The International Monetary Fund formally approved a $4.5 billion loan to Russia yesterday, a move aimed at keeping Moscow from disintegrating economically by giving it money to help avert default on its previous IMF loans.
Approval of the loan by the IMF's board reflected Russia's geopolitical importance as a nuclear power rather than the belief that it has put its economy on a sound footing.
Indeed, members of the IMF board complained that "there had been little progress in structural reform since last August, with some reversal in important areas," according to a statement issued after the meeting by Stanley Fischer, the IMF's deputy managing director, who said the IMF directors "underscored the need for full and timely implementation of the envisaged reform measures" that Moscow had promised.
The IMF and its leading member countries--notably the United States--have made it clear that they are anxious to keep Russia from falling into a new and deeper crisis, especially with elections looming in December for the national legislature and next June for the presidency. The infusion of IMF money is designed to help Moscow maintain a reasonable degree of financial stability by enabling it to continue repaying its most important creditor--the IMF itself--and unlock loans from other lenders, such as the World Bank.
"Why is the IMF giving the money? The answer is, they have no choice," said Clifford Gaddy, an expert on the Russian economy at the Brookings Institution.
To deflect criticism that it is throwing good money after bad, however, the IMF has limited its new loan so that the money, rather than being handed over to Russia, will be used strictly for the repayment of existing loans to the fund. In fact, beginning with an initial $640 million installment, the $4.5 billion will simply be transferred from one IMF account to another over the next 17 months as the debts Russia owes the IMF come due during that period.
A little less than a year ago, the IMF's last rescue attempt for Russia ended disastrously when Moscow, suffering a massive outflow of capital, was forced to devalue the ruble and defaulted on some of its government debt.
But after freezing a $22.6 billion international loan package for several months, the IMF resumed negotiations with the Russians and struck a preliminary agreement for the new loan in April.
Moscow hadn't shown convincing signs that it would balance its deficit-ridden budget or restructure its inefficient state industries. But the government managed to keep the worst from happening--the much-feared specter of hyperinflation, for example, never materialized--and President Boris Yeltsin kept Russia's relations with the West from falling apart over the war in Kosovo.
So the IMF decided to resume lending because of fears that a Russian default on its IMF loans would inflict severe and lasting damage on the country's ability to obtain capital from abroad.
"I don't think any reasonable person interprets this as a stamp of approval of Russia's reforms; the Russians are pretty much going through the motions," Gaddy said. "But without IMF support, the World Bank wouldn't be able to put any money into Russia, nor the [European Bank for Reconstruction and Development], which would be extremely significant. And it is only after IMF approval that Russia can officially enter into negotiations with its [private] creditors" to stretch out debts owed to commercial banks and other firms.
In exchange for the loan, Russia has pledged to boost tax collections, cut spending and take steps to clean up its loss-ridden banking system.