Russia Mends Ways for IMF, But 'Oligarchs' Still Dominate

Russian President Boris Yeltsin and his entourage of young economic reformers are facing an almost impossible choice.

They can continue to coddle a limping economy burdened by widespread graft and inefficiency. Or they can implement much-needed tax reforms, restructure their crushing internal debt, and slash rampant government spending.

The first option carries the danger of imminent financial meltdown. The second risks setting a match to a powder keg of popular frustration.

The lower house of parliament, or Duma, is dragging its feet. With billions of dollars hinging on passage of a government austerity package, lawmakers continued to be bogged down in acrimonious debate at press time.

Most observers agree that Russia's hefty new loan package has brought a welcome respite to the country's troubled economy. A serious cash shortage, compounded by growing social and political unrest, was threatening to plunge Russia into chaos.

On Monday, the International Monetary Fund (IMF), World Bank, and Japan announced an agreement on $17.1 billion in new loans for Russia, adding to $5.5 billion in existing loans.

The promise of rescue was enough to send Russian financial markets soaring Monday and Tuesday, while high interest rates on treasury bills were slashed nearly in half.

The bailout package alone will not solve Moscow's problems, however.

"The main value of the loans is psychological," says Al Breach, an economist at the Russian-European Center for Economic Policy in Moscow. "It will calm people down, avert panic, and restore confidence in Russia's markets."

Although outside forces, such as the worldwide drop in commodities prices and the backlash from the Asian financial meltdown, undoubtedly have exacerbated Russia's woes, the main cause of its distress is corruption at home.

A small number of business and banking leaders with close ties to the government control the bulk of the country's financial resources, as well as the major media outlets.

After financing Yeltsin's reelection campaign in 1996, these "oligarchs" have demanded their share of the spoils. They receive them in the form of tax breaks, advantageous terms for the privatization of state companies, and official indulgence of questionable accounting practices.

All this has drained money from the state coffers and fostered widespread anger and frustration among the population.

"The government has been subsidizing its friends," says Peter Ekman, professor of finance at the American Institute of Business and Economics in Moscow. "This cozy relationship between top members of the government and the 'oligarchs' has to end."

Unless Russia's energetic government team, led by Prime Minister Sergei Kiriyenko, can break the oligarchs' stranglehold on the country, all reform efforts may lead to failure.

With plenty of cash and access to the airwaves - and, of course, their entree into the halls of political power - they continue to exert considerable influence.

"Kiriyenko will not be able to do anything serious," says Andrei Piontkowsky, director of Moscow's Center for Strategic Studies. "The nexus of power, money, and the mass media will keep everything the way it was."

That could be bad news for Russia. The IMF has attached a series of conditions to the funds it is lending. First among them is passage of the government's austerity package by both houses of parliament. The upper house gave its approval last week. But the bill faced a tougher fight in the Duma, as lawmakers rejected several key planks of the austerity package.

The austerity measures are also likely to meet fierce resistance on the ground. The government has pledged to cut spending and raise tax revenues, which will put even more pressure on some sections of an already impoverished population. Protests and strikes are already sweeping the nation - and could worsen.

The skittishness of foreign investors is also holding back the development of Russia's fledgling market economy, analysts say. And the emergency loan is unlikely to tempt back those who fled at the onset of the crisis.

Russia may be running out of time. If it fails to enact reform now, it could find itself without a financial safety net during the next crisis.

"When the situation repeats itself in three months to a year, there will be no more bailouts," Professor Ekman at the American Institute says.