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. Last Updated: 07/27/2016

IMF Agreement Is Hollow Triumph for Russia




Russia seemingly scored a victory in Monday's agreement with the IMF, getting the international lender to agree in principle to release more credits this year and back down over its former insistence on an increased primary budget surplus and other major issues.


However, Russia's "success" is likely to be hollow and fleeting. As the dust settled Tuesday, it became ever clearer that Russia will receive this year the absolute minimum the International Monetary Fund can get away with lending it and that the grounds for new financing will be political, not economic.


"Kosovo sparked controversies within Russia," said Alexei Zabotkin, economist with United Financial Group. "The U.S. government understands that in such circumstances failure to give money spells refusal to support [Prime Minister Yevgeny] Primakov's government.


"It was the IMF that had to make concessions, not the Russian government," Zabotkin said.


The IMF's biggest concession was over the primary budget surplus - excluding debt servicing. The fund had originally pushed for a primary surplus of 3.5 percent of gross domestic product instead of the 1.64 percent written into the 1999 budget.


On Monday, the IMF dropped the figure down to 2 percent, effectively letting Russia have its way on budget tightening.


Even then, a Washington-based IMF official expressed skepticism that Russia could even meet the new, lower figure. How the Russians would achieve that surplus, one senior IMF official said, "is still a considerable mystery,'' The New York Times reported Tuesday.


However, Moscow economists said that inflation and oil price rises might allow the government to break even despite Russia's economic ills.


"High inflation and higher than expected oil prices will prop up budget revenues," said Sergei Prudnik, economics adviser at Troika Dialog. "This can give a 2 percent budget surplus by year end."


IMF chief Michel Camdessus also apparently failed to make any real progress on another major IMF desire - that Russia extract more taxes from its energy sector, especially giants Gazprom and Unified Energy Systems.


The best he could manage was a pledge from Russia that it would raise 60 billion rubles in new revenues, partly by delaying a cut in Russia's value-added tax. The fund had protested the tax cut, noting VAT was one of the few taxes Russia successfully collects.


Finance Minister Mikhail Zadornov has said Russia will probably delay implementing the tax cut, which some observers expect President Boris Yeltsin to veto.


All the same, the practical effect of the concessions is minimal, and fund officials in Washington on Tuesday did their best to ratchet down expectations.


Interfax had reported late Monday night that the IMF was prepared to provide Russia with four installments of $1.2 billion each, and the IMF board might meet as early as April 24 to consider approving such a step.


But an IMF spokesman in Washington denied agreement "on amounts or on a possible board date," The Associated Press reported.


Later Tuesday, Martin Gilman, the IMF's representative in Moscow told Reuters that $2.7 billion could be used as a benchmark in negotiations with the Russian government.


He also warned it would be hard to arrange a facility by April or even May.


A real agreement awaits further negotiations when an IMF mission hits Moscow next week to thrash out an economic program with the Russian government and the Central Bank.


And while the Russians will probably be able to retain the points they scored Monday, the hopes of $8 billion from the IMF expressed by several Russian officials look far fetched.


Russia's current program falls so short of the IMF's desires that the fund is likely to continue reducing its exposure to Russia by delaying loan disbursals and using those new credits to roll over Russia's obligations to the institution. Government sources say Russia will get $4.8 billion from IMF, barely enough to pay back $4.6 billion coming due.


The IMF is unlikely to want Russia to pile up more debt to it on top of the $19.3 billion it already owes the fund. More likely, it will hold off on new loans for as long as it can while Russia keeps on paying off its IMF debts in small, $300 million or so blocks each month.


Deputy Finance Minister Oleg Vyugin said Tuesday that Russia has already paid the IMF $1 billion this year and that it is on course to pay the $4.4 billion.


The IMF agreement is worth winning from Russia's point of view because it would allow for the release of other loans and facilitate Russia's attempts to restructure Soviet-era debt.


Some $1.85 billion in World Bank loans currently on hold can only be disbursed after an IMF economic program is signed, a World Bank official said Tuesday in Moscow.


Resumption of IMF lending will also open the road to talks on restructuring of Russia's loans to the Paris Club.


"Default would have made things worse for Russia's international creditors," said Christian Carrillo, analyst with Donaldson, Lufkin & Jenrette (London).


Playing the IMF game, Yeltsin admitted Tuesday the 1999 budget was unrealistic and told the parliament that Russia's debts should be rescheduled.


Even as the IMF talks drag on, Russia's economy shows little sign that it can revive under the current course. The government is at best expected to collect 84.7 billion rubles in revenues in the first quarter of the year, falling almost 30 percent short of target. The budget stipulates revenues of 473.7 billion rubles.


Meanwhile, Russia's key industries reported a 6.1 percent drop in output in the first two months of the year from the same period last year, the State Statistics Committee reported on Tuesday.