Russia and the IMF: A sordid tale of moral hazard

Demokratizatsiya, Winter 2001 by Hedlund, Stefan

In spite of mounting pressure to undertake a financial bailout, both the IMF and the G7 seemed determined to hold out. They appear to have believed that for the first time in a long time they had the Russian government and the Russian Duma in a position where necessary and repeatedly promised reform measures would simply have to be enacted. Thus the stage was set for an international chicken game. And the markets were putting big money on Moscow to be the winner.

To improve relations with Western creditors, on 17 June Yeltsin appointed Anatoly Chubais to serve as international loan liaison officer. Although this was a serious provocation to the Duma, the "young reformer's" personal contacts in Washington would prove to be of great value. On the following day, Russia issued a thirty-year $2.5 billion Eurobond, which provided some relief, but according to Chubais, $10-15 billion would be needed to avert financial collapse.

The IMF, however, was still holding back. On 18 June, it delayed payment of a $670 million tranche of the previous $10.1 billion credit, citing problems with the implementation of needed reforms.

On 23 June, the Russian government reacted by presenting an anti-crisis plan that was directed mainly at improving tax collection. Stating that the situation had now become "so acute that there are social and political dangers," President Yeltsin called on the Duma to take rapid action-or else! Two days later the IMF released the frozen tranche, but the situation was still deteriorating. On 29 June, the Central Bank raised its refinance rate to 80 percent.

At the beginning of July, Siberian miners resumed their picketing of the railroads, and this time they were not only calling for wage arrears to be settled. Now they were also demanding Yeltsin's resignation. GKO yields were running between 130 and 140 percent and the Moscow Times index was falling close to the 100 level, where it had begun in September 1995, representing a drop of more than three-fourths from its high in October 1997.

On 13 July, the international lenders finally came through. Under heavy political pressure not to let Russia fail, the IMF reluctantly took the lead in organizing a joint $22.6 billion rescue package. Including previous commitments, the IMF would contribute $15.1 billion over 1998-99. The World Bank would put up $6 billion and the Japanese government $1.5 billion.

On 20 July, the IMF approved its share, and a first tranche of $4.8 billion was paid out. Markets seemed to have been right in gambling that Russia was simply too big, and too nuclear, to be allowed to fail. What they failed to reckon with was that the chicken game would continue, and that in the second round both sides would lose.

An important reason behind the subsequent meltdown was that the breathing spell that the bailout was intended to provide was put to no good use whatsoever, at least not for Russia. Most important, the Duma continued to obstruct necessary legislation. In the days immediately after the rescue was announced-and before the IMF confirmed its decision-the Duma gutted the government's anticrisis plan, defeating measures that, according to Kiriyenko, would have provided two-thirds of targeted revenues.