For example, Stiglitz (2002) wrote, “The IMF strategy did not work: GDP in post-1989 Russia fell, year after year” (p. 146).
Klyamkin and Shevtsova (1999) have written about Yeltsin’s great weakness in practice, despite his considerable constitutional powers.
For a short time, from August 1996 to March 1997, Vladimir Potanin, a leading oligarch, was first deputy prime minister responsible for economic policy.
Because this paper is concerned with the IMF’s impact on Russia’s economic policies, references to the IMF’s views, advice, position, and so on refer to the official position adopted by the IMF in its relations with Russia. Different views existed within the IMF on various issues, sometimes reflecting the different responsibilities and perspectives of the executive board, management, and individual departments. Some of these differences are mentioned in the paper.
Camdessus (1992) noted that the process of basic economic transformation would take many years. Odling-Smee and Wolf (1994) classified reforms according to whether they could be undertaken over short-, medium-, or long-term time horizons.
The earliest official statement of the IMF’s views on economic reforms can be found in IMF and others, (1990). See, especially, Chapter V (pp. 16–19) for a discussion of the speed and sequencing of reforms.
Vladimir Mau, a leading reformer, explained the situation as follows: “A good part of the ‘IMF conditions’ were developed in Moscow, not Washington. Russian politicians are the ones who initiated many of these conditions” (Mau, 2000, p. 108).
The case for a gradualist strategy as presented by a number of authors is discussed in Åslund (2002). See, especially, Chapter 3 on Strategic Policy Choices.
The experience of China and other Asian transition countries is not very relevant to Russia and other former Soviet area countries, because political systems in the Asian countries did not collapse. More important, the Asian economies were largely agricultural, and the share of large industrial enterprises in total production and employment was much smaller than in Russia and other Soviet area economies. See Sachs and Woo (1994), Mau (2000), and Kalra and Sløk (2001).
See Anderson, Citrin, and Lahiri (1995); Citrin (1995); Hernández-Catá 1995); Odling-Smee (1996); Fischer and Sahay (2000); and Owen and Robinson (2003) for detailed discussions of these issues by IMF staff.
In addition to the direct channels through which it gave advice and transferred knowledge, the IMF also made a contribution through papers and participation in conferences. These had an indirect impact on Russian policymakers through their influence on western governments, other international organizations, and independent analysts and, hence, their contribution to the creation of a broad international consensus behind the policies advocated by the IMF.
Yevgeny Primakov, prime minister from September 1998 to May 1999 and previously a senior member of the Soviet foreign policy establishment, was representative of those who found it most difficult to accept the IMF’s role in Russia. In the Russian version of his memoirs published in 2001, he said that he was boiling inwardly when he thought that Gérard Bélanger, IMF mission chief in 1999–2002, was “moralizing”; this passage did not appear in the English version (Primakov, 2004). Earlier, in a November 1998 meeting with Jorge Márquez-Ruarte, IMF mission chief in 1997-99, Primakov had accused the IMF of dictating to Russia and acting like Bolsheviks.
Thus, the World Bank’s Country Assistance Evaluation for Russia noted that the Bank, IMF, and European Bank for Reconstruction and Development (EBRD) were asked by their shareholders to work together to facilitate Russia’s transition: “The Bank was entrusted with the responsibility of encouraging and overseeing structural reforms&. A series of strategy documents established that, beyond its complementary assistance in support for IMF-funded stabilization efforts, the Bank’s focus would be on helping build the institutions of a market economy, developing the private sector, and mitigating the social costs of transition” (World Bank, 2003, p. xi).
For example, Stiglitz (2002) has strongly criticized the IMF for insisting on rapid privatization, whatever the price, and for not being concerned about whether market institutions, such as a competitive system, were in place first. This led, he argued, to IMF acquiescence in the loans-for-shares scheme and to corruption, state capture, and growing income inequalities. (See below for more on the loans-for-shares scheme.) As Chief Economist at the World Bank in 1997–2000, Stiglitz knew that the World Bank rather than the IMF was in the lead in advising on these issues and that the IMF had little influence. Similarly, Lopez-Claros (2002), who represented the IMF in Moscow in 1992–95, deplored the fact that the IMF did not stop the loans-for-shares scheme.
