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. Last Updated: 07/27/2016

THE ANALYST: A Fudge Would Suit Both Government and the IMF




The way things stand now, Russia will not see a single dollar from the International Monetary Fund this year. On the basis of their demands to the Russian government, IMF directors have all but ensured that, on merit alone, the fund will not be obliged to dole out a dime to the economically paralyzed government of Yevgeny Primakov. So if any international finance is to be granted in the coming months, the decision to do so will be entirely political.


The IMF, in other words, scored a clear tactical victory during the latest round of negotiations in Washington. The task for fund directors Michel Camdessus and Stanley Fisher was to reach a tentative agreement for the allocation of new money that would make Russia feel it had the IMF's support, while tagging on certain conditions f legislative and otherwise f that would render final allocation all but impossible. Since 1992 the fund has "burned" $19 billion in Russia, during which the economy has contracted, the currency self-destructed, and investor and consumer confidence evaporated. IMF directors and staff dread the idea of incinerating more of their assets in the Russian hellfire, even if any new money will effectively be utilized to roll over the country's outstanding debt to the fund.


To achieve this subtle, somewhat twisted objective, the fund asked the Russian government f including legislators f to pass a number of laws that will increase budget revenues, reform the banking industry, and tighten the existing bankruptcy law. Some of the items on the IMF wish list, such as a delay in lowering the value-added tax, pose little problem, whereas others, like raising the excise on gasoline and alcohol, are bound to stir resentment. Legislators of all colors will pout and protest at any measure that would hit consumers; this is, after all, an election year. The same holds true for legislation on banks and bankruptcy; every lawmaker has a company or two (or 20) in his region that he or she will protect from the "interference of international financiers."


The time frame f and the timing f are also enough to bury any hope of an IMF-led summer of salvation. All draft laws are scheduled to be submitted to the Duma by about June 1, in the expectation that they will be speedily cranked out through the inefficient machinery of Russia's bicameral legislature in time for the meeting of the IMF's executive board at the end of June.


In the interim, the situation in Russia could take a turn for the worse. The president could be impeached, the government fired, and devil-knows-what-else could occur. In this inconducive environment, there is no reason to believe that parliamentary leaders such as Gennady Zyuganov (who are interested in maximum instability in the country) will be prepared to roll up their sleeves and get their hands dirty with the ink of freshly drafted laws put together "for the IMF's sake."


Finally, there is the matter regarding the fate of the last batch of money from the IMF f the $4.8 billion sent out last August. Camdessus & Co. want a full report from the government as to how this chunk of change (now one-fourth of Russia's 1999 revenues) was eventually spent (which they will use when they are called on the carpet by the executive board and fund shareholders). But here again we see Camdessus acting with cunning. It is not just the money last August that has come under suspicion, but all $19 billion over seven years. Fimaco, the Central Bank's offshore vehicle that operated on the bank's international reserves, and may have used money from the IMF, was in full swing in 1996. Therefore, any report should have a wider scope and include a full history on the use of IMF credits.


But this is precisely what the IMF and the Russian government fear. Full disclosure on this subject would probably blow a permanent hole in the universe. The IMF is terrified of what might be uncovered should the shroud of secrecy be rigorously pulled back from Fimaco. In fact, it is unlikely this disclosure demand even originates with the fund; here the instigator is more likely a handful of U.S. senators and the Treasury Department. Russia is equally petrified. The Central Bank is already being investigated on the use of the $4.8 billion by the Audit Chamber and the prosecutor's office, and it is known Chairman Viktor Gerashchenko had to quash an Audit Chamber report on the same scandal earlier this year. How, and in what form, this report will be delivered to the IMF will speak volumes on the IMF-Russian relationship.


For Russia, the prognosis could not be more bleak. Camdessus cannot risk another failure here, and is no doubt being advised that it would be better to put Russia in payment arrears than to disburse more money at a time when nothing in Russia has improved (save for oil prices). This would be the optimal way to avoid the double humiliation of a Russian default to the IMF and more reckless financial assistance.