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. Last Updated: 07/27/2016

IMF Says No Loans Without Reforms




The International Monetary Fund has warned it will not hand over an urgently needed multibillion-dollar loan until Russia pushes ahead with reform of the economy, especially the banking sector.


The IMF made the statement Tuesday, after talks with a Russian delegation that is seeking the new loans to avoid further defaults on Russia's foreign debt and help support the ruble.


But IMF Managing Director Michel Camdessus said after the Washington talks that Russia would need to act if it is to get support at the next IMF board meeting in June.


"We will expect Russian authorities to deliver prior actions, which will be part of the program, before we will be able to disburse the financing," Camdessus said.


The IMF's tough line comes after weeks, in which Russian officials have claimed an IMF loan was all but agreed. The onus will now be on the Russian government to push reforms through the fractious parliament and powerful interest groups.


Any delay in receiving the loan will be a major headache for Russia, which faces big repayments on its foreign debt in the next few months. Without IMF loans, Russia will have to draw down the Central Bank's hard currency reserves to meet the payments, a move which in turn threatens the stability of the ruble.


Russia, which earlier hoped for a loan of as much as $4.8 billion this year, now warns that it might be a lot less. First Deputy Prime Minister Yury Maslyukov, who led the delegation to Washington, said Russia could get from $1.7 billion to $4.5 billion this year.


"They have been talking up the sum and trying to build expectations," says Vladimir Konovalov, a macroeconomic analyst with Credit Suisse First Boston.


The IMF still says publicly that a deal is "almost ready" but a diplomat in Moscow with one of the Group of Seven leading industrial countries said this might be inaccurate.


"[IMF Moscow representative] Martin Gilman refused to give any details with regards to the future deal, saying everything is still up in the air and will be negotiated," the diplomat said.


The IMF has not said publicly what reform conditions it is placing on the loan but Alexander Zhukov, chairman of the State Duma budget committee, said it wanted Russia's parliament to enact several new laws.


The Duma will have to pass laws on bankruptcy of banks, restructuring of the banking sector, as well as introducing some changes to the Tax Code and the law on foreign exchange controls, Zhukov said."Of these, restructuring of the banking sector is the most crucial issue," said a Finance Ministry official who asked not to be identified.


The IMF is reportedly concerned by an internal World Bank report, which found that the government and the Central Bank had failed to restructure the banking sector.


Earlier this year, the World Bank conducted an appraisal of 18 big Russian banks. According to leaks, the report concluded that 15 of the banks had "negative equity" - they were insolvent - and should be either liquidated or restructured.


Creditors allege that Russian bankers have used their political power to block attempts to bankrupt them and are using the delay to siphon off assets.


Both the World Bank and IMF are also concerned about a lack of transparency in a bridge-bank scheme established by the Central Bank to refinance the Russian banking industry after the Aug. 17 crash.


"The problem is not the scheme itself but the fact that assets are hidden and the whole process is untransparent," said an official at a multilateral lending agency in Washington who asked not to be identified. "Large banks should be declared bankrupt," he said.


The Russian government has not only failed to bankrupt banks owned by Russia's powerful oligarchs but it has continued taking money from the state's coffers to bail them out.


The Central Bank has given 15 banks, many of them insolvent, a total of 17 billion rubles ($700 million) in stabilization loans from the Central Bank. This almost equals the federal budget's first quarter deficit of 20.6 billion rubles.


Analysts said that the IMF was also worried by foreign exchange restrictions introduced by the Central Bank, including a multiple exchange rate mechanism and limits on the rights of importers and exporters to convert money.


The government will also have to come up with plans to collect outstanding taxes from oil companies and the gas monopoly Gazprom, the financial news agency Bloomberg reported.


One Finance Ministry official, who asked not to be named, said the IMF likely also wanted Russia to implement fully a state treasury system rather than the current wasteful system of distributing funds via commercial banks. He said the IMF also wanted more transparency in tax collection.


Zhukov said the IMF expects the Russian government to boost revenues by hiking excise taxes on alcohol and gasoline.


All of these measures could meet opposition in the communist-dominated Duma. Zhukov said that the Duma might not pass all of them.


"Restructuring of the banking system ... is a complicated issue and passage [of corresponding legislation] through the Duma will probably not be easy," Zhukov said.


Though it traditionally criticizes the IMF, the Communist Party backs Prime Minister Yevgeny Primakov, and it may approve the new measures to help him.


"The Communist Party has voiced its support of this government several times," said Valentina Chistyukhina, a party spokeswoman. "Government initiatives will, therefore, be given priority."


Even if the legislative program is passed quickly, the IMF board will meet no sooner than June and money is unlikely to flow before July.


This will squeeze Russia which has to repay roughly $1.5 billion of loans in May and June and another $1 billion to multinational lenders like the IMF in July.


"July is a crunch time," says Konovalov of Credit Suisse First Boston.


"After talks with the IMF in Washington, Russian politicians have a clear choice on whether to continue playing games, including impeachment [of President Boris Yeltsin], or to pursue real reforms," he said.