IMF will not Aid Ukraine, Loan to Russia Unlikely
Summary
A scandal has erupted in Moscow over the discovery that, despite
Deputy Prime Minister Yuri Maslyukov's assertions to the
contrary, the IMF delegation in Moscow has no intention of
negotiating a resumption of IMF loans to Russia. This should be
no surprise, even within Moscow, but at the same time, an IMF
mission to Kiev recommended against resuming loans to Ukraine.
While abandonment of Ukraine may make economic sense, it
effectively forces Kiev into Moscow's arms -- a strategically
dangerous move for the West.
Analysis
The IMF mission that ended its visit to Ukraine on January 26 did
not recommend the granting a new monthly loan to effect the
resumption of the three-year aid package of $2.2 billion to the
country. The IMF, which froze aid to Ukraine in November 1998,
said Kiev was lagging in implementing economic and other reform
measures. Without the loan, Ukraine will probably fail to pay
its debts in 1999 to foreign creditors and will experience
increased inflation.
Like Ukraine, Russia's prospects for receiving renewed financial
support from the IMF are slim. The arrival of the IMF mission to
Moscow last week had been accompanied by optimistic statements by
Russian officials -- primarily by Deputy Prime Minister Yuri
Maslyukov -- regarding the possibility of an agreement with the
fund. Given the highly unrealistic economic program proposed for
1999 by Yevgeni Primakov's cabinet, we believe that it is very
unlikely that the IMF will approve new loan to Russia. And,
considering the fact that relations between Moscow and Washington
are at their lowest point since the end of the Cold War, this
does not surprise us.
What is surprising, however, is the IMF's attitude towards
Russia's southern neighbor -- Ukraine. By denying support to
Kiev, the IMF is making Ukraine extremely vulnerable to both
economic and political pressure. The IMF froze its three-year
aid package program to Ukraine, approved in September 1998, only
two months later, due to Kiev's inefficient tax collection system
and lack of progress in implementing reforms. Prior to
suspending the aid, IMF delivered $335 million of its original
loan to Ukraine. Since November, several rounds of talks between
the Ukrainian government and the IMF have taken place, but as of
today, the Fund has not changed its stance on the future
financial help.
Ukraine is now on a brink of financial collapse. The country's
foreign debt is $11.5 billion, of which $1.17 billion has to be
paid this year to foreign creditors and $670 million to the IMF.
The foreign reserve of the National Bank of Ukraine is reported
at only $1 billion, and there is a high probability that Ukraine
may face a severe economic crisis this year without help from
foreign financial institutions. The IMF is aware of this
situation, as well as of the fact that Ukraine has been slow to
realize economic progress because of the negative impact of the
financial crisis in Russia. What is important to recognize is
the consequences of IMF policies for the Ukraine: they amount to
leaving Ukraine with only one option, specifically seeking relief
by acquiescing in Russia's expanding sphere of economic and
political influence.
In the meantime, a political scandal is coming to a head in
Moscow, a scandal that involves First Deputy Yuri Maslyukov's
false statements regarding the progress the Russian government
was making with the IMF. The Russian newspaper Nezavisimaya
Gazeta wrote on January 26 that Maslyukov misled Prime Minister,
Communist Party, and the Russian people about the possibility of
getting a new loan of $ 4.3 billion as an extension of the old
IMF aid program. The newspaper has charged that "it is a bluff
on Maslyukov's part to raise the status of the IMF mission to
that of a negotiating delegation" when in fact "the mission has
no business other than compiling a quarterly report about the
state of the Russian economy, which the IMF does regularly in
conformity with point four of its Charter." The newspaper wrote
that it remained skeptical about the possibility that Russia
would receive a new loan from the IMF, and quoted "reliable
sources" to the effect that a draft presidential decree has been
issued to dismiss Maslyukov from his post. The Kremlin later
denied the report. And Maslyukov then blamed Russia's previous
reformist leaders for obstructing the present talks with the IMF.
Indeed, the indications that the IMF does not plan to grant
Russia another loan any time soon are numerous. Last week,
French Economics and Finance Minister Dominique Strauss-Kahn
reinforced impressions of the IMF's likely position when he told
a press conference in Moscow that the Russian 1999 budget was the
main reason why the IMF has been reluctant to grant a new loan.
This loan is critical in that it would secure debt relief for
Russia from the Paris Club group of creditors. On January 24,
Deputy Managing Director of the IMF Stanley Fisher said that the
new Russian economic program had no chances for success.
Moreover, he said, 1998 loan given to Russia had not been used to
help implement the reform strategy it was originally intended to
support. On January 27, German business daily Handelsblatt
quoted an IMF spokesman as saying that the fund has frozen all
further payments to Russia under the $ 22.6 billion aid program
designed last year. The IMF specifically disapproved of the
Russian government's inclusion of the IMF loan in its state
budget without specifying, in its new economic program, ways for
cutting budget deficit and curtailing inflation. The spokesman
said that as of this moment there is no timetable set for
starting new IMF negotiations with Moscow.
Confirmation of these reports may be found in the fact that the
planned January 28 meeting between Maslyukov and head of the IMF
mission to Russia, Jorge Marquez Ruarte, had been canceled a day
before it was to begin. According to the secretary of Anton
Surikov, Russia's First Deputy Premier, "there is no subject for
a talk yet." Clearly, the current Russian government can not
count on continued backing from Western financial institutions.
This is a painful realization for Primakov's administration,
which came to power once the previous pro-reform government was
sacked last summer. Primakov's government apparently believed
that help from the West would continue despite it having
jettisoned a reformist agenda.
It appears to us that the West is effectively abandoning Ukraine.
This certainly makes a great deal of economic sense. It does
not, however, make a great deal of strategic sense. We are now
at an interesting crossroads. The West has been treating the
former Soviet Union in primarily economic terms, and has left the
management of relations, to a great extent, to the IMF and other
primarily economic institutions. Economic rationality and
strategic rationality are two different things. Indeed, they are
sometimes contradictory things. Economists are controlling the
West's relation to Ukraine when, in fact, the issue should pass
into the hands of the national security specialists. This hand-
off is not taking place. Denying Ukraine aid makes economic
sense, but carries tremendous geopolitical dangers. It is
absolutely crucial that the West resume cooperation with Kiev,
especially if it breaks its relationship with Moscow.
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