Russian Federation and the IMF
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Russia and the IMF:
Address by Michel Camdessus
Meeting the Challenges of an Emerging Market and Transition Economy
Managing Director of the International Monetary Fund
at the U.S.-Russia Business Council
Washington, D.C. - April 1, 1998
It is a great pleasure to join you here once again. These days, so much discussion of the
economy and the IMF revolves around the crisis in East Asia. But as you know, East Asia is
the only part of the world where the IMF is helping countries open their markets, strengthen
financial systems, and manage their economies more transparently. And so I appreciate this
opportunity to discuss another economy in another part of the world, where the stakes for the
international community are also very high.
Since Russia joined the Fund in June 1992, the IMF has been at the center of
to help Russia become a stable and prosperous market economy. Certainly, there have been a
number of ups and downs in the process, and the transition is by no means complete. But
this time, the Russian economy has passed from the brink of hyperinflation to
inflation; from substantial isolation to substantial integration in global markets; from the
of central planning to the rise of a dynamic private sector; and from output collapse to a
long-awaited renewal of output growth.
But if the Russian economy has evolved in recent years, so have global capital markets.
particular, the crisis in East Asia provides a fresh reminder of just how quickly private capital
flow out of a country when market sentiment changes. It also underscores how important it is
countries that are tapping international markets to develop economic and financial
that are strong and transparent enough to retain market confidence--and resilient enough to
accommodate tighter policies when the need arises. So Russia still faces a number of
long-standing challenges in its transition to a market economy. But it also faces some new
in its role as an emerging market economy. Let me give you my perspective on where Russia
stands in meeting these overlapping tasks, and where we hope to see Russia go in the years
* * * * *
When I last met with you, two years ago today, our Executive Board had just agreed to
the Russian government's medium-term program of stabilization and reform, with a loan
the IMF's Extended Fund Facility. Since then, the main accomplishment has been the
further progress toward macroeconomic stability. Inflation has declined--from nearly 50
in 1996 to about 15 percent in 1997; the exchange rate has stayed within its predetermined
and the balance of payments has remained broadly favorable. And last year the Russian
grew for the first time since the breakup of the former Soviet Union--if only by a modest half
1 percent of GDP.
How has this progress been achieved? First of all, a large and increasing share of
activity is being channeled through private markets, which now account for 70 percent of
Russia's GDP. For all its imperfections, this dynamic private sector has become the major
of economic transformation and growth.
At the same time, Russia has been setting up institutions to manage the economy
instead of through direct commands. In part because of IMF support, Russia now has a
professional central bank. During most of 1997, the Central Bank of Russia kept monetary
appropriately restrained, including in the face of large capital inflows in the first half of the
And in late 1997 and early 1998, it fought off the contagion from East Asia by allowing
rates to rise sharply. In response to this decisive action, the exchange market has stabilized,
the three-month Treasury bill rate, which peaked at close to 50 percent in late January, has
declined to around 25 percent at present.
But while monetary policy has been very effective, the same cannot be said of fiscal
policy or of
the institutions needed to underpin an efficient market economy.
Turning first to the fiscal situation, I would say that, even though the federal deficit
well within the program target on a cash basis, overall fiscal performance still leaves much to
desired. Once again, cash revenues fell short of the level on which the budget law was based,
the government was only partly successful in cutting back on spending in response. So, even
though the government succeeded in eliminating arrears to employees and pensioners, large
arrears to suppliers emerged, and the overall problem of arrears remained unresolved.
the practice of offsetting arrears of taxpayers against the payment arrears of the government
continued to undermine the budget system.
The origins of these problems are well known. Part of the problem lies in Russia's
system, accounting rules, and administrative procedures, which are only slowly changing. But
also at fault are the exceedingly close ties between the government and a number of large
enterprises. These cosy relationships allow many firms to benefit from explicit or implicit tax
exemptions, to exploit flaws in the tax system to avoid paying taxes and, in some cases,
withhold their tax payments. Indeed, the government has had problems demonstrating the
political will required to enforce tax obligations, even following the establishment of the
Emergency Tax Commission.
The immediate result, of course, is that the government cannot always pay wages and
and provide basic public services. But that is not the only concern. These problems also hold
back investment and growth and impede Russia's transition to a stable market economy.
Moreover, the continued large fiscal deficit leaves Russia highly vulnerable to swings in
sentiment. Indeed, market perceptions that the government is not dealing forcefully with the
fiscal problem could lead to destructive pressures on the exchange rates and interest rates.
What about the rest of Russia's reform agenda? Russia is moving ahead in establishing
institutions needed for a market economy. For example, progress is being made on bank
restructuring, with some 200 bank closures and another 300 banking licenses revoked last
new bankruptcy law entered into effect on March 1, which, though not perfect, should
powerful tool for enforcing tax compliance and hard budget constraints. Meanwhile, the
authorities are beginning to give greater attention to protecting shareholder rights. And
considerable domestic pressure for greater trade protection, a generally open trading system
Nevertheless, much remains to be done to strengthen the banking sector, establish a more
favorable business environment, and level the playing field for private sector activity. Indeed,
this regard, one cannot help but observe the similarities between the relationships that existed
among chaebols, banks, and government in Korea under the system of "crony capitalism" and
system that is now taking shape in Russia under the elegant name of "oligarchy." And as we
seen in East Asia, when the structure of ownership is not transparent, when regulation is
inadequate and unevenly applied, and when market forces are prevented from playing their
normal disciplining role, serious imbalances and inefficiencies can build up. And, once
these problems can provoke an abrupt market correction.
