Well said, George

[Reza_Rahmani]

Korov'ev,

I am not thinking from a base in the 1980s, but from a much older base, reaching back to the 19th Century. You are mistaken if you think any desirable political future can be rooted in Russia. I feel for you in a way, since I know you will ultimately be insulted and deeply let down. My reference to the viper's nest of Eurasia was not flippant.

The time will come when you will be in some kind of trouble; and no Russian will lift a finger to help you. Take care.

Regarding the IMF, etc. Of course I don't disagree with arguments about the superstructural technical incorrectness of policies that were applied. But my objection to your approach is that you are always looking at "Court intrigues", without a thought for the ethical rottenness of the society at large. You are carried away by your romance with lyrical russianness or the like. Fundamentally not the IMF nor any agency could possibly have succeeded at straightening out what is essentially crooked.

By the way, my seemingly extreme attitude pales in the presence of what I have heard Russians say about their own country. I am not as isolated from reality as you wish I were. And I predict that within ten years your own Russian romance will come to an abrupt end.

Reza

[Reza_Rahmani]

Korov'ev,

Since you are interested in focussing on the IMF:


The Fund's best friend?

by James Arnold (Mon, 21 Aug 2000 10:11:34)

After years of tense relations, Moscow is on increasingly happy terms with the IMF. This probably has more to do with politics than economics.

Funny how economic crises make everyone an expert on the global financial system. The average prosperous American or German probably wouldn't know an Enhanced Structural Adjustment Facility from a hole in the ground. But ask any Moscow taxi driver what he thinks of the IMF's policies, and you'll get a detailed and opinionated answer. Not one we can print, however: for most ordinary Russians, the IMF is the vanguard of the international conspiracy to bankrupt Russia. It was the IMF's free-market prescriptions during the 1990s, many Russians believe, that put millions out of work, ruined the ruble and pitched the country into its 1998 financial collapse.

Political leaders have generally been a little more diplomatic. But for the last couple of years, they haven't exactly treated the Fund with much respect, either. The government's usual tactic has been to promise the IMF sweeping reforms, pocket the money and - oops - deliver nothing. Moscow hasn't exactly been over-scrupulous about meeting debt repayments, either. And there are allegations that billions of dollars of IMF money were misused: on August 14, a Swiss magistrate ordered raids on two banks accused of handling IMF cash diverted overseas.

Things seem to be changing. According to new figures, released by the IMF in mid-August, Russia is still the IMF's biggest creditor - owing nearly $12.7bn. But it's also been one of the best at repaying. During the first seven months of this year, Russia has repaid over $3.6bn to the Fund, only Brazil repaid more. And now Russia hopes to get by with less IMF help. The 2001 budget, currently being drafted, anticipates servicing the country's debts without further help from the Fund. (Just to be on the safe side, however, the government is currently putting out feelers for a $1.8bn IMF loan.)

So has Russia mended its ways? It's certainly in a better position to pay back loans this year. High oil prices have given policy-makers a huge financial boost: just two months ago, the government was assuming that 2001 GDP would be Rb6.8trn ($250bn at today's exchange rate); on August 9, Alexey Kudrin, the finance minister, said it was now projected at Rb7.8trn.

But there's a lot of politics mixed up in Russia's current good behavior. First, one great variable in Russia's economic outlook is whether it is able to reach some sort of accord with the Paris Club, a group of sovereign creditors to which Russia owes around $42bn. Being able to demonstrate a sound record with the IMF would be an enormous boost to its attempts to shift this much larger burden of debt.

Second, breaking even partly free from the IMF straitjacket will play well among voters at home. By the end of its tenure, the Yeltsin regime was regarded as little more than an IMF puppet (a view scarcely shared by Washington). If Vladimir Putin's Russia can use its oil riches to pay off the IMF, it will be able to argue that it is master of its own economic destiny. Given how little the Yeltsin regime listened to IMF advice, that shouldn't have much of an impact on policy. But it might shut up the amateur pundits who drive Moscow's taxis.

*****

[Dr_Woland]

One of the most remarkable - and rarely-remarked-upon factors of Russia, is its capacity for assimilation of foreign ideas, cultures, and concepts.

The historian Gumilev (the son of Leon Gumilev and Akhmatova I mean) made one of the grandest proposals in relation to this, in his "The History Of The Han Dynasty". His hypothesis is that far from dying-out, Russians assimilated the Mongolian culture so successfully, that they "became" Mongolians themselves and the culture and empire survived through them.

