INSIDE FINANCE: Both Left and Right Wings Want New Deal With IMF

As he said goodbye to Prime Minister Yevgeny Primakov, Michel Camdessus, the International Monetary Fund's managing director, promised him a new relationship. Previously, the IMF advised the government on what to do and made loans to ensure the realization of that advice. It was only afterwards that the government would explain to the IMF exactly what it was doing. A lot of the time, the fund didn't like what the government was doing but it still madethe loans.


Now, the government has for a second time not allowed the IMF to see a copy of the draft budget. The fund in turn has not given any loans and has promised nothing more than to come back sometime.


After meeting Camdessus, Primakov told the Federation Council that the government needed a deal with the fund. Without it, it would be impossible to even start restructuring Russia's foreign debt. Even those nice Japanese would not give the $800 million loan they had promised unless a deal was successfully signed with the IMF.


But to cut a deal, reforms have to be continued and in a civilized manner, without any return to the Gosplan-style experiments proposed by First Deputy Prime Minister Yuri Maslyukov. There seems to be no other alternative. The Primakov-Maslyukov government has been placed in an impossible situation by the frenzy for credit that began under the Soviet Union. The $90 billion of foreign debt borrowed under former Soviet Prime Minister Nikolai Ryzhkov is an unbearable weight around their necks. Without Ryzhkov's and subsequent debts, the government would have been considering a retreat into complete isolation with no external help. But, unlike Lenin and the Bolsheviks, our communists are scared of repudiating debts completely.


Some politicians think they have an alternative. State Duma speaker Gennady Seleznyov proposed repaying the hated IMF and then going it alone. If there is not enough money to pay off the debts, then print them, Seleznyov said, apparently not realizing that the Russian Mint has not yet worked out how to print U.S. dollars.


The government brushes aside these problems with fairy tales about the enormous quantity of humanitarian aid that is now on its way to Russia's New Year table. Of course, the government has a specialist in the area. Deputy Prime Minister Gennady Kulik, who ran the ill-fated "Harvest '90 Bonds" schemes which cheated millions of people, is now waiting for the gift parcels so he can put his talents to use. At the start of the 1990s, Kulik was in charge of distributing food received as a gift or in exchange for oil and raw materials. He signed a huge contract with an international trading firm called Noga for the delivery of food in exchange for oil. This led to a suit from Noga after which a Swiss court froze Russian bank accounts, including accounts in the name of Russian bureaucrats. But even if it gets the food aid which is so desperately needed - at least, by foreign food exporters - Russia cannot do without the IMF. Of course, the IMF has been criticized both from the right and the left. Milton Friedman, the father of monetarism, recently said the IMF did not slow but rather contributed to the world financial crisis. And the IMF made mistakes in Russia too.


One of the main causes of Russia's financial crisis was that after the start of the Asian collapse last year, foreign investors en masse cut back on their investments in all emerging markets. This hurt the Russian treasury bill market hardest. Prior to 1997, most GKO investors were Russian. That protected it from fluctuations on world markets. Yet it was the IMF that insisted on opening up this profitable market to foreigners. That was even a condition for granting one of the tranches of an IMF loan. A lot of reasons were given but the interest of foreign investors in getting involved must also have played a role.


When Russia's creditworthiness sank in the summer of 1998, the IMF also took some strange steps. In July, it lent Russia $4.8 billion and approved the government's budget program for the rest of 1998 and 1999. How did it happen then that, within a few months, the government was running out of money? Neither the government nor the IMF has given an answer.


The fund also gave its backing to the first voluntary restructuring of GKOs into Eurobonds for foreign investors. This gave a limited group of investors the chance to eliminate the risk of a devaluation. The foreign investors clearly gained. The Russian government lost. That deal had a decisive role in destabilizing the Russian market. It was then that prices on Russian Eurobonds and MinFins collapsed, pushing several big Russian banks to the brink of bankruptcy.


So, both the left and the right want a new relationship with the IMF, although both have different views of the nature of that relationship. Anyone who has heard a discussion between Finance Minister Zadornov and Agriculture Minister Kulik knows how much trouble Primakov will have working out a program.