Editorial

This selection first appeared in the Wall Street Journal Review & Outlook on August 20, 1999.

When IMF officials admitted three weeks ago they had been lied to by Russia, it finally seemed that the other shoe had dropped. After all the broken promises of reform, the devaluations and the defaults, the agency that so continuously vouched for the credibility of the promise-breaker was admitting Russia lied. Now maybe we could get on with letting the markets value the promises instead.

But along with that admission came the IMF announcement of a new loan facility for Russia. This time, the IMF was lending Russia just the amount Moscow needs to make good on its debt to the IMF, $4.5 billion. The Fund was saving itself the embarrassment (and financial hassle) of having one of its largest debtors go belly-up. But at the same time, it was handing Russia a financial lease on life.

The irony here is that the IMF isn't mad at Russia. It has forgiven Russia. The IMF is mad at the thinking world for not giving the IMF the same indulgence.

Currently, its wrath is directed at that quintessential center-left French newspaper, Le Monde. IMF Director General Michel Camdessus was given space in that newspaper yesterday to vent his "indignation at the untruths, the allegations or insinuations" in Le Monde about the diversion of billions of dollars from Russia's central bank to an off-shore investment haven. Le Monde editorialized two weeks ago in "Le FMI et la Russie" that if Russia had been deceptive, the IMF had been reckless and negligent. It's assertions are worth quoting at some length:

"We discover that--in the style of vulgar swindlers, through companies installed in distant tax havens--one of the planet's big powers . . . misappropriates the international community's money, to facilitate the enrichment of a few oligarchs. Worse yet, we learn . . . that this misappropriation of funds is taking place, if not with the agreement of, at least with full knowledge of the facts on the part of the bigs of this world: the top officials of the IMF, beginning with its general director Michel Camdessus, but also, together with him, our finance ministers . . . all of whom are administrators of the IMF.

"The culture of misappropriation of public funds is, of course, a tradition in Russia to which 70 years of state socialism have helped to impart a firm rooting. It cannot possibly be expected to disappear from one day to the next. Indeed, if anything, it is flourishing. Despite the hailed transition, generally speaking, the same men are at the controls in Moscow. . . . The oligarchs prospering in the shadow of the Kremlin will be able to continue their thieving."

John Odling-Smee, director of the European II Department at the Fund, denounced the editorial and accompanying articles as "irresponsible journalism." The IMF's chin-forward defense goes like this:

First, we're not guilty: It wasn't our money that went to the offshore fund on Jersey and we didn't know what the Russian central bank was up to. The IMF points out that it authorized Pricewaterhouse Coopers to look into the offshore deal. A draft of the audit firm's report is posted on its website.

Second, we're not letting Russia off the hook. The offshore imbroglio constitutes, Mr. Odling-Smee says in his letter to Le Monde, "a fundamental lack of cooperation on the part of the Russian authorities, and a serious violation of Russia's obligations to the IMF."

But then comes the bottom line, a defense of business as usual. New financing in Russia is warranted, according to "the considered judgement of [the IMF's] 182 member nations, in light of the economic policies that Russia is implementing," wrote Mr. Odling-Smee.

No wonder a lot of people are finding this hard to swallow. Pricewaterhouse Coopers says its limited examination does not constitute a proper audit. It did not independently verify any facts provided. Access to information was apparently incomplete. The IMF says it knew that the Russian central bank held some of its reserves with subsidiaries in Europe, but the IMF was ignorant of the activities of the transfers to a Jersey-based investment company called Fimaco until this year. How come? And what's the point of arguing that it wasn't the IMF's--ahem, Western taxpayers'--money that went to Jersey? Money is fungible.

Many questions remain, such as where all the profits from Fimaco's investments went. In one place in the report, PWC writes, "The IMF in Moscow has orally confirmed to us that the IMF had not stipulated any specific requirements regarding the investment of funds advanced to MinFin [the Ministry of Finance] under the Stand-by Arrangement. We do not know whether the IMF imposed any jurisdictional restrictions, or whether MinFin made any representations to the IMF about how any such funds were to be utilised. We note, however that the investment criteria in MinFin's investment plan differ from those adopted by Eurobank." Eurobank is the France-based subsidiary of the Russian central bank.

The IMF and the Kremlin kissed and made up but the rest of us are left wondering what the IMF's inclination to forgiveness has brought its shareholders--or Russia. As Le Monde put it, "lending to Russia has become for the IMF second nature, thus a dangerous habit. It could one day provoke the anger of the Western taxpayers." Les mots justes, indeed.