Editorial

This selection first appeared in The Economist, 13-19 July 1996.

The International Monetary Fund likes to say that it lends against economic policies, not against governments. But policies and governments do not always fit neatly into separate categories. As this year's Russian presidential election approached, hopes for reform and free enterprise rested on the reelection of Boris Yeltsin. Had voters plumped for Gennady Zyuganov, his communist rival, the country's economy would probably now be heading back into the dark ages.

The election is over and to almost universal relief Mr. Yeltsin is still in office. Now, though, there arises a ticklish question. Did the IMF, in effect, cast a vote for him? In principle, the fund is apolitical. It is supposed to be bound by strong internal rules and to be a strict enforcer of conditions attached to its loans. But some of its big shareholders, especially America and Germany, clearly cared more about Mr.Yeltsin's survival than about a percentage point here and there in Russia's national accounts. Did the fund take the hint and treat Russia with special leniency?

One reason to suspect that it did was the fund's readiness in the first place to grant a three-year loan of just over $10 billion--after Mexico's, the second-biggest ever--to Russia in March [1996]. This was a clear signal that nobody at the fund wanted to "lose Russia." And although the loan was supposedly tied to Russia's meeting a number of strict economic targets, there is a good deal of evidence that lender and borrower colluded to interpret these as flexibly as possible, at least until the election.

Certainly, nobody at the fund wanted to risk helping the Communists back to power by undermining the core of Mr.Yeltsin's campaign: promises of jam today and jam tomorrow. When, after the loan was promised, Russia's budget deficit began to exceed agreed levels and structural reforms languished, the IMF behaved as if it was happy to view many such terms as mere details to sort out once the vote was over.

To judge by its actions, the Russian government took this view as well. Having signed its deal with the fund, it issued no overall decree to make the package binding on its spending ministries. And, according to one minister, "bookkeeping tricks were pulled on both sides."

When Mr.Yeltsin dished out campaign promises to spend an unplanned $10 billion, and wrested $1 billion from a furious central bank in June [1996], the fund did not blench. Its boss, Michel Camdessus, said in June that Russia was "up to date on performance criteria." Thomas Wolf, head of the IMF's Moscow office, said [at the beginning of July], "In light of the presidential campaign, the authorities seem to have done well."

Perhaps. Officially the fund publishes neither its monthly targets for Russia nor its calculations of Russia's performance. It has declined to comment publicly in any detail. But the evidence is that Russia broke through the ceiling originally agreed for the budget deficit almost immediately, in March (see table 9). By April it would have been doing so even on the narrower calculation preferred by Russia's finance ministry, which, unlike the IMF, excludes interest paid out on high-yielding treasury bills.

Table 9
Russia's Budget Deficit (as percentage of GDP)
	IMF target	Outcome (IMF basis)*	Outcome (Russian basis)*
March 1996	5.7	7.9	4.6
April 1996	4.8	7.5	7.0
*Outcomes are calculated before crediting loans from Germany and France; the Russian calculation excludes interest on treasury bills. Sources: Russian Economic Trends; Russian government data

The IMF and Russia were let off this hook by France's and Germany's decisions to lend Russia $400 million and $2.7 billion, respectively, in April, and by the fund's willingness to let Russia treat this as spending money, instead of insisting, as it could have done, that it was used to finance the agreed deficit in place of costly treasury bills.

However, for all Mr.Yeltsin's extravagant spending promises, the root cause of the deficit overrun was a collapse in tax collection (a defect that the government said this week it would correct in the second half of the year). Having expected to collect the equivalent of 11.5 percent of GDP in taxes this year, the government managed to collect only at a rate of 8 percent of GDP in the first half. And in the weeks before the election, receipts fell to less than half that rate.

Tax, But No Brass

This was not entirely the government's fault. The IMF itself made Russia abandon counterproductive excise and wages taxes. In addition, some big companies chose to withhold taxes until they knew who had won the election. But the government made a bad situation worse by granting tax exemptions to some firms, thereby breaching undertakings to the IMF. Some exemptions were, in effect, a surrogate for public spending: Firms received tax breaks in exchange for giving goods free to other firms to which the state owed money.

Although Russia had promised to keep this in-kind taxation below a ceiling of $1.8 billion this year, it already stood at $3.2 billion by June. The government's lame excuse was that many of the offsets covered debts incurred in 1995 and so should not be reckoned into the current IMF program.

Russia's record on IMF-agreed monetary targets appears to have been at least as questionable as its record on fiscal targets. The former were fixed in terms of "net domestic assets," defined as the amount by which the monetary base (roughly, notes and coins in circulation) exceeded the net hard currency reserves held by the central bank. This formula allowed the money supply to grow so long as official reserves grew too. In the spring of 1995, when the ruble was rising, the central bank printed rubles and used them to buy dollars. Money supply rose by 27 percent in two months, reserves doubled to $6 billion, and the IMF's targets--set with respect to a preceding, one-year loan--were undisturbed.

This spring the picture was different. Base money grew by 7 percent in March and at the same rate in April, but this money was spent buying votes, not dollars. Worried by Mr.Yeltsin's extravagance, central bank officials revealed in June that almost $3 billion of reserves had been spent during April and May to prop up the ruble. Official numbers have not been published, but the combination of a rising money supply and falling reserves must have pushed up net domestic assets sharply.

If, as the IMF has insisted, monetary targets were met until at least the end of May (June figures have yet to be calculated), it is hard to see how. The IMF's Moscow office worried privately about the effect on the ruble. "The immediate challenge," said a preelection memorandum, "is to steer the exchange rate clear of a crisis."

Some on the Russian side made the same assessment, but thought it an acceptable risk. "A victory would be worth a Black Tuesday," said one minister in an unguarded moment, referring to the day in October 1994 when the ruble crashed 22 percent. With the election over, the currency looks much less vulnerable. Although official reserves are down from their peak, the central bank has about $7 billion in hand, adjusted for short-term liabilities. The government says it is confident that inflows of foreign investment and repatriated capital will support the ruble, so pushing interest rates down and making the budget deficit cheaper to finance. Annualized treasury bill yields have fallen below 90 percent, from a peak of 215 percent before the election.

Does it matter if the IMF bent over backward to help Mr.Yeltsin? Arguably, saving Russia from communism matters more than the niceties of monthly bookkeeping. And it would not be the first time the fund has been influenced by the political calculations of its chief shareholders. In 1987, for example, the Germans and Americans urged the IMF to lend to Egypt, a cornerstone of America's Middle East diplomacy, on terms that some fund officials considered too generous (one resigned over the issue). Some officials also resented America's hustling the fund to the rescue of Mexico after the peso collapsed in 1994.

Against such precedents, Russia, newly emerged from communism and still bristling with nuclear weapons, was arguably an even more suitable case for rule-bending treatment. But the fund has been left in a weaker position than it was to extract reforms from Russia. And in its dealings with other countries, the hint of double standards may come to haunt it.