… AND LOOKS TO AN UNCERTAIN FUTURE.

All participants of yesterday’s IMF meeting recognized that the prospects for future economic reform in Russia are bleak. A small minority argued that crisis always brings opportunity, and that the Russian government’s desperate financial straits means that it will now have to accept tough conditions from Western lenders to obtain the loans it desperately needs to recapitalize its collapsed banking system. This view was not generally accepted at the meeting, with many fearing that such an exercise would merely end up bailing out the oligarchs.

It seems clear that the international organizations have been chastened by their Russian experience. Some participants noted that international lending to Russia has created a severe case of “moral hazard”–meaning that the Russian government has come to expect that the West will always bail it out. If this is true, then international lending without strict conditionality may have made the situation worse rather than better, by enabling the Russian government to continue to pursue otherwise unsustainable policies.

However, political considerations in the form of 30,000 nuclear weapons mean that the international community cannot simply walk away from the Russia problem. It seems likely, however, that in the future responsibility for dealing with the need to bail out Russia will shift from the international financial institutions to more directly political bodies, such as the Group of Seven (G7). This will not be a problem-free approach, however, as there seem to be divergent attitudes between G7 members about what to do with Russia. Several European participants in the meeting suggested that the German government feels that it has given enough to Russia already, and that with the departure of Russian troops from German soil (in 1995) there is no longer an urgent need to prop up the Russian regime.

The prospects for Russia’s financial future look grim. Federal tax revenues are heading below 6 percent of GDP, while spending for 1999 is planned at 16 percent. With no means of financing the deficit, the federal budget will likely collapse in the first quarter of next year. Even printing vast amounts of new money and hence creating an “inflation tax” would only raise 2 or 3 percent of GDP for the government.

Russian TV crews were hovering at the IMF’s doors as the meeting broke up. In Moscow, it was erroneously assumed that the purpose of the meeting was to discuss whether to release the IMF’s frozen US$4.8 billion loan tranche. That specific question was not discussed at the meeting, though it seemed unlikely–reading between the lines–that the check will be in the mail any time soon.

Few participants believed that Russia will be able to meet a substantial proportion of the US$17 billion in interest and repayments on its foreign debts falling due next year. Even if the old Soviet debt is rescheduled (again), as many suggested, there is still the problem of payments on the US$45 billion new debts which Russia has acquired since 1991. The IMF itself is forbidden by its charter from rescheduling unpaid loans. If it wants to help, it would have to issue new loans–but the peremptory debt default in August has stripped away the fig leaf of conditionality. It will be up to the West’s political leaders to decide where to go from here.

AS CAMDESSUS ARRIVES, PRIMAKOV GOVERNMENT SAYS IMF MONEY IS VITAL.