A little less than a year ago, August 17 to be precise, the post-Cold War Russian economic experiment imploded. The ruble collapsed and debt payments to foreigners were frozen. Wall Street lost billions of dollars. Long Term Capital Management, one of the world's biggest hedge funds, had to be taken over by its bankers. Once burned, international investors yanked their capital out of all emerging markets— from Latin America to East Asia— causing world interest rates to spike. The global economy teetered on the edge of depression.
But, much to the surprise of most economic pundits, international markets quickly righted themselves. The Russian economy proved far more resilient than anticipated. And, in retrospect, the events of August, 1998 were little more than a very large bump in the road.
The lessons of this "crisis that wasn't" are now clear: Russia is not too big to fail (the volume of its debts do not dictate special treatment by its creditors); the financial world can cope with such failure; and the Russian economy can bounce back without much overt help from the West. But the impending $4.5 billion loan to Russia by the International Monetary Fund— reflecting Washington's gratitude for Moscow's help in Kosovo, continued fear of Russian nuclear proliferation and concern about Russia's internal political stability— demonstrates that Russia still remains too important for the world to ignore.
This contradiction— not too big to fail, but still too big to flounder— highlights the friction inherent when economic policy is used to further geo-political goals. Up until a year ago, the Clinton Administration argued that aid to Russia was needed, in part, to avoid global economic collapse. August, 1998 exposed that rationale as a charade. Now American support for assistance to Russia can only be justified for two reasons: to reinforce Russia's transition to a market economy or as ransom in Moscow's continued strategic blackmail of the West. Evidence to justify the former is dubious. Its time to own up to the latter.
Last summer's fleeting economic fright reflected Russia's staggering economic collapse. The ruble fell by more than 70 per cent in a couple of weeks. The economy shrank by 4.3 per cent. Real wages fell 41 per cent.
But the crisis was cathartic. "The shock accomplished what reform was intended to achieve," said Anders Aslund, a senior associate at the Carnegie Endowment for International Peace in Washington. The banking system now functions better. Barter is declining. Most important, there has been no reversion to central planning, government-directed lending, industrial subsidies or government reliance on simply printing money.
By any measure the economy has recovered. The Moscow Stock Exchange is now trading above pre-crisis levels, making it the best performing emerging market stock exchange in the world. Industrial production is expected to be up 7.8 per cent this year. Inflation is half what it was a year ago. Thanks in part to rising oil prices, exports are up. As a result, the Russian economy may actually grow by 1.1 per cent this year, according to recent estimates by Goldman Sachs.
But the Russian bear is not out of the woods yet. "Russia's nascent recovery could be unsustainable, if not fictitious," said Ben Slay, senior economist at PlanEcon, a Washington-based consulting firm, given the dubious nature of Russian economic statistics.
Moreover, said assistant Treasury secretary Edwin M. Truman, in testimony before the House Committee on Banking and Financial Services June 10, "Russia continues to suffer from an inability to implement a consistent, comprehensive and sustained economic reform agenda," such as creation of effective anti-trust statutes, bankruptcy laws and shareholder rights.
And Moscow is in the hands of a weak, caretaker government, that seems destined to last through the June, 2000 presidential elections.
In this environment, it is little wonder that foreign direct investment this year will only be two-thirds of what it was in 1997. Speculators may be willing to play the lottery in the Moscow stock market, but foreigners who have the money Russia needs to lay a strong foundation for a new economy remain on the sidelines.
So why is the IMF about to lend Moscow a new $4.5 billion, which will be quickly followed by new loans from the World Bank and a reworking of Russia's debts to foreign governments and commercial creditors?
"The idea that simply putting money into the economy will solve problems is a lesson we should have learned," laments Richard Ericson, a Russian economy expert at Columbia University.
Its because, said Truman in his testimony, "the strategic importance of Russia dictates continued engagement." Fair enough. No one wants impoverished Russian scientists selling nuclear secrets to make ends meet.
But Truman went on to assert that the "process of engagement is predicated on performance, not just promises." What performance? Heady but questionable growth figures are no sign of progress toward a market economy. That requires structural reform. By that standard, Russia fails the Truman test. This fiction about supporting Russian economic transformation should cease. Washington should own up to the fact that it is simply paying Moscow blood money that is cheaper than a war.