In fact, quite large sums of money were provided by the G-7, although most of it was tied to particular imports (suppliers’ credits) or expenditures (e.g., housing for troops returning from Germany), or was debt relief. In 1992 and 1993, all bilateral creditors provided a total of US$36 billion of financial assistance, with the G-7 accounting for the bulk of it (Citrin and Lahiri, 1995, Table 7.5).
IMF here means not only the management and staff but also many members of the Executive Board, albeit a minority, who did not like to see the majority pushing the Board in this direction.
Talbot (2003) described several occasions when Russian leaders pressed U.S. leaders to ensure IMF financial assistance. Primakov (2004) commented that progress toward an agreement with the IMF was determined largely by the United States. He also noted that President Yeltsin spoke to German Chancellor Gerhard Schröder about speeding up an agreement with the IMF, and French President Jacques Chirac promised Primakov that he would “convince Camdessus.”
One example of a difference on which the IMF gave way to the Russians was the oil price. The IMF argued for a larger increase in the domestic price of oil than the Russians were willing to implement, on the grounds that this was a move toward market pricing and would allow the government to collect more revenues from the oil sector and achieve a more ambitious target for the fiscal deficit.
Under an accelerated mechanism for admitting new members, Russia joined the IMF on June 1, 1992. Difficulties in agreeing on monetary policy and some other issues delayed agreement on an economic program until early July. The Executive Board meeting to approve the first loan was held on August 5.
Some IMF staff members believed that a cooperative ruble area would never work, and events proved them correct. Others, including executive directors representing some major countries, believed that the importance of the ruble area for regional trade and payments flows was such that every effort should be made to make it work. In hindsight, one can say that it would have been better for Russia—and probably for the other ruble area countries, too—if the ruble area had broken up earlier than it did, perhaps even by the middle of 1992. See Odling-Smee and Pastor (2002) for further discussion of these issues.
The IMF introduced the STF in April 1993 to enable it to lend to countries that were making the transition from centrally planned to market economies before they were able to implement strong macroeconomic stabilization and reform programs.
Tatiana Paramonova was appointed acting chair of the CBR in October 1994, after Viktor Gerashchenko resigned. Anatoly Chubais, who was already a deputy prime minister, took over responsibility for macroeconomic policy issues from Alexander Shokhin, who also resigned.
The IMF monitored progress on a monthly basis, as described later.
With inflation still high, the real appreciation was especially rapid.
Offsets were arrangements between the government and individual enterprises whereby the government’s unpaid obligations to an enterprise and an equivalent amount of the enterprise’s unpaid tax liabilities were cancelled. Enterprises were thus encouraged not to pay their taxes in the expectation of future offsets. The IMF pushed for many years for the practice to be banned.
Under this scheme, banks controlled by oligarchs made loans to the government on the security of attractive but undervalued state assets (e.g., oil enterprises), then took possession of the assets when the government failed to repay the loans.
These concerns and criticisms were voiced directly to the authorities and to all IMF members in papers for the Executive Board.
Given the very strong political backing of the scheme, it is doubtful whether the IMF, or the World Bank for that matter, could have had much influence on its actual implementation. See Freeland (2000) for a full account that emphasizes the political context.
Some months later, a story emerged that the money had been stolen and ended up in the bank accounts of people close to the president and government leaders. There was no truth to this story; the documents purporting to prove it were forged, and a detailed audit of the CBR’s reserves found that they had been used to support the ruble, as they were intended to be, if needed.
The boost to growth from the devaluation might suggest that an earlier devaluation would have led to an earlier recovery. But, as discussed below, this conclusion is not clear-cut, because higher inflation would have worked in the opposite direction. Even if it is partly correct, it does not in itself mean that the exchange rate was overvalued.
The Duma did, in fact, pass a large number of measures in a few days in mid-July but rejected two key measures, one to increase personal income tax revenues and the other to restore balance to the pension fund.
