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Moscow Times
November 29, 2001
IMF Plan 3 Years Late for Russia
By Victoria Lavrentieva
Staff Writer

Michel Camdessus can sleep well now.

Shortly after leaving the International Monetary Fund, Camdessus said that during his 13 years as managing director there were only two nights when he did not sleep: before Brazil announced the devaluation of the real in 1999, and the night before Russia defaulted on its debt Aug. 17, 1998.

This week the IMF finally unveiled a concrete plan to develop an international system that would allow troubled countries to file for bankruptcy protection when their debts become unsustainable.

Since 1998, the IMF has spent billions of dollars to prevent financial crises in Turkey and Pakistan and has already spent $48 billion to help rescue Argentina from defaulting on $132 billion of debt.

The new plan, to be discussed by the IMF's board in December, would make the IMF the gatekeeper of a new bankruptcy system where it will decide whether to grant nations a stay on their debts in order to negotiate an orderly restructuring.

The program, which would offer sovereign creditors the type of bankruptcy protection enjoyed by private companies, could have helped Russia in 1998, analysts said.

"What happened to Russia in fact was an effort to find the same type of solution," said Martin Gilman, who headed the IMF's representative office in Russia from 1997 to 2001 and is now a professor with the Moscow-based Higher School of Economics.

Oleg Vyugin, who was deputy finance minister in 1998 and is now chief economist with Troika Dialog, agrees that the "IMF de facto approved Russia's default."

"The new IMF initiative is [a far cry] from the way the IMF acted in Russia in 1998, as there was no legislative framework at that time and Russia had to invent many things for the first time," Vyugin said.

Since Russia repaid in full $1 billion of its first sovereign Eurobond this week, experts agree fully servicing foreign debt is one of the government's priorities.

Analysts said, however, that Russia will not need the new IMF emergency mechanism for the foreseeable future.

"It is clear that Russia won't need anything like that any time soon as the Russian economy is performing surprisingly well," Gilman said.

Furthermore, Russia is currently under-invested, he said, so there is no danger of excessive capital inflows.

"But in the future, when Russia re-establishes its financial markets and financial system, theoretically such needs may occur," he said.

"There is a very little chance that Russia may need such a mechanism in the future," Vyugin said. "The Russian budget was, and for the foreseeable future will remain, strongly dependent on oil prices, which are highly volatile," he said.

"I doubt the government will find the strength to get rid of this dependence, and this means that Russia also can't afford to have large debts."

Analysts, however, disagree on the usefulness of the bankruptcy plan.

"There is a fundamental difference between private companies and countries because the latter can't be called bankrupt and creditors can't see their assets," said Philip Poole, an emerging-markets analyst with ING Barings in London.

Furthermore, he said, there is already a market mechanism in place that is currently being used by Ukraine, Pakistan and now Argentina restructuring debts in exchange for new borrowings."The government has to decide how much it can afford to pay its creditors, and offer them to exchange the rest for the new bonds with longer maturity."

This isn't what Russia did in 1998, analysts said. But it's a market mechanism, which is always better than one forced by any governmental body even if it is the IMF, they said.

Most analysts agree that there needs to be a solution whereby private investors are involved in debt restructuring and share the burden with sovereign creditors.

At the same time, they point out that the IMF has a very constructive role to play, as it is still the only lender of last resort, but it should not take on the entire burden of any country.

"The financial community would still prefer to see a case-by-case approach to these sort of situations as opposed to a one-sided solution," said Poole.

"It should become very difficult legally for the IMF to be telling people that they can't be paid," he said. "It is something that should be discussed between the creditor and the debtor."

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