From Sat Dec 7 14:24:34 2002
Date: Fri, 6 Dec 2002 00:04:56 -0600 (CST)
From: mckeever <>
Subject: [toeslist] IMF: Stupidity Killed Russia
Article: 148029
To: undisclosed-recipients:;

Russia's Challenges in the 1990s

An interview with Martin Gilman of the IMF, Washington Profile News Agency, 3 December 2002

What were the main issues/problems the IMF had to deal with in Russia?

The main problem Russia faced in trying to pursue good economic policies at the time of the collapse of the Soviet system was to develop the human and administrative capacity to be able to formulate and implement economic decisions.

It sounds almost trivial to say that; however, if we at the IMF and others in the international community had understood and realized how significant a problem that would be, I think we would have designed our policy and our technical assistance in a rather different way. I say that because one of the prejudices that many observers of the West, even well-informed observers, believed that if there was one attribute you could say with confidence about the Soviet Union, it was the prevalence of centralized economy. It was, after all, an autocratic society, some would say a totalitarian state. And therefore centralized authority was its key feature. It was a belief by all observers outside of Russia that this dominant central authority survived the collapse of the Soviet system, because it was such a well-developed feature of the system, it had been in place for so many years, and even in post-Soviet Russia in 1992-93, you still had the attributes of central authority—a President, the Ministries, etc.

And even in the discussions in 1992 we thought we were dealing with a normal government going through dramatic changes, that we were dealing with new authority but in a country that had institutions that could develop and implement policies. I think it was only with hindsight that we gradually came to understand that there was a real central power vacuum, and this was not only a contradiction to observers who believed the function of the central government continued, but it was also ironic, in the sense that we all thought that the real legacy of the Soviet time was the continuation of central authority.

But the CPSU was the central authority, and when it disappeared there was nothing else, there was just a skeleton, so it looked like a government structure, but the real power of decision-making, for resolving disputes and reaching compromises and making decisions, was not there. There was a formal government structure that had no way of making decisions. And it took a long time to develop the workings of a normal government.

I remember that Oleg Vyugin, who is now the chairman of the Central Bank and had been involved in all of the discussions, was explaining to me that a valuable lesson was conferred by the work with the IMF, which is that if Russia was going to be able to have a modern state that could actually resolve economic problems, there had to be coordination in the various factions of government. He said that for Russian bureaucrats this was not obvious, it was simply not obvious how government worked, and one of the key contributions of IMF was not the money, and not even necessarily the specific advice on budgetary policy, but it was advice on how government works, although that wasn’t our intention. Had we understood what the real issue was, we would have focused our advice in a different way. In retrospect, it's very revealing how many times we in the IMF expected that the Russian government would implement decisions to deal with various problems—the banking system, taxation, lack of fiscal revenue. And we kept believing that the government was sincere in wanting to tackle these problems and yet time after time we kept seeing that these policies were never really implemented as agreed, or implemented poorly.

The whole opening of the GKO market to non-residents in 1996 was intended to provide the government with a deep and broad financial capital market to lower the yield so that it could have access to less expensive capital. But it was all predicated on the idea that the budget was going to be brought under the control, and that the EFF (extended fund facility) had negotiated with the Russian government in 1996 was based on the fact the central government deficit was going to decline to 4% in 1996, and 3% by 1998, and in fact it never happened, because the expenditures continued to increase, particularly because of the unfortunate but necessary policy of sequestration. After the presidential election, the great shock to the financial elite in Moscow was that in Sept 1996 cash revenues collected by the federal government fell to an all-time low. It was not even enough to cover the monthly wage bill for the power ministries. People came back from their dachas and found the situation was even worse than before the elections. And then, to announce publicly that you would be going after the ten largest tax delinquents by a particular date—the end of 1996—and then to do nothing, was so counterproductive it would have been better to do nothing at all, rather than pronounce very publicly an empty promise. But the problem we found is that the ability to actually develop and then implement policies just wasn’t there, the bureaucracy didn’t respond. When Mr. Putin was elected president in March 2000, we had understood from his staff that he wanted to send a strong signal of what kind of orientation his administration would have. And he realized that the time between his inauguration and the end of the spring Duma session was too short to table new legislation that could have a dramatic effect. So he with his advisors looked at what pending legislation there was that he could back that would send a signal of his intentions, and he decided to back the non-agricultural land-cove and issued a prikaz that the government should do everything possible to make sure this was voted into law before the end of the spring session. As you know, it took another year—it was only voted into law in July 2001. And the analogy that Mr. Voloshin gave me about the presidential prikaz was, he said “It was like pouring water into sand.” In other words, even a presidential instruction on something that has already been prepared—it just disappeared, because the ability to coordinate inside government was not there.

