Russia, IMF Reach Bailout Agreement
By Daniel Williams
At a joint news conference in Moscow, Russia's chief debt negotiator, Anatoly Chubais, and IMF negotiator John Odling-Smee said they settled on the package after what Chubais described as the toughest talks Russia had ever held with the IMF. In exchange for the loans, which Russia desperately needs to make foreign debt payments and bolster its currency, the ruble, President Boris Yeltsin pledged to push through parliament tough fiscal reforms to boost tax collection revenue and cut government spending.
The announcement quickly produced a rally in Russia's stock and bond markets, which have plummeted in recent weeks because of fears that the financial crunch would trigger a larger economic crisis, or even the breakdown of Yeltsin's government.
The news also was welcomed by the Clinton administration, which was closely monitoring the negotiations. "This new program of Russian policy commitments and international financial support can provide a sound basis for increased stability and confidence," Clinton said in a statement read by White House spokesman Mike McCurry. The statement stressed, however, that "strong implementation by the Russian government of these important reform measures is essential."
Under the agreement, the IMF will lend Russia $12.5 billion over the rest of this year, with almost half of it to be delivered as soon as the IMF board in Washington approves the package. The fund will also contribute another $2.6 billion next year. Between now and the end of 1999, the World Bank plans to provide an additional $6 billion and Japan another $1.5 billion. In all, Russia will reap $14.8 billion in low-interest loans this year and $7.8 billion in 1999.
The IMF loans still must win final approval from the fund's board at a meeting Monday. At the same time, many of the tax and fiscal reforms promised by Russia must be approved by the lower house of parliament, or State Duma, which will take them up later this week. The Duma, which is dominated by Communists and other opponents of the government, has repeatedly refused to approve similar measures in the past, and Yeltsin has threatened to implement some of the reforms by decree.
Russia was forced to request the international bailout last month because the government's reserves of dollars and other foreign currencies were not sufficient to keep the ruble at its current value in foreign-exchange markets. Without fresh supplies of dollars, the government might have been forced to let the ruble lose much of its value against the dollar. That would create serious problems for Russian banks and industries that must buy dollars with rubles to repay loans they have taken from foreign banks. It could also reignite the ruinous inflation that plagued Russia in the early 1990s by raising the prices of imports.
The crisis was caused in large part by a growing government budget deficit, the result of declining oil prices on world markets and the problems Yeltsin's government has had collecting taxes both from citizens and from newly privatized businesses. Because of its shortage of revenue, the government has been unable to pay wages to millions of workers and was forced to raise money by issuing ruble bonds that paid interest rates greater than 100 percent.
Odling-Smee told the news conference that Moscow had vowed to cut its budget deficit to 5.6 percent of gross domestic product this year and 2.8 percent in 1999. For his part, Chubais announced a plan to stop issuing high-interest ruble bonds and use the new loans to convert some of the outstanding ruble bonds into dollar bonds at a lower interest rate.
That would help reduce the budget deficit by lowering the government's interest liabilities, which had threatened to consume 40 percent of total spending this year. In effect, the government is acting like a consumer who consolidates his high-interest, short-term credit card debts into a long-term, low interest mortgage.
Chubais, a key architect of Russia's free-market reforms before becoming a special economic envoy, declared that the threat of devaluation is at an end. "It is obvious that . . . now this scenario becomes meaningless," he told reporters.
With baggy eyes betraying long hours spent in weekend negotiations, Chubais hinted strongly that Western skepticism about Russia's economic reform record had hindered the talks. He characterized the negotiations as "perhaps the most difficult in the whole history of the relations between Russia and the international financial institutions."
"We are convinced," he went on, "that the [government reform] program and the set of . . . financial supports are not a plugging of holes, not attempts to extinguish some fires, as it is often portrayed."
Russian officials said that the IMF pressed Chubais for guarantees that all of the reform program would be enshrined in law, while Chubais argued that, given opposition from Communists and other factions in the Duma, that might not be possible. Odling-Smee said the IMF board "would make a judgment . . . in light of whatever decisions the Duma makes."
In debates so far, the Duma has looked approvingly on tax-reduction features of the package and frowned on tax increases. With parliamentary elections scheduled for late next year, it is unclear whether the Duma would prefer to risk a renewed financial crisis or be known as a pro-tax body.
Russia's economy began to wither last fall as investors spooked by the financial crisis in East Asia began to sell stocks and treasury bills. Weaknesses in the Russian economy soon become evident. Russia relies on oil and natural gas revenue for taxes and foreign exchange, and, as worldwide petroleum prices plummeted, both government revenue and foreign currency reserves began to suffer.
Approval of the new rescue effort reduces IMF's reserve of ready cash to less than $10 billion, a level U.S. and IMF officials say is dangerously low. In putting together the Russian loan package, the IMF was forced to draw heavily on a rarely used convention called the General Arrangements to Borrow, a framework established in 1962 that allows the IMF to borrow from 11 industrialized contributors at market rates of interest.
At his news conference, McCurry assailed congressional Republicans for failing to approve payment of the U.S. share of funding to the IMF, which totals $18 billion. "There's no question that they're going to need to replenish those funds and make new arrangements for borrowing and that our Congress is going to have to step up to the plate," McCurry said.
Staff writer Clay Chandler in Washington contributed to this report.
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