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Russia, financial outcast
Russia has been in default since last August on most debts and will soon
want more money from the West so it can roll over the rest. The West
should say no
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Russia, financial outcast
Russia in default
Russia�s economy
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THE jar is all but empty, and once again Russia is looking to the West
for more honey. Once again, the spectre of bankruptcy looms. Once again,
Russia�s apologists present the prospect of the bear, once rebuffed,
sinking even further into resentful degradation and nerve-racking
unpredictability, and bristling all the while with nuclear missiles.
This time, however, the rich countries should steel themselves and say,
�Sorry, not until you�ve put your house in order.� Unless Russia gets a
radically new economic regime, any further western money is likely to be
squandered�at best used to prop up a system that does not work, at worst
to find its way into the pockets of corrupt politicians, officials and
businessmen.
Since the rouble�s crash last August, many of the tentative gains of the
preceding few years have been blown away. Misfortune has been piled on
misfortune. Last autumn�s worst harvest in 45 years means that even
bread may soon be in short supply. The price of oil, Russia�s main
earner of foreign exchange, has tumbled. Investors, bruised by the
collapse of Asian markets, do not wish now to be crushed in Russia. The
inflation rate, judging by December�s figures, may rise to 100%, or even
higher if the government decides to pay off wage arrears by printing
money. As it is, many public-sector workers�teachers, for instance, who
are supposed to get a princely $20 a month�have not been paid for a
whole year. Much of Russia�s nascent middle-class has been pulverised.
The monetised economy is barely half the size of the Netherlands�. The
murder rate may be the world�s highest. Male life expectancy has fallen
to African levels: 58 years is now the average life-span, and the
population is contracting by 800,000 souls a year. The country seems to
be dying on its feet.
True, Russia now has in Yevgeny Primakov a prime minister who, as a
former head of the KGB, is gathering power and has the experience to
make use of it. But he is not a man with a vision of the future or the
determination to make changes for the better, more someone to manage the
country�s decline. With Boris Yeltsin yet again shoved to the margin by
ill health, Russia has no presidential guidance. The federation
threatens to fragment. It has no real leader, no moral compass, no
tangible hope that things material will soon improve.
Mr Primakov has chosen the path of least political resistance, eschewing
virtually anything that smacks of economic risk or reform. He has hired
old sweats from the days of Soviet central planning to run the central
bank and what passes for economic policy. He has salvaged a shred or two
of national pride by continuing to behave awkwardly abroad. Above all,
he has managed to avert civil strife, at least tempering Russia�s steady
decline with a measure of political stability.
Soon Russia will face some big bills for the repayment of various loans
(see article). It has no chance of paying them all without more
borrowing. The argument for helping it out rests mainly on the belief
that a refusal to do so could upset whatever equilibrium exists. A
general default on debt, of which some $17 billion falls due this year,
would mean Russia�s exclusion from the world�s financial markets. In the
short term, Russia wants �only� $7 billion, partly to roll over
repayments to the IMF that fall due throughout this year; it is not
asking for budgetary support.
A bankrupted Russia, say those who would give it the money, would become
an economic outlaw deprived of any incentive to co-operate on many
issues, foreign and financial. It would turn its back on democracy. It
could bully its neighbours with impunity. It would topple backwards into
nostalgic communism or forwards into Slavophile fascism.
Really? The benefit of the doubt that the West has repeatedly granted
Russia on a range of questions, from abiding by IMF conditions to
rooting out corruption or behaving better on such matters as Iraq,
Kosovo and the sale of nuclear technology, has reaped but the scantest
of rewards. Why should the record change? Mr Primakov, after all, is a
past-master at reassuring the West of Russia�s good intentions at one
moment and then abetting the West�s enemies at the next.
When the importuning has to stop
Not that the West should turn its back on Russia for ever. It is still a
land of magnificent opportunity. Once it has begun to create a workable
financial system, a tax base, a set of laws that people respect and
obey, above all a modicum of honesty in public and private dealing,
western interest will revive. And even in the shorter run all is not
lost. For all his faults, Mr Primakov has afforded his country a
breathing-space. So long as the Russians� extraordinary stoicism
continues to put off a social explosion, their latest prime minister may
succeed in carrying the country forward to two big elections�one
parliamentary, the other presidential�which might provide it with a new
lease of proper politics and leadership.
The election to Russia�s lower house of parliament, the Duma, due in
December, is likely to produce much the same bloody-minded mix of
nationalists, communists and regional bigwigs as before. The
presidential contest, due in June 2000 if Mr Yeltsin lasts that long, is
more important.
