Russian Federation and the IMF
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PRESS CONFERENCE CALL WITH STANLEY FISCHER
FIRST DEPUTY MANAGING DIRECTOR
INTERNATIONAL MONETARY FUND
THE RUSSIAN FEDERATION
Thursday, July 29, 1999
[TRANSCRIPT PREPARED FROM A TAPE RECORDING]
MR. THOMAS DAWSON, Director, External Relations Department: This morning, Stanley Fischer, First Deputy Managing Director of the IMF, will have, on the record, some comments on the Fund action last night with regard to Russia, as well as taking some questions from the participants in this call.
Thank you very much.
MR. FISCHER: Thanks very much, Tom. I thank you all for being willing to get up at this time of the day for a discussion of Russia, and I would like to welcome Tom Dawson as well. He formally becomes Director of External Relations on the 1st of August, but he's been here for a month already, and I am sure he will be working closely with you.
This is about Russia and the IMF Board meeting yesterday, and there are a few points to make in addition to what was said in our release last night. [See IMF Press Release No. 99/35, July 28, 1999, on IMF website at http://www.imf.org]
Point one, the Russian economy has done a bit better than expected this year. Economic activity is recovering. In fact, the economy seems to be growing. Inflation is down, and the balance of payments is stronger. If you ask how all of that could happen after the disaster of last August, there are two clear reasons. One is they've had a very big devaluation. That tends to discourage imports and encourage domestic production. The other is their debt-servicing payments have gone down as a result of the de facto default of last August. But in addition, their policies have been a little better than had been expected.
Point two, the macroeconomic framework that is in the IMF program, the agreed program, is already being implemented. The target is to have monthly inflation down below 3 percent per month in 1999. The budget will have a primary surplus of around 2 percent. That is more than it was last year. And they are achieving those goals, which is different than a year ago.
Third, structural reforms are also underway, particularly in the financial sector; in addition the program includes measures to reduce the extent of barter. We have cash collection targets for the main natural monopolies which are the gas sector, the railways and electricity. And they have met those cash collection targets which are slated to rise throughout the rest of the year, and that's a way of trying to get at the root of the barter problem in Russia.
Now, of course, we also had the two external investigations of various aspects of the Central Bank's operations of concern to the Fund. There was an investigation of what happened last July with the US$4.8 billion tranche, about which there had been many allegations. The external investigators were PricewaterhouseCoopers. They report no evidence of the misappropriation of balance of payments financing received last July; that is to say, they can track where the money went. As was agreed at the time, US$1 billion was transferred to the budget, and the rest was used for intervention in the foreign exchange markets, which is what money that is used to defend the currency goes for. And those transactions have all been followed by the examination.
More complicated is the second report on FIMACO. Several of you have already published reports on that. They were pretty accurate, but they were not exactly accurate. What the FIMACO report shows is no evidence of large-scale misappropriation of money, but there were important instances of misreporting to the IMF, the largest of which, around the time of the Russian election in 1996, was a transaction which was not accurately reported; in essence, it exaggerated Russia's reserves.
And so the IMF made disbursements at the time, which were based on misrepresentation. That is a very, very serious issue. The Board made it clear yesterday in the internal discussion how seriously they take that. We have a set of corrective actions in place. These include eliminating the conflicts of interest between the Central Bank of Russia and its subsidiaries, excluding any deposits it holds with them from their reserves, and most importantly, getting far more detailed reports on reserve holdings from the Russian Central Bank, and we will be sending a team there in August to help on that.
As you know and has been reported, the money that was approved for release yesterday, the total is about US$4.5 billion over 17 months, but the amount released yesterday, the first tranche roughly, US$640 million.
That money is being held at the request of the Russian authorities, in an SDR account in the IMF, and will be used to repay obligations falling due to the IMF. So that's the opening statement. We can shift to questions now.
JOURNALIST "A": I have a technical question and a substantive one. The technical one is when will the full report on FIMACO and the July tranche be published?
And the substantive one is we understand the discussion yesterday was quite tense, and until very late in the day there was no consensus. So why was that happening and what happened to change the situation, to break the deadlock?
MR. FISCHER: On the publication of the reports, the Russian government has authorized the publication of the reports. PricewaterhouseCoopers has to take care of potential legal complications. We are working with them to do that, and we hope that the reports would be issued on our Web site possibly by the end of this week; namely, tomorrow. But if not, very early next week. We're not in any disagreement on the principle of publication. But since they identify transactions, they have to take care of potential legal complications, and we are working together on that.
[The PricewaterhouseCoopers report was posted on the IMF website on August 5, 1999 at http://www.imf.org/external/country/rus/fimaco/index.htm. As requested by PricewaterhouseCoopers and agreed by the IMF, the report is to be removed from the website by September 4, 1999.]
On yesterday's discussion, I didn't think it was excessively tense. We came back--now, remember, we haven't had, first of all, an Article IV discussion on Russia for well over a year or a Board meeting on a loan to Russia for just over a year. So this is a revisiting of all of the events of the past year, and there was a lot to revisit.
