Russia and the IMF: A sordid tale of moral hazard

When President Clinton met Yeltsin in Vancouver in April 1993, and when, some months later, the G7 held its economic summit meeting in Tokyo, it was already obvious what kind of political games were being played. The G7 governments were adapting themselves to a new set of rules-rules, moreover, that were being laid down by the Russians. And it was up to the IMF to shoulder the responsibility for implementation.

The adjustment was a three-stage process. In the first stage, a transformation was made from betting on Gorbachev and a preserved Soviet Union, to thinking in terms of Yeltsin and a disintegrating Soviet order. In the second stage, lasting from the August coup through much of 1992, there is confusion as to what the post-Soviet world would actually look like, and in the third stage, which took shape in 1993, the policy of "Russia first" took root.

Clark summarized the essence of the new game: "Somewhere in the course of these frantic discussions, it came to be accepted by everyone that for reasons of historical necessity, Russia must be given a uniquely privileged sort of treatment by the International Monetary Fund and the World Bank."20

What this meant was that political considerations must be allowed to override the rules and practices that had been IMF standards for decades. What type of pressure was applied is a bit unclear-perhaps the IMF did not need too much prodding-but the outcome is obvious. Russia was more or less exempt from all the rules and sanctions that were rigorously enforced in all other cases of countries turning to the IMF for assistance. To some, the transformation was baffling:

For the bankers and economists who worked at those institutions and had spent a lifetime schooling unruly nations in the ways of financial rectitude, it was a bemusing experience, at once comical and exasperating, to watch Russia's leaders cheerfully rewrite the rules of the capitalist club before they had even joined. High-flying bureaucrats, used to laying down the law in every semi-bankrupt finance ministry in the world, found to their astonishment that Russian officialdom treated them with condescension: the condescension of borrowers who know that their banker has no real choice, because the political cost of meanness is even higher than the financial risk of profligacy.21

The true reasons for this about-face remain a matter for speculation. In some quarters, there was likely a significant amount of naivete, an expectation that soft terms for Russia really would lead to positive results, that the Russian economy would rapidly recover, and that in the slightly longer term one would actually be able to recover all the billions that were granted in credit, perhaps even with interest.

In other circles, it is equally likely that pure cynicism prevailed, that it was fully appreciated that the soft credits would neither be repaid nor perhaps even have the promised effects, but that the short-term political gains in the relationship to the Kremlin could be worth some tens of billions of dollars. This was even more likely because the global availability of aid and credit to the needy has been decreased. It is hence other poor countries that indirectly have paid the price for Western "aid" to Russia.