The IMF: A New Actor in Foreign Policy Decision Making

CIAO DATE: 8/00

The IMF: A New Actor in Foreign Policy Decision Making

Pamela E. Blackmon

International Studies Association
41st Annual Convention
Los Angeles, CA
March 14-18, 2000

Abstract

The IMF as an international monetary institution was established to make small, short-term loans to its member countries in order to assist with balance of payments adjustments. Since its inception in 1944 at the Bretton Woods Accords, its purpose has changed considerably. The IMF has been recently criticized about its lending policies to some of its member countries. Among the countries about which lending has been questioned is the policies of the institution toward Russia. The decision of the IMF to disperse loan money to Russia during the Kosovo crisis was questionable, considering the political and economic instability in the country at the time. The decision was made largely due to the influence of the U.S. in order achieve its foreign policy goal of gaining Russia's assistance in brokering a peace settlement to end the Kosovo crisis.

The purpose of this paper is to analyze the circumstances and events surrounding the decision by the International Monetary Fund (IMF) to disperse loan money to Russia during the Kosovo crisis. Due to previous misuses of IMF money, which will be outlined further, it appeared that neither the U.S. nor the IMF would agree to provide loans to Russia until substantial changes in the structure of Russia's governmental system were undertaken. On February 6, 1999, The Economist contained two articles which supported the previous statement. The first article stated that, "There is no support in America's Congress or in the White House for further loans (to Russia)" (The Economist, 1999 February 6, a). The second article summed up the current economic situation in Russia by arguing that: (The Economist, 1999 February 6, b)

Unless Russia gets a radically new economic regime, any further western money is likely to be squandered - at best used to prop up a system that does not work, at worst to find its way into the pockets of corrupt politicians, officials and businessmen.

However, the precondition that the economic situation in the country stabilize was not established before a loan was made on April 28, 1999. In addition to the unstable economic situation, the political situation in Russia was also unstable during this time. The Russian Parliament had brought articles of impeachment against Yeltsin, and Yeltsins decisions to "remove" many of his prime ministers also contributed to an uncertain political environment. Therefore, the question that needs to be answered is: Why did the IMF disperse loan money to Russia during this time period? This paper will provide evidence for reasons other than those of an economic nature that were involved in this decision making process. Specific analysis will examine one foreign policy goal of the U.S.; to involve the assistance of Russia in the hope of finding a solution to the Kosovo crisis.

First, a brief history of the IMF will be presented. This will include a discussion of the relationship the U.S. has with this international monetary institution, as well as the joining of the IMF by the Russian Federation. Second, the paper will go through some criticisms of the IMF, including whether the institution has the knowledge to be involved with transition economies, and the influence the U.S. has in the institution. The sequence of events portrayed during the Kosovo crisis will be presented in chronological order, primarily using articles from the New York Times. In conclusion, a summation of the findings will be presented.

Early History of the IMF

At the end of World War II, there was much instability in the international system. The U.S. was the only strong country economically, and so it took the lead in establishing "...a liberal economic order that would both ensure prosperity and prevent the re-emergence of totalitarianism" (Crockett 268). The International Monetary Fund (IMF) and the World Bank were two institutions established in the Bretton Woods Accords in 1944 to help maintain this economic order.

In the original framework of the IMF the institution was designed to assist industrialized nations; the countries most affected by the war (Gwin and Feinberg 4). Helleiner points out that the framers of the Bretton Woods Accords were not specifically leaving out the developing countries needs in this framework, rather that "...they just didn't see them as particularly important " at the time (Helleiner 43). This is an important point because much of the recent criticism of the IMF focuses on whether the institution has successfully been able to make this shift to now make loans to developing countries.

The specific goal of the IMF was to help the industrialized countries "...stabilize their exchange rates, make balance-of-payments adjustments, return to currency convertibility and unwind discriminatory trade policies" (Gwin and Feinberg 5). A key element of the Bretton Woods system was the idea that fixed exchange rates would be better for the international economic system. However it was presumed that countries might likely be in a situation where they would need "international liquidity" to help them with their balance of payments adjustments. The IMF would, therefore, provide mechanisms to (Crockett 268-269)

i)promote smooth adjustments to payments disequilibria, and

ii) generate liquidity in quantities that provided the right balance of incentives for adjustment and financing.

