Why global purse strings may loosen (again) for Russia

IMF deal, seen as likely by March, may replace failed bailout.Reform is encouraged.

In nondiplomat's language, the West has been telling Russia, "No more money, honey."

Russia defaulted last August on about $40 billion in domestic debt, some $10 billion of it held by foreigners.

But Russia is special. Not only does it have a nuclear arsenal, it has massive natural resources and an educated population that can contribute to the world economy. The West doesn't want Russia sinking into political turmoil.

Top officials from the International Monetary Fund (IMF), the World Bank, and the United States Treasury keep saying Russia will need to implement more budget cuts, improve tax collection, and other reforms before it will get further funds. But it is always said with that "honey" tenor.

"Russia ... has enormous potential," said the IMF's deputy managing director, Stanley Fischer, at a US-Russian Investment Symposium at Harvard University in Cambridge, Mass., last week. "But we can only help if the policies are right."

The evening before, Deputy Treasury Secretary Lawrence Summers had noted that Russia's reformers "can feel justly proud" of the accomplishments of the past eight years. But he cautioned: "It is neither feasible nor desirable for Russia to incur major new [foreign] debts to finance large [budget] deficits."

Keeping Russia 'engaged'

Sources in Moscow, London, and the US say there is tremendous political pressure on the IMF by member governments to keep Russia "engaged." This, they say, should result in a new assistance program by March.

If so, it would replace the $22.6 billion IMF bailout agreed to last July. Some $4.3 billion of that money was paid out. When Russia devalued the ruble and defaulted on its domestic debt, the IMF froze the rest of the deal.

Boris Nemtsov, former deputy prime minister, said in an interview at the Harvard symposium that it is necessary to restructure Russia's debts, spreading repayment over 30 to 50 years.

Russia's central government, he noted, has revenues of $20 billion to $22 billion. It owes $17.5 billion on its debts this year.

Under the current system, it is impossible to make that large a payment and carry on normal government spending for defense, for instance, he said.

"Russia will not, under any realistic scenario, be in a position to service all of its foreign debt in 1999," the Treasury department's Mr. Summers said.

The London Club of commercial creditors decided last Wednesday against pushing Russia into default over a missed payment on $23 billion of former Soviet debts. Total Russian external state debts amount to about $150 billion.

In Moscow, Russian Finance Minister Mikhail Zadornov assured creditors Russia would meet its first quarter repayments on debt incurred by the Russian Federation - "regardless of the results of talks with the IMF." That means mostly eurobonds, and not Soviet-era borrowings.

If Russia is declared in default on external debts, creditors may put claims on Russian assets abroad, such as aircraft.

Banking on reformers

The crisis in Russia has so far cost American business about $150 million, it is estimated.

Peter Aldrich, chairman of AEGIS, a Boston-based partnership that has put $50 million into Russian businesses, including a Moscow gymnasium, says private foreign money won't return to Russia soon. Investors must see clear indications of a return to robust economic growth and the possibility of good profits.

Martin Cannon, a Moscow-based management consultant with A.T. Kearney, suggests that the Group of Seven industrial nations should remove Russia's debt burden in return for the enactment of reform legislation.

But also, the "$40 billion to $50 billion" held abroad by Russians in London and elsewhere should be frozen, Mr. Cannon suggests.

The owners could reinvest the money in Russia, no questions asked. If not, it should be confiscated, he said.

In this way, he notes, Russian money would lead the way in new investment in Russia.

IMF officials are not happy with a draft budget before the Duma that assumes $7 billion in foreign loans. But analysts say the IMF is betting on a more reform-minded team taking over after parliamentary elections at the end of 1999.