If there was tension, it related to the fact that many members of the Board--made it clear that they regarded misreporting with the utmost seriousness, and they pushed to find out what was being done to prevent that happening in the future. And I would say that that probably prolonged the meeting a little.
But my guess is that it was not longer than the average meeting.
JOURNALIST "B": Did the report indicate how high up in the Russian leadership people were aware of this maneuver to misreport? And did that include President Yeltsin, the prime minister at the time, any other leaders? In other words, how politically deliberate was it?
MR. FISCHER: I don't know how politically deliberate. The report was confined to the Central Bank of Russia's activities because that's where the IMF money goes, and they identified people within the Central Bank who were involved.
JOURNALIST "B": Well, Stan, isn't this a central question to--and, obviously, this is a country that's facing an election in coming months--the message you need to send is obviously to the political leadership, as well as to those in the Central Bank who would organize this. Isn't a vitally and centrally important question about who ordered this, as well as what was done? And if that question wasn't answered, doesn't it suggest that the audit was technically sufficient, but doesn't get to the central issue?
MR. FISCHER: I think it gets to the central issue. The central issue was: were we lied to? The answer to that, coming out of the report, is, unfortunately, "yes."
Then the issues for us are what can you do to prevent that again and what other measures are being taken.
It has been made clear, at the highest levels of the Russian government, that is, the present political leadership, that what happened then was unacceptable and that we need measures in place to prevent anything like that happening again. So, to that extent, the conclusions have been drawn to the attention of the political leadership, and they are well aware of the implications of what was done, of the attitude of the Board and of the consequences.
JOURNALIST "B": Not to drive this into the ground, Stan, but just to make sure I understand. Did you, at any point, ask the question, either of the auditors or of the Russians, about how high up in the leadership chain, political leadership chain, they understood what was going on?
MR. FISCHER: PricewaterhouseCoopers was not asked to answer that question. They were asked to answer questions about what the Central Bank of Russia did.
A main issue that they were asked to address, incidentally, was whether there was theft, because there were widespread allegations of large scale theft, which appears not to be the case, from the report. Those were the charges that were being made.
Some of those in political leadership at the time have been informed by Fund senior management of our views of what was done and the current leadership is certainly informed.
JOURNALIST "A": Sir, did you discuss any forecast for the national economy for the GDP? I mean, they obviously did. So was there agreement between the parties on the Russian side as to what the figures will be on inflation, and exchange rates and stuff like that?
MR. FISCHER: We make assumptions on the exchange rate. For growth, year-on-year, we have--this, by the way, will be made public; in fact, has been made public already in Moscow, these assumptions. We have year-on-year growth of minus 2 percent. That, of course, means positive growth during this year because from August to December the GDP fell significantly. We have inflation assumptions and targets.
It's assumed the current account will be in very large surplus by about 7 percent of GDP, and inflation will be close to 50 percent on a 12-month basis.
JOURNALIST "C": Three quick questions for you, one related to the report.
And secondly, just sort of taking care of just making this loan rollover, what happens now? Do we basically start sitting down and working through an entirely new international rescue package? Because the U.S. has said that they will not seek, in any way, to help Russia financially until their deal has been done with the IMF. It would appear that deal has been done. So what's the next step?
MR. FISCHER: The reports of PricewaterhouseCoopers have been given to the prosecutor general and to the Duma for them to take the actions that might be required under Russian law.
On the second issue, what will be done on the financial front? Today, there is a Paris Club meeting on Russia that will follow-up on their desires to deal with official-sector debt. They have been meeting with the London Club, as well, to deal with their private-sector debt. You know that they are going on the basis that they will try to service Russian-era debt, but will need to find some way of deferring debt service or however they deal with it on the Soviet-era debt.
There is not a plan for a very large extra package beyond what is being done between the IMF and the World Bank, and the World Bank will be meeting today on this issue on Russia. So that we don't see the need, given that they are dealing with their private-sector creditors and their public-sector creditors, for a larger financing package than is currently envisaged.
JOURNALIST "D": Could I ask just two questions? One, the extent of the underreporting, how large was that?
And the second question is how much debt relief does Russia actually need and what are the implications of that in terms of their rescheduling or debt forgiveness or that kind of thing?
MR. FISCHER: The single largest element of misreporting was about US$1.2 billion in the middle of 1996, but there were others. It's ironic in the sense that, in those circumstances, one can't be sure, but I feel reasonably certain that had the Russians come to us and said, "We're under enormous pressure. We need a waiver on these reserve targets," that the Fund Board, given the market pressures at the time, would probably have said okay. But that's history.
JOURNALIST "D": And that was the reason for--that is what you think is the reason for the misreporting.
MR. FISCHER: Well, it could have been also to provide--to convince the markets that they were stronger than-
JOURNALIST "E": And this was right in the middle of the election campaign. They were spending money left, right and center.
MR. FISCHER: That's correct.
JOURNALIST "D": I'm sorry. You said it was 1 point-
MR. FISCHER: -- 1 point 2 billion dollars.
JOURNALIST "D": The second question related to debt relief and how much they need.
