Russia and the IMF: A sordid tale of moral hazard

The general economic strategy that the Russian government developed was to play a series of chicken games. It did so in its relations to the country's popular assembly, first the Supreme Soviet and then the (democratically elected) State Duma, with deplorable results for the passing of both budgets and necessary legislation.

The pattern became wearisomely familiar: the president intimidated the Duma, the Duma threatened to impeach the president, and the president threatened to dissolve the Duma. And the West consistently chose to take sides, supporting President Yeltsin even to the point, in October 1993, of condoning Russian tanks' shelling the Russian parliament building.

Given the Western complacency with respect to Yeltsin's domestic chicken game, it was not really surprising that the strategy that was deployed vis-a-vis Western donors and creditors was strikingly similar, with one small difference. Rather than issuing direct threats, Russian sources consistently relied on more subtle threats of the "greater evil": unless Russia gets more funds, dark forces would come to power. Thus, Yeltsin simply must be supported.

Behind the scenes, however, it was slowly becoming clear that Yeltsin, as Rutland puts it, was "the problem, not the solution."33 There emerged in Moscow a form of implicit contract, to the effect that if the boyars (the oligarchs) recognized that Boris Yeltsin was the tsar of Russia, the tsar in return would grant his boyars a carte blanche to plunder the country and to transfer their loot to safe havens abroad. An obvious implication of this contract was that for as long as Yeltsin remained in his post the problems of predation could not be resolved.

What the IMF stands accused of here is having turned a blind eye to cronyism and systematic rule evasion. A particularly glaring example was the practice of "aggressive sequestration," of simply withholding disbursements from the federal budget when revenues fell short. A senior IMF official who was involved in the process describes how he saw it get started: "In the last months of 1993, [finance minister] Fyodorov used the only weapon that remained in his arsenal: he simply refused to pay. The policy of aggressive sequestration continued in the first half of 1994 and, coupled with a restrained monetary policy ... it helped to achieve a significant albeit temporary reduction in inflation.."34

The ad hoc way of running the budget, which had started in the first weeks of the Gaidar government, had a number of detrimental effects, notably the creation of a chronic arrears crisis. But none of this was ever seriously criticized by the IMF. Although the Fund was heavy-handed in its criticism of insufficient fiscal austerity, it is hard to recall its ever mentioning the importance of pacta sunt servanda, that the government has certain obligations vis-a-vis its citizens, and that a failure to honor such obligations may have serious repercussions for the country's social capital at large, eroding the very foundations on which the Westernstyle reforms were to be built.