INSIDE FINANCE: Ruble Presses Are Rolling Despite IMF, Macro Plan

The International Monetary Fund mission that came to town last week faces a tough assignment, probably the toughest since the IMF started working in Russia. They have to decide on the viability of the government's plan of action, but the government doesn't actually have one. The IMF is supposed to tell international creditors whether they trust what the government and the Central Bank are doing. But they themselves don't know.


Russian economic analysts are reduced to looking into a crystal ball. Will there be a huge emission of money this year and next ? The documents made public so far don't give an answer.


Everyone is hoping the 1999 budget will clear things up. From one point of view, the draft budget is encouraging. It provides for a small but solid primary surplus. That means current expenditure will be financed by current revenues, at least excluding debt repayments.


On closer inspection, it turns out that the draft budget does not allow for all the interest payments on foreign and debt. In other words, the budget assumes the speedy and successful completion of talks on restructuring treasury bills and the Russian and Soviet foreign debt. An optimistic assumption indeed.


Despite the focus on inflation and printing money, no one seems to notice that these are primarily determined by a monetary program rather than by the budget.


A monetary program lays out how money will be put into circulation, through the budget or the banking system, and how much will be taken out. That determines inflation. Under Russian law, a monetary program must be formulated by the Central Bank and presented to the State Duma not later than Nov. 1 in the form of a report on "Basic Aims of Monetary and Credit Policy." This year, it hasn't been.


While the budget must be approved by parliament, the monetary program is only sent to the Duma as a matter of record. Under the Russian Constitution, the Central Bank conducts an independent monetary policy.


That is exactly what the Central Bank is doing. Chairman Viktor Gerashchenko has said he will not print one kopek for the budget until he is authorized to do so by law. On the other hand, the Central Bank needs no law to print lots of money and hand it out to the banks. All that is needed is a decision of the board of the Central Bank where Gerashchenko presides.


How is this done ? The first method is what is being called debt settlements. In September and October, the Central Bank gave the banks money, letting them dip into their mandatory reserves in the hope they would finally start paying out their debts to clients. The result is obvious. Neither Inkombank nor other banks in a state of effective bankruptcy got any better as a result. But a few billion rubles were pumped into the economy.


At the time, Central Bank Deputy Chairman Andrei Kozlov said the measure was temporary and reserves would be returned by Dec. 1. But last week the Central Bank permitted banks not to return the funds.


A second method is just giving out loans to the banks. Gerashchenko says 15 billion rubles have been handed out so far. SBS-Agro was one of the first to receive a loan. Many depositors and creditors received none of it. But SBS did pay off principle and interest on a loan to International Moscow Bank of which Gerashchenko was chairman until two months ago.


Next in line, the Central Bank helped out MOST-Bank, which had put a lot of its assets into creating the NTV television empire. The motives here are obvious: Arguing with the media is dangerous. Third in line, perhaps because of the pushiness of its shareholders, was Menatep, even though the bank has relatively few depositors, no regional network and most of its clients are related companies.


From a macroeconomic point of view, it is immaterial whether money is printed to finance the budget or is given to banks in the form of virtually free loans. That is more a social question. The way the new money is used is crucial for taxpayers. Paying off wages and pensions and government debts is one thing. Saving the shareholders of bankrupt banks is another. And in the latter case, the risk is that the money will never get to the depositors for whom it is aimed. The tracks of the money could easily lead to the foreign exchange market and from there into the warm waters of the Caribbean.


Perhaps that is why the Central Bank has kept all information on its current monetary operations secret, even from the Finance Ministry. The IMF mission has also had trouble getting information. Anyway, the main point is that the printing presses have started running.


In fact, the IMF's work may be getting easier. Until recently, the Group of Seven leading industrial nations put political pressure on the fund's experts to lend to Russia. They no longer do.