Article I in the IMF's Articles of Agreement state that among the goals of the institution were: (Gwin and Feinberg 4)

To facilitate the expansion and balanced growth of international trade, and to contribute hereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade....

In order for the IMF to accomplish these goals, it relied on the stability of the U.S., through its creation of the Marshall Plan and the Bretton Woods system. Crockett explains that the IMF basically functioned in the way in which it was intended until the fixed exchange system collapsed in March of 1973. As a result of this change to a floating exchange rate system, "...pressures on balance of payments positions could now be accommodated by exchange rate adjustments" (Crockett 270).

Therefore it would seem that the IMF would have lost some of its significance in the international community. However, there are at least two reasons why the IMF has in fact become more influential since this development. First, macroeconomic interactions in open economies were viewed to be a responsibility of the IMF due in large part to oil price increases in 1974, and in the early eighties. Second, the IMF has a critical role in helping developing countries, which do not have access to international capital markets (Crockett 271). The IMF is otherwise known as the "lender of last resort" to many of the developing countries because it is the institution to which these countries turn when they cannot be assured of getting loans from commercial banks. Jeffrey Sachs has suggested that there could be other reasons for lending by international institutions. He stated that these reasons were often "...justified by several nonmarket criteria..." in which he included an instance of "an extension of the foreign policy interests of the major creditor governments" (Sachs 1989 (a), 276). This was only one of three examples given in which aid from the IMF and the World Bank could be distributed on the basis of reasons other than economic. The following are some possible reasons as to why other criteria for lending by the IMF were considered.

Changes in the IMF

The strong economic growth of the U.S. continued throughout the 1950's and 1960's. However in the late 1960's and 1970's, the U.S. began to lose its economic power (Gwin and Feinberg 5). In August of 1971, the U.S. notified the IMF that "...it (would) no longer freely buy and sell gold to settle international transactions. (therefore) Par values and convertibility of the dollar - two main features of Bretton Woods’s system - ceas(ed) to exist (IMF Organization). This meant that the exchange rate would no longer be fixed on the dollar.

Another change in the IMF occurred during the oil crisis in 1974. As previously stated, the IMF was designed to help industrialized countries; in fact, France was the first country to draw on resources from the Fund (IMF Organization). However, the increase in the price of oil affected most oil-importing countries, as well the developing countries. John Williamson explains that because the payments deficits increased in those countries, it meant that structural change would be necessary (Williamson 1982, 21). This was not an area in which the Fund usually got involved; this was usually the realm of the World Bank.

Williamson explains further that (Williamson 1982, 21)

...supervision of a program of structural change involves Fund intrusion into questions of investment priorities, microeconomic efficiency, and the structure of incentives, all of which have traditionally been the preserve of the Bank. In the late 1970's, the Bank, for its part, concluded that, since the main constraint on more acceptable rates of development was once again the balance of payments, fulfillment of its responsibilities required it to provide a facility to support coherent programs of structural adjustment aimed at earning or saving foreign exchange.

So, as a result of the economic changes brought on by the oil crisis, the IMF was now taking over some of the responsibilities previously held by the World Bank, and was getting more involved in assisting developing countries.

Structure of the IMF

The structure of the IMF was designed in the Articles of Agreement. The current organizational make-up consists of a Board of Governors, an Interim Committee, a Development Committee, an Executive Board, a Managing Director and Staff (IMF Organization). The Executive Board is defined as "...the IMF's permanent decision-making organ" (IMF Organization). The Board generally meets three times a week in Washington, D.C. at IMF headquarters, and is comprised of 24 Executive Directors who are elected or appointed by the member countries. This body makes crucial decisions having to do with the Fund including "...surveillance of members' exchange rate policies, provision of IMF financial assistance to member countries, and discussion of systemic issues in the global economy" (IMF Organization).

Decisions at the IMF are made through the members of the Executive Board, each one representing some of the member countries. Not all member countries have individual representation in the Executive Board. This is because the quota system in the IMF determines each member’s voting power, among other things, and some members join together as a group and have one representative. Argentina for example, has a representative in the Executive Board, but is also in a group with Bolivia, Chile, Paraguay, Peru and Uruguay (IMF Department).

