Economic Policy Views of the Russian Authorities

Throughout the 1990s, the Russian government’s public position was to pursue liberal economic reforms that would lead to the rapid establishment of a market economy. The intellectual leadership for these policies was provided by a relatively small group of economists and others who were committed to market reforms. The starting point was the government formed by President Boris Yeltsin in November 1991, in which Yegor Gaidar was the deputy prime minister responsible for economic reforms. Gaidar, who remained in government until December 1992 (for the last six months as acting prime minister) and returned for four months as first deputy prime minister in September 1993, and Anatoly Chubais, deputy prime minister from November 1991 until early 1996 and again in 1997, were the main leaders of the reform group.

However, there was opposition within the government to economic reforms. The strongest strand of alternative thinking came initially from those who saw the primary economic function of government as supporting production. Their views reflected the Soviet system rather than a market economy, in which enterprises adjust to changing conditions—especially changing relative prices and profitability and the collapse in demand for military products—within a framework set by the government. They did not wish to return to central planning, but they sought to use the government’s fiscal and regulatory powers, and the allocation of Central Bank of Russia (CBR) credits, to encourage the continuation and growth of production, even in sectors that objectively had little future. Various deputy prime ministers (for example, Oleg Soskovets, Oleg Lobov, and Vladimir Kadannikov) and ministers dealing with sectors of the economy formed the heart of this group. Viktor Chernomyrdin, prime minister from December 1992 until March 1998, was in the same camp by background, but as prime minister, he had to listen to the president and take account of reformers’ views. Yeltsin’s own position, as revealed by his speeches and appointments, suggested that he was close to the reformers, although he sometimes turned against them when politics required. Parliament also had an influence on economic policy through the legislation it passed. The Supreme Soviet, until it was dissolved in September 1993 (and its buildings stormed in October), and the Duma, from its inauguration in December 1993, were more often on the side of protecting production than supporting liberal economic reforms.

The opposition to the reformers not only had different ideas about economic reforms; in many cases, they also had more operational experience and knew how to make the bureaucracy work in pursuit of their interests or to impede the reformers’ policy initiatives. This was especially true in 1992, when the reformers underestimated the bureaucratic and other obstacles in their way and placed too much faith in Yeltsin’s ability to make things happen. Gradually, the reformers learned how to get things done, with Chubais emerging as a particularly skilled operator.

Economic policymaking suffered not only from differences of view within the government but also from the weakness of the state itself. A vacuum had been created by the collapse of the coercive communist system and the Communist Party network, which together had ensured that government policy was implemented. This vacuum was filled by various business and interest groups as well as by criminals. Many businessmen and some criminals had already learned in the Soviet period how to exploit loopholes in the system; for example, by buying goods at controlled prices and selling them at black market prices, and by bribing officials whenever necessary. Regional governors and legislators openly defied the federal authorities. Yeltsin was not able to retain the enormous authority he had acquired from standing up to the leaders of the coup in August 1991 and precipitating the breakup of the Soviet Union, and he was handicapped by poor health, especially after 1995. He tried to retain what influence he could; for example, by agreeing to transfers of power to regional levels on an ad hoc basis.³ But neither he nor the government ever had enough broad-based popular support to pursue economic reforms without at least tacit support from powerful groups in Parliament, the regions of Russia, and the economic sector.

Business leaders had a very important influence on economic policy in the early 1990s. Enterprises were finding it difficult to adapt to the new environment, in which they had to react to financial signals (e.g., changes in profitability and prices) rather than instructions from economic planners. They sought protection or financial assistance from the government and the CBR to help them through the adjustment phase. While in public they usually asked for temporary assistance, it is likely that in practice many hoped for permanent assistance or even an end to the market reforms that were causing them so much difficulty. Viktor Gerashchenko, chairman of the CBR from July 1992 to November 1994, was initially sympathetic to the view that the CBR and the government should deemphasize the goal of cutting inflation and instead support production, but he gradually moved away from this position. Beginning in the mid-1990s, a small group of businessmen, known as the oligarchs, became increasingly powerful. They consolidated their power dramatically in the loans-for-shares operation in late 1995 and as a result of their support for Yeltsin’s reelection campaign in 1996. They used this power to influence both the economic policy agenda, including the preparation of legislation, and the implementation of policy. They sponsored members of the Duma and even government ministers.⁴ They made special arrangements with the government about the amount of taxes they would pay. They were not opposed to market-oriented reforms in principle and, indeed, provided a bulwark against a return to a planned, state-owned economy. But they sought to ensure that their own businesses were protected from competition and had favorable financial dealings with the government (through sales to government and, for enterprises with government stakes, dividend payments, as well as through privatization and tax deals). When other businessmen saw what the oligarchs were able to get away with, they all tried to emulate them, further weakening the state.⁵

The lack of consensus in favor of liberal economic reforms among the Russian leadership and the weakness of the Russian state were the two most important reasons why economic reforms did not progress more smoothly, despite the stated policies of the government.

IMF Policy Advice

The IMF’s basic view of the necessary economic reforms was that it was important to move as quickly as possible with all the key changes, especially macroeconomic stabilization, liberalization, and privatization.⁶ The IMF recognized that many reforms would take years to complete, especially the construction of the legal infrastructure for a market economy, privatization and restructuring of large enterprises, and the creation of a market system for banking and finance.⁷ But this was not seen as a reason for postponing the main stabilization and liberalization measures, with some specific exceptions, such as gradually rather than suddenly raising the prices of public utilities and housing rents, and reducing export taxes on energy and other basic imports.⁸ Thus, IMF views were similar to those of Russian reformers and many foreign observers. As a consequence, the IMF was often in the position of endorsing policies proposed by reformers, with little need to push for major changes in them.⁹

Although this paper does not attempt to analyze the quality and relevance of IMF policy advice, a few brief comments regarding the case for rapid reforms may help set the scene.¹⁰ First, the disintegration of the old central planning system had reached such an advanced stage by the end of 1991 that there was little scope for pursuing a gradual strategy in which the new system would be phased in as the old one was dismantled. Second, in transition countries (such as the Baltic countries) that were able to implement a strategy of rapid reform, living standards rose from their low point earlier and more rapidly than in countries that reformed more slowly. The countries that sought to maintain many features of the old system, such as Belarus and Uzbekistan, appeared to avoid as sharp an initial fall in GDP as other transition countries, but they are now growing more slowly and still face some potentially very disruptive reforms.¹¹ Third, the many difficulties of the reform process in Russia, especially those stemming from the opposition from old vested interests and new powerful oligarchs, would not have been more manageable had the reforms been introduced more slowly. The underlying problems of the collapse of the old system and the weak state would still have presented major challenges. For these and other reasons that are discussed in more detail elsewhere, the IMF’s view of the appropriate reform strategy has remained broadly unchanged despite the difficulties Russia has endured.¹²

In the early 1990s, IMF advice was directed primarily toward avoiding hyper-inflation and bringing inflation down quickly to low levels, to create conditions for the resumption of growth. In those years, the IMF emphasized the necessity of tight monetary and fiscal policies to contain inflation. This contrasted with the alternative view, popular in some Russian circles, that more credit expansion was needed to stimulate output. In this view, inflation was the result of the absence of competition, not of excessive monetary growth. While the IMF was concerned in the early years about both monetary and fiscal policies being too loose, once inflation had been brought under control by the end of 1995, the IMF focused more sharply on fiscal policy. This reflected the difficulties the Russian government encountered in attempting to tighten fiscal policy, difficulties that culminated in the financial crisis of August 1998. After 1999, with macroeconomic stability reestablished and the economy growing at a good rate, the IMF’s policy advice included such issues as how to manage monetary policy in the face of large increases in international reserves and medium-term fiscal policy in a world of fluctuating oil prices and revenues.

