TO RUSSIA WITH INTEREST
July 13, 1998
International lenders agreed to loan Russia over $22 billion as part of a two-year financial bailout plan to rescue the country's floundering economy. Is it enough? Margaret Warner leads a discussion.
MARGARET WARNER: In Moscow today, Russian officials announced that international lenders will advance Russia more than $22.6 billion over the next two years. Most of the new loans will come from the International Monetary Fund, with further contributions from the World Bank and Japan. The loans are designed to boost the nation's currency reserves as the government struggles to service its foreign debt and stave off pressures to devalue the Russian ruble.
A RealAudio version of this segment is available.
May 28, 1998
Russia's government tries to maintain the value of the ruble.
April 24, 1998
After two tries, Sergei Kiriyenko is confirmed as Russia's Prime Minister.
January 6, 1998
Is Russia in control of its nuclear arsenal?
December 26, 1997
The unhealthy state of Russia's health care system.
September 29, 1997
How does a new law affect religious life in Russia?
An IMF address on Russia.
JOHN ODLING-SMEE, International Monetary Fund: The new package of measures, economic measures which the government is announcing, and the financial support from ourselves and the World Bank and the government of Japan will now make it possible to avoid devaluation altogether.
MARGARET WARNER: There was no immediate word on what conditions the IMF attached to the loans. Foreign investors and currency traders had been fleeing the Russian market since last October, when the Asian financial crisis caused tremors in emerging markets throughout the world. The Russian stock market lost 75 percent of its value from last October to the end of last week. Russia's hard currency reserves dropped as well as the government tried to prop up the ruble. The situation was further exacerbated by the country's huge budget deficit--due, in good part, to the government's failure to collect taxes.
The most visible impact of this turmoil on everyday Russians is the government's inability to pay workers in state-owned industries. Protesters like these defense workers are demanding their long overdue pay-and some have called for the resignation of President Boris Yeltsin. Russia's new prime minister, Sergei Kiriyenko, has proposed a major package of reforms to strengthen tax collection and narrow the budget deficit. The Communist-dominated Russian Duma is to debate the package on Wednesday. Today, Russia's chief negotiator said the loan package would boost foreign investors' faith in the Russian economy.
ANATOLY CHUBAIS, Russian Negotiator: (speaking through interpreter) There is one main reason why the Russian market has taken such a hard hit- -trust and confidence in the government- -and you could say that up until today there had been a total loss of trust in the government by the financial establishment. This is tied to both internal and external reasons. But today's announcement shows that there is confidence, it restores confidence.
MARGARET WARNER: The package must still be approved by both the IMF board and Russia's parliament.
Trying to divine the future of Russia's economy.
MARGARET WARNER: Russia's benchmark stock index rose nearly 10 percent today after the IMF announcement. The ruble also posted a slight gain against the dollar. We get two assessments now from Anders Aslund, senior associate at the Carnegie Endowment for International Peace, where he co-directs a project on the economics of post Soviet states and Marshall Goldman, professor of Russian economics at Wellesley College. Welcome, gentlemen, Professor Goldman, how is this bailout designed to work? How will it actually work?
MARSHALL GOLDMAN, Wellesley College: Well, I think the best way to understand it is imagine what will happen if there were a run on the American bank. We had those in the 1930's and we've had a relatively few in recent years, but the way we tried to stop it is to create an organization like the FDIC, the Federal Deposit Insurance Corporation, which guarantees that your deposits will be protected, and as long as you know your deposits are going to be protected because there's a big fund out there, people are very happy, they'll let their money stay in the bank. I think the same thing in this case with the International Monetary Fund, the notion is the International Monetary Fund is going to stand behind Russia, provide them with additional reserves so that if you want to take out rubles and cash them into dollars, you'll be protected, and if you know you can do that, then there's less urgency to take them out. And I think that's basically the way to understand it.
Will the loans do the trick?
MARGARET WARNER: Do you agree with that assessment, and is this package enough to do that.
ANDERS ASLUND, Carnegie Endowment for International Peace: Yes. I think that it works. You can say the crucial problem here is $25 billion of short-term treasury bills held by the Russian commercial banks and largely by foreigners, who were not happy to hold it, because they didn't trust the stability of the Russian economy and the Russian ruble now. And in order to convince them to do this, Russian international reserves needed to be large enough, and that will now be the case.
MARGARET WARNER: Prof. Goldman, everyone here talked about the fact that this would prevent the need for devaluing the ruble. Why would it be so bad for Russia to devalue the ruble?
MARSHALL GOLDMAN: Well, if you devalue the ruble, that means that-well in one sense it's good, I should say, and that it makes Russian exports normally more attractive, they become cheaper, but it's bad in the sense that there are lots of loans that the Russian banks or the government have taken out in the West, and those loans have to be paid back in dollars and in German marks and things of that sort. And to the extent that you devalue the currency, that means the ruble's worth less, and it is going to take more rubles to pay back those loans, and, therefore, it's going to cause those additional efforts-going to make it more difficult. It also means that imports for-of consumer goods will become more expensive, because, again, it will make more rubles to pay for them. But I think-you know, I don't want everybody to think that just because the money is there that Russia is home free. I think there still is a lot of skepticism and a lot of doubt this will help, but it's no guarantee that it will be successful.
The cause of the crisis: Asian and internal.
MARGARET WARNER: All right. Well, let's get into that, Mr. Aslund. How much of Russia's current predicament is due to sort of back wash from the Asian financial crisis and how much due to their own internal problems and failures?
