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. Last Updated: 07/27/2016

Play It Again, Boris




A new prime minister. A defeated State Duma. A sick and unpopular president. A continuing economic crisis. Debts worth billions of dollars coming due that can't possibly be repaid from government resources. An International Monetary Fund bailout proposal conditioned on reforms being passed by the Duma.


This summer's Russian financial crisis is starting to look much like last summer's Russian financial crisis. Will history repeat itself? Will Russia default on its IMF obligations by the end of the summer? It is best to prepare for the worst.


There are four major differences between this year and last - oil prices, the Kosovo conflict, the closeness of State Duma and presidential elections, and people's experience and learning from last year. None of these factors indicates a much better result this year over last.


Real oil prices remain at historically low levels - not much higher than last summer. It is true that prices have increased from last winter and surplus inventories have been reduced. The recovery in Asia and continued growth in America suggest that oil prices will rise, or at least not fall. Overall, however, the changes in the oil market are only marginally better for Russia than last summer.


The bombing of Serbia has led some observers to suggest that the West will continue to finance the Russian government to avoid aggravating strained relations. To put it bluntly, the West is expected to buy Russia's cooperation on Yugoslavia. If this was the West's policy it would be incredibly cynical. It also probably wouldn't work. Russian politicians, like their Western counterparts, cannot be bought - they can only be rented by the hour. If the Kosovo crisis ends soon, Russia will lose this possible negotiating point. If the crisis doesn't end soon, the West will understand that the cost of renting Russia's cooperation will be much too high.


With State Duma elections scheduled for December, and presidential elections for the following June - another argument goes - the IMF will be afraid to offend Russian voters, souring them on reformist candidates. Again, the argument is very cynical. Does the IMF expect to buy votes for President Boris Yeltsin's cronies? In any case, Yeltsin's cronies are not reformers and they have almost no chance of winning elections this year or in the next millennia, and the IMF realizes these facts.


The experience of last year will be a major negative factor in securing another bailout for Russia. Private investors have learned a very expensive lesson - don't trust the Russian government with any money. The only loans that the Russian government will be able to get, for a very long time, are from the IMF and from other governments.


The IMF lends money to governments to help pay for financial reforms when private investors shy away. The problem in Russia is that there have been no financial reforms. Time and again the IMF has lent Russia billions of dollars - time and again there have been no reforms. Like last year, the IMF is ins isting that the Duma pass a package of reform bills. Unlike last year, the IMF will not approve any loans until the bills are passed. The Duma probably won't pass these bills - almost certainly not in a form acceptable to the IMF.


Yeltsin's statement that he fired former Prime Minister Yevgeny Primakov's government for economic reasons seems very reasonable in this context. Primakov had staked his credibility on the receipt of IMF loans, without doing anything to reassure the IMF that the loans would be repaid. He wouldn't have gotten the Duma's approval of the required reform bills. Primakov was shut out by the IMF and thus had to go.


Yeltsin's response to the near impossibility of having the Duma pass the required bills has been to threaten to dissolve the Duma if deputies don't pass the bills. Passage of the reforms under this threat might meet the IMF's minimum requirements. If the bills aren't passed and the Duma is dissolved, Yeltsin can claim that it's impossible to secure the passage until after the elections, and gain a delay before default is declared. After last year's failures of reform bills in the Duma, it's unlikely that the IMF would fall for this desperate gambit.


So prepare for the worst. Unfortunately, nobody really knows what will happen if Russia defaults on its IMF obligations. The IMF will send a few politely worded telegrams informing the Russian government of the default, but they will not send in crews to repossess Russia's gold reserves, factories, or anything of that sort. In the short term not much new might happen. Russia will be embarrassed and won't be able to get loans from anybody. It will likely print some money to pay some wages and pensions, and leave some other bills unpaid. But ultimately the government would be forced to come up with some program to pay its internal bills, while keeping public trust in the ruble. This wouldn't be an easy task.


In external relations, a default on IMF obligations would have more complicated effects. Creditors may try to seize the few billion dollars' worth of Russian government property held in foreign countries.


Not much else is likely to happen immediately after a default. For example, it is very unlikely that it would be in anyone's interest to seize Russian oil or gas shipments. But within a few weeks or months of default there would likely be a falling ruble, high inflation, new currency controls, problems making payments through banks and some political instability. After all is said and done, there isn't much new under Russia's summer sun.


Peter Ekman is professor of finance at the American Institute of Business and Economics, an MBA program in Moscow. He contributed this comment to The Moscow Times.