A summary of the broad policy issues on which the IMF advised cannot capture the full range and depth of the many detailed aspects of macroeconomic policy formulation and implementation on which the IMF gave advice and technical assistance. Missions from IMF headquarters and staff in the Moscow office discussed with their Russian counterparts in the CBR, the ministry of finance, and other government departments all the relevant details, such as how to set monetary policy to achieve a desired reduction in inflation, the design of instruments for controlling the money supply, the creation of a treasury in the finance ministry, and the meaning and importance of quasi-fiscal deficits. (See the Appendix for a description of the channels of IMF advice.) Whereas the reformers were often familiar with the broad policy issues they discussed with the IMF, they and the technicians in the CBR and government did not necessarily know how to give operational meaning to their policy choices or how to handle many of the issues that arose. The IMF played a major role in transferring knowledge about such issues, all in the context of market-oriented macroeconomic policies aimed at producing low inflation and a favorable environment for growth.¹³

While the official policy was to request technical and financial assistance from the IMF, and many individual Russian officials benefited from discussions with their IMF counterparts, it was not easy for Russians, individually or collectively, to seek and accept advice from IMF staff members. Russia saw itself as a strong, independent nation with centuries of history as a major European power and recent experience as a technically sophisticated world superpower. Many Russians, especially older and more nationalistic ones, felt that it was humiliating to have to negotiate with the IMF for loans and to adjust economic policies to IMF requirements. IMF staff tried to be sensitive to this need for country “ownership” of economic policies, which is an issue in the IMF’s relations with all sovereign member states, albeit magnified in the case of Russia. But there was inevitably some tension in the relationship between the IMF and Russia arising from Russia’s self-image and history.¹⁴

The IMF’s policy and technical advice focused on macroeconomic issues and the structural and institutional reforms needed in the monetary and fiscal areas to design and execute macroeconomic policy. But the IMF was fully aware that the major—and most difficult—parts of the transition to a market economy were the structural and institutional reforms of the whole economic system. This was noted as early as April 1992 by Michel Camdessus, IMF Managing Director from 1987 to 2000, who placed the “speedy adoption of a legal institutional framework” first out of five broad reform areas.¹⁵ Macroeconomic stabilization was the third reform area on his list. The IMF took every opportunity to emphasize, in discussions with Russian authorities and in public, the importance of the broad structural and institutional reform agenda. A failure to make sufficient progress with structural and institutional reforms would not only threaten macroeconomic stability, it would prevent the resumption of economic growth. An example was the initial response of many unreformed enterprises to the sharp changes in demand and relative prices at the beginning of the transition. Rather than make internal adjustments and seek new products or markets, as enterprises that operate under strict financial discipline in market economies would do, they sought credits, tax breaks, and subsidies from the authorities, thereby complicating the task of macroeconomic policy.

Although the IMF recognized the paramount importance of structural and institutional reforms, it was not able to give much practical policy advice in these areas. Its mandate was to focus on macroeconomic issues, while other international financial institutions (especially the World Bank) focused on the structural and institutional areas.¹⁶ Nevertheless, the IMF worked closely with the World Bank to ensure that the government included important structural reforms in its programs. The World Bank was responsible for the discussions with the government about the details of the reforms. The IMF’s role was to assist in identifying broad reform priorities and to insist that key reforms were included in the programs before the IMF would agree to support them financially. This helped the government to obtain support from the Duma and other groups and to explain its policies at home and abroad.

The high point of the IMF’s involvement in advising on structural and institutional reforms was the preparation, with the authorities and the World Bank, of the government’s medium-term economic program in 1995–96. Many discussions took place and papers were prepared over the six or more months leading up to the approval of the program and of a loan, under the Extended Fund Facility (EFF), by the IMF’s Executive Board in March 1996. The outcome of this work was the structural reform agenda summarized in Box 1. The IMF’s contribution was primarily in the banking, finance, and fiscal areas, although it also tried to keep up the momentum of efforts in other areas. In practice, with the exception of some critical measures in the fiscal area, the IMF did not subsequently insist on the implementation of the original structural agenda. The authorities made rather slow progress in most areas, which raises the question of whether the whole effort was misconceived. The counterargument, which was the prevalent (although not the only) view in the IMF at the time, was that a reform agenda such as this one would strengthen the hand of reformers in government and increase the likelihood that reforms would be implemented. With the benefit of hindsight, one can add that, although structural reforms may have been slow to get off the ground in the 1990s, the acceleration after 2000 probably owes something to the earlier preparations.

It must be admitted that the IMF did not have a significant influence on structural and institutional reforms other than those related to the design and implementation of monetary and fiscal policies (e.g., the introduction of money market instruments, the design of the treasury, and tax administration). This partly reflected the staff’s limited expertise and the IMF’s macroeconomic mandate. More important, the IMF had to focus its efforts on macroeconomic, especially fiscal, issues during the difficult years of the 1990s and had little leverage left to persuade the government to implement its structural reform program. If macroeconomic policies were being successfully implemented, the IMF was usually unwilling to delay disbursements because of problems on the structural side, other than problems with measures (such as those related to revenue collection) that directly affected monetary or fiscal policy.

There were two prominent exceptions to this practice. In January 1997, the IMF postponed a disbursement because of delays in repealing a resolution introducing quotas on alcohol and vodka imports and in differentiating natural gas prices to reflect transportation costs. And in November 1999, a disbursement was delayed (in fact, was never made at all), ostensibly because the authorities did not fully implement various structural measures relating to the CBR’s foreign subsidiaries and its internal accounting and control arrangements. As discussed later, the real reason for this delay was more complicated. These two instances notwithstanding, the Russian authorities understood that the IMF was unlikely to delay disbursements for reasons not directly connected to macroeconomic policy problems. Partly because of this situation, they gave lower priority to implementing the structural and institutional measures in their programs than to macroeconomic measures.

There was quite a contrast between the IMF’s limited influence on structural and institutional reforms and the public perception in Russia and elsewhere that the IMF was responsible for policy advice in these areas and, indeed, for what actually did or did not happen. This perception was reasonable, given that the programs the IMF supported with loans (notably the 1996 program) had a large structural component and speeches by IMF leaders stressed the importance of structural reforms. The media focus on the drama of IMF-Russia negotiations added to the perception that the IMF had influence across a much wider range of policies than was the case. The role of the World Bank, the European Bank for Reconstruction and Development (EBRD), and others who were actively involved in advising on structural and institutional reforms received less public attention. While a general perception that the IMF was responsible for advice and outcomes in the structural and institutional area was understandable, it is surprising that some people who knew what the IMF’s role actually was have continued to hold the IMF accountable for problematic outcomes.¹⁷

Influence of the G-7

The transition of Russia from a planned to a market economy and the associated transition to a democracy was, of course, of great concern to the rest of the world, especially the major western countries. There was some discussion at the beginning of the 1990s about a so-called “Grand Bargain.” This was the name given to the idea that the major western countries would give Russia large sums of money in exchange for deep and sustained economic reform efforts.¹⁸ The main problem with the Grand Bargain was that the western countries were reluctant to spend the large sums of money that were being suggested without evidence that major reforms were being undertaken. They were unwilling even to commit to the idea because of a deep skepticism about whether the Soviet Union—and, subsequently, Russia—really was ready to implement such reforms. Instead, they turned to the international financial institutions (IFIs), which had significant resources as well as the capacity to apply conditionality to any lending.

By not providing large-scale financial support to Russia themselves, the G-7 were effectively assigning two tasks to the IFIs that were sometimes contradictory.¹⁹ First, the IFIs were expected to perform their usual function of lending on the basis of economic policies or projects that met the normal standards of the institutions. In insisting that Russia align its economic policies with the IMF, the G-7 caused Russia to take the IMF’s views more seriously than it might otherwise have done. Second, the G-7 sometimes wanted the IFIs to lend in order to show support for the government (or for President Yeltsin), even when economic policies or projects were not up to the standard normally required by the IFIs. The advocates in G-7 countries of these two tasks were sometimes split between institutions, with the finance ministry being most concerned that the normal standards of the IFIs should be upheld and the foreign ministry wishing to show support for Russia (or not, according to the circumstances) based on broader political and bilateral considerations. The president or prime minister would synthesize these views. The distinction was clear in the United States, where the Treasury Department, to which the U.S. executive director of the IMF reports, supported strict IMF conditionality and the U.S. State Department focused on the political and bilateral issues. The White House generally supported the Treasury position, although sometimes it allowed its impatience to see more IMF lending to overcome Treasury concerns about weak Russian policies. One incident in December 1993 illustrates this: Vice President Al Gore complained in public in Moscow about IMF policies being too tough, to the annoyance of the Treasury Department, which supported the IMF’s attempts to tighten macroeconomic policies (see Box 2).

This situation was unsatisfactory for both the Russians and the IMF. Russian governments thought that the west should be prepared to make available large sums of money without difficult policy conditions attached. This was a small price to pay for ensuring that Russia never returned to communism or confrontation with the west. The Russians resented the need to negotiate with the IMF and the delay this involved. The IMF was unhappy because it feared that the political concerns the G-7 had about making IMF money available to Russia, even when the normal economic policy conditions were not met, might cause the G-7 to push the IMF to lend with insufficiently strong conditionality.²⁰ Although this never happened in an overt way, an atmosphere was sometimes created (for example, at the end of 1993 as described in Box 2 and in 1996–98 as discussed in Section III) in which the IMF felt that it should err on the side of supporting weak policies rather than interrupt disbursements altogether. The Russians understood the situation and sometimes saw negotiations with the IMF as a charade since they believed that the G-7 would ultimately insist that the IMF go ahead with the loans.