The voting power of a member is determined as follows: "Each member of the IMF is assigned a quota, which is expressed in SDR's (special drawing rights) and is equal to its subscription of capital to the IMF". A members' quota provides the IMF with its financial resources and "...determines its voting power in the IMF; each member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. The quota also determines the maximum amount of balance of payments assistance that a member can normally obtain from the IMF" (IMF Organization). Special Drawing Rights are international reserve assets, which were created by the IMF in 1969, are used to supplement the existing reserve assets (IMF Organization). From the most recent data on the IMF website, (February 15, 2000) the U.S. as a member of the Executive Board has 17.68% of the percent of the IMF total in quotas or voting power (IMF Department). The U.S. has the largest percentage share, which means it has the largest voting percentage within the Executive Board of the IMF.

As the IMF has grown in member size throughout the years, and as its role has changed due to the oil crisis in 1974, there have been a number of critiques about the organization. One criticism of the lending policies of the Fund, was that it was designed only to provide short-term balance of payments financing, not the long term financing which the World Bank was designed (Williamson 1989, 3). Another criticism focuses on the secretive nature of the IMF's structural policies it prescribes to its member countries. Jeffrey Sachs, who was a consultant to the IMF and World Bank, explains that this is a main problem in attempting an informed analysis of the institution. Sachs states that, "...the limitations of this review of IMF policies, (are) necessarily impressionistic and non-quantitative because of the secretive nature of IMF programs (Sachs 1989 (b) 102). He states further that "...there is no legitimate reason for the IMF to operate in such secrecy... there is little in country programs that could not usefully be made public" (Sachs 1989 (b) 103). Therefore, it is difficult to find information on the specific types of structural adjustment programs that the IMF outlines for any of the member countries who ask for assistance.

The IMF and the Russian Federation

In October of 1991, a Special Association was established between the USSR and the IMF, which allowed the IMF to extend its first economic reviews of the union to those of the union republics. These efforts included"...reviews of the economy and economic policies...similar to the consultations conducted by the Fund with its members under Article IV of its Articles of Agreement"; as well as efforts by the staff of the IMF "...to monitor the implementation of the authorities' economic reform program and to prepare related reports" (IMF Economic Review Russian Federation, 1992).

On June 1, 1992, the Russian Federation under president Boris Yeltsin became an official member in both the IMF and the World Bank (IMF Russian Federation: Position in the Fund). Members of the IMF and Goskomstat (the Russian statistical agency) then combined their efforts to compile some economic indicators by which to study the growth and development of the Russian Federation on its own; as well as when it was a part of the USSR. The IMF produced these findings in a supplemental edition titled "Economic Review Russian Federation" published in 1992, covering the years of 1985-1991 for various economic indices. This was important because many of the indices that the Fund uses for analytical purposes were not available, since the USSR operated under a planned economy.

After the fall of the Soviet Union, which is dated somewhere between 1989 - 1992, there was some uneasiness in the international community about what type of system the Russian administration would pursue, both in the political and the economic realm. One way in which the international community could assist them in making changes to a democratic, and free-market capitalist society, was to encourage the Russian government to join international organizations like the IMF and the World Bank.

Criticisms of IMF Policy Making

Gould-Davies and Woods question whether the IMF should continue to lend money to Russia (Gould-Davies and Woods 1999). They also state three reasons as to why they believe that the IMF was seen as the "spearhead of Western support" to Russia. First, they argue that the IMF supported Russia because it was the position of the U.S. to become involved in assisting Russia. This position was taken due to the "enormous influence (the U.S. has) in the institution - well beyond its 18.5 per cent portion of votes and contribution to the IMF budget" (Gould-Davies and Woods, 1-2). Other authors have also pointed out that due to its large share of the percentage portion of votes, that the U.S. (or the West) then has greater influence over the decisions made in the IMF (Aslund 1999; Mikesell 1994; Treisman 1998).

Second, this was an easier route for the U.S. to enlist the IMF for support, than to try and obtain bilateral agreements, which would require the approval of Congress. Finally, the authors state that "...the IMF itself was actively searching for a new role and so was eager to take the lead in policy towards economies in transition" (Gould-Davies and Woods 2). This was also a point brought up by Crockett as a possible reason why the IMF became more influential, even after the breakdown of fixed exchange rates.

