Financing Capital Flight

Wall Street Journal, 14 July 1998

Maybe it was possible to be seen in public making a case for pouring $118 billion into the
economies of Asia, which after all are relatively functional. But what’s the case for dumping
billions down a bottomless pit? Presidential spokesman Mike McCurry is something of a specialist
in defending bottomless pits, and so yesterday said of the IMF’s big effort for Russia: “The size of
the package shows strong confidence in Russia’s reform commitments and reflects strong support
from the world community.”

Confidence in Russia’s reform commitments?

The post-Communist economy of Russia evokes many sentiments, including hope, but “strong
confidence” is not on the list, not even if IMF Managing Director Michel Camdessus says he has
ready for approval next week by his Executive Board an IMF-led Russia rescue package totaling
$22.6 billion. Perhaps it’s a coincidence, but this bailout figure bears a strong resemblance to the
net short-term foreign debt exposure in Russia–which by some estimates comes to about $23
billion. We can’t help wondering, how did the IMF get into the business of using U.S. taxpayers’
money to finance capital flight from Russia?

No one can doubt that Russia needs remedies of some sort. The ruble has come under serious
assault in recent months, as Asia’s troubles have rocked emerging markets. To their credit, the
IMF and Treasury, after fomenting the devaluations that last year wrecked half of Asia, have
finally twigged that it’s better to defend currencies than devalue them. Along with Russia’s Prime
Minister Kiriyenko, Messrs. Rubin and Camdessus now want the ruble steady against the dollar.
Good. This is vital to saving Russia from the sort of inflation and consequent upheaval that hit
Indonesia this spring.

But defending the ruble, if that is in fact what this money is supposed to do, is merely a piece
of
what’s needed to build normal markets on the vast swamps of the Russian economy.

Under central planning, when the government ran and owned everything, Russians became
adept
at siphoning off and ripping off state assets for private uses, that is, for survival. Progress since
then has been awkwardly paired with huge property grabs by men in positions of power. There’s
the notoriously secretive and strange way in which the government chose to “privatize” in the
hands of select cronies effective control of the national gas company, Gazprom, a big
hard-currency earner that claims about one-third of the world’s known natural gas reserves. In a
world that increasingly demands and rewards market transparency, Russia remains global finance’s
house of mirrors.

The notion that the IMF is going to fix the Russian fun house by funneling billions into its
Central
Bank reserves and then by sending teams of technocrats to dictate reforms is ludicrous. We know
this because it has been tried.

Folded into the $22.6 billion that Mr. Camdessus is getting ready to serve up are the remains
of
the $9.2 billion IMF package put in place for Russia two years ago. It clearly has not averted the
current troubles, and small wonder. Getting to the bottom of almost any financial deal in Russia is
tough enough even for gunslingers willing to spend years drinking their Siberian partners under
the table. This is a tough crowd. There is no way that a tax-exempt IMF staff, rotating through
Moscow’s better apartments and hotels, have enough information or clout to right the place.

But something else just might. The better way to defend Russia’s ruble would be to turn to the
private markets for help.

The IMF should stand aside and let the Russians haggle for bridge loans directly with foreign
lenders and investors, such as Mr. Rubin’s former employers at Goldman Sachs, who have been
throwing lavish parties at office openings in Moscow this season, and who if unhooked from their
own bailout drips might have a real interest in saving Russia, because they’d also have something
to lose. Let Russian interest rates rise as high as necessary to defend the ruble, and let Russian
politicians devote their energies not to lobbying the Clinton Administration and Mr. Camdessus,
but to directly pushing through the reform needed to pay back private loans.

While Russian politicians have learned they can get away with stiffing the IMF, or the World
Bank, or even the U.S. government, their turn toward capitalism has also been driving home the
lesson that it’s a lot costlier to play fast and loose with the private marketplace–where investors
react to dumb policies by doing things like selling off stocks, not offering bigger bailout packages.

The pro-forma bailout case–at both the IMF and Treasury–is that Russia’s bailout is simply
about
restoring “confidence” in Russia and its ruble. But we may be learning that hooking up the West’s
jumper cables to these sputtering economies doesn’t get you very far. Indonesia–an economy
surely no more corrupt than Russia’s–got a bailout last fall that was almost twice the size of
Russia’s fat rescue package. Where’s the “confidence” that was supposed to generate?

Spreading the scope of moral hazard in this manner is no solution. The solution, to the extent
there is one, isn’t going to be found in the hands of IMF technicians, but of Russia’s leadership–its
politicians and its businessmen. These are the only folks with any real chance of fixing Russia. But
if Russia is ever to have a functioning market, it is going to need private, not public, market
incentives to do so.