IMF issues ultimatum

THE International Monetary Fund is threatening to withhold all further financial aid to Russia until it receives cast-iron guarantees that the new government will continue with free-market reforms and not retreat to a Soviet-style command economy.

Pressure was growing this weekend for a co-ordinated cut in American and European interest rates as financial markets plunged on fears that the Russian crisis could be the catalyst for world recession.

Michel Camdessus, managing director of the IMF, insisted yesterday that it would still be possible to approve the second tranche of the $22.6bn (pounds 13.5bn) rescue package agreed in July, but only if the Russian Prime Minister, Viktor Chernomyrdin, moves swiftly on market-oriented reforms.

At present, all the evidence is that the new government is being pushed by internal forces in the other direction. Exchange controls have been re-imposed, and there is pressure from some quarters of the government for wholesale nationalisation of banks and other industries.

Mr Camdessus's warnings echo a similar ultimatum from European members of the Group of Seven, who said in an open letter on Friday that continued support for Russia would only be forthcoming if Mr Chernomyrdin was prepared to impose tough economic disciplines.

There is growing concern among Western leaders about the consequences for their own economies and markets of a Russian retreat into isolationism and backward-looking communist policies.

Western stock markets were savaged last week by fears that the Russian crisis, coming on top of the meltdown in the Far East and a general slowdown in the world economy, could lead to a worldwide recession.

If the plunge in world equity values continues, there will be intense pressure, particularly in the US, for interest rate action to stem the crisis. The Federal Reserve cut interest rates in 1987in order to curtail the stock market crash of that year.

Evidence of a slowdown in the world economy could also tip the balance with the Bank of England's Monetary Policy Committee, which has been resisting calls for a cut in British interest rates. The MPC's next formal meeting is not until 9 September. There is pressure for this to be brought forward in view of the crisis in world markets and the renewed strength of the pound.

In the US, Deputy Treasury Secretary Lawrence Summers insisted that the terms of the IMF loan to Russia would have to be renegotiated to take account of changed circumstances. "For Russia to go forward with the IMF would require a new set of understandings, appropriate to current circumstances, about Russian policy actions," he said at the weekend.

Mr Camdessus, who met with Mr Chernomyrdin last Wednesday, said yesterday that he told the acting Prime Minister there would be no international support if Russia imposed state control on its economy and returned to the Soviet system of price and trade controls.

"This international support will wait for clarity of the orientation of the government and the strength of support in parliament for measures, particularly on the revenue side".

Mr Camdessus said that any reversion to command economy policies "would lead to disaster".

The IMF chief made his remarks against a background of growing Republican opposition to any further aid to Russia. According to some estimates, the IMF is perilously close to running out of money after unprecedented calls on reserves over the past year. Many Republicans believe the bailouts in the Far East and Russia to be a waste of money.