Russians have rarely been innovators. What they do best is to develop the ideas of others to their own uses, often outdoing the originator. Most critically, they see no harm whatsoever in this - they will use what is available. This is what I mean by the laissez-faire attitude in the Far East. You see it as cultural invasion. They see it as welcome investment into an under-resourced, under-populated area.


>> I feel for you in a way, since I know you will ultimately be insulted and deeply let down <<

I am touched by your fellow-feeling :-) I have seen the phenomenon you mention endlessly. The mistake is to make your goals different from those of Russians. If you work in common purpose with them, and can find a way for this to work for you too, then your chances are greater. You will certainly never win against them, or outwit them - at least, not for long :-)

>> you are always looking at "Court intrigues", without a thought for the ethical rottenness of the society at large <<

You do, indeed, have a good point here. I suppose that I take the ethical rottenness for granted - it's merely the backdrop to the action. Whilst I would wish for better, however, it does not seem to me worse than many other countries? Against the "rottenness" (which exists, and I don't downplay) are other benefits - high levels of literacy and education, low levels of homelessness, and a clunky but free healthcare system. Whilst there are several forum-members who recognise only one worthwhile country in the world <sigh>, the reality is that Russia is, in fact, a very desirable refuge for all kinds of communities, both legal and illegal. Near where I live in Moscow there's a large Vietnamese community - they're here from choice, they like it here.

>> The time will come when you will be in some kind of trouble; and no Russian will lift a finger to help you. <<

Maybe so. But I already probably had one of the worst experiences someone like me can have, and it was my Russian friends who rallied-around and helped me. Those others I thought I could count on, did not - and many dropped me like a stone, at the first sign of difficulty.

>> You are carried away by your romance with lyrical russianness or the like <<

Again, you are putting supposition before fact, dear Reza. I have no illusions about Russia. A few weeks ago, after heavy rain, I was going down into the Metro and slipped on the steps - I caught my balance on the handrail, and by gripping hard, avoiding tumbling headlong. I grinned to the woman behind me for giving me space to save myself, and a faceful of grim people echoed her words - "young man, you're a disgrace - 9am, and drunk already".

>> Fundamentally not the IMF nor any agency could possibly have succeeded at straightening out what is essentially crooked <<

Hmmm, it's hard to entice much factual information from you, Reza. How much do you actually know about the Bond Issues which the IMF insisted upon, and can you tell us how and why it collapsed?

"Straightening out what is essentially crooked" is great electioneering patter, but once again, you're dismissing what you don't know with a wave of the hand and a casual put-down.

WHAT is/was "essentially crooked"? The Bonds issue? The Central Bank? The Finance Ministry? The Finance Minister? The "Family"? George Soros? The whole country? The Russian people generally? We're no wiser from your statement than we were before you made it. It's as helpful as saying "ah, Britain, well it's essentially class-ridden", or "India, hopeless, riven by caste divisions", or "America, blinded by materialism, not a hope".

If you'll forgive the joke, you were absolutely right when you said you couldn't express it better than Mr Will :-)) You'll have to do a bit better than this, Reza! Just saying "oh, Russia, hopeless" and walking-away, is not an answer. Well, it might be for you, because you have the luxury of closing your browser window and logging off. Millions of Russians have to live here, like it or not. You do them a grave injustice, to write them all off as hopeless at best, and crooks, dinosaurs, and vipers at worst :-(

I am, I must admit, intrigued by what motivates you in this discussion? Why is it so deeply troubling to you, to hear that life is not miserable and painful for every inhabitant of this country around me? I claim no socialist paradises. Have the hard-nosed multinational companies here in Russia been conned by Russian lyricism too? Their prognosis is quite different to your fatalistic damning of this country :-)

>> what I have heard Russians say about their own country <<

There are always a few who find life better elsewhere - myself included. Don't judge Russia by the half-truths of a few emigrants - and certainly, don't use them as a source of unbiased information :-)

>> I am not as isolated from reality as you wish I were <<

Perhaps you would like to expand upon this, and also tell us how often you come to Russia, and when the last time was? ;-) Please don't disappoint me, after all this, by telling me you are merely the mouthpiece of oft-repeated hearsay?