* * * * *
A little over a month ago, I traveled to Russia to discuss these problems with President
his economic team, and leaders of the Duma. In particular, I wanted to share our experience
East Asia with them and encourage them to consider its lessons for Russia. One key lesson is
in today's global environment, persistent macroeconomic problems, underlying weaknesses in
the banking sector, and a lack of transparency can leave countries vulnerable to changes in
market sentiment. A firm monetary stance can go a long way in stabilizing exchange markets.
But it is neither feasible nor desirable to rely on monetary policy alone for any extended
time. Thus, I urged the Russian authorities to reflect on three aspects of Russia's situation:
continuing deficiencies of fiscal policy; the weakness of the banking sector; and the
pervasiveness of "crony capitalism." And I urged them to consider the obstacles that these
pose for Russia's transition, as well as, possibly, for its ability to attract and retain stable,
long-term capital inflows. The President and his team agreed with this analysis and, on the
of this common understanding, the technical work on the 1998 program has by and large been
completed. With the recent dismissal of the Cabinet, we will be reconfirming these
understandings with the new government. This program, which tackles the problems Russia
on a broad front, is shaping up as follows.
On the fiscal side, the 1998 program will aim for a substantial reduction in the fiscal
through a marked improvement in budgetary practices. On the revenue side, this will involve
pursuing taxpayers with large arrears and abandoning the practice of offsetting tax arrears
arrears in government payment for goods and services. On the spending side, it will involve
cutting lower-priority programs and establishing better control over spending units.
Already there have been some important breakthroughs: the budget will be implemented
on a cash basis--with no more payments in commodities and no more offset arrangements.
Likewise, the government is developing a strategy for settling remaining expenditure arrears
through a combination of cash payments and securitization. Also, the budget allows the
government to reduce expenditure in line with any revenue shortfalls.
In addition, the government submitted a revised tax code to the Duma in January, which
many of the reforms suggested by the IMF, including fewer and more efficient taxes, the
introduction of accrual tax accounting, improvements in taxpayer rights, and simpler
administrative procedures. Further improvements could be made, and indeed, Fund staff have
made a number of suggestions to that end. But the proposed code still represents a vast
improvement over existing legislation. Thus, we have urged the government to spare no
ensuring its passage in the Duma.
The structural reforms to be included in the program, which were formulated in
both the World Bank and the IMF, focus is on creating an environment conducive to private
sector-led investment and growth. Thus, the reforms emphasize improving transparency and
accountability in the public utility and transport monopolies and the privatization process;
enhancing corporate governance and investor protection; and encouraging competition. Let
give you some examples.
To encourage openness and transparency in the so-called "natural monopolies," quarterly
accounts consistent with international accounting standards will be published for Gazprom,
(the national electricity company), the Railways, and Transneft (the oil transportation
In the area of privatization, greater use will be made of independent financial consultants
evaluate the companies to be privatized and carry out final sales in order to ensure a level
field for all potential bidders. Moreover, the government has indicated that the eight largest
enterprises (measured by asset value) will be sold in line with the competitive privatization
procedures developed in consultation with the World Bank. Indeed, the government has
announced that independent financial consultants will be involved in the upcoming
of the oil company Rosneft.
In the area of trade reform, the program calls for further steps to lower tariffs and
And in the area of banking sector reform, discussions have centered on introducing
accounting standards and reporting requirements for commercial banks, and strengthening
prudential supervision and regulation.
Indeed, the authorities do understand the need to publish data on economic and financial
developments in a more timely and transparent manner. Thus, they have indicated their
to improve their data practices in line with the guidelines set out under the IMF's Special
Dissemination Standard. On our side, the IMF staff is reinforcing its efforts to collect and
analyze data on financial and banking sector developments.
* * * * *
So what does all of this suggest for the future?
Clearly, the recent experience shows that unless the underlying weaknesses in Russia's
and economic situation are addressed, Russia will remain exposed to shifts in market
and sentiment. Addressing these weaknesses in a convincing manner is the challenge that will
face the new government when it takes office. In this regard, I could envisage two different
- in the positive scenario, all policy steps planned under the EFF-supported program are
implemented in full. This would lay the basis for a steady improvement and resolution of the
problems noted above. In this case, economic growth would gain strength without financial
disruption caused by loss of investor confidence. This scenario is predicated on firm
commitment, and implementation on the government side, which has not always been there
- under an alternative scenario, the pace of reform falls short of the program plans, giving
financial market disturbances and allowing continued "crony capitalism" that in turn prevent
economic recovery. I cannot emphasize strongly enough that the Russia cannot afford to take
route. As a friend of Russia, the IMF will urge the new government to implement the
full, as this is a sine qua non for the renewed economic growth needed to secure a stable and
IMF EXTERNAL RELATIONS DEPARTMENT