Among the G-7 countries, the United States effectively determined the collective position. It was unusual for other countries to initiate approaches different from that of the United States or to strongly oppose U.S. initiatives, except on matters relating to Russia’s debt to G-7 countries. Here Germany, by far the largest creditor, was able to modify U.S. policy positions, which tended to favor more generous debt relief than Germany could accept. The Russian authorities understood the preeminent position of the United States and frequently sought U.S. support to put pressure on the IMF.²¹

To sum up, during the years before the 1998 crisis, while the G-7 helped to create an important role for the IMF in Russia, its political and bilateral interests caused a weakening of the IMF’s influence. Many IMF staff members believed that it would have been better for the Russian economy and for the consistency of the IMF’s position across its member countries if it had insisted on more ambitious policies, especially fiscal policy, before agreeing to lend, and on fuller implementation of agreed-upon policies before resuming lending after a break because of poor implementation. A stronger position would also have embraced some conditions on the effective implementation of structural measures. Managing Director Michel Camdessus and First Deputy Managing Director Stanley Fischer, who were keen to avoid any formal proposals from the G-7, were more prepared to make disbursements on the basis of the best promises and prior actions that the Russians could present. Apart from the G-7 angle, they, together with some staff members, also believed that the IMF’s ability to influence Russian economic policies was greater when there was an active dialogue without lengthy interruptions in lending. The Executive Board was split, with some members doubting the wisdom of continuing to support weak Russian policies, although this rarely led to a rupture in the Board’s traditional consensus. After 1998, and especially after the newspaper stories suggesting money laundering scandals and the renewed fighting in Chechnya in 1999, the G-7 took a much harder line on IMF lending. This was reflected in the IMF’s behavior.

Overview

By the time the IMF had its first discussions with the new Russian government in November 1991, Gaidar and his team already had a clear idea of the economic reforms they wanted to introduce.²² IMF staff teams met with the new government almost from the beginning and sought to provide technical advice, especially on the importance and modalities of designing a consistent macroeconomic policy framework with a quantified program of monetary and fiscal measures to achieve specific macroeconomic objectives. In February 1992, IMF staff helped the Russian authorities prepare a policy program that the government and the CBR then published. The policy program did not contain a quantified monetary program because of a lack of consensus between the government and the CBR, problems arising from other countries’ use of the ruble, and inadequate CBR databases. Subsequent discussions in May, June, and July 1992 about a more detailed program that the IMF could support with financial assistance, after Russia became a member on June 1, built further on this first program. However, the policies themselves were essentially those chosen by the authorities. At the time of the February program, the IMF had little substantive disagreement with the Russians, but in the summer negotiations, the government was already moving toward less tight monetary and fiscal policies in response to pressures from the political opposition to support production. The IMF staff opposed this move, but in the end decided to support the program sought by the Russians in the interest of providing some financial assistance, as desired (and as had been promised) by the G-7.²³

From about April 1992 on, political opposition to the government’s strict monetary and fiscal policies grew sharply. The IMF was criticized by reformers in the government and their western supporters for not providing financial assistance on a larger scale and much earlier than the first US$1 billion approved by the Executive Board on August 5, 1992 (Table 1). The main reason for the schedule was that time was needed to make Russia a member of the IMF and also to agree on an economic program with the authorities.²⁴ The IMF limited the amount of the loan because Russia did not have complete control over its monetary policy as a result of the uncoordinated monetary policies among all the countries that used the ruble. The IMF had, in May, sought to make the ruble area work by brokering an agreement among ruble area countries, but Russia was not willing to share power and the agreement never materialized. Russia would have preferred the IMF to act decisively to end the ruble area. As explained elsewhere (Odling-Smee and Pastor, 2002), the IMF, as a cooperative institution, could not do this as long as some members wanted to retain the area, and it was too early to conclude that a successful ruble area was politically impossible.²⁵ Gaidar (1997, 1999), recognizing the IMF’s rules-based lending policies and the constraints on the speed at which it could move, argued that the IMF was not the right instrument to handle the large-scale political problem of Russia’s transition in 1992, when the situation was so unpredictable. But in the absence of major untied G-7 financial assistance, the IMF was the main instrument available.

Table 1.

IMF Lending to Russia, by Type of Arrangement

(In millions of SDRs)

Source: IMF Survey, various issues.

Table 1.

IMF Lending to Russia, by Type of Arrangement

(In millions of SDRs)

Type of Arrangement		IMF Board Approval Date	Amount Approved	Amount Disbursed
Stand-By Arrangement
	(First Credit Tranche)	August 5, 1992	719	719
Systemic Transformation Facility
	(First Tranche)	June 30, 1993	1,078	1,078
Systemic Transformation Facility
	(Second Tranche)	March 22, 1994	1,078	1,078
Stand-By Arrangement		April 11, 1995	4,313	4,313
Extended Fund Facility		March 26, 1996	6,901	5,105
Extended Fund Facility
	Augmentation	July 20, 1998	1,248	0
Supplemental Reserve Facility		July 20, 1998	3,992	675
Compensatory and Contingency
	Financing Facility	July 20, 1998	2,157	2,157
Stand-By Arrangement		July 28, 1999	3,300	471
Total			24,786	15,596

Source: IMF Survey, various issues.

View Table

Table 1.

IMF Lending to Russia, by Type of Arrangement

(In millions of SDRs)

Type of Arrangement		IMF Board Approval Date	Amount Approved	Amount Disbursed
Stand-By Arrangement
	(First Credit Tranche)	August 5, 1992	719	719
Systemic Transformation Facility
	(First Tranche)	June 30, 1993	1,078	1,078
Systemic Transformation Facility
	(Second Tranche)	March 22, 1994	1,078	1,078
Stand-By Arrangement		April 11, 1995	4,313	4,313
Extended Fund Facility		March 26, 1996	6,901	5,105
Extended Fund Facility
	Augmentation	July 20, 1998	1,248	0
Supplemental Reserve Facility		July 20, 1998	3,992	675
Compensatory and Contingency
	Financing Facility	July 20, 1998	2,157	2,157
Stand-By Arrangement		July 28, 1999	3,300	471
Total			24,786	15,596

Source: IMF Survey, various issues.

The period from mid-1992 until the end of 1994 was one of serious conflict between reformers and their opponents, both inside and outside the Russian government. The outcome was that macroeconomic policies were less tight than the reformers would have liked, as they were forced to bow to pressures from interest groups that sought more CBR credits and budget subsidies. The IMF encouraged the authorities to implement reasonably tight monetary and fiscal policies, and the annual programs agreed to in the early months of 1993 and 1994 (which were supported by loans under the new Systemic Transformation Facility [STF]) were in line with this.²⁶ The Russian authorities were in agreement with these programs, mainly because they had persuaded the IMF that anything more ambitious in terms of reducing inflation and the budget deficit—however desirable—would not be feasible. As noted above, at the time of the negotiations for the 1994 program, U.S. authorities were openly expressing concern that the IMF was being too tough (see Box 2). This stance weakened the IMF’s negotiating position, which was already more fluid than in normal situations because precedents had not yet been set for the strength of programs to be backed by STF loans. While this situation produced a less ambitious disinflation program for 1994 than the reformers and the IMF would have liked, any other outcome for the year would have been unlikely, because the pressures for looser monetary and fiscal policies that built up during the year (including unbudgeted expenditures on agriculture and the Northern Territories) would still have existed.

It is possible to see the 1992–94 period as one during which the reformers, supported by the IMF, were gradually able to move toward macroeconomic stabilization. Sergei Dubinin (1995), who was acting finance minister from early 1994 until October 1994, talked about a hardening of financial policies in a phased manner, to allow the continuation of some inflationary financing until enterprises were able to adjust to the new market conditions. A more accurate description might be that the reformers were doing the best they could to stabilize the economy, winning battles whenever possible and otherwise retreating. The 21 percent collapse in the ruble exchange rate on Black Tuesday (October 11, 1994) was a direct consequence of the loose monetary policies. Dubinin (1995) noted that this collapse signified the failure of the gradualist strategy. It certainly led to a significant change in attitude among Russian leaders outside the reformist group. Chernomyrdin, in particular, was determined to pursue policies that would avoid a repetition of such an event.

The failure of the gradualist or (depending on one’s point of view) ad hoc approach to macroeconomic stabilization was brought home not only by Black Tuesday but also by the continued decline in output. The argument that loose monetary policy was needed to protect output was shown to be incorrect. These facts, as much as the IMF’s repeated recommendations for tightening monetary and fiscal policies, were behind the tighter policies implemented in 1995.

The new leaders set about preparing an economic program for 1995.²⁷ The IMF worked closely with them and supported the program with a one-year Stand-By Arrangement (SBA) approved by the Executive Board on April 11, 1995. The macroeconomic stabilization objectives were more demanding than in earlier years, with monthly inflation targeted to fall to 1 percent by July and then stay there, and the general government deficit set at 6.5 percent of GDP (Figure 1). No direct CBR lending to the budget was permitted after the first quarter. More important, the program was successfully implemented, although inflation did not fall quite as much as planned (Figure 2). All the quantitative targets were met in 9 out of 12 months of the program, and the full IMF loan—about US$6.5 billion—was disbursed (see Table 2).²⁸

General Government Deficit

(In percent of actual GDP)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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General Government Deficit

(In percent of actual GDP)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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General Government Deficit

(In percent of actual GDP)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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CPI Inflation

(In percent, average monthly rate)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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CPI Inflation

(In percent, average monthly rate)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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CPI Inflation

(In percent, average monthly rate)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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Table 2.

