Russia and the IMF: Evolving relations

Yevgeny Gavrilenkov, RIA Novosti, Moscow

Russia joined the International Monetary Fund in July 1992, received its first credit tranche (around US$1 billion) and spent it in the same year on servicing its foreign debts.

A further $3 billion were allocated according to the program of structural transformation funding. They came in two tranches. In 1995-1996, the amount increased to $6.8 billion. The credit was allotted to support the reform and stabilize the economy.

A proviso of its receipt was Russia's agreement to carry out a policy aimed at sharp reductions in inflation, to introduce a fixed corridor for the ruble exchange rate, and to refuse to cover budget deficit at the account of Central Bank loans.

Instead of this, the IMF experts proposed Russia to establish a state drawings market. Soon, the Central Bank started emission of state securities.

The policy of annual drawings helped reduce inflation and to a certain extent led to financial stabilization. The economy managed to curb the rise in prices, which following the 1992 liberalization brought about hyperinflation.

In 1992, prices grew by 26 times, in 1995, inflation was contained to "only" 130 percent, 21.8 percent in 1996 and 11 percent in 1997.

In March, 1996 the IMF allotted another credit within the extended funding program to support financial stabilization and, primarily, to maintain the ruble exchange rate.

It was a $10-billion loan for 10 years with 4-years beneficent period. Russia actually received only $5.8 billion.

The IMF-recommended policy both had inherent contradictions and disregarded a number of fundamental disproportions in the economy.

The fund recommended a tough monetary policy to maintain the stable exchange rate of the ruble, which the Russian government could not afford.

Since budget deficit was covered at the expense of the so- called "non-inflation" sources, in other words, via placing GKO (short-term government bonds), the short-term effect was positive -- the growth of prices slowed down together with the rate of monetary supply growth.

At the same time, the volume of circulating GKO grew rapidly. By the end of 1997, it exceeded the volume of the monetary stock.

The growth of the money substitutes was accelerated by soaring interest rates, and, as a result, the budget expenses for the internal debt service began to swell up.

Although the admission of foreign capital into Russia's domestic market of state obligations enabled Russia to reduce the price of drawings, the overall volume of accumulated debt exceeded the critical mass by some indicators (for instance, by the relation of the short-term debt to international reserves).

Russia found itself alongside such countries as Thailand, South Korea, Indonesia that had already experienced monetary and financial crises. It is natural that under such conditions, foreign investors' funds began to flee from the domestic GKO market.

This decreased dramatically the Central Bank currency reserves and raised the interest rates again -- they exceeded 100 percent in certain periods -- while the expenses for GKO service surpassed the federal budget's income. The level of tax collection sharply dropped, as the outsized GKO market was consuming more and more financial resources, diluting the corporate sector.

In July, 1998, when aggravation of the financial crisis in Russia and devaluation of ruble were imminent, the IMF decided to allot Russia a special stabilization loan. At last, the term for the credit's allotment was implementing a program of state expenses' reduction. After the financial program was agreed on, a $4.5 billion-worth standby credit was approved.

It was to be transferred on Russia's accounts in seven $640- million tranches within 18 months. Russia received the first tranche in July, 1998; the second was expected in September, but its allotment was postponed under the pretext of misuse of the IMF funds in Russia (the Bank of New York scandal).

By that time (August, 1998) Russia was swept by financial crisis -- the country announced default on its internal debt and introduced floating currency rate.

In connection with this, the IMF stated that the allotment of the second tranche was postponed due to Russia's "incomplete execution" of certain structural measures envisaged by the program agreed with the IMF.

The history of IMF-Russia relations reveals that the fund's recommendations did not always reckon with Russia's political and economic realities. Apart from the contradiction between the tough monetary-credit policy recommended by the IMF and the chronic budget deficit, it should be noted that budget deficit altogether disagrees with this country.

The problem is that the level of the Russian economy monetization was too low.

In mid-1990s, the ratio of ruble money stock to the GDP was around 15 percent (in highly developed countries, this index is near 100 percent). For a poorly monetized economy, even a deficit in 3-4 percent of the GDP (internationally regarded as moderate) leads to heavy inflation consequences if covered at the account of money emission. Under such conditions, money stocks grow by approximately a third. If the deficit is covered at the account of emitting bonds in poorly monetized, and, consequently, lack of liquidity, the price of drawings rises rapidly and the economy moves toward a debt crisis.

This happened in Russia, and the IMF had not taken this factor into consideration.

In addition, accentuating achievement of financial stabilization while disregarding the low quality of Russia's market and state institutions along with high tax load on the economy which evidently does not correspond to the quality provided by the state to the public affected the investment climate.

As a result, Russia had to face mass defaults in payment and chronic capital outflow. This also hampered achievements of durable financial stabilization.

However, it should be acknowledged that Russia-IMF cooperation was more effective in other spheres. Thanks to the IMF assistance, Russia reformed its system of financial and monetary statistics for a relatively short time, the Finance Ministry began to compile the budget and the Central Bank to public statistics according to international standards.

As a result, the state financial statistics and accounting became more transparent and available. Unfortunately, this is not so for the corporate sector -- only a few Russian companies report their finances according to international accounting standards.

In the years that followed, the Russian Cabinet and the Central Bank annually developed and signed successive statements on the economic policy agreed on with the IMF. However, this practice has been discontinued. Russia is not a borrower any longer and pays off its foreign debt on schedule.

Currently, Russia owes the IMF $6.9 billion, or 6.5 percent of the overall state external debt.

The level of Russia's economic growth and development today is dramatically different, and, accordingly, the level of its cooperation with the IMF.

Cooperation is carried out in the framework of consultations on a broad range of economic policy issues. The IMF pays more attention to institutional and structural reforms. Apparently, Russia and the International Monetary Fund will continue their cooperation in this area in the future.

The writer is chief economist of Troika-Dialog Investment Company. He wrote this article specially for The Jakarta Post.