Russia and the IMF : Coming to
Patricia A . Wertman
Specialist in International Trade and Finance
March 25, 1994
-e~tir~n~r . . .
I III! IIII! III 11111111611 IIIII IIII IIII
The International Monetary Fund (IMF) has been tasked by the G-7
countries -- the United States, Japan, Germany, France, the United
Kingdom, Italy, and Canada -- to lead Western efforts to assist the
economic transformation of Russia from a collapsing socialist economy
into a market economy . Like some of its past relationships with other
countries in need of economic reform, the IMF's role in this process has
been controversial .
Western aid programs have been keyed to Russian agreement with
the IMF on an economic reform program . So far, Russia and the IMF
have failed to achieve agreement on a full standby program . Russia has,
however, received $2 .5 billion from the IMF, with another $1 .5 billion loan
agreed to on March 22, 1993 . Some have alleged that, as a result of IMF
caution, Western financial assistance has been inadequate, causing
Russian reform efforts to fail and the reformers to lose power . It has also
been suggested that the IMF has lacked sufficient vision for the task .
This report examines the IMF's purposes, how it goes about achieving
them, and most particularly, how it has gone about fulfilling its mandate
with regard to Russian economic reform . The analysis finds that only
during the first quarter of 1992, when Russia was not an IMF member,
did Russia successfully implement macroeconomic stabilization policies .
Since then, its macroeconomic policies have see-sawed, and Russia has
been troubled by high rates of inflation .
LINCHPIN OF THE INTERNATIONAL MONETARY
IMF FINANCING : SOME BASICS
CONDITIONALITY: THE KEY
IMF LOAN APPROVAL: THE G-7 CALLING THE "SHOTS" 5
RUSSIA AND THE IMF
RUSSIA AND THE IMF : COMING TO TERMS
The International Monetary Fund (IMF) has been tasked by the G-7
countries -- the United States, Japan, Germany, France, the United Kingdom,
Italy, and Canada -- to lead Western efforts to assist the economic
transformation of Russia from a collapsing socialist economy into a market
economy . Western aid programs have been keyed to Russian agreement with the
IMF on an economic reform program . So far, Russia and the IMF have failed
to achieve agreement on a full standby program .' Russia has, however, received
$2.5 billion from the IMF, with another $1 .5 billion loan agreed to on March 22,
Like some of its past relationships with other countries, the IMF's role in
the process of transforming the Russian economy has been controversial . Some
have alleged that, as a result of IMF caution, Western financial assistance has
been inadequate, causing Russian reform efforts to fail and the reformers to lose
power . It has also been suggested that the IMF has lacked sufficient vision for
the task . Others, however, have responded that macroeconomic stabilization
provides the fundamental underpinnings for all other aspects of economic
reform. Thus, without the fiscal and monetary discipline that leads to a
lowering of inflation, other aspects of economic reform are likely to fail . In this
view, the economic discipline provided by an IMF reform program is absolutely
This report examines the IMF's purposes, how it goes about achieving
them, and most particularly, how it has gone about fulfilling its mandate with
regard to Russian economic reform . The analysis finds that only during the first
quarter of 1992, when Russia was not an IMF member, did Russia successfully
implement macroeconomic stabilization policies . Since then, its macroeconomic
policies have see-sawed, and Russia has been troubled by high rates of inflation .
Domestic output has dropped dramatically.
THE IMF : LINCHPIN OF THE INTERNATIONAL MONETARY
The IMF is at the center of the international monetary system . It is
responsible for fostering the system's smooth functioning . In turn, a wellfunctioning international monetary system fosters international trade, economic
growth, and employment . The IMF's Articles of Agreement promote these broad
objectives by establishing a code of economic conduct for the IMF's 178 member
countries, particularly with regard to restrictions on international trade and
' A standby loan is an IMF loan that carries conditionality . Such loans are
extended for a fixed period of time, usually for one year .
payments . The IMF reviews the economic policies and performance of its
members through consultations held under Article N of its Articles of
Agreement . In addition, it provides its members with technical assistance in
areas related to its macroeconomic expertise . Finally and most importantly, in
order to help member countries that are experiencing balance-of-payments
difficulties, the IMF also provides financial assistance .
IMF FINANCING: SOME BASICS
The IMF is a revolving loan fund . The capital contributions of its members
constitute its basic financial resource . Currently, these capital contributions or
quotas amount to SDR 144 .8 billion (about $202 .7 billion) .' Although the IMF
has, from time-to-time, borrowed in order to obtain additional financial
resources, it is the quota resources that provide the basis for its loan operations .
Consequently, failure of a borrowing country to repay the IMF reduces the
availability of financing for all other IMF members .
