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. Last Updated: 07/27/2016

IMF-Russia Symbiosis




Why is the International Monetary Fund in Moscow? Because it is as desperate to lend to Russia as the latter is desperate to borrow. It realizes that if it doesn't come up with a way for Russia to refinance its 1999 IMF debt service, default becomes inevitable. This will bury any hopes of progress in Russia's negotiations with its commercial and bilateral creditors. For the IMF this amounts to "mutually assured destruction." Russia would be effectively shoved back behind the Iron Curtain, and the IMF's own credibility would suffer irreparable damage.


Key IMF and U.S. government personnel responsible for Russian policy are facing a moral hazard problem of their own. Abysmal results of Russian "reforms" and the crawling "red revenge" are putting them under a very uncomfortable microscope. The impact of a Russian default on IMF debt may well drive the last nails in the coffins of several careers. On the other hand, renewed lending would at least delay this.


Finally, neither the IMF nor the U.S. government is eager to call Russia's "nuclear bluff." Recent political chest beating has demonstrated that the proliferation of sensitive technologies does correlate inversely with Russia's economic well-being. Like it or not, the cost of keeping Russia above water would be far lower than the cost of dealing with the transfer of sensitive technology or another Chernobyl. Thus, the United States and the IMF may really not have much of a choice but to grind their teeth and cut a check.


The IMF and U.S. Secretary of State Madeleine Albright came to Moscow for the same basic reason. Having realized that Russia simply cannot "get back on track," both the IMF and the United States are searching for a "new track" for Russia to get onto. This will be defined by a qualitatively new set of rules and conditions, underpinning a mutually acceptable balance of interests and influences. Unfortunately, none of the parties has a clear idea about what those rules ought to be.


Historically, the IMF-Russia relationship has been based on political coziness. The IMF effectively bet on people more so than on policies. By funding President Boris Yeltsin and his "young reformers" as a counterweight to the Communists, the IMF became trapped in a game of pretense. Successive governments were given clear financial incentives to pretend they were implementing reforms, while the IMF pretended to believe them. In reality, the IMF for years funded a public-sector consumption binge and capital flight. Most critical reforms haven't budged. Now, the IMF and the U.S. government are stuck. Playing "let's pretend" with the Communists in the government is not an option. Overtly financing a Communist regime is irreconcilable with the West's political ideology. Leaving Russia to tend to its own problems is a dangerous proposition, with astronomical long-term political and economic costs. It is a foregone conclusion that the West will keep Russia afloat.


The issue is what "afloat" might mean. Resumption of full scale lending with First Deputy Prime Minister Yury Maslyukov holding economic reins is unlikely. He is ideologically incompatible with the United States and the IMF, and has failed to offer the IMF even the smallest excuse to start lending. The most Maslyukov could procure is some $1.5 billion to $2 billion of "hush up" money. It would effectively postpone a real decision on Russia, take some of the pressure off the IMF in the short term, but not address fundamental problems. It would neither guarantee Russia against defaulting on IMF debt, nor help in negotiations with other creditors. For the government this scenario would be politically disastrous, undermining its support in the Duma. For the IMF, it would be a highly controversial half measure, whose two assured effects would be the loss of the distributed funds and no progress to show for it in its Russia program.


The only remaining alternative is to reach a qualitatively new stage in the IMF-Russia relations. This would require a major personnel change in the government. Most likely, this is exactly what the IMF has been holding out for. Its best "out" would be the appointment of a new, more market reform- minded economic team under Prime Minister Yevgeny Primakov. Then, even with the abysmal record of the past four months and an unrealistic 1999 budget in tow, the IMF could make a credible case for sizeable financing of a new program on a forward-looking basis.


Can Maslyukov & Co. step down? Primakov is unlikely to initiate this. The Communists in the Duma would immediately turn on the prime minister, something that he is eager to avoid. Yeltsin could sack Maslyukov for a variety of reasons, not the least of which would be to put the breaks on Primakov's popularity. However, the likelier scenario is that Maslyukov would initiate his own departure, a face saving alternative for all parties. Maslyukov has on a number of occasions signaled his willingness to jump ship. It is quite conceivable that Maslyukov is feeling insecure in his job, and may decide to resign to pre-empt being sacked.


His departure would be a blessing and a curse for Primakov. He would gain significant flexibility in economic policy, and a realistic opportunity to avoid a full-scale default. On the other hand, the Communists would no longer have any strings attaching them to the prime minister, and may well set him up for the "Chernomyrdin treatment" to score political points in an election year. Primakov would have to move swiftly to get the upper hand in this situation. His new appointee would have to be bankable with the IMF, and as uncontroversial as possible in Russia. The most obvious candidate would be Yabloko leader Grigory Yavlinsky, the only IMF-friendly politician with a team and a program.


Robert Devane is managing director of Renegade Capital, a Moscow-based investment research and advisory firm. He contributed this comment to The Moscow Times.