ANDERS ASLUND: Well, it's both. You can't really divide how much it is but when the Asian crisis hit and oil prices fell, then the Russian trade balance deteriorated a bit, but still Russia will this year have a trade surplus, so it's not so much-the ruble is not really overvalued. The problem is still capital flight and unwillingness of Russians and foreigners alike to invest in Russia, so you can say the fundamental problems underneath are first two big budget deficits which was about 8 percent for the two--of GDP for the two last years-and for next year according to the IMF agreement it should be 2.8 percent of the GDP, which is reasonable, and the other that Russia has unfortunately and awful enterprising environment. It needs to be deregulated. The authorities need to be disciplined, and the big companies that are violating the rights of smaller enterprises should be disciplined as well.
MARGARET WARNER: Prof. Goldman, your assessment of what's at the nub of this problem.
MARSHALL GOLDMAN: Well, I think I would agree with Anders that those problems exist. I would add to them not just the question of willingness to invest, although I think that's a critical one, but also the willingness of people inside Russia to start playing by the rules, rules of law, the rules of taxation, and the fact that you just can't pick up the system and steal it, as so many of them have been doing. This is a critical problem, and what is disturbing now is that in recent months firms that have decided it would take a long run approach and go into Russia and begin to develop some of them, not all of them, but some of them have picked up their satchels and just simply gone home, even if it means leaving behind them hundreds of-well, in one case $100 million worth of investment so that people don't pay their taxes. There are about 4 million tax returns-individual tax returns-filed out of a work force of 60 to 80 million people out of a population of 147 million. You can't operate a system that way, and Anders says that the IMF wants them to reduce their budget deficit to about 2.8 percent of the GDP next year, well, you can only do that if people pay taxes and you cut expenditures, and they're having trouble cutting expenditures because wages are not being paid, bills are not being paid, and if people don't pay their taxes, then you're not going to be able to reduce that in any meaningful way.
Big companies in Russia find creative ways to pay (and not pay) their taxes.
MARGARET WARNER: And the big companies aren't really paying their taxes either, are they, Mr. Aslund?
ANDERS ASLUND: Yes, that's a big problem, and also when the big companies actually pay their taxes, for example, gas-gas monopoly company-they deliver in kind-they-they deliver gas, for example, that their government has not really asked for, and then they asked for payments by not paying taxes, or a local construction company doesn't pay taxes at all, and when local authorities come and ask for the taxes, the construction company says, oh, yes, we are happy to build whatever you want, so please just tell us, rather than paying the taxes, they're using this as a blackmail against the authorities to get orders.
MARGARET WARNER: So Prof. Goldman, how can the Russian government get a handle on this?
MARSHALL GOLDMAN: It's not easy. You've got to change centuries of culture. You've got to introduce all kinds of additional reforms. Anders said you're going to have to have some deregulation and to some extent he's right. But at the same time you're going to have to have increased enforcement of the regulation you do have. You know, it's a very delicate road to pursue because if you have too many regulations, then the government officials have much more room to operate in terms of corruption, so that you know, you're damned if you do, you're damned if you don't, but you've simply got to get these companies to do that kind of thing, and the worst problem is now in this crisis-Kiriyenko, who, I think, is probably the best prime minister they've had since the 1890's in the Czarist era-has had to work with these robber barons, as it were, these oligarchs, and indeed yield to them, and so you've got to connect on to these very people that the government now finds itself dependent on, so it's simply not-it's not an easy task at all.
Is the new government up to the task?
MARGARET WARNER: Do you think the political will is there to do what has to be done to collect these taxes and get this government on a footing that's realistic?
ANDERS ASLUND: We've seen now the new government only since the end of April. So far it looks very promising, in particular, of a government hit hard on the big oil companies and gas company for not having paid for their taxes in the last couple of weeks, but we are facing formidable resistance, and the resistance now is not really from the Communists in the Duma-or they are against the government. Also, it's much more the big businessmen who actually want devaluation, so they are the main threat today.
MARGARET WARNER: And explain briefly why they want devaluation.
ANDERS ASLUND: Because if there is devaluation, their exports will still be as much worth in dollars, because-
MARGARET WARNER: Especially gas.
ANDERS ASLUND: Yes, gas and oil-but the production costs in Russian ruble wages will be much lower, so they will benefit from a devaluation and they would be happy to buy up new enterprises for the money they earn and everything is cheap now in Russia and at the same time they would get rid of this government that is nasty enough to ask them to pay taxes.
Failure could mean a bankruptcy that spreads.
MARGARET WARNER: And Prof. Goldman, explain what the ramifications are if the Russian government can't create the conditions to make this loan bailout work both domestically and for the world internationally?
MARSHALL GOLDMAN: Well, it faces bankruptcy, in effect, and that could spread, but let me take issue with one of the things that Anders said. I don't think that-it's clear that the oligarchs have-some of them at least have been arguing for devaluation, but it's not going to make things cheaper for them, and that's kind of the mystery, because you need, if anything, to the extent that imports become more expensive, it's going to increase the cost for the workers but whatever the situation is, the fact does remain that this is I think our last best chance to try to help this government, which I don't think is going to solve all the problems, but if it's replaced, if there's bankruptcy, if the government is thrown out, if, indeed, the calls for the impeachment of President Yeltsin move forward, we're not going to find a government more to our liking, and so we've got to, I think, painful as it is, help this particular government-even though when they obtain more money, more loans, it means that their debt service is going to increase even more. If it's 36 percent of their budget right now, it's going to be much higher in the future, and it's going to make the task all the more difficult.
MARGARET WARNER: All right. And it's all the more difficult, but we have to end this here. Thank you both very much.