The IMF is the international lender-of-last resort . Countries failing to
repay the IMF are, therefore, likely to be cut off from all other sources of
international finance and forced to operate on a "cash-and-carry" basis .
Conversely, an IMF loan is viewed as an international "Good Housekeeping Sealof-Approval" and is likely to open up additional sources of finance for the
borrower, often in amounts well in excess of the IMF loan itself .
A country's access to borrowing from the IMF is determined by its quota,
which is assigned at the time of its accession to membership . The size of a
country's quota reflects the size of it economy . It is calculated on the basis of
a variety of economic data . These are then adjusted for comparability to
existing members with economies of similar size and characteristics . A country's
IMF quota also determines the size of its capital subscription, its voting rights,
and the size of any allocation of SDRs .
Russia's quota is currently SDR 4,313 .1 million (about $6,039 .2 million) .
It is the ninth largest quota, ranking Russia, within the IMF, immediately after
Canada. Under current access limits, a member can potentially borrow up to 68
percent of its quota annually, with a cumulative limit of 300 percent, net of
repurchases (repayments) . Russia could, therefore, borrow up to SDR 2,932 .9
million annually, up to a maximum of SDR 12,939 .3 million (currently about
$4,106.6 million and $18,117 .5 million, respectively .)
CONDITIONALITY: THE KEY
Conditionality is a unique feature of IMF loans . Conditionality consists of
the macroeconomic policy changes and the economic performance targets that
2 The SDR or "Special Drawing Right" is the international reserve asset
created by the IMF and used to denominate its accounts .
borrowing countries agree to undertake or meet in exchange for an IMF loan .
Conditionality is intended to ensure that the IMF, since it is a revolving fund,
gets its money back . Private loans and most official loans do not carry
conditionality of the kind borne by IMF loans . Indeed, it is conditionality that
has turned an IMF standby agreement into the international "Good
Housekeeping Seal of Approval ." By helping to ensure that the borrower is
taking steps to remedy its economic problems, IMF conditionality helps as well
to provide assurances to other lenders that they too will not just be throwing
good money after bad . In this manner, IMF loans can act as a catalyst, opening
up financing from other sources .
The IMF provides loans to ease the adjustment of an unsustainable balanceof-payments position . Specifically, the borrowing country has a current account
deficit that cannot be sustained over the medium-term by autonomous inflows
on the capital account .' The imbalance may have an number of causes . One
such cause is adverse external "shocks ." An example of this is the dramatic oil
price increases of the 1970s, which caused balance-of-payments difficulties for
many oil-importing developing countries . More commonly, domestic economic
policies overstimulate aggregate demand and cause a current account deficit . An
overvalued exchange rate may also result in an unsustainable current account
deficit . Structural problems may also lead to balance-of-payments difficulties .
The long-term effects of an international trading regime based on import
substitution is one significant example of a structural feature that can lead to
balance-of-payment difficulties .
IMF conditionality is intended to correct the borrower's current account
deficit . Conditionality, therefore, is intended to bring about macroeconomic
adjustment, that is, the correction of over-stimulative fiscal and monetary
policies . In particular, the IMF focuses on the excessive expansion of domestic
credit . Budget deficits are also to be cut in order to reduce the demand for
domestic credit . The Fund has found that, unless the monetary character of
payments imbalances is addressed, the problem will persist and that monetary
The current account is a major component of the balances of payments
that represents the net balance of payments arising from the export and import
of goods and services, together with unilateral transfers (such, as gifts,
emigrants' remittances) . The capital account is also a major component of the
balance of payments that represents the net balance of all short- and long-term
financial movements, including loans, credits, direct and portfolio investment .
The balance of payments, of which the current and capital account, constitute
two major parts, is a statistical statement summarizing the economic
transactions, during a given period, usually one year, between the residents of
one country and the rest of the world . A current account deficit indicates that
a country is spending more abroad than it is earning abroad . A current account
deficit is financed by inflows on capital account .
data are still the most accurate and readily available .'
approach tends to be essentially monetarist in nature .
Thus, the Fund's
In recent years, IMF conditionality has also focussed on a number of issues
beyond macroeconomic stabilization . Since the cost of restraining domestic
demand is almost always a loss of production and employment, the IMF has paid
more attention to the developing "growth-oriented" adjustment programs .
Because the poor may be disproportionately hurt by a slow-down in economic
growth, IMF programs have been paying greater attention to the distributional
impact of adjustment programs . Most importantly, recent Fund programs have
increasingly included structural adjustments, particularly price liberalization,
trade liberalization, and privatization . Finally, environmental issues and military
spending are also issues that are now receiving some attention .
IMF adjustment programs are embodied in a "letter of intent ." The letter
of intent details the economic policy actions that the borrower will take as a
condition of receiving IMF financing . The required actions almost always include
monetary and fiscal restraint and, sometimes, an exchange rate adjustment . The
letter of intent may also have an attached memorandum that provides greater
detail about the promised policy changes . As noted by Jacques Polak, however,
the best indication of a member's economic policy intentions are "prior actions ."°
Indeed, some countries find it to their advantage to undertake "preemptive
The IMF uses performance criteria, that is, quantitative targets for key
macroeconomic variables, to determine whether or not a borrower is fulfilling
its promises . Because IMF funding is generally disbursed on a quarterly basis,
failure to achieve these targets can lead to a cut-off of IMF funding. In cases
where the borrower may not be at fault or the lapse is inconsequential, a waiver
may be granted and the borrower may still be able to draw down on a loan
despite a failure to meet a particular target.
IMF adjustment programs with a member country are the results of
negotiation between the IMF and the borrower . They are not imposed, but the
letters of intent are often drafted by IMF staff.
Evidence has been
accumulating, however, that a major determinant of an adjustment program's
success is the extent to which the government "owns" or identifies with its own
economic adjustment program . 6
' Polak, Jacques J . The Changing Nature of IMF Conditionality . Princeton
[Sept . 1991] 13 .
Essays in International Finance, no . 184 .
' Ibid .
6 See . for example, Overseas Development Institute . Does the IMF Really
Help Developing Countries, p . 3.
Briefing Paper, April 1993 .
Trade-offs must be made between the amount of available financing and the
country's political capacity to carry forth an austerity program . The success of
an IMF stabilization program is, therefore, hostage to political constraints .
Ultimately, it is the government itself that must make the decision regarding
the program's political viability . Conditionality is an attempt to fortify
borrowers in their efforts to be wise in their own behalf, as well as to enhance
prospects of repayment . Conditionality also permits the government to use the
IMF as a "scapegoat" for unpopular, but necessary, decisions -- an uncomfortable
role that the IMF understands and accepts .
IMF LOAN APPROVAL: THE G-7 CALLING THE "SHOTS"
The IMF largely reflects the international financial policies of the G-7
industrial nations . The United States, with 18 .3 percent of total quotas, is the
single largest IMF shareholder . Together, the G-7 countries account for nearly
half (46 .1 percent) of all quotas . Since the 1970s, none of the major industrial
countries have borrowed from the IMF . Their participation within the context
of the IMF is, therefore, as lenders, further buttressing their power within the
IMF . The major industrial countries, thus, have both the votes and the financial
clout substantially to control the IMF's lending policies .
The IMF's Board of Governors consists of a Governor and an Alternate
from each member country, usually a country's finance minister and the head
of its central bank . The Board of Governors meets once a year at the IMF's
annual meeting. The day-to-day responsibilities of running the IMF, including
decisions regarding loans, are delegated by the Board of Governors to an
Executive Board, which has 24 members . Five Executive Directors -- from the
United States, Japan, Germany, France, and the United Kingdom -- are
appointed . The remaining nineteen members of the Executive Board are elected
by groups of the remaining member countries of the IMF . Russia has a seat on
the Executive Board, but its influence is substantially diminished by its status
as a borrower.
RUSSIA AND THE IMF7
Russia became a member of the IMF on June 1, 1992 . The relationship
between the IMF and Russia, however, antedated Russian accession to
membership . Beginning in October 1991, the IMF and Russia entered into a
"special association," with the IMF opening an office in Moscow, only the IMF's
third overseas office . With special association, the IMF, at the behest of the G-7,
began providing technical assistance and advising the Russian government on
7 For a detailed discussion of Russian economic reform and the role of the
IMF, see U .S . Library of Congress . Congressional Research Service . Russian
Economic Reform and the IMF.. Mission Possible? by Patricia A. Wertman .
[Washington] 15 p .
1B92128 . Updated regularly.
economic reform . Indeed, IMF approval of a "shadow" economic program for
Russia was a condition of debt deferral by the G-7 countries .' Since Russia was
not, at the time, an IMF member, however, the shadow program was not backed
by financing from the IMF . The shadow program was, nevertheless, widely
viewed as a substitute for and a precursor to a full IMF standby program .
When Russia joined the IMF, it was well understood that the
transformation of the Russian economy was a monumental task . It was also
widely anticipated that Russia would successfully agree upon a standby program
soon after becoming an IMF member . To date, however, no standby agreement
has been achieved . Nevertheless, the IMF has adapted its loan process to
accommodate the unprecedented difficulty of the task .