Running at 7 percent of GDP, the current account surplus gives you a lot of room to service debt.
JOURNALIST "E": So there will be no need to reschedule Russian debt, which they don't want to do anyway. You don't see that being economically needed?
MR. FISCHER: That's the current analysis, yes.
JOURNALIST "A": Sir, if that is true, how worried is the management of the IMF with this issue of the commodity credits from Russia to Yugoslavia?
MR. FISCHER: We've heard about these credits and are following up. But at this stage, I don't have any precise information to give you.
JOURNALIST "F": I'm curious whether the Board is a little bit concerned at the trend that seems to be emerging here, that the Fund is helping countries rollover debt not only to the private sector and government, but to itself.
MR. FISCHER: You know, if there's any country that didn't rollover its debts to the private sector and that didn't get Fund assistance to do it, it was Russia in August 1998. So I'm not quite sure what the reference is to the Fund providing financing to help the Russians rollover their private-sector debt. And also they are trying to reschedule their private-sector debt. So I think in terms of burden sharing, the private sector is certainly bearing its fair share of the burden in the Russian case.
With regard to payments to the IMF, it should be noted in the first instance that payments to the IMF by Russia have been going on all through this year on schedule well before this agreement was made. It is also the case that the international community very much has an interest in the recovery of the Russian economy and that this program is an essential part of making that happen.
So this is not, as you imply, just a rollover. It's a program, and it's a program during which there will be quite large net payments from Russia to the IMF, of US$2.8 billion in 1999-2000.
JOURNALIST "G": I want to take a somewhat longer term view here. The problem with Russia for the past number of years that we've seen repeatedly is that these Fund programs get agreed and a little bit of money is disbursed and then the reform process stops, either because the government is too weak to get the legislation through the Duma or there is a change in government or some external something happens to throw things off track.
How confident are you in this new government and their ability to actually take the process forward in a way that can begin to build a long-term, sustainable Russian economy?
MR. FISCHER: Well, everybody involved has to be a little concerned about the longer term failures to deliver by the Russian government. But one of the big changes is that practically everything that was a prior action and that required Duma action was actually passed this time.
And so whatever the constellation of political forces--and I am sure that you all thought like we did, when the Primakov government went, that possibly Duma support would be less-- nonetheless, it's the case with the new government that it has had Duma support.
It's also the case that, at least so far this year, the fiscal tax collection has been on target and rising. These are all modest but pleasant surprises relative to the expectations many people had last August about the collapse of Russian reform and the possibility that Russia would retreat in on itself.
Now, we're obviously going to have to monitor very closely, and we will, of course, not be disbursing if they don't meet the necessary conditions. But I would say that on the basis of this year's performance by the Treasury, by the Central Bank, and of course on the balance of payments, which means by the private sector, all of those have been better than expected. We are not in the dawning of a new era, but we have seen an improvement this year relative to last year.
JOURNALIST "C": Stan, just on the moral hazard [inaudible], it's kind of okay to talk about holding disbursements if they don't make targets, but just about everyone seems to believe that, basket-case or not, Russia has to be aided, given its nuclear status. Doesn't that still present an overall and overriding condition to whatever the IMF and the rest of the international community does, that Russia remains too big to fail?
MR. FISCHER: You know, one would think, listening to you, that we are back to last July when Russia was being given US$25 billion. They were-
JOURNALIST "C": Well, they are still being aided in a financial sense.
MR. FISCHER: They were allowed to fail. It was very controversial last August, but the moral hazard play, as you recall, was Russia. It was actually the one case where I thought the markets might have a point. But when push came to shove, the official sector did not go along with that.
So I don't see, in the Russian case, how the moral hazard argument can be sustained at present. And yes, we are trying to help them; but yes, they are members of the IMF, they have a program, they are doing reasonably well on implementing it, they have a right to assistance.
I would say that the Russians have shown enormous determination to stay in the international financial system, and to find, after August, a consensual way of dealing with their creditors. And they've come up with this distinction between the Russian-era and Soviet-era debt that seems to provide a good organizing principle for dealing with external creditors.
MR. DAWSON: Can we take one more question?
JOURNALIST "F": Will this bolster your efforts to change the way euro bonds are--contracts are written, given the way Russia is beginning to open up these dialogues? It's been a relatively quiet period for the last two months or so,
MR. FISCHER: It may have been quiet for you. It hasn't been quiet for us because we've been dealing with the external debt issues in very difficult circumstances in Ukraine, in Pakistan, in Romania, in Ecuador. There's nothing that is going on now that would hinder the effort to find ways of involving the private sector. And the way the Russians are proceeding on this debt is consistent with the notion that there should be private-sector burden sharing. But I don't see, right now, a major breakthrough on how to deal with instruments like euro bonds and other marketable instruments like Bradys, which are not in the Russian case anyway.
MR. DAWSON: Thank you very much. The embargo will be lifted at 9:25.
MR. FISCHER: Thanks very much.
[End of Conference Call.]
IMF EXTERNAL RELATIONS DEPARTMENT