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. Last Updated: 07/27/2016

Economics Must Drive IMF, Not Political Considerations




Unsurprisingly, the finale of the International Monetary Fund's mission to Moscow last week was its decision not to lend any new money at this juncture. After an objective assessment of the facts, this is the correct verdict . However, there is a persistent, well-founded belief that the IMF has made this "correct" decision for the "wrong" reasons.


There are three sets of opinion as to why the IMF is unlikely to favor the disbursal of a $640 million tranche to Russia in the foreseeable future. First, there are those who expect such decisions purely on political grounds: The intense anti-Chechen war sentiment among Western nations, this group argues, rules out the possibility of any new credit. Also, many feel that the IMF would rather postpone dealing with Russia until the country has an elected president. But this, too, is a political motivation, and shouldn't be used by the Fund's executive board.


The second group, consisting of supporters of the meritorious approach to IMF decision-making, claims that Russia has failed to deliver on its promises and fulfill many of the key points in the 1999 economic memorandum, and therefore should not receive any money. On merit alone, according to this line of thinking, Russia has not earned new money.


The third opinion basically says that the IMF will not give Russia money because, in a manner of speaking, it is simply "not vogue" to do so. The IMF has been burned too many times in the past by empty promises and endemic corruption, so its directors will go to any length - including changing the rules midway through the game - in order to justify its wish not to lend to Russia, not at least until the latter has an elected president and the lender organization a new executive director.


The dividing line between these mind-sets is quite stark: Russians adhere steadfastly to the first, and Westerners to the second and third. The Russian press has been in a frenzy on the subject as of late. For the most part, the bottom line is consistent: The IMF will not give a single dollar to Moscow as long as the war in Chechnya continues.


They have ample evidence to back up their argument. U.S. President Bill Clinton stated decisively that Russia "will pay" for its intransigence in the Caucasus, and the Council of Europe's parliament left no room for doubt where it stands on the issue. Given such strong criticism, and the West's undisputed influence over IMF decisions, what better way to display their united indignation than to pull the IMF plug that Russia so sorely needs? A belief IMF money was utilized to fight the 1994-96 fiasco in Chechnya pours fuel onto this fire.


At the same time Russian politicians and analysts, in support of the second opinion, readily admit that the country has failed to implement many key articles in the economic memorandum of June 1999, signed by the former government of Sergei Stepashin and the Central Bank. In this writer's opinion, this is all the rationale IMF executive director Michel Camdessus needs to justify delaying new finance. Those who have doubts should reread the memorandum; after perusing it they will see how much has gone unfulfilled, unaddressed or simply ignored by Russian government(s): amendments to laws on bankruptcy and bank restructuring, cancellation of export quotas on oil products, and so on.


Worse, now that political confrontation has stonewalled legislative work in the Duma, there is little hope that any memorandum-mandated laws will be passed in the near future. Russia's leadership is keenly aware of this, and realizes it has little to show the IMF mission save for euphoric tax collection and several positive macroeconomic indicators.


That's not enough. Russia's economy requires serious structural changes, and bureaucrats understand this keenly. This is why the memorandum was signed last summer, and why the government should be made to stick to it. Time and time again we have seen agreements between the IMF and Russian governments go unfulfilled, or only partially fulfilled, and yet money was handed over. But not this time; this time Russia's leadership should be told that it needs to deliver, and not just to promise.


Unfortunately, the lesson - which should have been taught long ago - is likely to be lost in the clamor surrounding Chechnya. The first, "Russian" opinion described above will hold sway: Yes, the IMF will postpone renewing the $4.5 billion loan, not because of a lack of concrete structural reform, but because Western leaders want to stiff the "bellicose Putin government." The pitiful result of this rationale will be another barrier erected between Russia and the West. The best way forward is to encourage the government to stick to the memorandum, and to show that, should it go partially fulfilled, the IMF is prepared to disburse not complete tranches, but partial ones. This policy has been used before, and should be reactivated.