Russia and the IMF: A sordid tale of moral hazard

This defense is striking in two ways. It seeks to reduce important criticism to simple tactical debating points, and it maintains that the fault rests with the Russians, rather than with the IMF. The fact that the Fund had been consciously playing along with Moscow in a game of systematic rule evasion seems to be of no consequence. As long as no critique is directed at the technical quality of the advice offered, whether or not it is actually implemented, or even possible to implement, is held to be an exclusively Russian problem.

The fact that none of the multitude of tricks deployed by Moscow was ever criticized by the IMF is hard to disassociate from the fact that the Fund was being drawn into a relationship of increasing mutual dependence with the Russian government. In a 1996 article in the Institutional Investor, published after the re-election of Boris Yeltsin, which had been indirectly sponsored by the IMF, David Fairlamb opens with a striking characterization of this relationship-"They're as intimate as lovers in a classic Russian novel"-and then proceeds to point out the inherent dangers:

The relationship between the world's financial policeman and its biggest debtor after Mexico is now so cozy that it has become a tad unwholesome. So anxious are the Russians to please the Fund that they often agree to unrealistic financial targets that are impossible to meet. So keen is the Fund to help Russia that it often turns a blind eye when its supposedly stringent lending conditions are infringed on.... It doesn't take a Tolstoy to see the potential for tragedy, or at least melodrama, in this situation.38

Half a year after the trauma of the August crash, The Economist summarized how Western thinking about lending to Russia had been transformed: "In the past, IMF money was always forthcoming. Whenever Russia has been in a scrape, a word of guidance from the American government to the world's financial overseers has been enough to overrule bureaucratic scruples about wobbly public finances, the risk of theft and the slender chances of getting the money back."

Then we are taken up to the rude awakening: "No longer. Perhaps belatedly, a new consensus now unites both the international financial institutions and their political masters in Washington: that without deep changes in the way Russia is governed, lending the country any more money is useless, or even harmful."39

The position of the IMF was thus beginning to look rather precarious. Given that the likelihood of Russia's actually implementing the reforms that the Fund had repeatedly called for was converging on zero, it really did not have much left to show for all its efforts in lending Russia Western tax dollars.

Political Meddling

There is another dimension of moral hazard, the intensive Western interference on Russia's domestic political scene. Here, the long-term consequences may turn out to be even more disturbing than those of the financial meltdown.

Although it may be debatable to what extent foreign involvement in the Russian reform process has had an impact-positive or negative-on the evolution of the economy (the financial disaster being a special case), its impact on the political process must be beyond doubt. Western "support" for the Russian reforms has been a long series of unprecedented meddling, to the point even of raising demands and setting conditions that no other country in the world would have found acceptable.