Will Clinton Get Away with Permitting the I.M.F. to Reward Russia For Its Efforts to Subvert NATO in the Balkans?

(Washington, D.C.): The image of Russian Prime Minister Yevgeny Primakov and Serbian
dictator Slobodan Milosevic mugging for the cameras in Belgrade says it all: Under its
career-KGB-thug-turned-premier, Russia is once again pursuing policies — in the
Balkans and
elsewhere — that are very much contrary to American interests. The Kremlin’s
announcement yesterday that it is sending as many as seven warships to the Adriatic, including
one equipped to intercept and relay to Belgrade sensitive NATO communications, ¹ probably
coincides with another, undeclared agenda item in the Primakov-Milosevic talks:
Moscow’s
covert resupply of the Serb military and perhaps the provision of Russian “volunteers” to aid in
the defense of an embattled, fraternal Slav nation.

Given this backdrop, what is one to make of the Clinton Administration’s decision to permit
the
International Monetary Fund to make a further $4.8 billion disbursement to an uncreditworthy
Russia? Since Moscow is in default to numerous international creditors and since there is
abundant evidence that it has squandered previous IMF disbursements (including the diversion of
huge sums to a secret offshore bank accounts of corrupt Russian officials and their patrons among
the country’s oligarchy), this new loan cannot be justified on its merits.

The latest IMF disbursement to Russia offers but the most recent proof that the IMF
decision-making process has become utterly politicized. ² The politicization, however, has
increasingly seemed a product of what amounts to Russian coercion and blackmail of the U.S. and
other Western governments, fearful that the Kremlin might behave even more boorishly if such
financial life-support is not forthcoming.

Strike While the Iron is Hot: New Money and
Forgiveness

As the Communists are fond of saying, “it is no accident, comrade” that two
critical financial
negotiations between Russia and the West are coming to a head at the very moment that Kosovo
is breaking badly for the U.S. and NATO — and as concerns are intensifying with regard to
prospective Russian involvement in the conflict. Consider these less-than-coincidental
developments:

• ‘Russian Clean-up’ of Moscow’s IMF Debts:
  The Washington Post reported in a 31
  March article entitled “Politics Central to Russian Loan” that IMF officials admit that the
  purpose of releasing these funds is what is known in the banking business as a “Chinese clean-up”:
  Borrowing funds to pay debts arising from previous loans so as to avoid a default on
  those earlier obligations — in this case, Russia’s arrearage to the IMF. Barring such an IMF
  debt roll-over, Russia would likely be forced to add sovereign bonds floated in Europe and the
  U.S. to their growing list of defaults. ³ More importantly,
  defaulting on IMF debt would
  effectively eviscerate what little remains of Russia’s creditworthiness.

What the Fund has thus far refused to admit publicly is that the economic
program to
which Primakov’s government has committed itself is an unachievable ruse. It is
devoid even of the lip-service usually paid to the need for deep systemic reform so
clearly required if Russia is to achieve long-term economic viability. As the Post
editorialized today:

“The unpleasant truth is that Russia has not taken the necessary steps
to promote its own
prosperity; its economic policy cannot ensure good use of IMF funds….Russia…has yet to muster
the political will or consensus to push reforms through. It is ‘stuck halfway’ between communism
and capitalism, as President Boris Yeltsin acknowledged in a speech Tuesday, with a ‘freakish
model…a hybrid.’ This hybrid has produced corruption, disillusion and economic decline.”

Even Russian economists have questioned the attainability of the
Kremlin’s budgetary
milestones. ⁴ And U.S. officials also know better. An
unnamed member of the Clinton
Administration stated in a 29 January Financial Times article that Russia’s 1999
budget is “a piece of fiction, inconsistent with the basic laws of economics.”

• Soviet-Era Debt Forgiveness: Building upon Primakov’s success in
  euchring the IMF into a
  further multi-billion disbursement, his First Deputy Prime Minister, Yuri
  Maslyukov, sent a
  second shot across the Western bow on 30 March. He declared Moscow’s intention to
  request that London and Paris Club lenders forgive (read write-off) upwards of 75% of
  the outstanding Soviet-era debt.

Unlike the temporary life-support provided by relatively short-term IMF money, the net
effect of a debt forgiveness scheme of this magnitude would be a longer term windfall
for Moscow — and for Western private sector creditors. After all, if this gambit is
also
approved, Paris Club official lenders would be foregoing repayments to Western
tax-payers in order to facilitate future repayments to Moscow’s commercial creditors.
The precedent set by this latest example of “moral hazard” would be to encourage
debtor nations around the world to over-borrow with relative impunity.

The Bottom Line

By signing the IMF agreement and considering a forgiveness scheme for
Soviet-era debt, the
West has signaled to the world that it is willing to use the IMF as little more than a foreign
policy slush fund — and an unsuccessful one at that. It has apparently made these
financial
concessions in the fatuous belief that Russia will actually live up to promises not to break the arms
embargo — or insinuate itself in other unhelpful ways into the NATO-Serbia conflict. It is
apparent from the Primakov trip, the deployment of one or more warships into the Balkan theater
and President Yeltsin’s call today for a “G-8” foreign ministers’ meeting on the crisis in Moscow,
that the Clinton Administration and its European allies got it wrong again.

Worse yet, the high price paid to dissuade Moscow from undertaking such
mischief may be shown
to be even more unwarranted if, as seems likely, Milosevic is able to finish his “ethnic
cleansing” in Kosovo over the next few days. This campaign will then have succeeded
in
leaving a third or more of the native population of Albanian origin (not just the KLA) dead,
hostage or displaced by Serb death squads and other troops and ceding to Milosevic’s control of
virtually every cultural and economic asset of any value in the province. In that circumstance,
Milosevic may well unilaterally cease hostilities and it is unclear whether the
West will be
willing to keep up the bombing, let alone send in ground forces to retake and repopulate this
region. Milosevic will then be able to rearm at his leisure while handing NATO and its leader,
President Clinton, a decisive and humiliating defeat as Serbia’s fiftieth anniversary present.

¹White House Press Secretary Joe Lockhart yesterday understated
substantially the ominous
implications of this step, suggesting that it risked sending a signal to Belgrade that Russia’s
commitment to stay out of the conflict “may not be rock solid.”

² See Casey Perspectives entitled
‘Read Me’: Before Congress Gives the I.M.F. More Bailout
Authority, It Should Consider Findings of Casey Asia Symposium (No. 98-R 140, 27 July 1998);
Wall Street Journal Joins Casey Institute on Right Rx For Russian Financial
Crisis: ‘It’s the
Private Sector, Stupid’ (No.
98-R 130, 14 July 1998); and As Expected, Russia Gets a Bail-Out —
But
It Won’t Get Moscow Through Next Year, or Protect U.S. Security
Interests (No. 98-C 128,
13 July
1998).

³The devastating effects of default to the IMF should not be
underestimated. Russia is currently
teetering on the brink of an economic meltdown and a default of this nature would effectively cut
Moscow off from additional foreign private credit flows for a debilitating period of time.
Interestingly, yesterday, according to the Financial Times Standard and Poor’s credit
agency
downgraded Indonesia to a credit rating of selective default, “the lowest rating possible for a
sovereign nation” for defaulting on a $210 million commercial loan. Russia’s external debt is in
excess of $150 billion.

⁴In a recent lecture by Dr. Andrei Illarionov, Director of the Institute
of Economic Analysis,
Moscow, the economist revealed that the numbers found in Russia’s official budget “had been
doctored.” Of note, he estimates that the actual budget deficit in Russia will be in the range of
8-14% of GDP, not 2.5% as predicted by government officials.