7/14/98 WSJ Front Page. Russia to Get $22.6 Billion in Loans Tied to Economic-Reform Pledge
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The International Monetary Fund Monday admitted Russia into its
intensive-care ward, already crowded by Indonesia, Thailand and South
Korea.
This article was prepared by reporters Andrew Higgins , Matthew
Brezezinski and David Wessel of The Wall Street Journal.
The IMF, the World Bank and the Japanese government said they plan to
lend Russia $22.6 billion by the end of 1999, more than half of that from
the IMF, which will have to activate its spare fuel tank, known as the
General Agreements to Borrow, to come up with the cash.
The assistance, substantially larger than expected, depends on Russia's
promise to deliver on a raft of reforms to boost tax revenue, narrow the
budget deficit and encourage more competition.
Russian shares, which have fallen 60% this
year, rose on news of the IMF-led package.
The Russian Trading System Index surged
13.18 points, or 9.2%, to 157.20. The ruble
firmed slightly against the dollar. Yields on
one-year treasuries declined to 115% from 129% Friday.
New IMF Money
Anatoly Chubais, the Kremlin's negotiator with international lenders, and
IMF officials said that Russia will get $11.2 billion in new IMF money this
year, in addition to $1.3 billion already committed, and another total of
$2.6 billion in 1999. The World Bank said it will lend Russia up to $6
billion this year and next, of which about $4 billion is on top of previous
commitments. Mr. Chubais said he expects $1.7 billion this year and $4.3
billion next. And Japan, gripped by economic woes of its own and a
political crisis following the resignation Monday of Prime Minister Ryutaro
Hashimoto, will loan $600 million this year and $900 million next year,
said Mr. Chubais. The U.S. isn't providing any bilateral aid.
In Washington, White House spokesman Mike McCurry said the U.S.
welcomed the deal as a "major step forward." The assistance program is
subject to formal approval by the IMF board, which is scheduled to meet
in Washington next Monday.
The package marks a pivotal point for Russia. It takes pressure off the
ruble -- staving off a potentially ruinous devaluation -- as well as bond and
security markets. But it also sharply raises the price of failure to carry out
reforms due to be debated by parliament this week.
Breathing Room
"In the short term Russia gains some breathing room. But it also raises the
stakes tremendously," said Vladimir Konovalov, economist at Credit
Suisse First Boston in Moscow. "Russia has given the fund the go-ahead
to come in and look over its shoulder. If they mess up again they will pay a
terrible price."
Mr. Chubais said the scale of the IMF-led assistance would allow Russia
to avoid seeking supplementary loans from private sources. Negotiations
with western banks have been fitful and testy, said bankers in Moscow.
Mr. Chubais said Russia would "not pay any price" for new commercial
loans. He said the package would also enable Russia to "limit" issuing new
treasury bills. Short-term paper has become a costly burden with real
interest rates currently over 100%. The government spends between $1
billion to $1.5 billion a week to redeem such notes, according to officials.
At a joint press conference with Mr. Chubais, John Odling-Smee, the
IMF's top Russia negotiator, said holders of short-term Russian treasuries
would be able to exchange these for longer-term, dollar-denominated
notes. He said the optional bond swap would "ease the pressure on the
treasury market and ease the burden of interest payments on the budget."
In Washington, a senior U.S. official said Russia is expected to offer
holders of short-term ruble-denominated notes dollar-denominated
securities with maturities of seven and 20 years. The official distinguished
this from Mexico's ill-fated teso bonos, short-term notes that were,
effectively, denominated in dollars and proved to be a major problem
when the peso collapsed in 1994-95. The Russia notes will be longer
term, and will involve much less money, relative to the size of Russia's
economy, the official said.
In 1997 Russia's budget deficit stood at 6.8%. Under the IMF-supervised
program, Russia is to trim this to 5.6% this year and 2.8% in 1999.
Achieving such targets will depend on Russia's implementing an "anticrisis"
program scheduled to be debated Wednesday by the
communist-dominated lower house of parliament, the Duma.
Mr. Odling-Smee said the first half of the new funds pledged by the IMF
will be released as "soon as action is taken by legislation."
Dmitri Zhukov, chairman of the Duma's tax and finance committee, said
the anticrisis package contained "many reasonable things" and predicted
parliament will "pass 80%" of it. If rejected, the reform program could be
enacted by decree by President Boris Yeltsin.
The measures include a new tax code aimed at streamlining an unwieldy
system still based largely on Soviet accounting practices. The government
is looking to increase monthly tax receipts by the federal government to at
least 15 billion rubles by November from a current level of around 11
billion rubles, Finance Minister Mikhail Zadornov said last week in an
interview.
"Russia has had a near death experience," said Al Beach, an economist at
the Russian European Center for Economic Policy, "But this could be very
positive if they get through it ... they are fighting an uphill battle. The IMF
money is a first and crucial stage. But it is not enough."
In a statement, IMF Managing Director Michel Camdessus said the
increased international aid for Russia "will help Russia face its difficult
problems, which have been exacerbated by the sharp decline in
commodity prices, in particular oil."
The IMF-Russia pact came after several days of intense negotiations in
Moscow, and a telephoned plea for help from Russian President Boris
Yeltsin to President Bill Clinton on Friday.
In the 20-minute call, the Russian leader argued that his economy had
come to a make or break moment that could determine the future of
Russian reform. He sought a quick public U.S. call for an immediate IMF
deal -- which White House spokesman Mr. McCurry promptly delivered
-- as well as a nudge from inside the IMF, where the U.S. is the biggest
shareholder.
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