Interests greater than money Policy: Russia has economic problems found in the poorest of nations but has huge potential as a trading partner -- and thousands of nuclear weapons.

Sun Journal

July 20, 1998|By Robert A. Rankin | Robert A. Rankin,KNIGHT RIDDER/TRIBUNE

WASHINGTON -- What's in it for us?

The question might seem crude, but it doubtless occurred to many Americans when they learned last week that the International Monetary Fund is going to loan Russia another $22.6 billion.

That's a lot of cash. Where does it go? And haven't we been down this road with Russia before, with little to show for it?

"Russia is a special case," said Willard Workman, vice president for international affairs at the U.S. Chamber of Commerce. "Part of this is not economic. Part of this is called 6,500 nuclear weapons."

In other words, Russia gets big Western loans partly because without them it faces a great risk of financial breakdown and political instability, possibly leading to a hostile government with nuclear weapons taking over and a return to Cold War-style tensions.

Yet the IMF loans also are intended to serve U.S. and global economic interests.

"Someday the Russian market will be a wonderful market," Workman said. "And I think we have an obligation to help them make the kind of tough economic reforms they need to transform their economy. The best way to do this, probably the only way, is to work through the IMF mechanism. We don't have a lot of tools for this."

President Clinton couldn't have said it better; Workman's words describe Clinton's policy.

The IMF was created in 1944 to help countries overcome the kinds of destabilizing economic problems that helped foster the Great Depression and World War II. Over the past year, similar difficulties -- plummeting currencies, balance-of-payments crises, financial market plunges and recessions -- spread like an epidemic across Asia and beyond. No nation caught a worse dose than Russia.

Foreign investors -- who provide the money and know-how to build Russia and other developing countries into modern economies -- were spooked by Asia's turmoil and cashed out of (( many risky emerging markets. Russia's stock market valuation has plummeted by 60 percent since last fall.

Russia's government was dependent on foreign investors to finance its deep budget deficits. To keep foreign cash coming in to pay its bills, Russia's Treasury sold them bonds valued in rubles by paying interest up to 150 percent.

Still, as investor confidence collapsed, so many people were dumping rubles for dollars that Russia was depleting its scarce reserves of foreign currencies to maintain the ruble's value. With reserves of only about $15 billion, by last week Russia was spending $1 billion a month servicing old foreign debt and up to $1.5 billion a week redeeming recent high-interest bonds.

It couldn't go on. Russia was under great pressure to let the ruble's exchange value sink, but that would have further soured foreign investors and raised inflation at home, risking social upheaval.

On July 10, after warning publicly against coups, Russian President Boris N. Yeltsin called Clinton for help, and three days later the IMF and Russian authorities agreed on a bailout plan.

The IMF agreed to lend Russia $22.6 billion through next year -- $17 billion in new loans, the rest previously approved -- as long as Moscow tightens its economic management. Russia must overhaul its tax laws and tax-collection systems, slash its budget deficit, and accept strict oversight by IMF technicians.

The deal immediately restored confidence among foreign investors -- for now -- as Russia's stock market and ruble rebounded strongly. The promise of IMF money freed Russia from having to keep paying high interest rates for short-term loans. And by restoring financial confidence, such IMF packages often inspire private investment, leading to economic renewal.

The IMF's action settled Russia's immediate financial crisis and bought Yeltsin time to push reforms. His goal -- shared by the IMF, Clinton and the West generally -- is to transform Russia into a prosperous market economy with a democratic government.

Yet those have been Russia's goals since the Soviet Union collapsed in 1991, and skepticism is rising about whether Moscow can get there even with the IMF's help. Since 1992, the IMF has given Russia five other loan packages totaling $24 billion, and the World Bank has chipped in almost $10 billion more. What is there to show for it?

The loans and technical aid financed reforms that helped Russia stem raging inflation. More than two-thirds of the economy, directed wholly by state bureaucrats less than a decade ago, is now run as private enterprise. And after traumatic production cuts in the early years of transition, Russia's economy came close to actual growth in 1995 until political stalemate stalled further reforms.

Yet Russia never followed IMF advice to restructure its tax system and legal code, and to privatize its biggest state industries. Russia went halfway down the road to market reforms, then stopped, leaving an economy where corruption, inefficiency and black-market transactions make further outside aid questionable.

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