IMF Lending to Russia, by Year

Source: IMF.

¹Converted from SDRs at the exchange rate at the time (annual average and end-year).

Table 2.

IMF Lending to Russia, by Year

Year	Disbursements	Repayments	Outstanding (end of year)
	(In millions of SDRs)
1992	719	0	719
1993	1,078	0	1,797
1994	1,078	0	2,876
1995	3,594	0	6,470
1996	2,588	359	8,698
1997	1,467	360	9,806
1998	4,600	674	13,732
1999	471	3,101	11,102
2000	0	2,189	8,913
2001	0	2,998	5,915
2002	0	1,148	4,767
2003	0	1,356	3,411
	(In billions of U.S. dollars)1
1992	1.0	0	1.0
1993	1.5	0	2.5
1994	1.5	0	4.2
1995	5.5	0	9.6
1996	3.8	0.5	12.5
1997	2.0	0.5	13.2
1998	6.2	0.9	19.3
1999	0.6	4.2	15.2
2000	0	2.9	11.6
2001	0	3.8	7.4
2002	0	1.5	6.5
2003	0	1.9	5.1

Source: IMF.

¹Converted from SDRs at the exchange rate at the time (annual average and end-year).

View Table

Table 2.

IMF Lending to Russia, by Year

Year	Disbursements	Repayments	Outstanding (end of year)
	(In millions of SDRs)
1992	719	0	719
1993	1,078	0	1,797
1994	1,078	0	2,876
1995	3,594	0	6,470
1996	2,588	359	8,698
1997	1,467	360	9,806
1998	4,600	674	13,732
1999	471	3,101	11,102
2000	0	2,189	8,913
2001	0	2,998	5,915
2002	0	1,148	4,767
2003	0	1,356	3,411
	(In billions of U.S. dollars)1
1992	1.0	0	1.0
1993	1.5	0	2.5
1994	1.5	0	4.2
1995	5.5	0	9.6
1996	3.8	0.5	12.5
1997	2.0	0.5	13.2
1998	6.2	0.9	19.3
1999	0.6	4.2	15.2
2000	0	2.9	11.6
2001	0	3.8	7.4
2002	0	1.5	6.5
2003	0	1.9	5.1

Source: IMF.

¹Converted from SDRs at the exchange rate at the time (annual average and end-year).

One of the consequences of the successful monetary tightening was the strong appreciation of the nominal exchange rate beginning in April 1995.²⁹ The authorities were concerned about this, partly because of its impact on competitiveness and the real value of the population’s foreign currency savings but also because of fears of a sharp reversal, with economic and political consequences even more severe than those following Black Tuesday. Therefore, they introduced an exchange rate corridor in July to contain appreciation and any subsequent depreciation pressures.

Although the actual fiscal deficit in 1995 was in line with the target, revenues and expenditures were not as high as originally intended. As in most years in the 1990s, revenues were below the projected level, mainly because well-connected enterprises had been able to reduce their tax liabilities, either by obtaining formal tax exemptions or by informal arrangements. The government responded by holding expenditures below budgeted levels, which subsequently created serious problems. First, by allowing wage and pension arrears to build up, the government only postponed the problem until 1996, when special loans had to be raised to pay off the arrears (in part because it was an election year). Second, the fact that the government was not paying its bills—for procurement of goods and services, as well as wages and pensions—was a major reason for the financial indiscipline throughout the economy. It contributed to the withholding of tax revenues by taxpayers who were not themselves being paid by the government and to the growth of the pernicious practice of offsets.³⁰

The loans-for-shares scheme introduced in 1995 also had lasting adverse economic consequences.³¹ Starting in May 1995, the IMF expressed concern about the lack of transparency and the unsatisfactory arrangements for competitive bidding. The scheme, as it was endorsed by the president in October, looked more reasonable on paper, but there remained scope for collusion, nontransparency, and asset-stripping. IMF staff warned about this in October and, in December, criticized the implementation of the scheme.³² However, the IMF did not consider postponing disbursements on this account for the general reasons relating to structural reforms noted earlier, namely, the IMF’s macroeconomic mandate and modest expertise in structural issues, and the need to focus its limited influence on macroeconomic policy issues.³³

Despite these problems with arrears and loans-for-shares (and others not discussed here), the IMF judged the 1995 program to have been broadly successful as a major step toward macroeconomic stability. From the middle of 1995, the IMF staff discussed with the authorities a medium-term economic program that the IMF could support with a three-year loan under the Extended Fund Facility (EFF). The program that was approved by the Executive Board in March 1996 envisaged further disinflation and reductions in the general government deficit to 4 percent, 3 percent, and 2 percent in 1996, 1997, and 1998, respectively (see Figure 1, where the deficits are shown as a percentage of actual GDP as now estimated, rather than GDP as estimated at the time). However, performance under the EFF was not as good as under the SBA.

The fiscal situation deteriorated sharply during 1996, partly as a direct consequence of the buildup to the presidential elections, which brought promises of more expenditures from the president and an increased capital outflow. To keep the exchange rate within the band, interest rates had to be raised sharply, which added significantly to the government’s interest expenditures. Moreover, revenue shortfalls worsened, for two main reasons. The first was the reduced tax discipline as a result of the government’s own expenditure arrears, noted above. Second, the powerful oligarchs, who helped secure Yeltsin’s reelection, reduced their tax payments. It was no coincidence that nearly all the main enterprises with tax arrears at the end of 1996 were oil or gas companies.

New hope was kindled by Yeltsin’s hard-hitting State of the Nation speech in March 1997 and his appointment of Anatoly Chubais and Boris Nemtsov as first deputy prime ministers. These moves appeared to signal a willingness to tackle the oligarchs and restore some of the authority of the state. In a speech in Moscow in April 1997, Camdessus (1997) strongly urged the authorities to establish the proper role for the state in a market economy, including collecting taxes, meeting the government’s own financial obligations, and avoiding excessively close relationships with large enterprises. But tax collection did not improve as the intense struggle between the oligarchs and the government and among the oligarchs themselves progressed. The Emergency Tax Commission that had been set up in October 1996 was not effective at increasing revenues.

The effects of the Asian crisis began to be felt in Russia toward the end of 1997. Contagion led to a large outflow of capital in November, to which the authorities responded by tightening monetary policy. During the following months, the price of oil collapsed, with adverse consequences for Russia’s balance of payments and government revenues.

The IMF’s advice in the first half of 1998 was to tighten monetary policy and introduce new fiscal measures to deal with the growing fiscal gap. The former worked in January, but the very high interest rates in May did not contain the loss of international reserves. While the authorities recognized the need for further fiscal measures, they were paralyzed by the unexpected dismissal on March 23 of Chernomyrdin as prime minister and the delay until Sergei Kiriyenko was approved on April 24. With confidence not restored in financial markets after the May crisis, calls were heard for more drastic measures, including devaluation, refinancing of government debt to extend maturities, and a massive external loan. The IMF’s room for maneuver was narrowed by the announcement by President Bill Clinton’s office on May 31 that the United States endorsed additional financial support from the IFIs to promote stability and structural reforms. During the months that followed, until the crisis in August, the IMF focused on attempting to strengthen Russia’s fiscal policy, knowing that the government was weak and could not deliver very much. The key event here was the approval on July 20 by the Executive Board of a major loan (US$4.8 billion) in support of a new package of fiscal and other measures, many of which would not take effect until January 1999. The aim of this loan was to provide Russia with additional reserves so it could manage any short-term outflows until confidence in financial markets was restored. Unfortunately, after a temporary improvement in July, confidence continued to weaken in August; drastic measures, such as those announced on August 17, became inevitable.

After a failed effort to avert a financial crisis, it always appears that the attempt was a mistake. The increase in Russia’s international reserves after the new loan was disbursed was reversed in the subsequent weeks as financial players converted rubles into dollars.³⁴ But it is important to assess the situation as it appeared at the time. Judged from the point of view of the balance of payments, which was not in “fundamental disequilibrium,” the exchange rate was not obviously overvalued.³⁵ The government under Kiriyenko was firmly committed to trying to bring the fiscal situation under control, although the absence of strong support from the Duma was a matter of some concern.³⁶ There was a reasonable chance that confidence would return to financial markets and the crisis would be averted. As the government clearly wanted to take the chance and was prepared to take the measures necessary to strengthen policies, especially in the fiscal area, the IMF chose to support it, although there were naturally some misgivings among the executive directors and the IMF staff.³⁷

Following the crisis, the IMF’s main concern was that the new leadership of the government and the CBR should not move toward more inflationary policies, thereby losing the degree of macroeconomic stability that had been achieved with difficulty over the previous few years.³⁸ In fact, the authorities pursued reasonably tight monetary and fiscal policies, after a short injection of liquidity to the banking system that was motivated mainly by the need to protect the payments system. Although the IMF made no further disbursements under the EFF, the authorities hoped to reach an agreement with the IMF that would lead to disbursements, and this gave the IMF some influence. But more important was the message of the crisis: that the fiscal deficit must be kept under control if problems were to be avoided. In addition, of course, the government’s inability to borrow abroad and limited scope at home imposed a much tighter limit on the fiscal deficit than before the crisis.