Here there is a flicker of hope. In the past, Mr Yeltsin�s adversarial
heroics have saved the democratic day. But, since his re-election in
1996, he has failed to build the consensus for reform that Russia�s
rough system of largely presidential, partly parliamentary government
crucially needs. Of those who might follow him�Mr Primakov (though he
denies such ambitions); Moscow�s mayor, Yuri Luzhkov; and ex-General
Alexander Lebed�none can win the presidency without building alliances.
The sooner Russia has a proper president, the better.
In the meantime, the West can still do some good, even with the Kremlin
in a sulk. It can continue to offer money to help decommission nuclear
weapons and clean up the contamination they are causing. It can provide
humanitarian aid, including cash for food and medicine, and give support
to groups struggling to strengthen the press, the protection of human
rights and other aspects of the building of democracy. It should pay for
cohorts of young Russians to come to western countries to learn about
decency in business. It can engage directly with Russia�s ever more
powerful regions, rather than concentrate entirely on leaders and
institutions in Moscow. And it should help neighbouring countries,
whether democratic Balts or stumbling Ukrainians, to step out of the
shadow of a menacing bear.
All of this would be evidence that the West was still ready to support
the things it believes in. But a profligate dependency, with no will to
reform, is not one of them. In the end, whatever help is offered, only
Russians can make their country work. They may as well realise this
sooner rather than later.
=====
RUSSIA IN DEFAULT
Money can�t buy me love
M O S C O W A N D W A S H I N G T O N , D C
Russia looks set to become even more of a financial outcast this year.
Will it become a political outcast too?
Bearish on debt
Who is running
Russia?
Russia�s economy
THE Russians have long aspired to join the G7, the group of leading
industrialised countries. But now membership of another tightly drawn
club of seven is looming: what might be called the �P7� group of leading
pariahs that have borrowed money from the International Monetary Fund (
IMF) and failed to pay it back.
Last year�s financial crash, when the government defaulted on $40
billion of rouble bonds, rocked the world financial system. Since then,
the government has fallen behind on a further $1.5 billion due on the
largest chunk of its dollar debts, which were inherited from the Soviet
Union. Worse is to come. Without more international help, Russia will be
unable to pay $4.8 billion or so that is due this year to the IMF and
World Bank.
That would place the world�s sixth-most-populous country, a nuclear
superpower and permanent member of the UN Security Council, in the
company of Afghanistan, Liberia, Sudan, Iraq, Congo, Somalia and
Yugoslavia (see chart 1)�poor, war-ridden places, some barely existing
as states. It would also be an embarrassing failure for the western
countries and institutions (chiefly America and the IMF) that have
sponsored and financed Russia�s attempts at economic reform. Although
their leaders argue now that matters would have been even worse without
their help, the current economic mess far exceeds their worst fears in
1991, when the loans and aid began.
Down to the last kopek
The arithmetic is depressing. Even the most optimistic bankers no longer
expect Russia to pay the entire $17.5 billion in interest and principal
that is due this year. Without further aid, even finding the $9 billion
it needs to service the �untouchable� debt incurred since 1991 looks
impossible.
This reflects the poverty and weakness of the Russian state, rather than
of Russia itself. The country�s annual current-account surplus,
excluding interest payments, is a healthy $18 billion. But Russians�
reluctance to invest at home, or hold their own currency, means that
most of the inflow zips straight out of the country to Switzerland or
Cyprus. Little reaches the tax collectors, or the central bank�s
reserves (see chart 2).
Neither the government nor the central bank can pay Russia�s debts. Tax
revenues last year were running at around $1 billion a month, less than
those of New York city. The central government was spending $1.5 billion
a month. Although tax collection is improving, there is no chance of
finding $9 billion from that. And raiding the central bank will not help
much. Only $7 billion of its $11.6 billion reserves are in cash; the
bare minimum, to cover a month�s imports, is $4 billion. Were the state
to drain central-bank reserves as well as sell gold and shares in
state-owned energy companies, chiefly Gazprom, it would raise only some
$4 billion. That is not enough to pay the IMF, let alone satisfy all the
other creditors.
The Russian budget for 1999 assumes that $7 billion will come from new
international credits. Few find this plausible. Scorched by default,
western bankers say they would rather eat nuclear waste than lend to
Russia in its current state. Foreign governments might lend a little,
but only if the IMF and its sister organisations also stump up some
cash.
In the past, IMF money was always forthcoming. Whenever Russia has been
in a scrape, a word of guidance from the American government to the
world�s financial overseers has been enough to overrule bureaucratic
scruples about wobbly public finances, the risk of theft and the slender
chances of getting the money back.
No longer. Perhaps belatedly, a new consensus now unites both the
international financial institutions and their political masters in
Washington: that without deep changes in the way Russia is governed,
lending the country any more money is useless, or even harmful. There is
no support in America�s Congress or in the White House for further
loans. Those politicians who remain interested in Russia, such as Curt
Weldon, a Republican congressman, urge a new focus. Mr Weldon wants to
steer money away from central government, co-financing, for example,
local mortgage-lending programmes. The West�s priority should not be
bailing out the government, he says, but building a Russian middle
class.
Unfortunately, this new American resolve is matched by a new, less
sensible, consensus in Russia. Politicians in the country now believe
that it is precisely IMF and western advice on such matters as budgetary
stringency and privatisation that is largely to blame for Russia�s
plight. The new rulers do not see why they should sweat to pay back
loans that formed part of their predecessors� failed experiment in
�shock therapy� and �wild capitalism�. Moreover, there is no appetite
for painful structural reforms of the kind that the West believes are
inescapable; the great achievement of Russia�s new government, which
took office in September, is merely to have maintained a dismal
stability. Things may get worse, goes the unspoken motto, but at least
they will do so quietly.
A mission from the IMF is currently in Moscow. And Stanley Fischer, the
IMF�s first deputy managing director, met Yevgeny Primakov, Russia�s
prime minister, in Davos last weekend. Yet there is little sign of any
meeting of minds. The Russian side finds the IMF�s insistence on higher
taxes and lower revenues impractical and exasperating. The IMF finds the
main assumptions in the budget�on the exchange rate, inflation, revenues
and spending�ridiculous. It strongly opposes the government�s planned
cut in value-added tax; it wants to see taxes collected in cash, rather
than IOUs; it demands that the country�s corrupt and phoney banking
system should be reformed; it wants a proper bankruptcy law, and market
prices for energy and housing. Oh, and it wants decent treatment of
other creditors too (see article).
Don�t care was made to care
The immediate future is likely to be messy. There will be months of
brinkmanship, during which Russia pays some creditors, at least in part,
while keeping others at bay. Russia is constrained far more in theory
than in practice, because the public and western banks and governments
are proving remarkably stoical.
Surprisingly, perhaps, IMF debt looks to Russians like a softer target
than Eurobonds. The first step against IMF defaulters is (wait for it) a
telegram, and after two weeks a reminder. After a month, the IMF�s
managing director informs the board members (who presumably have read it
in the newspapers) that payment is overdue. After two months he formally
complains to the board. After three months, the board may decide to
suspend the offending country�s right to use IMF money. Subsequent steps
towards infamy include a declaration of non-co-operation (after up to 15
months), a suspension of voting rights and so forth. The full process
can take years. Sudan has been in bad standing since 1990.
Such thunderous huffing and puffing from the IMF would be humiliating
for any government that prized financial respectability. But set against
Russia�s other choices it seems to allow plenty of time to sort
something out.
Indeed it may be a chance for a formerly communist superpower to show
its frustration at the way the capitalist world is run. Mr Primakov
loathes what he calls a �unipolar� world (meaning one dominated by
America). In part, Russia views the IMF not as a global financial
referee but as a tool of American economic hegemony. What could be more
satisfying than to bend its rules by, say, missing a couple of payments
and demanding an arrangement that no country but Russia could have hoped
to obtain? �Primakov hates the idea of rules that apply equally to all
countries. He wants special treatment for Russia on principle,� notes
one of the architects of western policy towards Russia.
Russia may therefore try to play off western powers against each other
by, for example, exploiting European and Japanese edginess about
America�s role in Russia. Mr Primakov might also honour debts from some
western governments and the World Bank, which Russians see as rather
softer creditors, but default on the IMF, with its tiresome conditions.
If not a policy of divide and rule, it is at least one of divide and
survive.
Some Russians also calculate that an IMF default will not do lasting
damage. In December Russia is due to elect a new parliament; and in the
middle of 2000, if not earlier, a new president. The West is impatient
with the current crew and fed up with all the broken promises made by
past Russian governments. Nevertheless, a new leadership in Russia could
make pro-western noises (even Mr Primakov could one day tempt some
economic liberals into his government). If so, the West might make a
gesture of support�though Russians would be wrong to expect more than a
token.
So far, Russia�s approach is going down badly in the West. Those in
Washington who deal with the Russian government complain that it treats
the negotiations like a poker game, rather than a joint effort to rescue
the economy. But cynics give Russia�s tactics a chance of succeeding.