>> And I predict that within ten years your own Russian romance will come to an abrupt end <<

Well, it's lasted 18 years so far, but give me time, and I'll see what I can do to help you nourish the irrational anger and contempt you bear this country and its people :-(

Dr W.
(who lives alone in Moscow - in case you thought some Russian romance underpinned my open-mindedness? :-)

[Dr_Woland]

Hi Reza

What a pity - I was hoping for some of your own views about the IMF. Instead of which, we get a no-name pundit from an undisclosed source complaining about... uninformed pundits! Hilarious stuff! :-) Well, let's see what your latest darling has to say for himself....


>> It was the IMF's free-market prescriptions during the 1990s, many Russians believe, that put millions out of work, ruined the ruble and pitched the country into its 1998 financial collapse. <<

Many Russians believe this because, well, the IMF actually admitted it, and this was supported by an in-depth investigation by the BBC, and Arthur Andersen, and... well, I think you remember all those names? I'm sure "James Arnold" knows better than all those experts. Of course, neither he, nor you, Reza, have shared their inside knowledge on what DID cause the 1998 meltdown if it was not the IMF funds-default. Please do us a favour? If you don't know about this stuff, please don't pretend a knowledge of it, because constant repetition of baseless accusations of "crookedness" does not make it true, and does not elucidate the situation further :-(

>> The government's usual tactic has been to promise the IMF sweeping reforms, pocket the money and - oops - deliver nothing <<

Mr Arnold's pig-ignorance betrays him. The Finance Ministry followed IMF instructions to the very letter - and the result was the 1998 September Crisis. Perhaps you could tell me which of the IMF's (insane) prescriptions was NOT implemented? Or else, you might consider getting your info from better-informed sources than Mr Arnold? :-) (so what ARE his sources? At present reckoning he's outclassed by the taxi drivers...)

>> But it's also been one of the best at repaying. During the first seven months of this year, Russia has repaid over $3.6bn to the Fund, only Brazil repaid more. <<

Is this the useless country peopled by crooks and cheats you mentioned earlier, or a different Russia we had not heard of?

>> First, one great variable in Russia's economic outlook is whether it is able to reach some sort of accord with the Paris Club, a group of sovereign creditors to which Russia owes around $42bn. <<

This is true. Mr Arnold omits to mention that they already reached accord with the London Club, which was an even bigger hurdle to jump. Part of such accord depends on trust, and performance. You, Reza, would have us believe that Russians cannot be trusted whatsoever. The London Club believed otherwise.

>> . By the end of its tenure, the Yeltsin regime was regarded as little more than an IMF puppet <<

Which, indeed, it was. It did anything the IMF wanted, and paid the price for their incompetence (and some might say, their own lack of self-awareness). Russia has now learned that being able to lend money is no guarantee of financial rectitude whatsoever, and is wisely distancing itself from the IMF and its "amateur-night" policy-makers.

>> Given how little the Yeltsin regime listened to IMF advice <<

WRONG, WRONG, WRONG, WRONG. Where do you get these idiotic pundits FROM, Reza? "When the facts don't fit your bigotry, then make-up some NEW facts that do". Pathetic, the work of an amateur!

>> But it might shut up the amateur pundits who drive Moscow's taxis. <<

For someone so phenomenally ignorant, Mr Arnold, you sure have a high opinion of yourself. But tell me this, Mr Self-Important....

1) To what do YOU attribute the 1998 Financial Crisis? <no answer, because he doesn't even understand the question, or the issue, and doesn't even get the basics right, or lies about them.>

2) The IMF pledged HOW many tranches of funding in 1998? <he doesn't know>

3) Russia delivered on all the figures it was asked to, despite rocketing instability which Nemtsov warned the IMF about three times in telegrams which were unanswered. What was the IMF's response when the final tranch of funding came due for draw-down? <he has no idea what any of this is about>

If I were you, Mr Arnold, I'd take the cab more often. They may know little, but they know more than you do.

What hilarious Western arrogance, combined with arrogance. Arnold cannot believe that the IMF might ACTUALLY have got it wrong, so he rewrites history to say the Russians didn't hit target when they did - because, hell, the IMF can't be wrong, eh? Must've been the Russkies!! Mind you, I can't prove that. And I ain't gonna try either, says James Arnold. I'll just write crap about taxi drivers, in lieu of supporting facts for my (unstated) contrary position.