With macroeconomic policies reasonably sound in the winter of 1998–99, the IMF was able to reach agreement with the authorities in the spring of 1999 on a program to be supported by a new SBA. Following delays caused by, among other things, a change of government and the need to investigate accounting irregularities in the CBR dating back to 1996, the Executive Board approved the SBA in July 1999. Macroeconomic policy performance was generally in line with the program, helped by higher oil prices and the recovery of growth in the economy. But stories in the press about corruption and misuse of public funds led the IMF, encouraged by the G-7, to ask for various structural improvements in accounting and control practices in the CBR, including its relationship with its subsidiaries. These were not fully implemented, which gave the IMF a reason for not making the disbursement under the SBA that was due in November, as noted earlier. However, attitudes in major western countries toward helping Russia had hardened because of the press stories and the start of the second Chechen war. As a result, the G-7 made clear to IMF management that they did not favor a disbursement at that time, and the IMF adopted an unusually strict position toward the non-implementation of structural measures. Thus, the IMF’s relations with Russia were tested (and strained, because the government partly blamed the messenger) by the G-7’s sharply cooler attitude, after many years of being under stress because of G-7 pressures in the opposite direction.

As the macroeconomic situation, especially the balance of payments, continued to improve during 2000–03, it became apparent that there was no need for the IMF to lend to Russia.³⁹ Moreover, most government leaders were eager to see an end to negotiations over economic policies. The relationship between the IMF and the authorities, therefore, changed from one involving negotiations and detailed monitoring by the IMF to one in which the IMF was a more detached observer and advisor, as is the case with the IMF’s relations with other major countries. The absence of negotiations made for an easier dialogue between the IMF and the authorities but also released the latter from the obligation to agree their economic policies with the IMF. Despite this, IMF policy and technical advice was generally welcomed and had some impact on policymaking and implementation.

A final point in this section relates to the development during the course of the 1990s of the authorities’ understanding about macroeconomic policy and how to implement it. Whereas in the early and mid-1990s the IMF’s messages about the importance of macroeconomic stability and how to achieve it were understood and accepted by relatively few reformers in the government and the CBR, by the early 2000s these messages were fully accepted by most important policymakers, including the leaders of the Duma. The IMF itself contributed to this development through the continuous dialogue its staff and management maintained with their counterparts at every level. This included the highest level, where the personal relationship of Camdessus and Chernomyrdin was a factor in the latter’s coming to trust IMF advice about macroeconomic policy.⁴⁰ The spread of knowledge was assisted by the gradual changing of the guard, as some of the younger reformers of the early and mid-1990s, who were most open to modern macroeconomic analysis, moved into senior positions.

But, given the deep differences in perspective within Russia about economic policy in the transition to the market, the competition for political and economic power, and the suspicious attitude toward foreign advisors inherited from Soviet times, IMF advice alone was not enough to change things. The experience of the 1990s was a necessary part of the learning process, especially the failure of the attempts in 1992–94 to stimulate output through expansionary monetary and fiscal policies, the crises of Black Tuesday (October 11, 1994) and August 1998, and the coincidence of the post-1998 recovery with the tightening of fiscal policy. But the importance of real-world experience does not diminish the major contribution that the IMF made to the transformation of the authorities’ understanding of macroeconomic policy issues and implementation.

Fiscal Policy

The IMF and the reformers in the government generally agreed that macroeconomic stabilization required a reduction in the fiscal deficit from the high levels of the early 1990s. However, good intentions to reduce the deficit were thwarted in most years before 1999 by unanticipated shortfalls in revenue, and in some years by excessive spending (see Figures 1 and 3). The failure to reduce the deficit decisively was, of course, the single most important cause of the 1998 financial crisis. This section first discusses the IMF’s role in the reduction of the deficit and related issues, especially the revenue shortfalls. It then briefly considers the IMF’s role with respect to social expenditures, oil export duty, and the liberalization of the treasury bill market.

Federal Revenues

(In percent of actual GDP)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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Federal Revenues

(In percent of actual GDP)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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Federal Revenues

(In percent of actual GDP)

Citation: IMF Staff Papers 2006, 001; 10.5089/9781589065093.024.A007

Sources: IMF staff estimates based on data from Russian authorities.Notes: EFF=Extended Fund Facility; SBA=Stand-by Arrangement; and STF=Systemic Transformation Facility.

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Impact of the IMF

A distinction should be made between the planned deficit and the actual outturn. Both the reformers and the IMF sought a similar path for the reduction of the deficit. Without the IMF, it is unlikely that the reformers would have been able to resist the pressure from others in government and the Duma to plan for a bigger deficit, especially in 1995 and 1996. In some years—for example, 1995—the IMF was able to agree easily with the government’s plans for the deficit, but it had to argue for additional measures to raise revenues or cut expenditures, because the revenue projections were too optimistic and the planned deficit was unattainable without additional measures.⁴¹ In 1997, the IMF had little influence on the planned deficit. It accepted the authorities’ argument that only a small reduction from the high outturn of 1996 was possible during the following year or two and that major improvements had to be postponed.

The planned deficit was one thing; what actually happened was quite another. The IMF’s impact on the implementation of fiscal policy and, hence, on the short-term fiscal deficit was rather weak. As Figure 1 shows, the failure to keep the actual deficit in line with the planned deficit, except in 1995 and 1997, was the main reason deficits remained so high before 1999. Most of the overshooting was the result of revenue shortfalls; some came from spending overruns. Both of these were in most cases under the control of the authorities, with some important exceptions, such as the higher interest expenditures before the presidential elections in June 1996 and after the Asian crisis in 1997, and the lower oil revenues in 1998.

The IMF attempted to influence the implementation of fiscal policy by monitoring it during the course of the year and urging the authorities to take corrective measures if necessary. Such encouragement had no teeth in 1992–94, because the IMF made only one disbursement in each year and had little leverage over developments in the later months of the year. For two years, beginning with the SBA approved in April 1995, a formal system of monthly disbursements was linked to monthly reviews of progress toward the targets of the program. While this enabled the IMF to check almost continuously on policy implementation, it also made it more difficult to resist proposals from the authorities to change the next month’s targets because of insufficient time to take measures to meet them. For this reason, and to encourage the authorities to take more responsibility, in 1997 and 1998 the IMF switched to the more typical quarterly disbursements linked to quarterly reviews.

The IMF’s ultimate lever for influencing fiscal policy implementation was its disbursements. A number of disbursements between the middle of 1996 and the middle of 1998 were delayed because of insufficient progress toward the targets or inadequate corrective measures, mostly but not always in the fiscal area. The slippages in disbursements were only minor in the second half of 1996 but became larger in the first half of 1997 (see Table 3). There was an improvement in the summer months of 1997, but this was followed by a deterioration later in the year and into 1998, as large slippages reemerged. Associated with the delays was the easing of targets, both those that had already been missed and future targets that could not be achieved (see Table 4). Although some of the easing of targets reflected factors outside the government’s control, as noted above, most (especially in the fiscal area) resulted from the authorities’ failure to implement the agreed-upon policies in full. The summary in Table 4 does not distinguish between targets within and outside the government’s control, but a careful analysis indicates that weak implementation was often the main factor.⁴² The IMF’s hope at the time that close monitoring would lead to an improvement in implementation, especially of fiscal policy, was, therefore, only partly realized during the 1996–98 EFF period.

Table 3.

Delays in Disbursements Under the Extended Fund Facility (EFF)

(In millions of SDRs)

Source: IMF.

¹The detailed schedules for these disbursements are not shown because they were replaced by revised schedules in the first two cases and no further disbursements were made in the third case.

²The amounts in this panel refer only to those committed under the original EFF. The additional amounts approved on July 20 under the EFF augmentation, the Supplemental Reserve Facility, and the Compensatory and Contingency Financing Facility are shown in Table 1. The actual disbursements under the three facilities were all made on July 22.

Table 3.

