Russian lessons for the IMF

15 September 1998

The Russian economic crisis, hot on the heels of the Asian meltdown, has provoked the Financial Times to comment that “the role of the International Monetary Fund in preventing crises has been comprehensively undermined.” Stanley Fischer, the Fund’s Deputy Managing Director, however seeks to blame others: “we could have pulled it off this time if it had not been for George Soros and his call for devaluation”, adding that “the situation became untenable after the G7 did not hurry to help.”

George Soros pointed out that IMF-mandated tight monetary and fiscal policy to resolve the government’s budgetary crisis ruled out the injection of liquidity needed to alleviate the domestic banking crisis. The package was also criticised for treating the symptom of Russia’s financial problems rather than their cause. The Russian crisis has made clear that the IMF‘s tranched and conditioned loan disbursement system prevents it acting as a rapid lender of last resort to protect the financial system.

In July the IMF, World Bank and the G7 governments agreed a $23bn restructuring package to try to allay investors’ fears. But its impact on confidence was undercut when the IMF withheld $800m because the Russian parliament rejected many of the package’s tax reforms.

With no access to international funds, the government spent $9bn of its foreign currency reserves trying to defend the rouble before it was forced to announce an effective 34% exchange rate devaluation, capital control reimposition, and a restructuring of its rouble-denominated debts (effectively a default). The European Union has also distanced itself from IMF and US prescriptions for Russia, and called for a review. Austrian foreign minister, Wolfgang Schussel, urged “a European model of a socially responsible market economy.”