The authors also point out a problem from the onset of IMF mandated policies; the lack of experience of the organization in dealing with countries in transition from communism to capitalism ( Gould-Davies and Woods 2). The authors try to determine whether the West, through the IMF, "helped or hindered" the transition of Russia based on three positions of the current situation. The first position, the "we lost Russia" view, that reform failed because the West did too little; the second position, "we messed up Russia" by pressuring the governments too rapidly; and finally the idea that "there was little we could do" that foreign assistance can only be effective if sound policy choices are made ( Gould-Davies and Woods 3). The authors' find some evidence for all three of these positions in their research. They state that the most damaging effect of the IMF on reform initiatives was the (Gould-Davies and Woods 18)

...slow(ness) in offering assistance to help increase leverage and consolidate the position of the reformers sympathetic to macroeconomic stabilization - partly, of course, due to the ambivalence of the Fund's major shareholders.

Other reviewers on the effectiveness of the IMF also focus their critiques on the inadequacies of the IMF as an institution to be in charge of the policies for transition economies. The IMF has also been criticized for the pace at which privatization efforts were undertaken.

Joseph Stiglitz, chief economist at the World Bank, criticizes the IMF because he believes that privatization efforts happened too rapidly, and without the proper regulatory framework necessary to adjust to the changes. He also criticized the decision to go forward with privatization efforts before effective law enforcing institutions were established (ie. an effective court system) (The Economist, 1999 September 18).

A previous accusation against the IMF made by Gould-Davies and Woods, is also restated in this article; namely that, "...the IMF... may have been unsuited as an institution to handle the murky, stricken economies of Eastern Europe in the first place" (The Economist, 1999 September 18). Political and strategic issues have also played a part in decisions made by the IMF, including relaxing the lending criteria before the 1996 Russian presidential election, and money spent trying to "prop up the ruble" in July 1998. These decisions reflected a desire to ensure that a communist government did not return to lead Russia, as well as security issues involved with consequences of a decline of a nuclear power (The Economist, 1999 September 18). The issue of a return of a communist government in Russia will be discussed in more detail later in the paper.

Anders Aslund also criticizes the pace of privatization efforts as they were carried out in Russia. He argues that, "Russia's problems were actually caused by reforms that were too slow and partial" (Aslund 64). He argues that this slow reform process allowed "Russia's Elites" to benefit financially from state subsidies still in place, and that this group began to make their fortunes during the last years of the Soviet Union through commodity exports, subsidized credits and food imports (Aslund 65). Aslund also states that the privatization efforts were, "...one of the few important steps that reformers actually managed to take..." and that these efforts did not cause Russia's problems (Aslund 68-69). Instead, he states that the problem lies with the corrupt state officials, and their limitations on private property rights (Aslund 69).

Aslund is supportive of the IMF's policies of reform, including "shock therapy" and the privatization of state property. However, he states that the institution lost its "economic credibility" in its political decision to disperse loan money to Russia in the spring of 1996. He states that this loan was obviously made to help reelect Yeltsin "...in the face of a potent Communist threat" (Aslund 71). McFaul made the same point that "On several occasions, Western leaders encouraged (if not compelled) the IMF and World Bank to make loans to Russia based on political calculations rather than on sound economics (McFaul 1999-2000, 65). Aslund, however, concludes optimistically that Russia's external finances have improved, and that Russia "...is likely to enjoy a $25 billion trade surplus and a $15 billion current account surplus in 1999." Further, he states that Western policy (presumably through the IMF) should "...disperse a minimum of financing" if it is evident that serious reforms are not undertaken in the country (Aslund 77).

Two main areas of criticism have emerged throughout this review of literature regarding the IMF and its reform initiatives for Russia. First, there was the criticism that the IMF as an institution, may not have been knowledgeable enough to advise the governments of transition countries on the types of economic reforms to implement; or the pace at which to implement these reforms. Second, the decision making of the institution was questioned; specifically, whether the IMF was used to promote the foreign policy objectives of its major shareholders, often defined as the West.

The reliability of the IMF as an economic institution, independent of the policies of its shareholders is important for its validity to dispense sound economic advice. The economic objectivity of the IMF is necessary for the institution to develop sound economic policy initiatives. This brief review seems to indicate that other interests and goals, apart from the economic progress of Russia, may have influenced the IMF and resulted in poor decision making on the part of the institution.

The following is a presentation of important events, culminating in the decision of the IMF to disperse loan money to Russia. In order to determine if there were other interests and goals the IMF may have considered in its decision to dispense loan money to Russia, one specific instance of the dispersal of loan money will be examined. The decision to primarily use articles from The New York Times for this analysis was made for two reasons. First, the interpretation of events as presented primarily by: Celestine Bohlen, Michael R. Gordon, