Is Argentine currently experiencing a default? The international news agencies in eager rivalry report that Argentine failed to pay another tranche at the rate of 682 million dollars to the Inter-American Development Bank. Argentine Economy Minister Roberto Lavagna assured the international financial community that the nonpayment was just a technical delay. However, the Inter-American Development Bank immediately suspended bank loans to Argentine. At the same time, any spare dollar would be of use to this Latin America country, as payment of the debt to the International Monetary Fund is highly likely to be a default. This Friday, Argentine must pay almost one billion dollars to the International Monetary Fund.
Experts suppose that the delay of the debt payment to the Inter-American Development Bank is a desperate attempt to exert pressure upon the IMF. For almost a year already Argentine has been trying to conclude a new agreement on another loan with the Fund. But the IMF avoids signing such an agreement. And this tactics seems to be quite reasonable: the recent statements of the Argentine Economy Ministry clearly show that the country won’t be able to pay to the IMF. The IMF Board of Directors is going to consider the possibility of extra loans to Argentine only on January 23. Without new loans the government of Eduardo Duhalde refuses to use the current reserves for payment of the previous debts. Which in fact means a default.
After the failure in Argentine, the IMF is currently experiencing a serious crisis; it decided to try its luck in Russia. Mission of the Fund started its work in Moscow on January 15.
This fact is remarkable to some extent. Right after the 1998 default in Russia, then Vice-premier of Russia Boris Fyodorov invited the author of the Argentinean economic miracle, Dominigo Cavallo to Moscow. In the early 1990s, he took the post of Argentine’s Economy Minister; at that very period he strictly followed the IMF recommendation to obligatorily coordinate the national currency with the dollar and managed to overcome the crisis and the long-term stagnation. However that wasn’t the final recovery. In Moscow, Dominigo Cavallo together with Boris Fyodorov tried to teach the Russian Government to cope with the crisis. The famous Argentinean was politely received in the House of the Russian Government, but none of his recommendation was realized in practice. Moreover, very soon the Russian government restricted its cooperation with the International Monetary Fund to the consultation level only. Already at that time Moscow suspected that very soon the IMF and Dominigo Cavallo would be reputed the “authors” of one of the largest bankruptcies in the history. It seems that the process has already started.
In 2001, Dominigo Cavallo was dismissed from the post of economy minister. Currently, he is serving his time in jail on the indictment of illegal arms sales to Croatia and Ecuador in the early 1990s, right at the height of his “economic miracle.” Is it likely that illegal arms sales to countries under the international embargo are the formula of the Argentinean economic miracle? It is obviously clear today that the events in Argentine will mar the IMF reputation. No wonder that the Fund desires so much to rehabilitate its reputation. It may sound strange (even for the Russian government) that Russia may be useful for the IMF in this case.
At present, Argentine, Turkey and Brazil are the key recipients of IMF loans. Argentine is experiencing a default. Turkey is balancing on the verge of a default and actively negotiating a new loan at the rate of 10 billion dollars. After getting a credit line to the sum of 15 billion dollars from the IMF, Brazil is very optimistic about its future. Indonesia, that blindly followed the IMF recommendations (which by the way resulted in overthrowing of Dictator Suharto), has been in a deep crisis since that time and asks the IMF for new loans. In fact, the Fund has registered not a slight objective achievement since 1998.
The IMF mission came to Moscow on the invitation of the Russian Ministry of Finance for analyzing the course of the taxation reform in the country. Russia borrows no loans from the IMF for a long period already, as high oil prices allow it to manage without force majeure borrowings. The debt to the Fund (8 billion dollars) is rather insignificant as compared with the rest of the foreign debt. The possibility of the Fund’s inspections was an obligatory condition fixed in agreements on previously granted loans which Russia hasn’t paid yet.
As a matter of fact, the Russian Government says that Russia may ignore the opinion of the IMF. But it is quite a different thing that if Russia openly ignores the recommendations of the Fund, it may never get new loans from the IMF if they will be necessary. So, it is better to be on friendly terms with the IMF. After all, a possible military operation of the USA in Iraq and subsequent landslide in oil prices may suddenly change the situation and break Russia’s independence. That is why it is not ruled out that the IMF inspectors came to Moscow to determine its stability and find out the possibility of laying the IMF hands on Russia.
The Russian Government has been denying the possibility of new large foreign borrowings for the whole of the past year. However, as it turned out on the New Year’s eve, Russia wouldn’t do without more borrowings. Even under such conditions, the Russian Government won’t make direct borrowings from the IMF as it believes loans from the World Bank, the International Bank for Reconstruction and Development and the European Bank for Reconstruction and Development will be enough for the country. But the country’s international credit rating directly influences the success of eurobonds’ floatation. In this case, support of the IMF may be of great use, as international rating agencies respect opinion of the Fund. That is why, opinion of the Fund concerning the course of reforms in Russia is actually of some importance for the country.
In accordance with its plans, at beginning of February the Russian Government plans to discuss further reduction of taxes and to develop the concepts of budgetary and taxation politics for the next three years. The IMF inspectors will deliver their report approximately to the same time.
As is known, at the end of the previous year opinions of the Russian Ministry of Finance and Ministry of Economic Development and Trade concerning further reduction of taxes were radically different. The Ministry of Finance emphasizes the unstable world conjuncture and reduction of revenues to the budget. It offers to postpone reduction of taxes till 2005. The Ministry for Economic Development and Trade in its turn thinks that the tux burden in Russia is still very high and offers to continue reduction of taxes.
Russian Prime Minister Mikhail Kasyanov promised to take all the arguments into consideration. However, judging by his statements it seems that he would like to continue reduction of taxes. It is not ruled out that recommendations of the IMF inspectors on the problem will be decisive for the prime minister.
Russian economists believe that the problem of tax burden reduction is rather speculative in Russia. Reduction of the tax rate of the Value Added Tax and the Single Social Tax doesn’t mean that the taxable base will increase proportionally. The income tax reduction is still the only example when reduction of the tax rate resulted in increase of the tax collection. No more considerable achievements in reduction of the tax burden in Russia were registered last year.
Dmitry Slobodanuk PRAVDA.Ru
Translated by Maria Gousseva
Read the original in Russian: http://economics.pravda.ru/economics/2003/7/21/64/5632_IMFRussia.html
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