Delays in Disbursements Under the Extended Fund Facility (EFF)

(In millions of SDRs)

Expected Disbursements		Actual Disbursements
Earliest date	Amount	Date	Amount	Review on which disbursement based
A. Schedule approved on March 26, 1996
March 26, 1996	233.6	March 29	233.6	Approval of EFF
April 15, 1996	233.6	May 3	233.6	First monthly
May 15, 1996	233.6	June 10	233.6	First quarterly
June 15, 1996	233.6	June 28	233.6	Third monthly
July 15, 1996	233.6	August 26	233.6	Fourth monthly
August 15, 1996	233.6	September 18	233.6	Second quarterly
September 15, 1996	233.6	October 11	233.6	Sixth monthly
October 15, 1996	233.6
November 15, 1996	233.6	December 18	233.6	Third quarterly
December 15, 1996	233.6
January 15, 1997	233.6	February 12	467.3	Eighth monthly
February 15, 1997	233.6
May 15, 1997, and later dates1	4,097.6
B. Revised schedule approved on May 16, 1997
May 16, 1997	500.0	May 21	500.0	Second annual
August 1, 1997	500.0	September 8	500.0	Fifth quarterly
November 1, 1997	500.0	January 13	500.0	Sixth quarterly
February 1, 1998	500.0	June 30	500.0	Seventh quarterly
May 16, 1998, and later dates1	2,564.7
C. Revised schedule approved on July 20, 19982
July 20, 1998	768.4	July 22	768.4	Emergency review
September 15, 1998 and later dates1	1,796.3

Source: IMF.

¹The detailed schedules for these disbursements are not shown because they were replaced by revised schedules in the first two cases and no further disbursements were made in the third case.

²The amounts in this panel refer only to those committed under the original EFF. The additional amounts approved on July 20 under the EFF augmentation, the Supplemental Reserve Facility, and the Compensatory and Contingency Financing Facility are shown in Table 1. The actual disbursements under the three facilities were all made on July 22.

View Table

Table 3.

Delays in Disbursements Under the Extended Fund Facility (EFF)

(In millions of SDRs)

Expected Disbursements		Actual Disbursements
Earliest date	Amount	Date	Amount	Review on which disbursement based
A. Schedule approved on March 26, 1996
March 26, 1996	233.6	March 29	233.6	Approval of EFF
April 15, 1996	233.6	May 3	233.6	First monthly
May 15, 1996	233.6	June 10	233.6	First quarterly
June 15, 1996	233.6	June 28	233.6	Third monthly
July 15, 1996	233.6	August 26	233.6	Fourth monthly
August 15, 1996	233.6	September 18	233.6	Second quarterly
September 15, 1996	233.6	October 11	233.6	Sixth monthly
October 15, 1996	233.6
November 15, 1996	233.6	December 18	233.6	Third quarterly
December 15, 1996	233.6
January 15, 1997	233.6	February 12	467.3	Eighth monthly
February 15, 1997	233.6
May 15, 1997, and later dates1	4,097.6
B. Revised schedule approved on May 16, 1997
May 16, 1997	500.0	May 21	500.0	Second annual
August 1, 1997	500.0	September 8	500.0	Fifth quarterly
November 1, 1997	500.0	January 13	500.0	Sixth quarterly
February 1, 1998	500.0	June 30	500.0	Seventh quarterly
May 16, 1998, and later dates1	2,564.7
C. Revised schedule approved on July 20, 19982
July 20, 1998	768.4	July 22	768.4	Emergency review
September 15, 1998 and later dates1	1,796.3

Source: IMF.

¹The detailed schedules for these disbursements are not shown because they were replaced by revised schedules in the first two cases and no further disbursements were made in the third case.

²The amounts in this panel refer only to those committed under the original EFF. The additional amounts approved on July 20 under the EFF augmentation, the Supplemental Reserve Facility, and the Compensatory and Contingency Financing Facility are shown in Table 1. The actual disbursements under the three facilities were all made on July 22.

Table 4.

Reviews Under the Extended Fund Facility (EFF)

Source: IMF.

Table 4.

Reviews Under the Extended Fund Facility (EFF)

Date of Board Meeting	Review	Delay	Easing of Targets	Fiscal Measures
March 26, 1996	Approval of EFF
April 29, 1996	First monthly	On time	Fiscal deficits increased from April to enable payment of wage arrears using new foreign loans; deficits reduced toward end-1996 so that annual deficit target unchanged.
June 5, 1996	First quarterly	On time	Fiscal deficits increased from May because of higher interest payments than expected.
June 24, 1996	Third monthly	On time	May target for international reserves missed.
August 21, 1996	Fourth monthly	Delayed by one month	June targets for international reserves, net domestic assets, net credit to government, and federal government deficit missed. Fiscal deficits from July onward raised because of weak revenue collections and higher interest payments. Targets for international reserves, net domestic assets, and net credit to government eased to reflect higher growth in nominal GDP and money demand.	Measures taken to strengthen revenues.
September 13, 1996	Second quarterly	On time
October 8, 1996	Sixth monthly	On time
December 13, 1996	Third quarterly	On time	September and October targets for international reserves, tax revenues, and fiscal deficits missed. November and subsequent targets for tax revenues, fiscal deficits, and reserves eased. Targets for net domestic assets and net credit to government tightened.	Measures taken to strengthen tax collection. Major program of revenue measures developed.
February 7, 1997	Eighth monthly	Delayed by two months, but two monthly disbursements made together	No further easing; delay caused by the delays in October-December 1996.
May 16, 1997	Second annual and ninth monthly	On time, but two monthly disbursements missed	Most January targets missed, but March targets hit. New targets set for second year.	Measures taken to strengthen tax revenues.
September 3, 1997	Fifth quarterly	On time	June target for tax revenues missed by a small amount. Credit targets tightened and reserves targets raised for next two quarters.
January 8, 1998	Sixth quarterly	Delayed by 1–2 months	September targets for international reserves and tax revenues missed. Targets for international reserves, tax revenues, and credit growth eased for the fourth quarter of 1997 and subsequent quarters.	Measures taken to strengthen tax collection.
June 25, 1998	Third annual and seventh quarterly	Seventh quarterly delayed by 4 months	March targets for tax revenues and fiscal deficits missed. Delays in implementing revenue reform measures.	Major program of tax and expenditure measures initiated.
July 20, 1998	Emergency review, with enhanced commitments and disbursements	Not applicable		Major program of measures, mostly in the fiscal area, launched.

Source: IMF.

View Table

Table 4.

Reviews Under the Extended Fund Facility (EFF)

Date of Board Meeting	Review	Delay	Easing of Targets	Fiscal Measures
March 26, 1996	Approval of EFF
April 29, 1996	First monthly	On time	Fiscal deficits increased from April to enable payment of wage arrears using new foreign loans; deficits reduced toward end-1996 so that annual deficit target unchanged.
June 5, 1996	First quarterly	On time	Fiscal deficits increased from May because of higher interest payments than expected.
June 24, 1996	Third monthly	On time	May target for international reserves missed.
August 21, 1996	Fourth monthly	Delayed by one month	June targets for international reserves, net domestic assets, net credit to government, and federal government deficit missed. Fiscal deficits from July onward raised because of weak revenue collections and higher interest payments. Targets for international reserves, net domestic assets, and net credit to government eased to reflect higher growth in nominal GDP and money demand.	Measures taken to strengthen revenues.
September 13, 1996	Second quarterly	On time
October 8, 1996	Sixth monthly	On time
December 13, 1996	Third quarterly	On time	September and October targets for international reserves, tax revenues, and fiscal deficits missed. November and subsequent targets for tax revenues, fiscal deficits, and reserves eased. Targets for net domestic assets and net credit to government tightened.	Measures taken to strengthen tax collection. Major program of revenue measures developed.
February 7, 1997	Eighth monthly	Delayed by two months, but two monthly disbursements made together	No further easing; delay caused by the delays in October-December 1996.
May 16, 1997	Second annual and ninth monthly	On time, but two monthly disbursements missed	Most January targets missed, but March targets hit. New targets set for second year.	Measures taken to strengthen tax revenues.
September 3, 1997	Fifth quarterly	On time	June target for tax revenues missed by a small amount. Credit targets tightened and reserves targets raised for next two quarters.
January 8, 1998	Sixth quarterly	Delayed by 1–2 months	September targets for international reserves and tax revenues missed. Targets for international reserves, tax revenues, and credit growth eased for the fourth quarter of 1997 and subsequent quarters.	Measures taken to strengthen tax collection.
June 25, 1998	Third annual and seventh quarterly	Seventh quarterly delayed by 4 months	March targets for tax revenues and fiscal deficits missed. Delays in implementing revenue reform measures.	Major program of tax and expenditure measures initiated.
July 20, 1998	Emergency review, with enhanced commitments and disbursements	Not applicable		Major program of measures, mostly in the fiscal area, launched.

Source: IMF.

What was the IMF’s impact on the level of revenues? The IMF certainly tried through various means to prevent the revenue shortfalls. It provided extensive technical assistance on tax administration and posted a senior tax administration expert in the State Tax Service to assist the authorities.⁴³ Beginning in August 1996, it set targets for revenue collection as conditions for disbursements of IMF loans. It frequently insisted on the introduction of new tax measures to increase the effective tax rates or to improve tax administration before agreeing to disbursements. As shown in Table 4, most reviews under the EFF involved new tax measures, ranging widely from short-term fixes such as collecting tax arrears from specific debtors to fundamental reforms of the tax system.⁴⁴ Despite all this activity, in a broad sense the IMF failed to have much impact on revenues, which continued to fall short of targets until 1999.