I say this to underscore the huge challenge that post-Soviet authorities have faced in trying to fund the right people to bring into government, to adopt the right kind of structures for decision making, and they had to do it not only in a vacuum created by the collapse of the CPSU, but also in a time of economic chaos, when a lot of the Soviet legislation did not apply to a market economy, at a time of great disruption. And I think it's remarkable that as one looks to the end of the 1990s, so much progress has been made—inflation was brought under control, the ruble was stabilized, the government actually started collecting money. The legislation has started to have a real impact.

How influential was the IMF in Russian policy-making during the 1990s?

Our role was really very marginal in influencing what happened in Russia. Michel Camdessus said to me “What happened in Russia in the 1990s was 99% Russia, 1% IMF.” He said that even the 1 percent probably shouldn’t have been that much, it should have been more the World Bank, which was better equipped to deal with major structural and administrative change, but that's the way the world was in the 1990s. In all countries it's always the authorities of the countries that make decisions, whether you’re talking about Argentina today or Indonesia several years ago. In a sense, Russia was not different from those cases. The only thing is that Russia is a very special country, for geopolitical and historical reasons, and the IMF could try to educate and advise and influence a little, but Vyugin was probably right—the IMF's biggest contribution was getting Russian senior advisors to understand that they had to coordinate if they wanted to transform the post-Soviet system into a modern state.

IMF's biggest influence was probably in the crisis of 1998—all the senior officials were worried, and yet they were convinced that you could not devalue the ruble, sometimes for political reasons, sometimes for monetary control reasons. If you don’t have the right people—and I’m not going to name names—if you don’t have the people to carry out so-called emergency policies in a crisis environment, the markets are simply not going to believe it. Not only the international markets, but your own bankers are not going to believe that the government has a credible policy that will lead to financial stability. As one London-based investor said to me: “When you’re lending to the government, you have to be confident that the government is going to generate the revenues to repay you. Once that confidence has eroded, no one will want to buy your government papers.”

What is the level of professionalism in Russian government today?

I can’t address the situation as of right now, but I could say that it has been very difficult for the government to find a staff, middle and senior positions, and even throughout the bureaucracy, and I suspect that this is still a major problem. Throughout the world, especially in times of economic crisis, governments have a difficult time recruiting very good people into service. In Russia though, it's even more difficult, because the private sector attracted the young people who had managerial and entrepreneurial skills, the very people that the government desperately needs. They either went to the private sector, or found jobs abroad. The fact is, it's very difficult to attract people because of salary levels, and there is still very antiquated restrictive practices for employment in government surveillance that discouraged people—the Official Secrets Act, which is very ambiguous in today's Russia and makes a civil servant vulnerable to what could be fairly arbitrary administrative procedures. There is always the concern that you don’t have security of employment, particularly at the senior levels. It's a very difficult situation, at least it was during the period I was familiar with, to recruit young talent, and I think that what is needed is a genuine civil service reform. My own view has always been that the hope for Russia depends on a long time scale, one that will take generational changes. That's why, as I said earlier, I am somewhat impressed with the efforts of the Putin administration in trying to address these issues. In my last discussion with Kasyanov last year, he was saying that personnel issues take up the vast majority of his time—conflicts between ministers etc. In the functioning of a modern state, the prime minister shouldn’t have to do so much of that.