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. Last Updated: 07/27/2016

Political Turmoil Unlikely to Stop IMF Loan

When a team from the International Monetary Fund arrives in Moscow next week to sign over to Russia the second-largest loan in the organization's history, some dramatic and worrying changes will have taken place since its last visit to Russia in early December.


Communists have won some 35 percent of the parliament in elections, and President Boris Yeltsin has signalled a chilling change of climate by lashing out at the heads of his economic reform team as "saboteurs," implying that they could soon lose their jobs.


And while Economics Minister Yevgeny Yasin remains in his post yet, Yeltsin did nothing to dampen rumors that Yasin is to be fired when on Wednesday he said more cabinet changes were coming and that "you journalists are not always wrong."


But IMF officials and analysts alike agree that none of this is likely to prevent the deal for a three-year, $9 billion loan package -- the second-largest in the fund's history after the 1995 Mexican bailout -- from going forward.


Deputy Prime Minister Anatoly Chubais said much the same in London on Wednesday, telling a conference that the package will be approved by early February, Reuters reported.


The IMF negotiating team will indeed be examining the political and economic situation in Russia, but it seems to have been accepted that while the coming presidential elections inevitably will throw political hurdles in the path of economic policy, that does not mean that hopes for long-term reform should be abandoned.


"They will have to make a judgement and determine if the government is committed to a strong anti-inflationary, reform budget," said Thomas Wolf, head of mission in Moscow for the IMF, adding that there are political "concerns," but none that currently directly threaten the talks.


"It's never a done deal until it's signed, but the IMF is very, very likely to approve the loan by next month," said Dirk Damrau, director of emerging markets research for Salomon Brothers, London. I think the IMF will be more concerned with basic economic figures and the process of change ... too many people place too much emphasis on people in the government rather than the broader policies of the government."


Next week's visit by the negotiating team will be the fourth since October, Wolf said, and will include the regular monthly evaluation of the economy's progress to release a further $500 million tranche of the IMF's one-year, $6.5 billion loan approved for Russia last April. That loan has proven key in plugging the 60 trillion ruble ($13 billion) deficit in the 1995 budget.


The new $9 billion loan being negotiated, called an Extended Financing Facility, targets structural issues such as tax, banking and land reform.


IMF interest rates vary monthly, but IMF officials estimated the EFF rate will hover around 4.3 percent, which is lower than the current one-year benchmark LIBOR rate of 5.34 percent, at which commercial banks lend each other money. The current loan has been made on similar terms.


In another fundraising move, Russia is planning to issue Eurobonds for the first time, issuing $1 billion to $2 billion this year. This borrowing will be more costly: A Western investment analyst in Moscow said that the interest rate the Russians will offer is expected to be around LIBOR plus 2 percent.


Still, both sources of external financing are far cheaper than issuing state treasury bills, for which the government is now offering an annualized yield of around 100 percent.


IMF officials, Damrau said, are likely to meet with parliamentary and government leaders in an effort to assure themselves that the government is not going to make an abrupt about-face on the economy.


The 1996 budget passed by parliament in December calls for an inflation rate of 1.9 percent a month, which is above the 1 percent rate initially called for by the IMF. Wolf indicated, however, that the IMF has no serious objections to the budget; it simply wants assurance the government will adhere to it.


Russia, he said, has made progress on inflation, reducing the monthly rate of nearly 18 percent last January to 3.2 percent in December.


A possible sticking point, however, is the Russian government's inability to boost revenues. The 1996 budget includes tax exemptions and other measures that could hurt revenue generation, Wolf said. The 1996 budget proposes a deficit of 88.55 trillion rubles ($19 billion), or 3.85 percent of the gross domestic product.


"Revenue-raising capabilities will be a major issue in the negotiations," said Wolf, adding that the IMF will suggest ending some tax exemptions, increased tax compliance and reforms in tax administration.


Last month the IMF released a study stating that Russia has done much to privatize industry and land, but little to improve the safety net for the old and unemployed. The study called the privatization of formerly state-owned land "substantial." However, it added that although pensions for the elderly account for a large part of government spending, they are still small and lag far behind inflation.


The report called the success of Russian policies "uneven and fragile" compared with some other countries of the Commonwealth of Independent States.