Russia grabs its last chance

News Analysis: Post-Soviet nightmare goes on as wary IMF steps into the breach again

NO ONE EVER realised it would be so tough. The theory was clear enough: get rid of useless Soviet central planning, privatise land and businesses, and let the market work its magic. Milk and honey would quickly flow.

What happened? Since the end of the Soviet empire, Russia's economy has been in steep decline. Fifty-five million people - a third of the population - live below the poverty line. Social conditions are far worse, blighted by disease and alcohol; state services have all but collapsed; direct foreign investment is miserably low, undermined by endemic corruption, inadequate laws and bureaucracy. Moscow has become the International Monetary Fund's biggest borrower by far, owing more than $18bn. And yet again - despite concern about the misuse of previous loans - the fund is helping out Boris Yeltsin.

So fierce is the depression throughout most of the former USSR that the World Bank's chief economist, Joseph Stiglitz, has admitted to wondering if the transition to market economics - the defining force behind so much Western policy towards Russia for so long - has failed. "I think the lesson we've learned is that market economies are far more complicated than text book models often describe them," he told a recent Washington press conference.

After months of negotiations, the IMF last week agreed - subject to numerous conditions - to give Russia another $4.5bn over the next 18 months. Once again, the fund and Moscow find themselves locked in an uneasy, untrusting embrace. Both sides have painful memories of the collapse of a $22bn IMF rescue package last August when Moscow devalued the currency, and defaulted on $40bn debt.

This time the fund wants answers to some awkward questions. What happened to previous loans? And, in particular, why did Russia channel billions of hard currency reserves, including IMF money, through an obscure offshore company in Jersey called Financial Management Co, or Fimaco?

The Fimaco scandal is a revealing example of the difficulties faced by international institutions when dealing with Russia. It broke in February when the Russian chief prosecutor, Yuri Skuratov, exposed Fimaco's existence, saying billions of dollars had passed through it. No one disputes that the company was used as a conduit for reserves; the question is - why?

Sergei Dubinin, former chairman of the Russian Central Bank, has said it was a perfectly legal practice, intended to protect reserves from litigious creditors. But there have been repeated allegations that it was a link in a scam under which bank officials bought high-yielding Russia treasury bills and hid the profits.

Leading the charge is an independent parliamentarian, Nikolai Gonchar. Armed with internal documents, he has claimed that in 1996, between March and June, the Jersey company invested $143m in Russian treasury bills which - with investor jitters following the Asian crisis, low oil prices and Moscow's budgetary problems - by then carried sky-high interest rates. When the bonds matured in September, they produced a profit of $39m. Under the law, half of this should have gone to Russia's hopelessly emaciated budget. There is no evidence, he says, that the funds ever got there.

Nor, it seems, is this the only cause for concern. Russian prosecutors this month ordered an auditors' probe into the use of $4.8bn given by the IMF to Russia last year. Officials say about $2bn was thrown at the vain attempt to prop up the rouble. $1bn went to budget demands with IMF permission. But $1.5bn was placed on deposit in US banks and invested in securities in the US. Auditors are trying to establish whether the Central Bank accounted for these funds.

Fimaco also appears to have had another role, which stretches back into the last days of the Soviet Communist party. As its empire tottered, its elite became concerned about their future. The Independent has been told that Fimaco was used by officials from Mikhail Gorbachev's government as a channel for settling hard currency debts to foreign firms in return for kickbacks. (There is no suggestion of impropriety by the Jersey company; it was merely a conduit).

According to a British executive who took part in negotiations to recover $23m owed by the USSR to four companies during 1990, the Soviets demanded a 5 per cent "commission" - a figure that comes out at $1.15m, in this case - to organise payment of their overdue bills. The businessman, who insists on anonymity, recovered two debts, one for an American client and the other for a German firm.

The Fimaco experience has made the IMF even more wary. As Russia is due to pay off $4.5bn in debts to the IMF this year, the latest loan is not expected even to go through Moscow, but will pass from one Washington account to another. How long the loan will stave off further disaster is uncertain. Moscow wanted to raise $4.5bn from the IMF this year to help meet the $8.2bn of new debts that fall due.

In fact, the deal is over 18 months; this year - if it meets the fund's conditions - it will only get $3bn. So a hole yawns, yet again, in the budget. The pressure will be on the Central Bank to draw on dwindling foreign reserves (now about $10bn) but those will be needed to defend the rouble. Russia, which has ceased servicing its crushing $100bn inheritance of Soviet-era debt, may be forced to a further default and devaluation.

Nor is the IMF agreement safe from possible sabotage from a Russian parliament dominated by Communists and nationalists with little love for Western remedies. The fund's latest loan is dependent on the passage of stringent measures, including increased excises (on petrol and alcohol), banking reforms, and tax-code changes.

These have spawned 59 bills which will soon go before the lower house, the Duma. Last year, the Duma refused to pass the bulk of a package of emergency measures - a move which helped bring down the government of the pro-Western Sergei Kiriyenko, and hastened August's economic melt- down.

Parliament had a much warmer relationship with the current premier, Yevgeny Primakov, so it may be more compliant. But anti-Western sentiment is at its highest since the end of the Soviet Union, ignited by the Balkans war, and elections are only seven months away. One leading lawmaker, Vladimir Ryzhkov, head of the centrist "Our Home is Russia" faction, believes the house will throw out two-thirds of the IMF bills.

A note of desperation is already evident. "We are being offered our last chance, because right now Russia is technically in default," said Mr Zadornov, the Finance Minister, on Friday.

The international community is trying again to help Moscow, partly because it wants its earlier debts back, partly because it fears an isolated Russia and no doubt partly - though officials deny this - to reward Russia for refusing to be drawn into the Kosovo conflict. Yet even before the ink has dried, fears abound that the IMF's latest deal will founder, further prolonging the post-Soviet nightmare.