Worth reading - Boris Nemtsov's memoir about the events leading-up to the Crisis, which was published in "Ogonek" in spring 1999.

Worth hearing - "The Causes Of The Crisis" - a two-hour (2-part) BBC Radio Documentary, which analysed the 1998 Crisis in depth, with interviews with top IMF officials, Boris Nemtsov, and senior analysts from multinational financial corporations. (no taxi drivers were interviewed).

Reza, I've asked you before, and yet you post this stuff as a reply. PLEASE TELL US, WHOM YOU HOLD ACCOUNTABLE FOR THE CRISIS OF 1998 IF NOT THE IMF?? You consistently post material which denies the IMF's culpability. You presumably believe what you post? So please ....

.... tell us?

Dr W.

[oca]

JK:

I am sad about your posting. Did you have breakfast this morning? Ypo sound so bitter and caustic indicting a whole country "stupid americans" VietNam, Kosovo, Hiroshima, etc. Are you going to overlook Chechyna, Afaghanistan, and other places and countries crushed by brute force by the armed forces of Russia (Former Soviet Union). I do not see postings where the authors will call Russians "stupid Russians".. that is not very smart, because it creates animosity and a need for revenge. Study World History (from different sources) so you can have a better perspective and feel of world politics, even at an amateur level. What I am trying to do is to defuse an angry mind and re-channelize it to be more inquisitive in a constructive way. I am always trying to learn by reading other peoples postings. Do not fall in the practice of bad-mouthing an individual, a country or whatever. It hurts you more that anybody else.

[Reza_Rahmani]

I'm no strong fan of the IMF, but let's hear a Russian discuss the 1998 crisis:

RUSSIA AND THE IMF
testimony by
Dr. Andrei Illarionov
Director, Institute of Economic Analysis
September 10, 1998


Prepared for the hearing of the General Oversight and Investigations Subcommittee of the Banking and Financial Services Committee of the United States House of Representatives, concerning the recent efforts by the International Monetary Fund (IMF) to provide aid to Russia.
Mr. Chairman and members of the Committee, ladies and gentlemen:
I am pleased to be here to discuss the relations between the International Monetary Fund (IMF) and the Russian Federation in recent years.
Basic Facts
The Russian Federation became a member of the IMF on June 1, 1992. Russia¡¦s quota in the IMF¡¦s capital is equal to 4.31 billion Special Drawing Rights (SDR), or about $5.7 billion. Given its high quota, Russia was allocated a Directorship at the IMF. Over the past more than 6 years of its membership, Russia has received financial assistance from the IMF through the following programs:
„h Standby arrangement: August 5, 1992 ¡V January 4, 1993. Amount approved is SDR 719 mln. (approximately US$ 1.1 bn).
„h Systemic Transformation Facility (STF), 2 purchases: July 6, 1993 - April 10, 1995. Amount approved is SDR 2.07 bn (US$ 2.9 bn).
„h Standby arrangement: April 11, 1995 ¡V March 26, 1996. Amount approved is SDR 4.31 bn (US$ 6.8 bn).
„h Extended Fund Facility (EFF): March 26, 1996 ¡V March 25, 1999. Amount approved is SDR 6.90 bn (US$ 10.0 bn). Renewed on July 20, 1998 through March 25, 2000; amount approved is SDR 10.5 bn. (US$ 14.1 bn).