In September, Yevgeny Primakov became prime minister and appointed Yuri Maslyukov as first deputy prime minister for economic policy. Mikhail Zadornov remained as finance minister. Gerashchenko returned as CBR chairman.
There was, however, a downside to this personal relationship in Camdessus’ increased willingness to accept Chernomyrdin’s pleas for continued disbursements when conditions had not been met.
It was common for the Duma to increase expenditures in the draft budget and to “finance” the increase by arbitrarily raising projected revenues.
A complete list of the reasons why some reviews were delayed and the measures that were taken to enable reviews to be completed is available on request from the author: email@example.com.
Richard Highfield, previously a second commissioner of the Australian Tax Office, was an advisor to the Ministry of Taxation from September 1997 to August 1999.
A full list of the revenue measures is available on request from the author: firstname.lastname@example.org. The wide scope of the measures reflected the fact that many things needed to be put right, as well as uncertainty about the underlying causes of poor tax collections. Sometimes the problem seemed to be that the weak government was not able to force strong enterprises to pay their taxes; at other times, the inadequacies of the tax administration system seemed to be the problem. The government urged the IMF not to insist on higher tax rates when the taxes due at existing rates were not being collected, but the government did not itself solve the collection problem. The sharp improvement in tax collections after 1998, as the economy grew, suggests that tax evasion rather than the tax administration system had been the main problem before 1998.
Hernández-Catá warned as early as the beginning of 1995 that the continuation of a strategy of large budget deficits was dangerous (Hernández-Catá, 1995, p. 121).
A very senior representative of one of the biggest oil and banking groups told the author in November 1997 that the period of asset grabbing would last only a few more years and that after that his company would have to start earning money in the usual way of western companies.
An incident in December 1997 is an example of IMF flexibility weakening the efforts of some people in government to persuade taxpayers that they were serious about strengthening tax collection. Chubais was trying to use the Emergency Tax Commission to seize the assets of two delinquent taxpayers. Chernomyrdin wanted to take a more lenient line with the two companies and urged Camdessus to agree with him, while promising to improve tax collections. Camdessus took him at his word and decided that the IMF should not insist on specific actions by the Emergency Tax Commission as a condition of disbursing the next installment of the EFF. This incident had wider ramifications for other taxpayers’ assessment of the government’s willingness to tackle evasion.
Federov had been deputy prime minister and finance minister in 1993, and Illarionov, who was an economic advisor to Prime Minister Chernomyrdin in the early 1990s, was President Putin’s advisor in 2000–05.
Notably, Michael Mussa, economic counselor, was an early advocate of terminating IMF financial support.
In summarizing the desirable reform strategy, Camdessus (1992) gave equal billing to social security and to structural reforms and macroeconomic stabilization. He said that “the need for adequate social safety nets is greatest when society is undergoing far-reaching upheavals, as it is now.” (Camdessus, 1992. See also Camdessus 1994 and 1997.)
The IMF was not qualified to advise on the health and education sectors. The World Bank was active in these areas.
Primakov complained to Camdessus about being outflanked on the left.
Some people—for example, Lopez-Claros (2002)—have argued that the IMF’s failure to protect the social safety net while allowing the oligarchs to minimize tax payments was a major mistake, because it undermined support for reforms.
While the IMF appeared to play an important role in bringing about liberalization, some government officials and observers have argued that if the IMF had not pressed, the government would itself have insisted on liberalization.
It should be noted that many commentators—for example, Berglöf and Vaitilingam (1999); Kharas, Pinto, and Ulatov (2001); and Stiglitz (2002)—have argued that the exchange rate was overvalued before the crisis and that an earlier devaluation would have been beneficial. For a defense of the IMF’s position, see the comments of Fischer (2001) and Summers (2001) on the paper by Kharas and others (2001).
The government was opposed to a devaluation because its credibility and one of its few macroeconomic achievements—the low inflation rate—were linked to the exchange rate peg. It would, therefore, have resisted any pressure from the IMF for an early devaluation, although it is possible that it would have eventually relented.