Assessment

A superficial reading of the impact of the IMF on the fiscal deficit might suggest that the IMF did not have a major impact. The IMF was pushing for a substantial reduction in the deficit from the very high levels at the beginning of the 1990s, and some reduction was achieved. But the reduction was much less than the IMF recommended or the government announced that it would bring about. Strong vested interests prevented weak governments from delivering on their commitments. Taxes were not paid and unbudgeted expenditures were extracted from the government. The result of the failure to bring the fiscal deficit down was the August 1998 financial crisis, which could have been avoided if the fiscal situation had been under better control.⁴⁵

Despite what the large deficits of the 1990s and the 1998 crisis suggest, the IMF was not without some influence. First, the government wanted to continue to qualify for IMF disbursements and therefore tried hard, albeit with rather modest results (except in 1995), to bring the deficit below what it would have been in the absence of the IMF. The IMF helped tilt the internal argument toward reformers who were pushing for more fiscal consolidation. Also, despite the disappointing overall outcome, many of the specific measures taken to enable Russia to continue to qualify for disbursements were good reform measures with long-term benefits. Second, the extensive discussions between the government and the IMF about fiscal (and monetary) policy issues led over time to the existence of a strong cadre within the government that was able to articulate the case for a restrained fiscal policy in public and in private, and to design an appropriate policy. Third, IMF advice and technical assistance contributed to many improvements in budget procedures, tax policy, and tax administration that made it easier to design and execute the planned budget. As described in more detail in the Appendix, technical assistance in the fiscal area was concentrated on tax administration and the creation of the treasury, although assistance also was provided on tax policy, public expenditure management, the social sector, and other issues. The impact of such assistance built up gradually over time, as administrative systems were reformed and increasing numbers of Russian officials learned the new procedures. In the case of tax policy reform, major changes did not come until 2001 under President Vladimir Putin. The seeds of some components of this reform had been sown earlier, partly by the IMF and other technical assistance advisors. The IMF staff had opposed other components, however, notably the move to a flat-rate personal income tax, which, although desirable on structural grounds, had seemed to the staff to carry the risk of a temporary loss of revenue.

Would the IMF’s influence on fiscal performance have been greater if it had postponed disbursements more often in response to missed targets? Consider first the accumulation of arrears as a by-product of the successful reduction of the deficit in 1995. The IMF was aware at the time of the adverse consequences, although it may not have envisaged the full scale of the nonpayment problems that were partly caused by government arrears.⁴⁶ The IMF was so pleased that progress had been made toward macroeconomic stability that it did not aggressively challenge the manner in which the progress had been achieved. Had it done so—for example, by postponing some disbursements in 1995 until revenues were raised or expenditures cut in a more economically sensible and socially acceptable way—future problems might have been diminished, although at the price of less progress in reducing the deficit and inflation.

Turning next to the missed targets for the deficit and for revenues—especially from mid-1996 through mid-1998, when major taxpayers were able to make arrangements with the government to pay less than their full liabilities—some disbursements were postponed, but the postponements were fairly short (see Table 3). At the time, the IMF generally believed that the chances of implementing the fiscal policy set forth in the program were greater if postponements were not too frequent or prolonged. If delays were prolonged, the relationship between the IMF and the authorities would become strained; the authorities would be less, rather than more, inclined to follow the IMF’s advice; and the position of the reformers in government who shared the IMF’s views would be weakened. These were years when the government appeared to be especially weak. Yeltsin was frequently sick and not exercising strong leadership. The oligarchs were confident of their power vis-à-vis the state and were manipulating the law, or worse, to add to their wealth.⁴⁷ Under these circumstances, the G-7 favored IMF engagement with Russia as a way of adding some weight to those in government who were struggling to bring the fiscal situation under control. As noted above, the IMF was not impervious to the views of the G-7; however, the IMF management itself believed that close engagement with the Russians, with continuous dialogue about economic programs and the next IMF disbursement, could effect some improvements in policies and avoid major reversals, which could have been very disruptive. Given the importance of Russia in the region and the world, it was thought to be worth the risk to the IMF’s reputation and finances to persist with the engagement.

The alternative view was that the government would be strengthened in its relations with recalcitrant taxpayers and others if it were deprived of IMF backing, especially financial support.⁴⁸ This view was held by some reformers in Russia, notably Boris Fedorov and Andrei Illarionov,⁴⁹ and it was increasingly held by some in the IMF, both executive directors and staff.⁵⁰ Changes in Russia, such as the appointment of Anatoly Chubais and Boris Nemtsov as first deputy prime ministers in March 1997, gave rise to new hope that the fiscal problems would be solved and held the growing disillusionment in the IMF at bay. The very large disbursement of US$4.8 billion in July 1998 was seen by the IMF leadership as the last chance for Russia. When this disbursement did not succeed in restoring confidence, there could be no question of more money without a major strengthening of the country’s fiscal position.

The decision to withhold financial support in August 1998 had important ramifications in Russia and international financial markets. It contributed to the determination of subsequent Russian governments to keep the fiscal situation under control so that they would never again be dependent on the IMF. (However, more important influences on government behavior were the absence of new borrowing possibilities and their wish to avoid both another crisis and renewed dependence on financial markets.) International financial markets learned that the G-7 and the IMF would not always provide assistance to important countries just because they were “too big to fail.”

We have discussed whether a firmer policy by the IMF, with less willingness to continue disbursing funds in the face of continued fiscal slippages, would have been better. A tougher line, with more interruptions to disbursements and less IMF money to finance deficits, might have had some impact on the behavior of recalcitrant taxpayers and the Duma majority that was opposed to the government’s policy, although these groups were very powerful and were focused on improving their own financial and political positions at the expense of the weak state. A tougher line might also have led to a crisis, perhaps a less damaging one, well before August 1998. Taking into account what we now know, including the cathartic effect of the crisis, it seems that it would have been better for economic reforms in Russia, and for the IMF, if the IMF had taken a tougher line in 1996–98. It is, of course, much easier to say this now than at the time, when the possibility was very real that without active lending from the IMF, Russia would face economic collapse, or at least economic policy going seriously wrong.

Social expenditures

One of the major casualties of the failure to bring fiscal policy under control before 1999 was the social sector. The health and education sectors were starved in the budget. Moreover, even the meager budgeted amounts for the social sector were often not made available, as resources were sequestered during the year and bills—including for wages and pensions—were not paid. The overall standard of living and general well-being of those who could not afford to pay out of their own pockets for health and education services were severely reduced. The social safety net still consisted primarily of heavily subsidized prices, which were being raised over time, for housing and related services and for privileged groups, rather than income transfers based on need. Should the IMF have tried harder to protect social expenditures?

Some reduction in the real value of social sector expenditures was inevitable because of the decline in GDP. A further reduction would have been justified if reforms had introduced more private financing of and charges for health, education, and other social services in a structured way. But, although there was a willingness in principle to introduce private financing and charging, the necessary structural reforms for this and for the overall reduction in the size of the sector were never undertaken in a comprehensive way. As a result, the adverse effect of the deterioration of the social sector on the standard of living was greater than it had to be.

The IMF’s view from the beginning of the transition was that a strong social safety net was critically important, and Camdessus frequently referred to that in his speeches.⁵¹ The IMF provided technical assistance regarding ways of targeting the social safety net to the most vulnerable groups instead of continuing with expensive subsidies that held down the cost of housing, utilities, and services for everyone.⁵² The IMF also encouraged the government to include various social protection measures in its programs.⁵³ Reforms to social safety nets featured prominently in the government’s program in 1992 and again in the 1996 EFF-supported program.

In practice, however, little effort was made to reform the social sector or to protect social expenditures from general fiscal tightness. This reflected the government’s priorities against the background of its weakness in the face of strong taxpayers who were able to avoid paying their full obligations. Despite its concerns about this situation, the IMF did not push hard for higher social expenditures or the reform of the social safety net. It never made shortfalls in these areas a reason for delaying disbursements or a major sticking point in program negotiations. The Russians knew this. In the exception that proved the rule, they were surprised by the intensity of Camdessus’s concern in 1999 to limit the large cuts in real wages and pensions that were being planned by the government as part of the adjustment to the 1998 crisis.⁵⁴ But, in general, the IMF felt that it could not, against a background of weak revenues, insist on achieving both a satisfactory overall fiscal balance and the protection of social expenditures.⁵⁵

Specific fiscal issues

In two specific fiscal issues, the IMF made a difference and, in hindsight, a mistake. The first was the abolition of the oil export duty, which the IMF insisted, against the advice of the authorities, should be a condition of the approval of the EFF in March 1996. This was seen as a major step in a program that had been running for a few years to remove all taxes and restrictions on exports. It was to be accompanied by an increase in excise duties on oil and oil products. As it turned out, the enforcement of the higher excise duties proved difficult, as they were much easier to evade than the export duty, and export duties were reintroduced after the 1998 crisis. Given the importance of collecting as much revenue as possible in the 1996–98 period, it would have been better to have postponed the abolition of the export duty on oil until the excise tax collection system and the government’s authority were stronger.