As of September 1, 1998, the combined total of credits provided to Russia by the IMF was SDR 14.14 bn (worth approximately US $18.8 bn), a sum roughly equal to 328% of the Russian quota. In absolute terms, Russia is currently the IMF¡¦s largest borrower; in relation to its quota, it is the fifth largest borrower after Korea (which has borrowed 1576% of its quota), Mexico (384%), Thailand (366%), and South Africa (334%). The latest program approved by the IMF Board on July 20th of this year, if it continues, will increase Russia¡¦s proportional use of its quota to 430.9% by the end of 1998, which will make it the second largest borrower, in quota terms.
The Dichotomous Nature of the IMF¡¦s Approach to Russia
The IMF¡¦s policy towards Russia deserves both praise and criticism. However, as is often the case, the Fund is frequently applauded when it does not merit praise, and criticized for actions and policies that are quite appropriate. The Fund¡¦s dichotomous approach to Russia reflects both economic and political considerations.
IMF policies driven by its mandate to act as an institution focusing on economic issues in a number of countries have been productive and successful. The Fund has made significant contribution to the development and implementation of a rather thoughtful and responsible economic policy by Russian decision-makers, particularly in the early 1990s.
Personal contacts between the IMF representatives (including participants in the Fund missions to Russia) and Russian officials has been crucial for the education of the latter in basic economics. Thanks to regular discussions of current events, representatives of the Russian executive and legislative branches have markedly improved their understanding of economic issues.
IMF professionals have also played a significant role in helping their Russian colleagues to adopt the internationally accepted statistical reporting standards. Since April 1996, the IMF¡¦s official publication International Financial Statistics is publishing Russian data, which is now prepared in accordance with international economic and financial requirements. As a result, Russian authorities now regularly release statistics on Russia¡¦s economic, monetary, foreign exchange and financial situation. It is difficult to overestimate the significance of this fact as it became an important contributor to the eventual fall of the ¡§iron curtain¡¨ that blocked for decades the information about Russia¡¦s economy from the Russian public as well as from the rest of the world. Criticizing some aspects of the IMF¡¦s policy approach to Russia, one should not omit or forget these facts.
Moral Hazard
On the other hand, the IMF¡¦s attitude towards economic policy carried out by the Russian authorities was and remains timid, inconsistent, and subject to permanent compromise. In Russia, the Fund does not apply the universal and equal criteria that are used in Fund programs in other countries. Fund representatives negotiating with Russian officials have almost always been willing to compromise not only on the conditions generally imposed on other countries, but also on those previously developed specifically for Russia. The marked softening of conditions set forth in original agreements between the Fund and the Russian authorities, the constant revision of conditions stipulated in initial agreements, as well as criteria and requirements have become an unfortunate tradition.
Not a single one of the IMF programs developed in coordination with Russia has been executed in full (for example, see Table 1). Despite this, the IMF continued to provide larger and larger credits to Russia (see Table 2). This approach has led to serious tensions among other IMF member-countries who were concerned about the special priviledges enjoyed by Russia which were not conditional upon the implementation of specified performance criteria. This tension has been expressed not only in sharp discussions among Fund directors, but also in the lack of unanimity in the vote to provide Russia with the EFF credit on July 20, 1998.
However, the most important negative consequence of the Fund¡¦s approach have been felt in Russia itself. Decisions to provide financing for Russia, motivated by political rather than economic considerations, have given rise to the problem of moral hazard. For several years, the Russian government and Russian society as a whole turned out to be effectively spoiled, as they have been granted unearned financial assistance. As a result, Russian economic policy has not only been inconsistent, but it has seriously diverged from the economic policy conducted in a majority of countries in transition, having become even more irresponsible than it was before. The most evident example of the latter is decisions of the Russian authorities undertaken on August 17, 1998, that will be discussed in details below.
Moreover, the Fund itself has made a series of significant errors in assessing the economic situation in the FSU, and this has negatively impacted on the design of economic policies for Russia. In 1992-93, the Fund was in favor of a unified ruble zone for ex-USSR countries, and energetically opposed the introduction of national currencies by these countries. The consequence of this strategy was keeping the so-called ¡§technical crediting¡¨ by Russia to former republics of the USSR, which cost Russia around 8% of its GDP in 1992 and over 3% in 1993.
In 1994-96 the Fund provided financial assistance to Russia at the time when the Russian government has undertaken an adventurous war in Chechnya, that means that the US and other countries taxpayers¡¦ money could be practically used in military purposes.
In 1995-96, the Fund¡¦s program documents were based on inaccurate estimates of the GDP deflator and the rate of growth of real GDP in Russia. These assumptions artificially increased the nominal Russian GDP by 17.5% in 1995 and 28.3% in 1996 (see Table 3). As a result of the inflated GDP figure, economic indicators measured as a percentage of GDP were incorrectly diminished, which in turn led to the design and adoption of incorrect policy recommendations. For example, the size of fiscal activity of the general government in Russia appeared substantially lower than it actually was - by 12-14% in 1995, and by 25-30% in 1996 (see Table 3). These inaccurate assumptions created the widely accepted but enoneous impression among the international audience that the fiscal burden in Russia was inappropriately low and was even getting lower. This belief has also led to the regularly repeated calls for increased taxation in the Fund programs for Russia.
The Latest IMF Package (July 20, 1998)
The clearest example of the Fund¡¦s misguided approach to Russia is the collapse ¡X in less than a month ¡X of the program approved by the IMF Board on July 20, 1998. The program has failed so quickly and so obviously because it was based on wrong assumptions, set unrealistic targets, and provided misguided policy recommendations.
The Fund program of July 20, 1998, was based on a doubtful assumption that it was possible roll over the main bulk of domestic debt maturing in the fall of 1998. In the summer of 1998 this assumption became evidently unrealistic due to the clear unwillingness of investors to purchase Russian debt securities with annual yields less than 70-80%. At the same time, gap between regular federal government revenue and expected federal government expenditure widened up to R40-60 bn. The average monthly payments on government debt in the fall of 1998 should reach R40-45 bn (approximately R35-40 bn on domestic and R6-7 bn on foreign debt), plus the monthly expenses of the federal government on its regular activities at R28 bn as it was budgeted, or R18-20 bn as it was cut the first 7 months of 1998 that caused heavy budget arrears. At the same time, the average total federal budget revenues in January-July 1998 were only R21 bn a month.
The Fund program set a number of unrealistic targets to be met by the Russian authorities, including those for the rate of inflation, real GDP growth, and the trade balance. The annual inflation rate for the whole of 1998 was projected at 7,2%; in reality it is already 20% for the first 8 months, and is expected to be 60 to 100% in the best case scenario by the end of 1998. The target for the real GDP growth in renewed program was set at minus 1%, while in the first 7 months of 1998 GDP has already fallen by 1.5%, and in July alone, year-on-year, it fell by 4.5%. The trade balance was projected to be positive at US$ 7 bn; in reality in the first half of 1998 it has already fallen to US$ 0.9 bn (1).
The most serious mistakes were made by the Fund in defining targets for the exchange rate and fiscal policies. Exchange rate was projected to be on average 6.22 Ruble per US$1 in 1998, and 6.53 Ruble per US$1 in 1999; in reality it fell to at least R20 per US$1 in early September trade, just in 1.5 months after the IMF¡¦s Board has approved the program. The basic reason for that was a steep fall in gross reserves (foreign exchange plus gold) which were projected to increase up to US$ 29.6 bn by the end of the year. In reality they fell from US$ 19.2 bn in June, despite receiving the US$ 4.8 bn tranche from the IMF, to US$ 15.1 bn in mid-August and to US$ 12.3 bn in early September. As a result, the basic monetary equation, namely, foreign exchange reserves-to-monetary base ratio, fell to 35-40%, which made the devaluation of the ruble absolutely inevitable.
The fiscal policy target - annual revenue collection by the Russia¡¦s federal budget in the program was kept at Ruble 290 bn for 1998 (see Table 4). This assumed an increase in monthly collection of revenues from roughly R21 bn in the first 7 months of the year, to R28.5 bn in the last 5 months of 1998 ¡X an increase of 35.7%. Given that the average inflation rate for June - July had falled to the negligible 0.1-0.2% a month, meeting this criterion actually required an almost overnight real increase in average monthly budget revenues of 34% which did not look realistic. Moreover, the well-known facts of the fall in real GDP in June 1998 by 1.2% year-on-year along with the depressed state of international commodity markets (one of the main sources of Russia¡¦s budget revenues) made it clear for any observer of the Russian economy that this fiscal target was totally impossible to meet.
Finally, the latest package prepared by the Fund also included inappropriate policy recommendations for the Russian authorities in two crucial spheres - exchange rate and fiscal policies.
As for the exchange rate policy, the Fund program stipulated:
