Russia and the IMF: A sordid tale of moral hazard

Demokratizatsiya, Winter 2001 by Hedlund, Stefan

Equities were also being pummeled, with the Moscow Times index sliding to a low of 137, erasing all gains since December 1996. Some blue-chip stocks lost up to a quarter of their value in that one day. Moscow-based market analysts were worse than gloomy: "We are seeing a meltdown.... Everything has been shot down." All was seen to hinge on a massive foreign bailout: "The writing is on the wall: only a big, fat foreign loan will save the ruble from a devastating collapse."6 Even World Bank president James Wolfensohn was talking of "a crisis."

At the end of the day, the Central Bank announced that it was raising the refinance rate from 50 to a forbidding 150 percent, to cool off speculation against the ruble. Bank chairman Sergei Dubinin also announced that the bank had spent close to $1.5 billion on its ruble defense, bringing total reserves down to just above $14 billion, from a high of $24 billion in July 1997. Markets were hoping for a further loan package of no less than $10 billion.

Then the IMF announced that it would release a previously frozen $670 million loan, which was good news, but at the same time Moody's announced a downgrade for Russia (from Ba3 to B1, or on par with Lebanon but below Jamaica), which put a real damper on potential optimists.

Seeking to restore some confidence in the country's deteriorating system of tax collection, President Yeltsin fired the head of the government tax service, Alexander Pochinok, and replaced him with former finance minister Boris Fyodorov. Major corporate tax dodgers were given until the end of June to come up with 5 billion rubles in back taxes, and about a thousand Russian jet-set celebrities were threatened with special tax revision.

The gist of the new campaign was clearly reflected in the media. While television showed Russian tax police, heavily armed and clad in black ski masks, making brutal raids all over Moscow, the Moscow Times published a cartoon of Boris Yeltsin wielding an executioner's ax and clad in a big apron, with the caption reading, "Let's collect some taxes."

Responding to rumors that the G7 were pondering a relief package, the stock market duly rebounded, gaining 20 percent over two days. The government also succeeded in issuing a five-year, $1.2 billion Eurobond, priced at 650 basis points above the May 2003 U.S. Treasury note, implying a yield of about 11.75 percent, up 75 points over its latest Eurobond.

It was beginning to look as though the worst was over, and the Central Bank announced a cut in the refinance rate from 150 to 60 percent. Then there was more bad news. Meeting in Paris, the G7 finance ministers produced verbal encouragement but no cash, and with the Japanese yen taking a serious nosedive, further waves of "Asian flu" began spreading.

By mid-June, the Moscow Times index had slid to 124.5, down 60 percent since the start of the year and touching a twenty-month low. The one-year benchmark GKO again rose to more than 70 percent, and there was a renewed attack on the ruble.