The latest IMF package for Russia, which is on the brink of an economic collapse, is premised on certain perceived patterns of international investor behaviour which are far from realistic.
ECONOMIC historians of the future seeking to describe the path of the Russian economy in the last decade of this century may find it difficult to make their accounts appear credible. The sheer scale of dislocation and devastation in the Russian economy, as well as the dramatic collapse of per capita incomes and wages along with the rapid aggrandisement of a few in that country, is unparalleled in modern history. Since the disintegration of the Soviet Union in 1991, Russia's economy has lurched from crisis to crisis, all the time on a downward path that has seen output fall in every single year.
As a result, Russia's gross domestic product (GDP) last year was around half the level of 1989, and it was much more unequally distributed among the population. The process has entailed dramatic increases in poverty to levels that would have been simply inconceivable a decade ago. And it has also a created a society without moorings, marked by the growing economic control of arriviste gangster lords and the expansion of a parallel economy in which most citizens are forced to participate simply to ensure their own survival.
The latest financial crisis comes at a time when most of the population is already exhausted by the continuing material downslide and by the extreme volatility of financial indicators. But the present situation is actually much worse than even the Russian economy has experienced before, in terms of both the extent of the damage already done, and the paucity of official ideas of how to resolve the huge and interrelated material problems. Even by the admittedly extreme standards of the recent Russian experience, the present economic crisis is exceptionally grave.
Millions of workers across the Russian Federation - including coal miners, teachers, soldiers and others - have not been paid their wages for more than a year, sometimes even for 16 months. Many of these workers are now on strike, disrupting both transport and essential services in many areas, but wage arrears show no signs of being paid up. The distress and social tensions unleashed by such unbelievable cynicism on the part of employers, can only be imagined. In several regions formal distribution networks have virtually broken down. Several cities are now functioning without supplies of electricity or gas, as these have been cut off because of unpaid bills by the municipalities.
And now, in addition to all this, the fragile financial system of the country is tottering on the edge of collapse. The currency is under severe pressure from speculators who foresee a collapse in its value in the near future, and short-term interest rates have had to climb up to 150 per cent in June this year (up from 21 per cent in late 1997) to ward of speculative attacks on the rouble. The fledgling stock market has slumped by more than 60 per cent since January. Inflation, which was briefly brought under control last year, now once again threatens to spin out off control. And all this is making the political situation even more unstable, as it becomes evident that this combination of unrestrained greed among a few and rapidly increasing penury of many has very destabilising social and political consequences.
The qualitatively different nature of the current crisis is also forcing the international financial community to take it more seriously. In early July, the IMF announced that it would lend an additional $11.2 billion to Russia this year, as part of a $17.1-billion package of new loans the fund has proposed for Russia over the next 18 months. The Clinton administration has expressed its concern (although, as usual, it has been slow and reluctant in reaching down to its pockets to offer any real material help). Foreign investors, who hold around $20 billion of the short-term debt issued by the Russian Government, are also panicking, and this has added to the official international concern.
HOW could things get quite so bad? And how is that even after so many years of "adjustment", "tough medicine" and so on, administered with the advice of foreign experts like Jeffrey Sachs and then from the IMF, the Russian economic crisis has only worsened and the problems seem even more insoluble?
The answer must be sought in the nature of the economic transition process in Russia, which has been through at least three distinct phases. The period 1991 to 1993 saw inflation exploding as prices in a whole range of markets were deregulated. The command economy structures of the past were almost completely non-operational after the years of perestroika, but there was no new mechanism in place to replace them. Meanwhile, the mass privatisation of state-owned enterprises (which covered the period 1992-1995) were marked by clientelism and lack of transparency, disproportionately benefiting a small group of the new elite which quickly gathered economic power through a variety of means. Two contending policy opinions were evident in the fluctuation between expanded budget subsidies and increasing bank credits, or the contrasting tight fiscal controls and limited access to credit, but neither was effective in controlling the hyperinflation which characterised this period.
In 1993, short-term securities (known in Russia as "GKOs") were introduced as a non-monetary avenue of financing the government deficits. There is one school of thought, of which the IMF is an influential element, that blames the Russian Government's "reckless issuance of short-term debt" since then for the current financial crisis. But it should be noted that by the standards of other capitalist countries, Russian fiscal policy since 1993 has been far from profligate. Fiscal deficits have been kept at the level of 3 to 4 per cent of GDP, which is very respectable even when it is acknowledged that several expenditures have been moved off-budget. The Government's debt is frequently cited as a major problem, but even now it amounts to only 7 per cent of GDP, which is laughably small when compared to public debt in the U.S. or most of the countries of the European Union. At present the Russian Government actually runs a primary budget surplus (that is, excluding interest payments).
These are fiscal figures that most governments would be rather proud of. So it is mystifying to be told that irresponsible fiscal policy is the crux of the Russian problem, and that the solution lies in further cuts in public spending, further layoff of public sector workers (even as unemployment is at a historic high) and further limitation of any supportive activity of the state. It is even more mystifying that the international community does not find it outrageous that the government and other private employers can simply not pay workers their wages for more than a year, even though the payments due to rentiers - those holding government securities - have been regularly made and are expected to continue.
In fact, one major source of the current economic crisis in Russia is a shift in monetary policy, which has dried up credit to enterprises (both state-owned and private) and thus deprived the entire system of an important source of liquidity. The move from almost completely soft budget constraints to utterly hard ones at the enterprise level must always be painful, but when that takes place in the context of falling output and incomes (and therefore falling profits) the consequences cannot be anything short of disastrous. In the downward spiral created by the interaction of falling demand and tight credit, the Government has wavered between inconsequential pump-priming (as in the dramatic increase in government employment under Chernomyrdin) and throwing up it hands in despair and allowing the downslide to continue.
As in so many other cases, the only hope that the IMF can provide is the fond illusion of the benefits of "restoring investor confidence". The IMF's latest deal for Russia involves a number of measures like further cuts in public spending and government employment (interestingly, it is silent on the urgency of paying arrears of wages), sweeping tax cuts, new laws that would allow foreigners to buy land and other natural resource assets like oil companies. The logic is essentially as follows: As the primary government surplus continues and improves, it will reduce the issue of GKOs. The IMF package will mean that the price of GKOs will increase as fears of a rouble devaluation recede, and this in turn will lead to falling yields and lower rates of interest. This would increase liquidity in the banking sector and cause banks to lend more to productive companies, which are at present starved of credit. And this will finally lead to recovery in the real economy.
Quite apart from the prolonged and wishful nature of this process, it relies on certain patterns of international investor behaviour which are far from realistic. As the Mexican and South-East Asian financial crises have shown, international investors do not necessarily follow any rules relating to either economic "fundamentals" or gentlemanly behaviour. And there is a clear problem of moral hazard involved in throwing more money into a system that has so far diverted into non-productive speculative channels because that is where the highest profit incentives are. So it is extremely unlikely that the IMF simply providing the extra money will do anything to solve the economic crisis in Russia.
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