Second, the IMF supported the government’s wish to liberalize access to the treasury bill market by foreign investors in 1996. The government’s intention was to reduce interest rates by opening up the market. The IMF was sympathetic to this view and, more generally, to the liberalization of capital markets. There was also strong support from the G-7, especially the United States, for the same reasons. However, the CBR was opposed to this measure because it feared the possible volatility of external capital flows. The IMF pressed for liberalization, and in early 1997 the CBR agreed to a phased program of liberalization to be completed in January 1998. This added a significant element to the financial market volatility that culminated in the August 1998 crisis, although, because of the behavior of domestic investors, the crisis would not have been avoided had the liberalization not occurred.⁵⁶

Channels for IMF Advice

The main channels for IMF advice between 1992 and 2003 were the discussions between visiting staff missions from the European II Department (EU2) of the IMF and their Russian counterparts. In 2003, the IMF’s area departments were reorganized; EU2 was disbanded, and responsibility for Russia was transferred to the European Department (EUR). In 1992–94 and 1997–2001, there were usually five or six missions a year, each lasting about two weeks. In 1995–96, there were monthly missions, although they were shorter (7–10 days). Since 2001, the frequency of missions has declined to two or three a year.

During 1992–2001, when Russia was borrowing or seeking to borrow from the IMF, much of the policy discussion between the missions and the authorities took the form of a debate about the details of the economic program for the coming period. The annual programs were most important, but quarterly and monthly programs were also discussed. Typically, drafts of the program documents were prepared by the IMF team, taking into account both the IMF’s views about what was needed and the authorities’ objectives. The drafts were amended to take into account the authorities’ views, and differences were negotiated. Since 2001, the Russian authorities have not sought to borrow from the IMF and the policy dialogue has been less intense. The IMF staff from EU2/EUR has focused on giving advice on a few key issues and backing it up with convincing technical work.

A related channel to the EU2 missions was the work of the staff at the IMF Moscow office, whose role has varied according to the frequency of EU2 missions. When these were very frequent, Moscow office staff spent most of their time supporting the missions. Since the missions have become less frequent in recent years, the Moscow office staff have played an important role in advising the Russian authorities directly. One advantage they have in this role over their colleagues at IMF headquarters is that they have time to develop a deeper knowledge of specific issues and closer personal relationships with their counterparts. The latter quality led in a few cases to Moscow office staff members acting as part-time advisors to senior officials in the CBR or the finance ministry.

A third channel for advice was technical assistance, which took the form of missions of technical experts and resident technical advisors who advised on particular issues, especially the development of the capacity of the CBR and the ministry of finance to design and implement monetary and fiscal policies. In the 10-year period from May 1991 to April 2001, the IMF provided 63 person-years of technical assistance (TA), which was nearly 4 percent of its worldwide TA provision (Table A.1). In the four peak years, May 1992 to April 1996, nearly 6 percent of the IMF’s worldwide TA effort was devoted to Russia. In the early 1990s, well over half of the technical assistance to Russia concerned the development of the CBR as a modern central bank. The rest was mostly assistance in the fiscal area, including advice on tax policy, tax administration, and the creation of the treasury. As Table A.2 shows, this assistance was concentrated on tax administration and the treasury. All the long-term resident advisors (who accounted for over half of the total fiscal TA provision) worked in these two areas. There was also assistance on statistics and drafting legislation. Details of the TA in the central banking area in Russia and other transition countries in the region are available in Zulu and others (1994), Knight (1997) and Sundararajan and others (1997). Details of the work on setting up treasuries in Russia and the other countries of the region can be found in Potter and Diamond (2000), and details on reforming budget systems in Russia in Diamond (2002a, 2002b).

Table A.1.

IMF Technical Assistance Work in Russia

Source: IMF.

^*The fiscal year runs from May of the previous year to April of the year shown in this column.

Table A.1.

IMF Technical Assistance Work in Russia

Fiscal Year*	Number of Person-Years	In Percent of Worldwide Total
1992	3.2	2.4
1993	7.2	4.8
1994	9.6	6.7
1995	12.1	7.2
1996	8.8	4.2
1997	6.1	3.3
1998	4.0	2.7
1999	4.6	2.3
2000	3.9	2.0
2001	3.6	1.9
Total	63.1	3.7

Source: IMF.

^*The fiscal year runs from May of the previous year to April of the year shown in this column.

View Table

Table A.1.

IMF Technical Assistance Work in Russia

Fiscal Year*	Number of Person-Years	In Percent of Worldwide Total
1992	3.2	2.4
1993	7.2	4.8
1994	9.6	6.7
1995	12.1	7.2
1996	8.8	4.2
1997	6.1	3.3
1998	4.0	2.7
1999	4.6	2.3
2000	3.9	2.0
2001	3.6	1.9
Total	63.1	3.7

Source: IMF.

^*The fiscal year runs from May of the previous year to April of the year shown in this column.

Table A.2.

IMF Technical Assistance in the Fiscal Area

Source: IMF.

¹Includes visits lasting from a few days to a few months, comprising both single experts and teams.

²The fiscal year runs from May of the previous year to April of the year shown in this column.

³Includes missions on general budget making and fiscal monitoring, participation in World Bank missions, and other visits.

Table A.2.

IMF Technical Assistance in the Fiscal Area

A. Short visits (number of visits)1
Fiscal year2	Tax policy	Tax administration	Treasury	Social sector	Public expenditure management	Other3	Total
1992	2	2	1	1		2	8
1993	1	3	6			2	12
1994		2	14	1			17
1995	1	6	6			1	14
1996	2	1	5				8
1997	2	6	1			2	11
1998		3		1		2	6
1999		2	1			1	4
2000		2	2		2		6
2001	1	3	2		6	2	14
B. Long-term resident advisors					Total (person-years)
February 1993–June 1997			Tax administration			4.4
January 1994–December 1995			Treasury software			2.0
March 1994–September 1995			Tax administration			1.6
July 1994–December 1995			Treasury			1.5
September 1997–August 1999			Tax administration			2.0
February 1999–August 2001			Treasury			2.6
C. Short- and long-term technical assistance (person-years)
Fiscal year2		Short visits1		Long-term advisors		Total
1992		1.7		0.0		1.7
1993		2.5		0.3		2.8
1994		2.3		1.5		3.8
1995		1.3		3.8		5.1
1996		0.6		2.8		3.4
1997		1.0		1.0		2.0
1998		0.4		0.9		1.3
1999		0.4		1.2		1.6
2000		0.7		1.3		2.0
2001		1.0		1.0		2.0
Total		11.9		13.8		25.7

Source: IMF.

¹Includes visits lasting from a few days to a few months, comprising both single experts and teams.

²The fiscal year runs from May of the previous year to April of the year shown in this column.

³Includes missions on general budget making and fiscal monitoring, participation in World Bank missions, and other visits.

View Table

Table A.2.

IMF Technical Assistance in the Fiscal Area

A. Short visits (number of visits)1
Fiscal year2	Tax policy	Tax administration	Treasury	Social sector	Public expenditure management	Other3	Total
1992	2	2	1	1		2	8
1993	1	3	6			2	12
1994		2	14	1			17
1995	1	6	6			1	14
1996	2	1	5				8
1997	2	6	1			2	11
1998		3		1		2	6
1999		2	1			1	4
2000		2	2		2		6
2001	1	3	2		6	2	14
B. Long-term resident advisors					Total (person-years)
February 1993–June 1997			Tax administration			4.4
January 1994–December 1995			Treasury software			2.0
March 1994–September 1995			Tax administration			1.6
July 1994–December 1995			Treasury			1.5
September 1997–August 1999			Tax administration			2.0
February 1999–August 2001			Treasury			2.6
C. Short- and long-term technical assistance (person-years)
Fiscal year2		Short visits1		Long-term advisors		Total
1992		1.7		0.0		1.7
1993		2.5		0.3		2.8
1994		2.3		1.5		3.8
1995		1.3		3.8		5.1
1996		0.6		2.8		3.4
1997		1.0		1.0		2.0
1998		0.4		0.9		1.3
1999		0.4		1.2		1.6
2000		0.7		1.3		2.0
2001		1.0		1.0		2.0
Total		11.9		13.8		25.7

Source: IMF.

¹Includes visits lasting from a few days to a few months, comprising both single experts and teams.

²The fiscal year runs from May of the previous year to April of the year shown in this column.

³Includes missions on general budget making and fiscal monitoring, participation in World Bank missions, and other visits.

The fourth channel for IMF advice was less direct. The IMF organized many courses for government and CBR officials at its training institutes in Washington and Vienna. It also invited officials, parliamentarians, and journalists to seminars in Washington, Vienna, and centers in Russia. These courses and seminars covered economic policies in general, economic policies in transition, and specific Russian policy issues. Typically, they did not address current policy issues, unlike the policy advice provided by EU2 missions and Moscow office staff.