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. Last Updated: 07/27/2016

NEWS ANALYSIS: West Keeps Hands Off Russia as Ruble Drops




Solidarity with Russia in its time of economic trouble, yes. Another injection of financial aid, no.


That was the stance adopted over the weekend by Western governments and by the International Monetary Fund as Russia teetered on the brink of ruble devaluation.


In the past, Russia had been able to secure financial help by arguing that the West could not afford to abandon a young democracy with nuclear weapons.


But analysts said the West's decision this time not to extend Russia any further cash to stave off currency devaluation or a debt default marks a watershed.


They said the decision was motivated by a sense that it was up to Russia to sort out its own problems. The IMF is already overburdened with billion-dollar bailouts in Asia, and it has come under political pressure for using taxpayers' funds to run rescue packages that effectively bailed out speculative investors.


So as Russia's crisis reached a climax over the weekend, the West offered moral support but no cash.


A Western economist said Western bankers knew about Russia's plight as early as Saturday, two days before the announcement. But no help was offered.


The International Monetary Fund had only a month earlier put together a $22.6 billion rescue package for Russia. This made it all the more embarrassing that Russia was forced to announce a default on state debt during its watch.


But International Monetary Fund managing director Michel Camdessus' only comment on the collapse was to encourage reforms and offer sympathy. "It is important that the international community ... show solidarity with Russia at this difficult time," he said Monday.


Neither Germany nor the United States, which had pressed the IMF to help Russia, got involved this time.


Robert Rubin, U.S. Treasury secretary, also urged Russia to move ahead quickly on economic reforms aimed at improving tax collection and strengthening the government's finances but offered no concrete help.


German Finance Minister Theo Waigel also put the onus on Russia to sort out its own problems. He said Russia had to restore faith in its financial markets by carrying out the IMF's requirements: "Lasting stabilization of the financial situation in Russia is only possible if new confidence is created on financial markets and in the Russian public," he said in a statement, Reuters reported.


Charles Blitzer, director of emerging markets research for Donaldson, Lufkin & Jenrette in London, said "it's been fairly clear for some time that the view is the Russians got a big package and the key to solving their problems lies in the actions they take to deal with the fundamentals.


"And until there is clear evidence that the fundamental issues, be they on the structural side or on the fiscal side, are being dealt with adequately, it makes no sense to put more money in."


Paul Reynolds, director of the international department of the Adam Smith Institute in London, said the IMF could only do so much and it was up to Russia to cure its deeper underlying problems.


"It is the fundamentals, and not the herd instincts of investors," Reynolds said. "There are fundamental flaws" including the reckless behavior of the banking sector.


"At the end of the day, it's a sovereign state and perhaps not enough emphasis has been placed on that," he said.


At the same time, neither Western governments nor the IMF are about to turn their backs on Russia completely.


The IMF is still on track to release a $4.3 billion tranche in September, the second installment of the rescue package agreed to in July. Future Western aid will, however, depend on reforms, especially in the State Duma, or lower house of parliament, which is scheduled to take up tax legislation in three special sessions Friday, Tuesday and Wednesday.


"It will be especially important for the Russian authorities to take all necessary steps to strengthen the fiscal position," Camdessus said in a statement.