During the summer of 1992, in the wake of a mid-June bilateral summit
between Presidents Bush and Yeltsin and with a G-7 summit scheduled for
Munich in early July, the IMF was under pressure by the Bush Administration
to extend a loan to Russia . As a result, on July 5, 1992, the IMF agreed to a
first credit tranche drawing of $1 .0 billion (SDR 719 billion) by Russia .' First
tranche agreements are unusual . Their key characteristic is that they carry less
conditionality than borrowing in the upper credit tranches . As part of the first
tranche agreement Russia agreed to reduce the government budget to 5 percent
of GDP and its monthly inflation rate to below 10 percent . The $1 .0 billion
drawn by Russia was to be retained in its international reserves .
In the spring of 1993, the IMF announced a new loan facility -- the
"Systemic Transformation Facility" (STF) -- intended specifically for Russia, but
available to other formerly socialist economies as well . The intent of the facility
was to streamline and focus conditionality . More precisely, it was intended to
ease conditionality and, thus, meet criticism that the IMF had not been
sufficiently responsive to Russia .
Countries borrowing under the STF are not required to have a standby
program in place . In countries where inflation is "unacceptably high or is
accelerating," however, macroeconomic stabilization efforts are of primary
importance in receiving STF loans . Access to the STF is limited to 50 percent
of quota . Funds from the STF are structured so as to be rapidly disbursing. The
loans are made available in two tranches, with the first half dispensed
immediately . The STF is a temporary loan facility that expires at the end of
1994 ; drawings must be completed by the end of 1995 .
For details of Russia's debt problems, see U .S. Library of Congress.
Mortgaging the Future by
Patricia A . Wertman . [Washington] August 12, 1992 . 33 p .
CRS Report 92-678 E .
International Debt and the ex-Soviet republics :
s The word "tranche" is derived from French, meaning slice, section, or
portion . IMF credit is made available in four tranches, each of which is equal
to 25 percent of a member's quota .
On June 30, 1993, the Executive Board of the IMF approved a drawing of
$1.5 billion (SDR 1,078 .275) for Russia, the first half of a proposed $3.0 billion
STF loan . Once again, Russia's key commitment was to reduce its budget deficit
to 5 percent of GDP and its monthly inflation rate to a "low single-digit level" - effectively the unmet targets of 1992's first tranche agreement . While the first
half was disbursed last summer, agreement between the IMF and Russia on the
second tranche of the STF loan proved to be extremely difficult . The accord was
reached only after direct negotiations between IMF Managing Director Michel
Camdessus and Russian Prime Minister Viktor Chernomyrdin . In addition to
the $1 .5 billion that the IMF will provide under the STF second tranche,
Russia's agreement with the IMF is also expected to lead to debt relief on
payments due to the Paris Club of official creditors in 1994 .
The most important performance targets of both the 1992 first tranche loan
and the 1993 STF loan were identical . The agreed conditionality, therefore,
emphasized macroeconomic stabilization -- consonant with the IMF's
institutional role and experience . It is also consonant with a view widely held
by mainstream economists that macroeconomic stabilization is the necessary
precondition for successful economic reform, particularly where the reforming
country is at risk of high rates of inflation or hyperinflation . t o
In January 1992, following price liberalization, Russia had a monthly
inflation rate of 296 percent ." As shown in figure 1, 12 in July 1992, Russia's
monthly inflation rate reached what was to be its lowest level in a 25-month
period -- 7.1 percent. The level of inflation lags monetary growth by about four
months ." Thus, the low level of inflation during the summer of 1992 was the
product of the restrictive monetary and fiscal policies that were implemented
during the first quarter of 1992.
The World Bank, for example, has just issued a comprehensive study of
29 sub-Saharan economies that shows that countries that undertook
stabilization and reform programs achieved more economic growth than those
that did not . In the words of World Bank Vice President Edward V . K . Jaycox :
"good policies work ." Friedman, Thomas L. Africa's Economies: Reforms Pay
Off. New York Times, March 13, 1994, p . A18.
u IMF . Economic Reviews . Russian Federation . [Washington] June 1993,
p . 88 .
Through March 1993, data for figure 1 are from IMF . Economic Reviews.
Russia Federation . [Washington] June 1993, p . 88. After March 1993, Russian
Government data, as reported by Interfax, were used.
The World Bank . Financing the Storm : Russia's Inflation Crisis by
William Easterly . Transition, Oct.-Nov. 1993, p . 4. The study covers the period
up to September 1993 . The four-month lag may not necessarily continue to hold
after September 1993 .
