The Board of Directors of the International Monetary Fund (IMF) is considering granting Russia a $10.2 billion loan, and the U.S.- run Export-Import Bank may provide an additional $1 billion to boost Russia's flagging civilian aircraft industry. President Clinton strongly endorses the IMF loan, hoping it will bolster Yeltsin's faltering presidency. But giving Russia a handout will only encourage Russia on its destructive course.
If a hard-line communist like Gennady Zyuganov were to carry the presidential election this June, which looks increasingly likely, IMF credits would be going to precisely the kind of regime that could resume threatening the United States and Europe with nuclear weapons. There is a chance that these loans would never be repaid since, under a communist government, Russia could sever relations with the IMF and the World Bank.
Economic reforms in Russia are grinding to a halt. First Deputy Prime Minister Anatoly Chubais, the last remaining radical reformer in Yeltsin's cabinet, was forced to resign to appease Yeltsin's nationalist and communist critics, whose power and influence are gaining strength. Vladimir Kadannikov, Chubais' replacement, directed Russia's inefficient auto-making giant VAZ, whose low-quality products have long been the laughingstock of Europe.
Meanwhile, in 1995 Russia's inflation rate raged between 120 and 130 percent, budget deficits remain very high, and privatization has failed to raise the revenues to reduce them.
Leading Yeltsin administration officials such as Interior Minister General Anatoly Kulikov, along with communist deputies in the Duma, are seriously considering reversing privatization and stopping economic reforms in their tracks. Communists and their allies control the majority of the Duma's committees and the powerful Duma Executive Council.
Moreover, election pressures have forced Yeltsin to break budgetary constraints and promise billions of dollars in credits and payments to powerful industry groups.
For example, about $4 billion was earmarked for the defense industry and $2.2 billion in back wages has been promised to public-sector workers. The notoriously inefficient Russian miners, who went on strike in December 1995, were promised another $2 billion; $3.3 billion has been pledged to the agricultural sector; half a billion dollars went to pensioners, and more than $1 billion will be paid to officers and soldiers in the armed forces. All of these are panic-driven political payoffs by a frightened regime fighting for its survival.
Instead of offering a handout to the Russian government, the IMF and the World Bank ought to be providing policy advice to Russian leaders on decreasing tax rates to boost private enterprise and encouraging investment to make the Russian economy more attractive for domestic and foreign entrepreneurs. Only when investment, both foreign and domestic, is able to create prosperity for the Russian people will the tensions tearing the country apart be eased.
Russia has become such an investment risk that more than $12 billion a year is leaving the country to be deposited in foreign banks. Such capital flight -- the result of incoherent economic policies -- is starving the Russian economy of investment and taxable income and creating political unrest. Even as it asks the IMF for loans, Moscow is forgiving sizable debts owed to it: $8 billion owed by Libyan dictator Muammar Qaddafi; $3 billion owed by the Sandinista regime of Nicaragua; and $250 million owed by Ethiopia.
Meanwhile, Russia continues to prosecute the war against Chechnya. According to estimates by Russian economists, this war is costing more than $4.5 billion a year. The IMF should not subsidize such a war, or any other military ventures into which a future Russian hard-line president might drag the country.
Most ominous of all, the country may be on the brink of a takeover by Gennady Zyuganov, the leader of the unreformed communists who has promised to restore the U.S.S.R. "by voluntary means." Leading in opinion polls, he is followed by ultra-nationalist Vladimir Zhirinovsky, who has declared he will restore the Russian empire and possibly expand it even further into the Middle East.
The Clinton administration should not lobby the IMF on behalf of Russia. More money is not what Russia needs. At best the money will be wasted; at worst, it could be abused by a future anti-Western leadership. Instead, President Clinton should take the lead in ensuring that all aid to Russia is conditioned on the adoption of free-market and democratic reforms.
Otherwise, the foundation for a Russia more dangerous than the Soviet Union will continue to be laid.
Note: Dr. Ariel Cohen is senior analyst in Russian and Eurasian studies for The Heritage Foundation, a Washington-based public policy research institute.
