The recent devaluation of the ruble reflects the loss of confidence in Russia’s reform efforts. It also reflects well-founded expectations of future inflation — the one area of reform in which Moscow could claim some success. Those sentiments are reinforced by the grim assessment of Boris Nemtsov, a leading reformer who resigned last week from Boris Yeltsin’s Cabinet: “If Chernomyrdin says now that he can save the country, it is just a joke.” That is because he did little in the previous five years as prime minister to address Russia’s economic problems.
Nationalizing major industries, controlling prices and suspending the ruble’s convertibility, as is now being proposed by Duma members close to Mr. Chernomyrdin, will only prolong the country’s financial storm. Leaders of the Western industrialized countries concede that providing aid under such conditions is undesirable. But the pattern of IMF lending to Russia — which has helped to bring the country to crisis — shows that the aid-for-reform approach is also flawed.
The fund provided credit amounting to more than $20 billion in 1992, 1993, 1994, 1995 and 1996 — each time in exchange for Russian promises of reform. It is telling that the conditions of the IMF’s $11.2 billion loan, approved in July, were virtually identical to the fund’s conditionality since 1992. According to the IMF, the July loan called for reducing the fiscal deficit, addressing banking sector problems, dealing with government debt and “expanding and strengthening existing policies.” We’ve heard all of that before, so why was Stanley Fischer, the second highest ranking official at the IMF, asserting in early August that “there is certainty that the IMF measures will be implemented in full?”
The answer appears to lie in the agency’s often-overlooked institutional incentives to lend. In practice, the fund’s money has helped to delay, rather than accelerate, reforms because it has eased Moscow’s economic problems and allowed it to forgo policy change. Liberal reformer Grigory Yavlinsky noticed as much back in 1993 when he explained, “It has become clear that new Western credits are no longer a remedy for Russia, but a drug helping to maintain an unfit system.”
Faced with a government unwilling or politically unable to stick to IMF conditionality, the fund has repeatedly suspended its loans to Moscow. On each occasion, the elimination of aid has forced Russian policymakers to become more serious about liberalization. Indeed, the IMF has time and again encouraged policy change in Russia by cutting off its credit. Unfortunately, whenever policy changes do occur, the IMF resumes its lending. The fund has simply not risked letting the world watch Russia reform without IMF intervention.