Russia comes begging again
Phil Reeves explains why the West has little alternative but to lend more to a corrupt state that has already squandered billions
Sunday 25 April 1999
Their destination is the International Monetary Fund and World Bank's spring meeting. Their aim - finally to nail down a new loan agreement in the hope this will stave off the threat of further economic collapse.
Moscow is already the fund's biggest debtor by far. It owes $18bn (pounds 12.5bn), money thrown at the country to secure its transition from Communism to democratic capitalism, and avoid total breakdown. The money has gone, yet free market reforms and the economy are in refrigeration. Again, Moscow turns to the West, hand outstretched, encouraged by the thought that its chances are improved by its commitment to stay out of the Balkans war.
The delegates, led by first deputy prime minister Yuri Maslyukov (a dinosaur, in IMF eyes) are not exactly alluring suitors, as the fund has made clear in weeks of tough negotiations. Among many sins, Russia has an ineffective tax collection system, a profoundly corrupt bureaucracy, a shaky understanding of money, a bad habit of settling its accounts by barter, and a capital flight crisis in which several billion dollars wing their way abroad every month. To that should be added the central bank throwing credits at its crippled and crooked banking system. The figures look grim: this year the IMF expects inflation in Russia to come in at just more than 100 per cent, while GDP shrivels by a further 7 per cent.
Looming large are the memories of the fate of last year's IMF $22bn (pounds 15bn) rescue package, which failed to save Russia from an economic meltdown, but instead got sucked into a vortex on the debt market which stifled credit and investment, before the market crashed. After Russia defaulted last August the rouble fell to a quarter of its 1997 value against the dollar. Now more problems are brewing: without a deal, Moscow says it will be unable to honour foreign debts of $17bn (pounds 11.4bn) due this year.
Despite all this - and divisions within the IMF - the Russians are likely to get their money. Obviously, the IMF wants its loans back, but some of Moscow's debts due this year are to the fund itself and the World Bank. By borrowing again, Russia should be able to make payments, ultimately reducing overall debt.
Broader geopolitical issues are also in play, including the lingering fear that a stagnant, truculent Russia will slide into isolation and international delinquency. Though the West does not like Yevgeny Primakov, the Prime Minister, or the free market sceptics at his side, they have proved unexpectedly thrifty, and successfully stabilised the country after last August despite predictions of chaos. Ultimately, he is someone the West can work with.
"Moscow needs the deal to avoid the nightmare of another default," said Al Breach, a Moscow-based economic analyst. "The IMF needs it because it doesn't want egg on its face by seeing its biggest involvement go utterly wrong, and the West needs it because it doesn't want Russia to blow up."
Michel Camdessus, the IMF's managing director, said on Wednesday that he expected "good news" for the Russians. Much hinges on tomorrow's meeting of G7 financial ministers. But bets are on a one-year deal for about $3bn (1.9bn).
Yet a nagging issue remains. Could this be the same Russia whose Central Bank recently admitted channelling abroad hard currency reserves - including IMF loans - through an obscure offshore company called Financial Management Co in the Channel Islands?
The Fimaco story broke in February when the chief prosecutor, Yuri Skuratov, claimed billions of hard currency reserves went through the company in five years. Mr Skuratov has now found himself in the cross-hairs of Boris Yeltsin himself - ostensibly because he was caught with prostitutes, but more probably because his department is digging into Kremlin bribe-taking and corruption in the Central Bank. The President wants him to be fired.
Nine days ago, the Russian parliament called on Mr Skuratov to investigate the Central Bank's use of Fimaco, accusing bank officials of using the company to siphon off millions of dollars through insider trading.
Fimaco was an obscure shell company set up in Jersey in November 1990. Although ownership was unclear, there is no doubt it was an instrument of Eurobank, a Paris-based company controlled by the Soviet State Bank, then by its Russian successor, the Central Bank.
As the West wonders whether to dole out more - Britain is among the IMF's top five contributors - many questions remain unanswered. What happened to the profits from the billions that Russia sent abroad which were said to have been used to play the country's debt market? Why were they not spent on the benighted population of Russia itself? These considerations have been put on the back burner in the past few weeks, overshadowed by the Kosovo crisis, and the recognition that Russia's ruffled feathers must be smoothed.
But not everyone has forgotten. Like, for instance, Gerd Meissner, a senior diplomat at the German embassy in Moscow. "Personally, I fully support the view that no IMF money should be released before Russia makes clear how it managed its reserves," he told the Moscow Times. He has a point.
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