They note that the generous treatment received by Russia since 1991
demonstrates that the IMF�s rules apply less consistently and harshly to
a large country with nuclear weapons than they do to others.
Nonetheless, for a good part of this year Russia will be flirting with
financial outlawry. The crunch is likely to come in July, when a
technical fluke makes Russia�s monthly payments to the IMF, for most
months below $400m, suddenly shoot up to $1.2 billion. Until then, the
betting is that Russia will pay everything but its debts to the London
and Paris Clubs on time. After that, expect the telegrams to start
flying.
Believe in yesterday
Being a financial pariah will do little further damage to the day-to-day
functioning of Russia�s crippled economy. Barring an unlikely attempt by
the West and the IMF to punish Russia further, the wheels of trade will
continue to turn, oiled by letters of credit and export guarantees.
Western firms determined to invest in Russia will continue to do so.
(The well-connected may even be able to drum up support from their g
overnments.) Although Russia will be cut off from the international
capital markets, some parts of Russia, such as the city of Moscow and
some oil companies, will still be able to borrow from western banks.
The real danger is that isolation will postpone even further the day
when conditions in the country will improve. Integration with the world
economy has enabled the most successful post-communist countries, such
as Hungary and Estonia, to begin to repair the damage of the past five
decades. Cut off from foreign capital, Russia faces years of poverty and
stagnation. That means misery, danger and waste: sickly, brutalised
children; monstrously run asylums; crowded, plague-ridden prisons; leaky
nuclear installations; rampant organised crime and corrupt officialdom;
the erosion of cultural life and the education system; and the decline
of civil liberties.
All these stem from the financial and moral weakness of the state. A
government that cannot tax its powerful citizens is in no position to
protect its weakest ones. Even in the best case, changing this would
take decades. Yet before the August crisis, there had been signs of
hope. There was a growing middle class, particularly in larger cities.
The needs of the poorest were beginning to be met by a thriving, if
tiny, voluntary sector. Some Russian businesses had revealed glimmerings
of respect for shareholders, staff and customers. Higher standards were
encouraged by a growing foreign business presence�which, miraculously,
paid its taxes. Even some bits of the public sector were behaving
better.
Now the prospect is of almost unrelieved gloom. The economy is
shrinking, and most Russians think their lives will get worse before
they get better. That threatens others too, because Russia�s pollution,
crime and disease will inevitably cross its frontiers. Moreover, the
prospect of a fascist, feudal, or thieving government in charge of
thousands of nuclear and other weapons now seems less remote. �The
world�s second-largest nuclear power is falling into the hands of people
who will do absolutely anything for money,� argues David Satter, a
Washington-based Russia-watcher. The dream of a strong, friendly Russian
government shouldering its share of the world�s problems is sunk.
Yet this dream lay behind the whole thrust of western policy, first
towards Mikhail Gorbachev�s Soviet Union and, later, towards Russia. The
West supported democrats and reformers (sometimes with its fingers
crossed), in the hope that their virtues would rub off on their country.
In reality, the results were dismal. Pro-western politicians in Russia
turned out to be at best politically inept, at worst corrupt. Their
failure has been matched by a collapse in the moral standing that the
West gained among Russians when communism fell. Not for two decades have
Russians been so mistrustful and cynical. The epitaph on the West�s
policy to Russia, says Gordon Smith, a Republican senator involved in
foreign policy, is �money can�t buy me love�.
So what happens now? The West has dramatically scaled back its
ambitions. Rather than pursuing grand dreams of making Russia friendly
and prosperous, America is tossing it $300m to keep its nuclear industry
together, while proceeding with its own anti-missile defences. Russia is
all but ignored in the Gulf and the Balkans. NATO is expanding
eastwards. Trade and investment are now concentrated mainly on Russia�s
vast energy industry, rather than trying to transform Russian business.
This approach has not been exhausted. The West could, for instance,
trade more with Russia, by opening its markets. There could be detailed
work with competent Russian regions and institutions. Competition
between regions for foreign investment has already yielded some positive
results, as in Novgorod, a region outside St Petersburg, where tax
breaks and a business-friendly governor have attracted Russia�s biggest
cluster of foreign investment in light industry. All the same, so long
as Russia�s misery endures, the West�s grim, unambitious task will be
restricted to doing what it can to limit the damage.
� Copyright1999 The Econmist Limited. All Rights Reserved.
-----
Aloha, He'Ping,
Om, Shalom, Salaam.
Em Hotep, Peace Be,
Omnia Bona Bonis,
All My Relations.
Adieu, Adios, Aloha.
Amen.
Roads End
Kris
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