The Heritage Foundation

Executive Memorandum #581 on Russia

March 24, 1999

March 24, 1999 | Executive Memorandum on Russia

Primakov's Washington Visit: Not the Time for More IMF Credits

On March 23, 1999, Russian Prime Minister Evgeny Primakov visits Washington, D.C., for a summit with Vice President Al Gore. His main purpose is to ensure the Clinton Administration's support for new International Monetary Fund (IMF) loans to Russia. Russia seeks these new credits even though it has defaulted on most of its foreign loans since the August 1998 ruble crisis. Russia has threatened further default on its debt if the IMF does not provide the new credits. Supporting new IMF loans or the unconditional rescheduling of Russia's debt is not the best course for the United States to consider. Nor is forgiving one-half of the $90 billion Soviet-era debt, as Russia's Ministry of Finance suggests.

Americans are questioning the reason that the United States should support new IMF credits to Russia. The latter's lack of coherent economic policies, along with the statist mindset of Primakov's cabinet, will make any new credits or other Western largesse wasted efforts. IMF bailouts amounting to $27 billion since 1992 have failed. Additional IMF credits aimed at saving the economic status quo will prolong the agony, postpone the day of reckoning, and perpetuate the poor conditions under which Russian and foreign businessmen must work. Moreover, because Russia has shown little inclination to support the United States over international security issues, new credits in effect would reward Russia for its anti-U.S. stance.

Before the United States considers giving Russia another dose of IMF anaesthesia, the Vice President should ask Primakov to temper his opposition to U.S. security concerns. For example, why should Russia's debt be forgiven when it continues to proliferate ballistic missile and nuclear technology to states like China and Iran or go against the will of the United Nations to support Saddam Hussein's regime in Iraq with illicit weapons? If Russia wants further aid, Primakov should explain the reason that Russia opposes the United States on issues like enlarging the North Atlantic Treaty Organization and intervening in Kosovo, as well as the reason it supports Serbian leader Slobodan Milosevic despite many documented atrocities. Primakov also should explain the reason that Russia refuses to ratify the Strategic Arms Reduction Treaty (START) II. Finally, Primakov should explain the reason that Russia spends billions of dollars modernizing its strategic weapons arsenal while millions of Russians remain impoverished and hungry.

The Roots of the Crisis. 
The strategic goal of U.S. Russia policy should be to facilitate Russia's integration into the global economy and international community. The West should encourage Russia to implement realistic and responsible foreign policies and economic strategies that are in the interests of not only the United States and the world, but of Russia as well. To do this, Russia will need to come to grips with the twin legacies of its Soviet past: a superpower ambition, with its reflexive hostility toward the United States, and a costly military-industrial complex that survives to this day. The two are interdependent and undermine both economic reform and Russia's integration into the global community.

Russia's attempts to succeed the Soviet Union as a superpower and challenge the United States puts it on a collision course with the West over important issues, including Kosovo, Iran, and Iraq. Geopolitical games force Russia's leaders to maintain and modernize a large military--at great expense to the country's impoverished taxpayers. Finally, great power aspirations entice Russia's leaders to attempt to create alliances with China, India, and Iran. Such alliances contribute little to Russia's dire economic straits, however, and make decision makers in the West cautious and suspicious.

The military-industrial complex that is necessary to support Russia's great power aspirations is an immense drain on the country's economy. Russian-made products are not competitive in the global market, and the country's industrial base is plagued by barter arrangements that distort market value and deny the state tax revenue. This virtual economy is supervised by First Deputy Prime Minister Yuri Maslyukov, the last Soviet chief of central planning and a lobbyist for the military-industrial complex, and Viktor Gerashchenko, the Chairman of the Central Bank. They are working to revive such Soviet-style policies as price controls and industrial subsidies. So long as they are in office, little will change to lift Russia from its economic quagmire.

The first step to improve the economic situation of ordinary Russians is a difficult one: complete the dismantling of the Soviet-legacy socialist economy. Even senior officials at the IMF and the World Bank compare Russia's dependence on Western credits to a drug addiction. New IMF credits would be wasted, as a recent scandal involving the Financial Investment Management Company (FIMACO), an offshore company set up by the Central Bank, demonstrates. According to the Russian Prosecutor General and the State Duma, FIMACO siphoned up to $50 billion of Russia's currency reserves. A full-scale investigation of these fraudulent activities should be conducted.

A Fresh Start. 
If Russia wants additional aid from the United States and the West, it must act consistently as a responsible member of the international community, cooperate with the United States, and reform its economy. These actions should include putting strong anti-proliferation measures in place with specific timetables and verification regimes to deal with Russian companies that contributed to weapons programs in Iran and Iraq. The Administration needs to make clear that, so long as Russia continues to assist U.S. foes and remains recalcitrant in opposing vital U.S. interests, it is neither fair to the American people nor in their interest to facilitate debt relief for Russia.

To reform its economy successfully, Russia will need to implement new economic policies. This will require a highly competent, free market-oriented economic team that will develop a comprehensive program to restructure the economy. So long as the current team remains in power and continues its neo-Soviet approach, debt restructuring will be a waste of time and valuable resources and only will perpetuate the problems. To be effective, Russia also needs to implement an unprecedented crackdown on crime and corruption.

For Russia to continue its current policies while asking the IMF to support its habits with additional loans is like giving cocaine to an addict. On the other hand, if Russia implemented genuine economic reforms and demonstrateed responsible international behavior, then the United States should reconsider the issue of debt rescheduling.

Dr. Ariel Cohen is Senior Policy Analyst, Russian and Eurasian Studies, at The Kathryn and Shelby Cullom Davis International Studies Center of The Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy