Journal Issue

Why resume lending? Russia’s current economic policies are deserving of IMF support

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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Since joining the IMF in 1992, Russia has made progress in moving from central planning to a market-based economy, with the support of the IMF and the international community. It is a reform effort whose scale and ambition have few parallels, and whose outcome is of vital importance both for the people of Russia and for the rest of the world.

In view of what is at stake, the relationship between Russia and the IMF is also of vital importance. It is one that has, over the past seven years, been marked by both successes and disappointments. As Russia moves forward with the backing of a new IMF loan, there are reasons to look to the future with some hope.

Nevertheless, Russia’s relations with the IMF are passing through a period of intense public scrutiny, and it is necessary to answer the many voices questioning the purpose of current lending to Moscow, the record of earlier programs, and the use of previous IMF loans.

Why did the IMF resume lending to Russia in July 1999 (see IMF Survey, August 2, 1999, page 247)? For the past several months Russia has been carrying out economic policies that deserve support: a cautious monetary policy, a reduction in the fiscal deficit, and progress in righting the reversals in structural reforms that occurred after August 1998. Moreover, the government, the central bank, and the parliament had implemented many key macroeconomic and reform measures in advance of the latest loan, and more are scheduled over the period of the program. All this explains why on July 28 the Executive Board, representing the IMF’s 182 member countries, unanimously approved an SDR 3.3 billion (about $4.5 billion) Stand-By credit over 17 months. The program is available on the IMF website (

In most respects, the program, which was adopted by both the Primakov and Stepashin governments and has been broadly endorsed by Prime Minister Vladimir Putin, contains updated versions of the measures in the July 1998 program of the Kiriyenko government that was interrupted in August 1998.

Need to reform

Even when the program is implemented, there will, of course, remain the need for radical reforms, including additional steps to overcome nonpayment and corruption, impose the rule of law, create a favorable climate for private business, and reform key sectors such as agriculture, energy, and social services. The IMF will continue to urge Russia to make more progress in these areas. However, it is in the setting of an IMF program, when there is a continuous dialogue between Russia and the IMF and where departure from agreed-upon policies can halt IMF lending, that the prospects for economic reform are greatest. If the IMF had signaled after August 1998 that it would provide no new lending to Russia even if it adopted appropriate policies, Russia’s willingness over the past year to improve economic policy and mend relations with its creditors would have been much less evident.

The second critical question asks why, even if the current loan is fully justified, the IMF has lent so much to Russia over the years when economic reforms have moved so slowly. The response is that we underestimated the complexity of the whole transition process, in which the economic and political dimensions are intertwined. So, of course, did most observers. As a result, insufficient attention was paid, not least in Russia’s own priorities, to the development of institutions and changes in governance that are needed to support institutions.

Similarly, the fact that the authorities adopted an excellent economic program in the past did not mean that it would be implemented. If the economic programs the IMF has supported in recent years had been fully implemented, the Russian economy would look very different today. This is why, looking forward, the IMF’s membership has insisted on numerous prior actions before approving the loan and why further disbursements of the loan will depend on continued implementation of the program.

Use of IMF loans

Part of the skepticism surrounding IMF lending to Russia has, not surprisingly, been prompted by the various allegations that money from the IMF has simply disappeared abroad. One allegation is that capital flight has been financed with IMF money. Another is that the money was diverted into the wrong hands or even stolen. It is true that loans from the IMF eased Russia’s external financial situation, although they were small compared to total capital flight and to Russia’s other sources of foreign exchange, especially export earnings. But the capital flight was caused, not by the loans themselves, but by the failure to establish economic and political stability and to create a favorable climate for investment. Despite the disappointments of the past, we believe that the current program offers a good chance of gradually improving the economic situation and discouraging capital flight.

Regarding the allegation that IMF money was diverted, there is no evidence that any of the IMF’s money was stolen or otherwise misappropriated. The PricewaterhouseCoopers reports on the use made of a tranche of IMF money drawn by Russia in July 1998 and the role of the central bank subsidiary, Financial Management Company (FIMACO), did not find any such evidence. These reports were commissioned by the central bank at the insistence of the IMF and have been published.

PricewaterhouseCoopers did, however, find instances of misreporting to the IMF a few years ago when domestic transactions by the central bank were channeled through FIMACO. The problem is not the nature of the transactions themselves—the central bank had lent to commercial banks and the government before, and has done so since. But hiding the transactions created a misleading impression of the true state of reserves and monetary and exchange rate policies, and may have caused the IMF to disburse funds in 1996 that would otherwise have been delayed. This was a total breach of the trust on which the relationship between the IMF and its members must rest. But Russia now has committed itself to report data to the IMF in a more transparent and comprehensive way, and it knows the very serious consequences of any future misreporting.

A common thread runs through these questions about IMF support for Russia: is it better for the IMF to stand aside in the face of Russia’s challenges or to remain engaged? The world community, through the members of this institution, has clearly expressed the view that Russia continues to deserve support as long as it is taking appropriate steps to tackle the difficult problems it faces.

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