IMF Acknowledges That It 'Underestimated' Challenges of Russian Economy
By Emily Schwartz
IMF Says it 'Underestimated' Challenges in Russia (Update1)
(Adds comments from Leach, bankers' group.)
Washington, Aug. 27 (Bloomberg) -- The International
Monetary Fund failed to grasp how difficult it would be for
Russia to transform its economy as the lender provided some $20
billion in aid during the past seven years, an IMF official
acknowledged.
Yet ''Russia continues to deserve support'' as long as the
government takes ''appropriate steps to tackle the difficult
problems it faces,'' wrote John Odling-Smee, director of the IMF
department in charge of former Soviet states.
''We underestimated the complexity of the whole transition
process, in which the economic and political dimensions are
intertwined,'' Odling-Smee wrote in the ''IMF Survey'' newsletter
to be published next week.
He also said ''there is no evidence that any of the IMF's
money was stolen or misappropriated.''
Odling-Smee's remarks came as the IMF looks into reports
that some of its loans were diverted in an alleged money-
laundering operation. And earlier this month, an informal audit
concluded that Russia's central bank misreported reserves to the
IMF and criticized the bank's use of foreign companies to manage
its money.
Pressure on the IMF to monitor its loans to Russia and other
countries in increasing. U.S. Representative Jim Leach, chairman
of the House Banking Committee, said until the IMF can confirm
that money lent to Russia won't be misused, it should stop
lending to the country.
'Financial Sieve'
And the head of a banking association also cast doubt on the
lending program, calling Russia a ''financial sieve.''
The country is not just having trouble tracking the use of
its loans from the IMF, said Charles Dallara, managing director
of the Institute for International Finance, an association of 300
banks and other private financial companies. ''Russia has been a
financial sieve for the better part of this decade,'' Dallara
said.
The IIF has found, on average, that Russians stow $2.5
billion every month in foreign bank accounts, he said. This
capital flight ''is a commentary on the failure of political
maturation in Russia,'' Dallara said.
The IMF said it will continue its investigation of the
alleged money-laundering operation. ''We still haven't found
anything and we will, no matter what, continue to examine the
allegations because they are serious,'' IMF spokesman Thomas
Dawson said. ''None of the allegations are specific enough to
easily trace.''
'Total Breach of Trust'
Odling-Smee also had harsh words for Russia. Reports by
PricewaterhouseCoopers, commissioned by the Russian central bank
at the IMF's ''insistence,'' showed that misreporting foreign
reserves ''may have caused to IMF to disburse funds in 1996 that
would otherwise have been delayed,'' he wrote in the newsletter.
''This was a total breach of the trust on which the
relationship between the IMF and its members must rest,'' he
said.
Russia is counting on getting a $640 million installment of
a $4.5 billion IMF loan next month, Russian Finance Minister
Mikhail Kasyanov said this week.
Still, Odling-Smee expressed support. ''Despite the
disappointments of the past, we believe that the current program
offers a good chance of gradually improving the economic
situation and discouraging capital flight,'' he wrote.
Russia has succeeded in keeping the ruble stable since
March, lifting industrial output and improving tax collection,
the first signs the economy may be starting to recover a year
after the government defaulted on $40 billion in Treasury debt
and abandoned its defense of the ruble.
Russians Seek Details
Russian law enforcement officials said they're seeking
information from U.S. authorities about the U.S. investigation
into allegations of money laundering through the Bank of New York
Co.
Russia's Federal Security Service, known as the FSB, will
meet with U.S. authorities at the request of Russia's General
Prosecutor. The U.S. didn't request assistance, the prosecutor's
office said.
''We gave an order to the FSB to contact colleagues in the
U.S. and clarify the situation,'' said Natalia Veshnyakova, a
spokeswoman at the prosecutor's office. ''The U.S. is the one
conducting the investigation.''
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