Calling the I.M.F. to Account

By Jeffrey D. Sachs,
New York Times, 08 September 1999

Treasury Secretary Lawrence Summers has wisely called for a review of International
Monetary
Fund lending to Russia before any more money is wasted. The I.M.F. programs have been a
failure — a mix of incompetence and neglect of Russia’s sordid corruption.

Here are some questions that the Treasury Secretary and Congress should have answers to
before
we proceed with any more lending.

First, why did the I.M.F. turn a blind eye to the transfer of oil and gas companies to cronies
of
the Russian Government? It was widely reported, for example, that a huge stake in Gazprom, the
Russian natural gas monopoly, was given away during 1994-95 to associates of Viktor
Chernomyrdin, then Prime Minister, at a cost of billions (or even tens of billions) of dollars to
the Russian Government.

Billions more were effectively given away, in full public view, in 1995 in equally crass
“loans
for shares” deals mainly involving oil companies. Why didn’t the reports — in the Russian press
as well as the American press — on these questionable deals appear to prompt any soul searching
by the I.M.F. as it shoveled billions of dollars to Russia at the same time, and as it fulsomely
praised Mr. Chernomyrdin as a friendly partner in reform?

Second, have the I.M.F. or other agencies looked into other allegations of high-level
corruption?
For example, Switzerland is investigating accusations by Russian prosecutors about possible
kickback payments from a Swiss construction company, Mabetex, to Kremlin officials to get
Russian contracts.

Third, why did the I.M.F. lend $11.2 billion to Russia in July 1998, on the eve of the
country’s
currency collapse? Much of that money ended up abroad, squandered in a useless defense of an
overvalued currency. According to the terms of that loan, Russia’s reserves were to rise by
several billion dollars. In fact, the reserves fell far short of the target, reflecting huge capital
flight. Was the loan at the behest of top Russian insiders? Or of American investors, eager to
escape the losses of an inevitable devaluation? Or simply a reflection of another I.M.F.
misjudgment?

Fourth, why haven’t the I.M.F.’s member governments called for an external review of the
effectiveness of the fund’s lending program in Russia? After all, the I.M.F. made huge mistakes
from the very start of its involvement in 1991. Consider just one example. The fund was deeply
misguided in delaying the introduction of a new Russian currency after the collapse of the Soviet
Union. That mistake delayed the end of Russia’s high inflation, angering the public and helping
to lead to the dismissal of reformers from the Russian Government at the end of 1992. Ancient
history, one might say, except that the official in charge of the I.M.F.’s Russia program in 1992,
John Odling-Smee, is still in charge today.

Fifth, how can we rely on an organization that fails to make structural changes after a decade
of
continuing failure? For example, the I.M.F.’s executive board is supposedly the agency’s
watchdog, but it is fed documents prepared by the fund’s staff itself and thus has incomplete
information.

The I.M.F., of course, wants to limit any review to a narrow question: was its own money
misused by the Russian central bank? Officials say that an investigation the I.M.F. began
Monday is unrelated to allegations that Russians illegally diverted I.M.F. money through the
Bank of New York.

The Treasury Secretary and Congress should insist on a much broader review. The I.M.F.
programs have failed — at an enormous cost to the Russian people and ultimately to global
security.

Many types of foreign institutions involved in Russia have faced the issue of corruption. In
1995,
more than a year after I resigned as an adviser to Russia, I became director of a university
program involving dozens of overseas advisory activities, including an ongoing project in
Russia. When I received information concerning the probity of individuals involved in the Russia
project, I quickly closed it down. When there is even a hint of corruption, it is important to move
rapidly and openly.

Russian reform was always going to be against the odds. The Soviet system left the people
impoverished, divided, confused and victimized by systematic cruelty and corruption. The
Russian Government, especially after reformers were pushed out of real power in 1992 and 1993,
has been dominated by recycled Communists, including spymasters like Yevgeny Primakov, the
former Prime Minister.

Western policy, to be sure, has had notable successes: Russia has remained peaceful vis-a-vis
the
rest of the world, and the country is much freer today than at any other time in its history. The
Clinton Administration shares credit for these outcomes. But the turmoil in Russia and the
unnecessary costs to this generation of Russians have been enormous; the dangers are still great.
The West could have done much more to raise the chances for successful reforms.