Why Moscow could use a $13bn loan

The main purpose of the loan Russia is seeking from the International Monetary Fund is to strengthen President Boris Yeltsin's market-based reforms, which are finally producing results after years of hardship and upheaval. By keeping down Russia's budget deficit, reducing inflation and maintaining the rouble's stability, the loan is intended to create a positive environment for the operations of thousands of state companies privatised in the last four years.

The loan, which will be disbursed over a three-year period, is likely to total between $9bn and $13bn (pounds 5.85bn to pounds 8.4bn), and should be agreed after discussions in Moscow this week between Russian leaders and the IMF managing director, Michel Camdessus. An IMF credit last year of $6.3bn, released in monthly tranches of $500m in return for adherence to a fiscal austerity programme, contributed greatly to improving Russia's economic performance.

Inflation, which had risen to a monthly rate of almost 18 per cent in January 1995, fell last December to 3.2 per cent, the lowest level since Mr Yeltsin launched his reforms in 1992. Moreover, the rouble, which declined precipitously against the dollar in the early reform years, now holds its own in Moscow's foreign exchange market.

Since last July, the rouble has maintained its value in a "corridor" trading range of 4,300 to 5,150 to the dollar. Indeed, Russia's Central Bank has often bought substantial amounts of dollars to prevent the rouble from appreciating beyond its "corridor".

At the same time, Russia has run big trade surpluses for four of the last five years, thanks largely to exports of oil, gas and other natural resources. Some Western investment analysts believe Russia's 1996 trade surplus could be as high as $13bn, which reflects expanding sales to Western markets and trade liberalisation measures adopted under IMF guidance.

From the IMF's point of view, one of the biggest successes last year was Moscow's ability to stick to a policy of tight budgetary restraint. By enforcing strict spending cuts, cutting tax exemptions and imposing limits on Central Bank emissions of credit, the government broke with its old habits of fiscal indiscipline and won the confidence of its IMF advisers and international investors.

This was important not least because Russia's 1996 budget foresees $8.7bn in new credits from abroad, of which it is expected the bulk will come from the IMF and world capital markets. Securing that money will require Russia to maintain its newly acquired reputation for fiscal responsibility.

One condition that the IMF is attaching to its new loan is that Russia should abolish its existing system of tariffs on oil exports. Western companies that have set up joint ventures in Russia dislike both the taxes, levied at a rate of 20 ecu (pounds 16) a tonne, and the fact that exemptions to the tariffs sometimes appear to be granted for quite arbitrary reasons.

Despite the scope for corruption in the new Russian private sector, the IMF seems confident that Mr Yeltsin's economic reforms have on the whole succeeded and deserve continuing support.

This is also the view of Western leaders such as Chancellor Helmut Kohl of Germany, who visited Moscow this week in an undisguised show of support for Mr Yeltsin's presidential election campaign.

Mr Yeltsin's main rival, the Communist leader, Gennady Zyuganov, is critical of the economic reforms but, if elected, he would not find it easy to reverse course. The IMF would certainly balk at the idea of loaning money to Russia without a firm commitment from him to pursue sound fiscal policies.