Rewarding Russia for what?

Loans from West flow in spite of political antagonism and corruption

When the dust settles after the latest Russian political crisis - the ouster of Prime Minister Yevgeni Primakov - the issue of International Monetary Fund loans will once again become the focus in the Russian economy.

While officials on both sides of the pond are uneasy - especially given the slim chance the Duma will pass IMF-friendly legislation - they will, eventually, come back to the table and are likely to agree to release the next scheduled $4.5 billion loan disbursement.

But there are compelling reasons for caution about international loans to Russia.

Repeated threats to withdraw from the peace-brokering process in Kosovo are only the latest Russian measures aimed at frustrating Western foreign policy. Russia has been an irritant to NATO at every stage of the crisis, yet it howls in protest when it is ignored.

Still, a new IMF loan disbursement to Russia is imminent and for a very bad reason: to assuage Russian hurt feelings. If the IMF follows through, it will make two grave mistakes: rewarding Russia's antagonism of the West, and addressing political rather than economic considerations.

The abysmal track record of Russian economic reform - inability to implement a true market economy and lack of fiscal accountability and transparency - doesn't justify further loans.

Rationales advocating new loans to Russia have ranged from concerns about Russia's alienation from the international community in case it defaults on its foreign debt, to fears that Russia itself will collapse, resulting in political chaos in a country that spans 11 time zones and still has 20,000 nuclear weapons. These scenarios, it is argued, would make Russia far more dangerous than we perceive it to be now.

The fact is that this has been tried before.

Last summer, a $22.6 billion loan package put together by the IMF, World Bank, and Japan at the urging of the Clinton administration was intended to help stabilize the Russian economy. The justifications given at the time were some of the exact concerns listed above. Within weeks the ruble collapsed, and in the aftermath of the financial crisis, former Finance Minister Anatoly Chubais admitted publicly that the loan package had been "swindled" from the West. Adding injury to insult was the subsequent discovery that most of the first $4.8 billion disbursement of the loan package flowed right back out of the country again in a matter of weeks.

The lion's share of the billions of dollars the international community has loaned Russia since the breakup of the Soviet Union has fallen into the pockets of corrupt bureaucrats and has primarily benefited those for whom it was least intended.

It is little wonder that these loans have failed to stop, or even to postpone, the devaluation of the ruble and the crisis of the Russian economy.

Until a measure of transparency and accountability has been achieved in the Russian economy, the IMF might just as well deposit the money into Russian offshore holding companies directly. For the IMF to loan money to Russia in order for it to repay loans that it initially "swindled" from the IMF is not only absurd, it's fiscally irresponsible and potentially dangerous.

The fundamental issue is that aid money that has gone into Russia has consistently and illegally increased the polarization of wealth in a country where more than a third of the population lives below the subsistence level. The pandemic corruption of the Russian state should have caused IMF wariness and requirements of close scrutiny as to the final destination of the loan money.

It's impossible to divorce the economic quagmire in Russia from the stranglehold crime and corruption have on Russian society. Solutions to these problems are to be found in fostering a culture based on the rule of law, a judiciary that is not cowed by political forces or police organs or criminal syndicates.

THE best course of action for the West is not to throw money at Russians, but to help them better help themselves by providing them with the tools needed to improve their economy.

Attracting foreign direct investment is the quickest path Russia can take to recovery. This requires nurturing a more transparent business climate that would subsequently generate investor confidence. Then not only would Russia free itself from dependence on the IMF, but also nurture a truly free and democratic market economy.

*Frank J. Cilluffo is a senior policy analyst and director of the Russian organized crime task force at the Center for Strategic and International Studies, in Washington, D.C. Todd Nelson is a research analyst for the task force.