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.
"IMF loans and other government-backed capital transfers do not contribute to new investment so much as they contribute to sustaining old institutions," said William E. Odom, a former national security aide to President Reagan who works for the Hudson Institute.
Much of the IMF money simply repays loans to Russia's new capitalist oligarchs, while Yeltsin's government is too weak to impose the reforms necessary to restructure the economy, Odom told the House International Affairs Committee on Thursday.
"The only real beneficiaries of the IMF loans will probably be the Western investors, who hold about 60 percent of the foreign exposure," Odom said.
Other experts disagree.
"I think the notion that the money is wasted is a big mistake," says Al Fishlow, a senior fellow at the Council on Foreign %J Relations.
For one thing, all IMF loans are repaid -- with interest. U.S. dues cover 18.5 percent of IMF resources, but no IMF loan has ever cost American taxpayers a dime. Russia has repaid about $10 billion to the IMF so far.
Andrew Szamosszegi, a senior researcher at the Economic Strategy Institute, a trade-oriented think tank in Washington, argues that a Russian collapse would be felt far beyond its borders.
"The last thing we need right now is another emerging market going bust and flailing because of [Asian-driven] contagion," he said.
Investors are starting to return to troubled markets such as South Korea, Szamosszegi said, but if Russia collapsed, the instability could spread anew. "Where does it go next? Latin America? Mexico?"
Rep. Lee H. Hamilton, an Indiana Democrat, summed up the stakes for Americans at the House International Relations Committee hearing Thursday.
"Destabilization in Russia would have a negative impact across the world," he said. "Success is surely not guaranteed, even if the IMF package [goes forward]. But I think the risks are grave if the loans do not move forward: devaluation, economic chaos and even a possible coup and the rise of a hostile government.
"We risk the defeat of democratic and market reforms, and a return to a Russia that opposes Western values. The stakes are simply huge, and the interests of the United States in the outcome unsurpassed."
IMF loans
International Monetary Fund loans help finance macroeconomic reforms and support Russia's ability to finance trade and investment. The IMF gave Russia five loans before this month's, totaling about $24 billion:
August 1992 -- $4.1 billion
June 1993 -- $1.5 billion
April 1994 -- $1.5 billion
April 1995 -- $6.8 billion
March 1996 -- $10.1 billion
3' SOURCE: International Monetary Fund
World Bank loans
The World Bank has granted Russia 40 loans totaling almost $10 billion since 1993. World Bank loans usually finance specific projects, such as new highways and housing.
Here are the year-by-year World Bank loan totals:
1993 -- $1.4 billion
1994 -- $1.5 billion
1995 -- $1.6 billion
1996 -- $1.9 billion
1997 -- $1.8 billion
1998 -- $1.6 billion.
In addition, the World Bank gave Russia three grants in 1995 and 1996 totaling $83 million for environmental projects.
' SOURCE: World Bank
Pub Date: 7/20/98