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. Last Updated: 07/27/2016

IMF Scolds Russia but Gives $4.5Bln




The International Monetary Fund scolded Russia for lying to it but nevertheless approved a long-delayed $4.5 billion loan package that also paves the way for billions of dollars more in fresh loans from other institutions.


The release of the loans, announced Wednesday evening in Washington, came with unusually sharp words and strong warnings for Russia from IMF officials, who cited an audit that concluded the Central Bank falsified the size of its reserves in 1996 by secretly channeling funds through the obscure offshore company FIMACO.


"The central issue is, were we lied to?" said Stanley Fischer, the IMF's first deputy managing director. "The answer to that, coming out of the report, is unfortunately 'yes'," Reuters quoted him as saying.


"It has been made clear to the highest levels of the Russian government that what happened then was unacceptable, and we need measures in place to prevent anything like that from happening again," Fischer added.


The decision, announced when it was already early Thursday in Moscow, thus appeared to be motivated more by political and diplomatic concerns than by confidence that Russia was fixing its battered economy.


The first installment of $640 million is to be released immediately while further tranches will be disbursed over the following 17 months, an IMF spokeswoman said in a telephone interview from Washington.


The decision to unlock the IMF bailout package marks the first time Russia has received money from the Fund since last August's ruble devaluation and government debt default. Difficult negotiations on the release of funds were further snarled when Russian Prosecutor General Yury Skuratov blew the whistle in February on the Central Bank's use of FIMACO and claimed that up to $50 billion in Russia's hard currency reserves had been funnelled through the company, based in the British tax haven of Jersey.


The allegations prompted the IMF to demand an audit of the Central Bank's use of FIMACO as a key condition for the release of funds this year. The audit was conducted by Central Bank auditors PricewaterhouseCoopers and was only recently handed over to the IMF after months of delay.


The IMF board of directors expressed their "strong disapproval" of the Central Bank, saying in a press release Thursday that the PricewaterhouseCoopers report had clearly found that the bank was guilty of skewing the size of its reserves by channeling funds through FIMACO. Fischer said the IMF was now asking Russia to supply it with more information about Central Bank reserves following the "misreporting."


The IMF also broke its usual diplomatic approach by dishing out harsh criticism for the Russian government's handling of the economy.


The directors "noted that there had been little progress in structural reform since last August, with some reversal in important areas," an IMF statement said.


Analysts said the decision to release the funds was based on a desire to try and retain political leverage with Russia rather than on economic concerns.


"The United States regards Russia as too big and too important to risk financial instability, and thinks the IMF loan will help avoid this," said Ben Slay, a senior economist at the PlanEcon research center in Washington.


The United States also wants to avoid a repeat of the Kosovo fiasco when Russian troops sneaked into the airport at Pristina without letting NATO know, he said. "The U.S. wants to increase its control over Russia's foreign policy and it thinks the best way of doing this is by releasing more funds."


"But if they give Russia too long a leash on fiscal policy then experience has already shown that funds can be misused," he said. "And the decision to go ahead and release funds despite the FIMACO findings could come back and haunt the IMF."


The first tranche of IMF funds will never reach Russia, but instead will move from one IMF account to another as part of repayments on former IMF loan packages. That eases Russia's crushing foreign debt burden - freeing up locally generated funds for internal expenditures - and wards off a potential default that would further isolate Russia from foreign lenders. A Russian default would also give ammunition to critics who say the IMF is throwing good money after bad.


Both the World Bank and the Japanese government have been waiting for the green light from the IMF before they agree to hand out further aid. Loans from the World bank are expected to total $1.85 billion over the next 12 months, with $1.1 billion due to be released in 1999 alone, while the way is also clear for funding from the Japanese Export-Import Bank totalling $1.15 billion.


The IMF decision will also allow Russia to kick start negotiations on rescheduling Soviet-era debt with the Paris and London clubs of creditors.


Alexander Livshits, Russia's envoy to the Group of Seven leading industrialized nations, said Thursday he expected the Paris Club of creditor nations to decide within the next few days whether to grant Russia a deferment of two years on $16 billion in Soviet-era debt, Interfax reported.


"Now that a program is ready and approved by the IMF and the World Bank, creditors have the formal basis to carry out official negotiations with us on restructuring former Soviet debt," Russian Finance Minister Mikhail Kasyanov was quoted as saying by Itar-Tass.


Russia began talks with the Paris Club on Thursday in Paris, and talks with the London Club of commercial creditors are scheduled for Aug. 3.


In return for the loans, Russia agreed to implement strict limits on government spending in agreement with the IMF.


"The release of funds gives Russia some breathing space on its debt burden, but the fiscal targets set in the policy agreement are very tight," said Vladimir Konovalov, an economist at CS First Boston. "And if it does not meet these targets, then given its poor track record I don't think the IMF will give it the benefit of the doubt this time."


However, other observers suggested the IMF would follow through on loan disbursal even if Russia failed to stay on track on fiscal policy.


"The decision to release funds was clearly political and to follow the logical conclusion of this reasoning, one would expect the IMF to continue releasing funds even if Russia slips up on its budget surplus," said Phillip Poole, head of emerging market research at ING Barings.


At a time when parliamentary and presidential elections are looming, lowering Russia's debt burden could wind up freeing funds to pay for election-year spending promises and, some critics say, simply to finance the campaign.


"There's a good chance that Russia will stay on track for the remainder of this year. Experience shows that financial pressure is less for the parliamentary elections," Poole said.


"But the last presidential elections sparked a huge rise in spending, so there's a very big risk the same might happen next year," he added.