happen at any time ... even in the next few days, or it could go on for weeks without knowing where things will end up."


Basically, analysts said the IMF faces a dilemma: Demand austerity measures from the government, regardless of the electoral outcome, or maintain support for Russia, fearing that otherwise it will abandon reform.


An IMF team arrived in Moscow Jan. 17 to begin what many assumed would be the final stage of negotiations for an Extended Financing Facility -- a loan aimed both at continuing current macroeconomic reforms and starting reforms in economic sectors such as banking or land reform.


However, fears have spread that the loan could be in trouble after recent signs that Yeltsin is changing economic directions before announcing his campaign for re-election.


Last week, the government's economic chief, First Deputy Prime Minister Anatoly Chubais, resigned amid condemnation from Yeltsin. He was replaced Thursday by Kadannikov, head of the troubled AvtoVAZ auto maker.


Also this week, Yeltsin signed several potentially inflationary decrees calling for increased spending for pensioners, students and the reconstruction of war-ravaged Chechnya.


Although Western leaders and investors have grown nervous that the days of reform are over, one foreign adviser to the government substantiated ?slund's comments that the proposed terms of the loan are virtually settled.


"The talks are very advanced, not just at the technical level, and the government is involved at the highest level. That means the prime minister," Jochen Wermuth, head of the Finance Ministry's economic expert group, told Reuters. "Things are going well."


The Russian side may be seeking a relaxation of monetary policies -- something the IMF is not prepared to do, according to a foreign analyst who met with Fund officials.


Thomas Wolf, head of the IMF's office in the Russian capital, declined to comment on details of the negotiations.


IMF team members have been working with Central Bank chief Sergei Dubinin, Deputy Economics Minister Sergei Vasiliev and Maxim Boiko, head of the Russian Privatization Center, ?slund said.


"This is essentially Chubais' old team," he said. "It's only that Chubais is not there. The question is ... how much political authorization will they get?"


Aslund also said that the loan needs to be approved as quickly as possible, as a $6.5 billion, one-year loan approved last March by the IMF is about to run its course.


The comment is in stark contrast to ?slund's remarks Thursday to The Washington Post, in which he said that the appointment of Kadannikov represented an about-face by Yeltsin which made conclusion of an IMF loan unwise.


The Post also reported that Western financiers have threatened to withhold money for the loan given current tensions in Russia, and that approval of the loan is unlikely before an IMF board meeting in mid-February.


However, ?slund said Chernomyrdin would be meeting with IMF managing director Michel Camdessus while in Washington for a gathering of the Gore-Chernomyrdin Commission, due to start Monday.


Chernomyrdin spokesman Alexander Mogilany said a decision on whether to meet with Camdessus would be made in Washington.


What seems clear is that the IMF's mantra -- to focus on policy, not politics, when making a decision -- has become confused as the lenders try to divine whether Russian leaders have the political will to maintain economic policy.


At stake is nothing less than Russia's 1996 federal budget, which economists say assumes about $3 billion in IMF funding. Likewise, the spending plan assumes a rescheduling of $110 billion in debt which Russia inherited from the former Soviet Union. A deal postponing payment of commercial debts was tentatively reached with the London Club of creditors in October, but signatures are being withheld until an agreement with the Paris Club of institutional and governmental creditors, which in turn awaits the IMF agreement.


Few could argue that politics plays no role.


"In actuality, the decision has always been made by the bigger guys," said Matthew Sagers, director of energy at PlanEcon in Washington, referring to the United States and other major economic powers. "There have been a number of times in the past when the IMF has actually gritted its teeth, closed its eyes and handed over the money."


The foreign analyst who met with IMF staff said they admitted to feeling some pressure from the Group of Seven leading industrialized nations.


"[They] indicated that they're sensitive to that," he said. "The last thing Germany or the U.S. wants ... is more instability. The Russians are providing enough of that with their statements. But that's the Russian way. They're putting the West in a rough spot."