RUSSIA-FINANCE: Waiting to Inhale

By IPS Correspondents Reprint | | Print |

Sergei Strokan

MOSCOW, Jan 30 1996 (IPS) - In a way, Russia today is like someone deeply submerged for an extended period in dirty water whipped by heavy currents, heart pumping hard and aching to inhale.

Signs of political chaos abound. Economic decline seems inexorable. Thus the country’s negotiations with the International Monetary Fund (IMF) for a 9.5 billion US dollar loan offer more than the mere prospect of fresh credits.

That loan – the second largest package the Fund would have extended after the huge chunk it plunked down to bail out Mexico – appears in the current scenario to be a political and economic lifeline.

However, even as reports reached here Tuesday of palsy-walsy talks in Washington between Russian prime minister Viktor Chernomyrdin and U.S. Vice-President Al Gore, considerable doubts were being raised about whether or not the IMF would deliver.

Last week, it had appeared the three-year package was all but in the bag. Tuesday, as Chernomyrdin prepared for a meeting with U.S. President Bill Clinton, sources here said it was still touch and go whether a deal would be set by Wednesday, Jan 31, when the current round of talks are supposed to end.

The loan under negotiation is contingent upon Russia maintaining the macro-economic reforms which reduced inflation and stabilized the ruble in 1995. Political changes have rendered these questionable.

The start was hardly propitious. As the new round of talks began on Jan. 18, it was announced that the privatisation chief had resigned. Reformist-minded first vice-premier Anatoly Chubais was also Moscow’s chief negotiator with the Fund.

A Russian Finance Ministry official said Fund representatives were “unhappy” with Chubais’ resignation. “The course of economic development is still not clear to them,” said Anton Tolstikov, an a senior official in the Ministry of Finance. Chubais’ resignation “will keep negotiations in suspended animation”.

Analysts and market watchers still anticipate approval of the loan, but IMF officials in Moscow are showing a more restrained approach.

“It is premature to say at this point exactly how far we’re going to get on negotiations this time around,” IMF country representative Thomas Wolf told journalists.

An IMF source, who spoke to IPS on condition of anonymity, said contrary to earlier expectations, the agreement would not be reached this time. “While the two sides were deep in talks last week, several ominous events in Russia made IMF team doubt the prospects for the loan to be used in a proper way,” the source said.

The replacement of Chubais by Vladimir Kadannikov, former director of the ‘Avtovaz’ automobile plant, “to spearhead Russia’s economic development”, evoked deep concern among IMF officials.

According to the source, the Fund has asked for clarification of Kadannikov’s statement that “corrections” were needed to improve domestic industry.

And hard on the heels of Kadannikov’s appointment, the newly- elected Duma (lower house of Russia’s parliament) raised questions which seemed to hint at reassessing the results of privatization.

Communists elected to parliament in the recent elections have called for increased credits to industry. Last week president Boris Yeltsin compounded matters with a series of decrees.

One was to finance rehabilitation in Chechnya, the breakaway republic where Russian troops have been bogged down fighting a bitter war against rebels.

Some economists fear that action by Yeltsin, along with other measures like promising to set up a fund to pay public workers on time, could lead to the increase in budget deficit and higher inflation.

War-torn Chechnya has already turned into the “black hole” of Russian economy. Yeltsin’s rehabilitation plan calls for expenditure of some eight billion dollars, and the public workers fund would be over nine billion dollars. These decrees by the president have caused some raised eyebrows even within the regime.

On top of that, on Wednesday First Deputy Prime Minister Oleg Soskovets lambasted Western-style economic reform policies, saying they have been conducted without regard to Russia’s special circumstances and should be changed.

Soskovets, known as the government’s champion of the military- industrial complex, also criticized the “ruble corridor”, which maintains a soft peg for the Russian currency against the dollar and is widely viewed as the driving force behind a thriving Treasury bill market.

Worries over economic policy have pulled down the ruble in recent days, traders said. The currency slid 16 points last Friday to close at 4716 to the dollar. Several stocks, including Norilsk Nickel, LUKoil and Mosenergo, slid after Soskovets’ comments, dealers said.

“Under these circumstances IMF officials have no other option rather than to take a break to show all these signs didn’t go unnoticed,” the IMF sources said. “Most probably it would take another round of talks, somewhere in February, to finalize the deal.”

Chris Wood, chief economist with Morgan Greenfield, Moscow, said: “I think IMF is in a very tough position. You can’t make a loan contigent on one personality, but I think a lot of people in the markets thought Yeltsin wouldn’t get rid of Chubais because he wanted an IMF deal.”