¡§32. The staff is in agreement with the authorities that the monetary and exchange rate policy strategy should remain broadly unchanged for the remainder of 1998. The sharp fall in inflation in recent years has been a singular achievement and should not be placed in jeopardy. Accordingly, the CBR intends to continue its policy of an exchange rate crawl within the wider band, aimed at avoiding a significant real appreciation of the ruble. The CBR would gear interest rates policy towards that broad objective, and allow the liquidity impact of foreign exchange sales to be reflected in domestic liquidity conditions. The implementation of this policy should permit a substantial recovery in gross international reserves as confidence returns and capital flows turn around¡¨ (2).
In reality, given the low level of international reserves, the current account deficit since the second quarter of 1997, and growing capital flight from Russia, it was critically important to implement serious changes in monetary and exchange rate policy as early as in December 1997 and certainly in May or June 1998. The postponement of such changes led to the aggravation of currency crisis and to a substantially higher rate of devaluation of the ruble.
As for the fiscal policy, the Fund program stipulated:
¡§18. The government has commited to moving from approximate primary balance in 1998 to a primary suplus of Rub 84 billion (or 2.9 percent of GDP) in 1999. This will be accompished largely through a significant strengthening in revenue performance from 10.7 percent of GDP in 1998 to 13 percent of GDP in 1999¡¨(3).
And also: ¡§21. The mission and the authorities agreed that further substantial expenditure compression is likely to be difficult to realize, and the adjustment in the primary balance in 1999 will need to rest largely on an increase in revenue¡¨ (4).
This erroneous approach has its roots mainly in the wrong data on the Russian nominal GDP that is used by the Russian Statistics Committee, the IMF, and the World Bank. Calculations of the GDP are based on a methodology that differs from the international standard, since Russia¡¦s GDP includes the Goskomstat¡¦s estimates of the so-called ¡§grey¡¨ or ¡§shadow¡¨ economy. Correcting (or ¡§cleaning¡¨) the GDP figures of such estimates produces a much more accurate and therefore much lower numbers for the actually produced GDP. It means that the total fiscal burden on the ¡§white¡¨ economy in Russia in reality turns out to be substantially heavier that it seems when the official data are used (see Table 5).
For instance, the actual budget revenue as a ratio of ¡§white¡¨ GDP in the January-July 1998 was 14.5%, and not 10.7% as it was reported in the IMF documents. According to the IMF program, it would increase to 17.6%, not to 13.0% of GDP, or by more than 22% in real terms. As for the general government, its revenue according to the IMF program would increase from 43.2% to at least 47% of the actual ¡§white¡¨ GDP, and therefore would increase, not reduce the fiscal burden on the Russian economy that is already heavy enough. And this means that the main policy prescription proposed by the Fund, namely, - ¡§to raise revenue, not to reduce expenditure¡¨ - happened to be wrong.
The mistakes made by the Fund in its program of July 20, 1998, led almost immediately to the worsening of macroeconomic situation in Russia. That is why not surprisingly, but perhaps unprecedentedly, that within 3 weeks after the IMF¡¦s Board has approved the program the main indicators of financial markets in Russia were substantially worse than they were 3 weeks before the decision (see Table 6). Between July 20th and August 17th stock market fell by 43%, and since August 17th until September 8th by another 42%; ruble exchange rate for the last one and half month fell by 71%. According to the preliminary data from the Russian Ministry of Finance, the total federal budget revenue in August was R16 bn, which means it did not increase by 35% as it was envisaged in the program, but fell by roughly 30% in real terms compared to the average level in the first 7 months of 1998. Attempts to implement the wrong program caused the US$ 4.8 bn tranche given to the Russian authorities to be spent in less than a month not on softening Russia¡¦s debt servicing problem, but on defending an unrealistic overvalued exchange rate, i.e. mainly on subsidies for domestic and international investors that were in hurry leaving the Russian debt and equity markets.
Attempts to implement wrong program elaborated by the Fund and proposed to Russia have logically led to the August 17 decision of the Russian authorities to devalue the ruble, to default on ruble-denominated debt, and to announce a 90-day moratorium on servicing dollar-denominated debt by the Russian private entities. As a result, the largest financial assistance package in the IMF history has failed in less than a month, international and domestic investors had borne multibillion losses, while Russia has fallen in one of the sharpest and deepest financial, economic and political crises in its history.
1) All projected numbers are taken from: Russian Federation-Use of Fund Resources-Request for Augmentation of Extended Arrangement and Request for Purchase Under the Compensatory and Contingency Financing Facility. IMF, EBS/98/120. Supplement 1. July 17,1998, pp. 26-27; all actual data - from official publications of the State Statistical Committee of the Russian Federation (Goskomstat).
2) Russian Federation-Use of Fund Resources-Request for Augmentation of Extended Arrangement and Request for Purchase Under the Compensatory and Contingency Financing Facility. IMF, EBS/98/120. Supplement 1. July 17,1998, p. 13.
3) Ibid., p. 9.
4) Ibid., p. 10.