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Moscow Carnegie CenterMoscow Carnegie Center
10 February 201110 February 2011
Sovereign Debt and the IMF: the case of Russia and Lessons for Europe
Martin GilmanMartin Gilman
Director, Centre for Advanced Studies,Director, Centre for Advanced Studies,National Research University – Higher School of Economics, National Research University – Higher School of Economics,
MoscowMoscow
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Based upon my book,
No Precedent, No Plan: Inside Russia’s 1998 Default,
recently published by MIT Press
Focus of today’s seminar is on sovereign debt and the International Monetary Fund in the case of Russia, and the lessons from that experience
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Why did the Russian default of 1998 happen?
Was it inevitable?
What was the role of the IMF?
What are the lessons for Russia and others?
Main questions covered:
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Russia and the IMF were unlikely partners
Russia presented a unique challenge to the IMF
Why the IMF? Why not the World Bank?
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Some major themes in the book:
When Russia emerged from the collapse of the Soviet Union in late December 1991, the challenge was unprecedented
There was no plan of action, no obvious or easy solutions, but plenty of controversy
Russia’s policy response to the economic collapse stemming from the disintegration of the Soviet Union was chaotic
The Russian authorities learned quickly and generally understood what had to be done, but personalities and politics constantly interfered to block needed policies
In the end, the IMF and the G-7 played a marginal role
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the creation of the GKO market was a Ponzi scheme from the outset, or
the monetary-fiscal policy mix was inappropriate and unsustainable, or
the debt burden inherited from the USSR was just too high, or
the Asian crisis created an irresistible dynamic, or
having secured Yeltsin's re-election in 1996, the oligarchs
stopped paying taxes so revenue collapsed.
Like many accidents in history, the Russian default was not pre-ordained. Some have contended that:
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Was there something feasible that someone in the Russian government could have done at some point that would have prevented the crisis?
When did the prospects for avoiding a crisis start to deteriorate?
If the crisis was avoidable, how?
The problem of the counterfactuals
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Public debt in Russia was not so high by international standards
0 50 100 150 200 250
Russia 1998
Japan
Greece
Italy
Ireland
United States
Portugal
Britain
India
Brazil
Spain
China
Russia now Government Debt,% of GDP, 2010
Source: IMF
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Zero option agreement of 1992
Foreign public debt ($150 bln.) versus domestic debt ($55 bln.)
GKO debt was only 27% of total public debt
Debt flows versus stock problem – trend in GKO rates
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Turning point was March 23, 1997, when Prime Minister Chernomydrin was sacked
Even then, on the whole, the bond market was not convinced of an imminent crisis
After the dismissal of Chernomyrdin, could anything have been done to forestall a crisis?
An avoidable crisis becomes unavoidable. What really was the trigger?
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Why is it that no one, including the IMF, was expecting a “default”?
Since the debt was in rubles, why didn’t the Central Bank just print more money?
In the end, Russia never defaulted on its external debt when it could have. Why?
In financial history (witness Reinhart & Rogoff) a default on domestic public debt is very rare and hasn't happened in a major debtor since the great depression.
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Under Primakov, the meltdown was avoided by chance
Why did the economy rebound?
The friendly divorce with the IMF
The surprising postcrisis recovery
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Macroeconomic prudence
Stabilization funds
Tax policy and administration
Musical chairs stopped
Structural reforms until high oil prices bred complacency
The legacy of the crisis The 1998 default was a turning-point:
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Stolen IMF tranche
BONY money-laundering
IMF was tricked
Scandals associated with the Russian crisis:
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Sterotypical views about Russia are probably wrong
The reality is more complex than implied by simple theories, and more troubling
External perceptions contrasted to internal ones
In the end, did we know that a crisis would erupt in Russia?
History is not doomed to repeat itself
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similarities with developments in Ireland and Greece are striking
as in the case of Russia, they and their banks took advantage of a benign global environment to issue large amounts of debt on the local market on the assumption that it could always be rolled-over
the securities were issued in local currency
among the largest buyers of the sovereign securities were domestic and foreign banks
and the International Monetary Fund was called in to do the heavy lifting once trouble developed
Some of the parallels between the events in Russia almost 13 years ago and current concerns with
sovereign debt:
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The next steps in the drama
It is likely that the bond markets will persist in the belief that European politics would never allow a default until it actually happens – whatever it is actually called
A lesson from the Russia crisis is that the longer you wait, the worse the results will be when you are forced to deal with the issues
No particular outcome is inevitable
The problem of crisis prevention