Figure 1 Russia's Monthly Inflation Rate,
Since the first quarter
Feb . 1992-Feb . 1994
of 1992, Russian
have see-sawed, and its
monthly inflation rates
have remained high . An
easing of restrictive fiscal
and monetary policies
began in the second
quarter of 1992 . In late
1992, a moderately
restrictive policy was
imposed, and, again, in the
spring of 1993, when the
Russia Government and
the Central Bank reached
agreement on a set of
measures to control
accord between the
government and the
central bank, money
creation began, once again, to accelerate after May 1993 . 14 This was followed
by a tightening in fall 1993 .
In January 1994, the monthly inflation rate was 22 percent, equivalent to
an annualized rate of 1,087 percent ; in February, 9 .9 percent or an annualized
rate of 310 percent . Viktor Gerashchenko, the normally prodigal head of the
Russian Central Bank and an ally of the Prime Minister, is reportedly
continuing the financial squeeze of late 1993 by undershooting credit targets by
40 percent .'5 This appears to have provided the "window of opportunity"
necessary for IMF action .
In Russia, the size of the budget deficit, which is financed by central bank
credit, is critically important in determining the rate of inflation . Russia's fiscal
performance, therefore, was the primary issue in its negotiations with the IMF .
With tax revenues dropping dramatically and substantial pressures for increased
expenditures, the prospects in 1994 are for a ballooning budget deficit, increased
credit creation, and increased inflation . Reportedly, the Russian Government has
agreed to send to the State Duma by mid-April a package of legislative
For a discussion of the accord between Russian Government and the
Central Bank and of credit creation during 1993, see U .S . Library of Congress .
Russian Currency Exchange:
Shrinking the Ruble Zone, by Patricia A.
Wertman. [Washington] Aug . 31, 1993 . 9 p .
CRS Report 93-785 E .
'5 Lloyd, John. IMF Chief Steps Into Russia's Gathering Economic Storm .
March 17, 1994, p . 2 .
initiatives that are intended to revoke a number of laws, presidential decrees,
and government resolutions that would have increased spending . Ways of
increasing revenues are also under consideration ." Much, therefore, depends
on whether Russian Prime Minister Viktor Chernomyrdin has the personal and
political resolve to hold the line on the budget .
A brief"window of opportunity" for financially supporting Russian economic
reform was missed during the first quarter of 1992 -- a period that followed
immediately on the heels of the break-up of the Soviet Union and the
subsequent January 3, 1992 announcement by the United States Government
of its support for Russian membership in the IMF . Russia became an IMF
member on June 1, 1992 . By that time, its economic policies had already eased
and were clearly setting the stage for further difficulties, although its
performance still reflected first quarter stabilization efforts .
During the first quarter of 1992, it may not have been clear to G-7 policy
makers that Russian stabilization efforts were succeeding . Data on economic
performance always lags the implementation of policy . In the case of Russia,
problems of availability, timeliness, accuracy, and comparability of economic data
have been very substantial . The data problem also undoubtedly complicated the
calculation of Russia's initial quota, thereby further slowing the admission
For much of 1992 and 1993, Russia was sustaining high rates of
inflation ." Given the severe economic and political consequences of high rates
of inflation, macroeconomic stabilization was the appropriate policy goal . Thus,
the IMF's policy recommendations to Russia have been consistently, even
relentlessly, anti-inflationary . While some economists might argue with the
specific numbers agreed between Russia and the IMF for the size of Russia's
budget deficit and for the rate of its monthly inflation, few economists would
dispute the goal itself . Nor would they dispute that Russia has fallen far short
of reaching the agreed targets .
Finally, the IMF is an international institution with a limited, technical
purpose : the financing of macroeconomic stabilization . The broader goal of
supporting Russian economic reform by supporting the reformists is, therefore,
more appropriately carried out in another venue . Such a political goal is the
responsibility of the G-7 . As Samuel Brittan has suggested, "[i]f opportunities
have been missed, the IMF is . . . only a minor culprit . A decision to use
Interfax, March 23, 1994 .
Hyperinflation is defined as a monthly inflation rate of 50 percent or
more . The highest monthly inflation rate during the two-year period shown in
figure 1 occurred during September 1992, when the monthly inflation rate was
31 .1 percent . This represents an annualized rate of 2,578 percent .
economic aid to sustain particular governments in Russia or elsewhere is a
summit one to be made by presidents and prime ministers and they abandon
their duty if the delegate it to "experts ."" Ultimately, however, only the
Russians themselves can ensure successful economic reform .
18 Brittan, Samuel Post-communism : the Rival Models
. Financial Times,
February 24, 1994, p . 14 .