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. Last Updated: 07/27/2016

U.S. Tells Russia to Cut Budget Deficit

Cambridge, Massachusetts -- Opening an annual conference on investment in Russia, a top U.S. Treasury official said the United States would only back more aid if Russia reached a deal with the International Monetary Fund on cutting the budget deficit.

Deputy U.S. Treasury Secretary Lawrence Summers said Thursday that Russia would have to make "genuine and realistic cuts" in its budget deficit to secure IMF aid.

He warned that Russia's decision to reduce the VAT from 20 percent to 15 percent this year appeared to be "firmly headed in the wrong direction."

The Russian government claims that, despite the cut in the value-added tax, the 1999 draft budget now before the State Duma is a model of toughness and the deficit is being cut.

But Summers struck a cautious tone on the budget, admitting it was tough but saying it was too optimistic in its projection for the ruble and inflation rates.

The draft budget sets a ruble rate of 21.5 to the dollar for the year, even though the actual rate is already lower. It also predicts inflation of only 30 percent while the State Statistics Committee said prices rose 3.2 percent just in the first 11 days of this year.

Despite Summers' comments, Prime Minister Yevgeny Primakov said Friday the positions of Russia and the IMF on Russia's economic prospects were growing closer, Russian news agencies reported.

Speaking in the Siberian city of Kemerovo, Primakov said he had received word that talks in the United States between First Deputy Prime Minister Yury Maslyukov and IMF Managing Director Michel Camdessus were going "not badly."

He also said the ruble was undervalued because of "psychological factors."

An IMF mission is due in town next week to consider further lending to Russia.

The IMF ceased lending to Russia after the Aug. 17 financial crisis but Summers defended the fund's $22.6 billion bailout to Russia this summer.

That bailout failed to ease pressure on the ruble, and just a month after receiving it the Russian government defaulted on its treasury bills and let the ruble devalue dramatically - decisions that together crippled the banking system."It was a calculated risk. In my judgement it was a risk worth taking," Summers said. He added later, "talk of 'who lost Russia' misses the point. Russia has never been and never will be ours to lose or win."

Summers, a Harvard-trained economist who came to the Clinton administration's Treasury Department from the World Bank, has been a leading architect of U.S. economic policy toward Russia. He and his boss, U.S. Treasury Secretary Robert Rubin, have also coordinated a policy of using large IMF loans to patch up weakening economies around the world.

This week a bailout similar to Russia's - a $41.5 billion aid package to Brazil to bolster its currency, the real - also ended in failure, with Brazil devaluating the real by 8 percent Wednesday.

Although a speaker introducing Summers noted that Summers must be busy working on what to do next about the real, Summers did not mention Brazil in his speech or in a brief question-and-answer session afterward.

As Harvard University's third annual U.S.-Russian investment symposium opened Thursday, blizzard conditions dumped snow and freezing rain up and down the Eastern Seaboard, paralyzing airlines.

Summers - along with Maslyukov and Stanley Fischer, the first deputy managing director of the IMF - found himself trapped by the snowfall at an airport in Washington. His address to the opening dinner was therefore made via videophone bridge. As financiers such as Boris Berezovsky and politicians such as Deputy Moscow Mayor Vladimir Rezin dined on pasta, Summers' face looked down on them from an enormous screen at the end of the hall.

Organizers joked that it was an improvement over last year, when Summers, Rubins and Fischer had to fly to Indonesia to broker an IMF bailout there.

On Thursday, the weather and the real seemed to capture the mood of a conference devoted to investing in a nation that Summers said still lacked rule of law and had too little long-term investment and "far, far, far too much" capital flight.

Asked by one participant what his first steps would be to revive the economy if he were in Primakov's chair, Summers said his No. 1 priority would be judicial reform, because a strong legal and court system is crucial to establishing rule of law and to guaranteeing that business contracts be honored.

He added that there were IMF and World Bank projects already in the works to encourage judicial reform.

Another priority he said, would be to launch "a comprehensive anti-corruption campaign ... making sure those in government and [who are] corrupt are brought to justice."

Summers praised Primakov's government for the passage of a law on production-sharing agreements which will help investment in oil and gas.

But he complained on several occasions of capital flight - of money intended to help Russia being diverted instead " to beachfront properties, to Swiss bank accounts."

Afterward, one American businessman joked, "talking of capital flight and corruption, I'll bet if a bomb went off in this room, that would solve a lot of the problem."

To a questioner who suggested the United States was not doing enough for Russia, and then invoked the memory of the U.S. Marshall Plan, which spent billions of U.S. dollars assisting Europe to rebuild itself after World War II, Summers was sympathetic.

"It is important that we do as much as we can. There are arguments that at some points more could have been done, there are others who have argued that at some points too much was done and the money ended up in Swiss bank accounts. That will be for historians to sort out."