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Russia: Long Climb Out of a Black Hole

A Commentary
By Michel Camdessus
Managing Director of the International Monetary Fund

The Washington Post
September 13, 1999

Reproduced with permission of The Washington Post

In recent weeks, Russia's difficult road to economic reform has become a deeply emotive issue in world capitals. Allegations of money laundering have set in train angry recriminations about the strategy chosen by the international community to help Russia emerge from the nightmare of the Soviet system.

But before political passions get the better of us, it is crucial that cooler heads prevail.
The International Monetary Fund, as the agent of policy decisions made by its 182 member countries, has been at the center of the effort to assist the Russian people. From that vantage point, the IMF has witnessed, and learned from, the mistakes and the successes of the past decade.

And there have been successes. Russia has achieved a certain level of economic stability--including overcoming the threat of hyperinflation and putting in place reforms that are the foundation of a modern market economy. These are significant achievements.

There also have been setbacks. Growth has been disappointing, the pace of institutional reform has left much to be desired and living standards for most Russians have fallen since Communist times. But these shortcomings represent not so much the failure of reform as the effects of 70 years of central planning and the incomplete implementation of reform policies--itself a result of a lack of domestic political consensus on reform.

These problems also have been exaggerated at times. For example, some news reports in recent weeks have alleged that substantial sums of IMF aid have been siphoned out of Russia through a money-laundering scheme at the Bank of New York. The IMF takes these claims seriously and is trying both to ascertain their basis and to strengthen even further the safeguards on the use of its funds. However, we should note that so far no evidence has been found to support the allegation that IMF funds have been diverted from their intended purpose.

For the future, even stronger safeguards have been in place for some time to ensure that IMF funds cannot be misused. Under the 17-month, $4.5 billion lending program approved on July 28, all IMF money disbursed to Russia will be held at the IMF. Repayments to the Fund from earlier loans to Russia will be made from that account.

Those arrangements are a response to the FIMACO episode, in which the Russian central bank hid from the IMF its use of an offshore subsidiary to handle some of its foreign reserves. That affair, which did not involve money laundering, has been extensively examined at the IMF's insistence by the accounting firm of PricewaterhouseCoopers. The Russian authorities now understand that any future efforts to hide the true level of foreign reserves from creditors can result in loan suspension.

The IMF, through the routine process of monitoring its lending programs, is scrutinizing the Russian authorities' policy implementation. If the IMF's Executive Board concludes that Russia is failing to meet program commitments, it will consider suspending further disbursements, as it has done on several occasions in the past.

At the same time, we must address two overriding issues: whether engagement is better than isolation, and whether there is reason to hope that economic reform will succeed in Russia and other countries facing the same painful transition.

On the question of engagement, there can be no doubt that the world is better served by constructive dialogue between former enemies. The most impressive outcome of our engagement with Russia is that despite all the difficulties, Russia has tried to stay engaged with the international community and to become part of the global economy. If the international community had walked away from Russia in the past year, Moscow would not have taken steps to repair its damaged
relations with creditors. The government probably would not have rejected calls for greater intervention in the economy. It would have had a much harder time maintaining open markets, and Russia likely would not have stayed at the negotiating table to hammer out new agreements with the IMF and the World Bank.

As for progress in reforms, it is clear that Russia's economic situation is not a lost cause, as some critics would suggest. There is evidence of economic revival and reason to believe that output this year will be above last year's level.

Certainly the situation is improved from a year ago, when Moscow's default on its foreign debts sent the ruble into a tailspin, unnerved global financial markets and caused the Russian economy nearly to grind to a halt.

Despite the political instability in Moscow, the authorities have put in place economic policies that have mitigated the downturn. Budget and monetary policies have been restrained and have kept inflation in check. Factory production is rebounding, and many domestic manufacturers are taking advantage of last year's devaluation to replace imports. Cash payments again are replacing barter.

These are not insignificant achievements, and one hopes they are a harbinger of further progress as Russia continues to assimilate the lessons of its policy errors. Foremost among these is the blow to the country's credibility from the debt default. In recent months, important steps have been taken to repair that damage as the authorities engage in constructive talks with their creditors.

There is no question that there have been lessons to learn on all sides as the IMF and its member countries have tried to assist Russia through the transition to a market economy. Politicians and economists alike have underestimated the enormous obstacles, and some of those obstacles unfortunately reveal the worst failings, especially the staggering corruption that drains off so many
resources.

The transition from the black hole of the Soviet command economy will take years, and progress will not be linear. Our--the outside world's--assistance must be determined by improvements that can realistically be achieved, not by too-distant goals. But any potential achievements will fade into impossibilities if we walk away from Russia. The loss of confidence and turning inward that
would result from abandoning the Russian people are in the interests of neither Russia nor the rest of the world.