The G7 Summit: Yeltsin wins aid from IMF with promise of reform: Peter Torday and Peter Pringle examine the economic trade-off Moscow has negotiated with the International Monetary Fund
Wednesday 08 July 1992
'The Cold War has ended but so far our economic relations (with the West) have not become a partnership - the East-West divide is still there,' Mr Yeltsin said before leaving for Munich.
The success of Mr Yeltsin's attendance at the Munich summit was virtually assured even before he arrived. On Sunday, the IMF said it was ready to advance a downpayment of dollars 1bn ( pounds 520m) from the promised dollars 24bn financial aid package, in return for an acceleration of Russia's economic reforms.
Moscow's promises were at odds with Mr Yeltsin's criticism of the IMF last week. But the Group of Seven believes he is determined to go down in history as the leader who transformed Russia, even if he does not fully understand the reforms. Mr Yeltsin thus staunchly backs the reformist team of Yegor Gaidar, the Prime Minister-designate.
And although the IMF bowed to pressure from the G7 to announce an agreement before the summit, it is understood that Russia has made significant concessions to the Fund.
In order to ward off the threat of hyperinflation, the Yeltsin government has undertaken to cut its budget deficit from 17 per cent of national output to 5 per cent during the second half of the year. What spending will be cut and which taxes raised is unclear at present, but is bound to risk some social unrest.
Russia has also unified a series of exchange rates and allowed the rouble to float - on a small, narrowly based internal market - as a first step towards international convertibility. Moreover, the government will no longer require exporters to surrender a portion of their hard currency earnings at a penal rate of exchange - this was contributing to capital flight and a shortage of hard currency in the country. Exporters will henceforth get the market rate for roubles swapped for dollars, which should encourage repatriation of flight capital. Undeclared hard currency earnings kept in the country are estimated to total dollars 5bn, and perhaps more than dollars 24bn lies in Western bank accounts, according to G7 reports.
The government will also tighten monetary policy with sufficient force to curb inflation to a monthly rate of 10 per cent by the end of 1992, compared with 15 per cent a month at present, according to the terms of the IMF accord.
The dollars 1bn IMF loan should unlock World Bank assistance and - if the Yeltsin team agree to even stiffer measures by October - a further dollars 3bn will be released by the IMF. That loan, if it is ever agreed, should also prove the trigger for the release of the bulk of the dollars 24bn, and, it is hoped, for private investment. The main development between now and October is the orderly departure of Ukraine from the rouble monetary area. That would remove the threat of an expansionary monetary policy by Ukraine undermining Russia's attempts to tighten credit.
But a dollars 6bn rouble stabilisation fund is unlikely to enter into force until late next year. For the rouble to be pegged to the dollar on international markets with some success, Russia must meet the conditions that apply to other currencies. That will mean low inflation, a shrinking budget deficit and balance of payments shortfall - goals that look unattainable from today's standpoint.
As for structural reforms, Russia has promised very little. It will introduce a bankruptcy law, and begin privatisation of small and medium-sized businesses. But large-scale privatisation lies some way off. So too do measures to lift oil prices to world levels - once an important demand of the Fund. And land reform, which would boost agricultural production and reduce the need for expensive food imports, has hardly begun.
Nevertheless, the measures Mr Yeltsin has promised are significant. He will use this to buttress his request for a two-year moratorium on debt principal and interest payments on dollars 74bn of foreign borrowing by the Soviet Union. 'We really are unable to pay the foreign debts of the former Soviet Union for a couple of years and I would ask to defer this payment,' Mr Yeltsin said yesterday. That could save his government dollars 20bn over the two-year period.
It remains uncertain whether the G7 will meet his demands. Some officials favour an 18-month moratorium, others think interest payments should continue. Britain and Japan would like to leave the question aside altogether, postponing formal consideration until the Paris Club of Western creditor governments meets in several weeks' time.
But James Baker, the US Secretary of State, called for a 'generous' Paris Club settlement, a sign that the Russian leader will probably get what he wants. Unless he has some sudden about-turn in mind, he will appear more reasonable than at the weekend, when he said Russia might have to do without the IMF and the other Western loans if the West insisted on economic reforms that were unsuitable for Russia.
His outburst was mainly for home consumption: an effort to keep the critics at bay. They have been unusually voluble in the three weeks since his summit with President Bush. The complaints started with suggestions from neo-Communists that Mr Yeltsin, by agreeing to new nuclear arms cuts, was 'turning Russia into a US puppet'. He has also been accused of 'personal bankruptcy' as a politician, and of leading the country to economic ruin.
Shouting and bullying are an intricate part of the political tactics of Russia's leader. He undoubtedly hopes that Western leaders will deduce that if he really needs to behave in a bombastic manner to calm his foes, then the threat is real and they had better hurry up and help him if they want him to survive.
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