IMF will not Aid Ukraine, Loan to Russia Unlikely
January 28, 1999
stratfor.com
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. |
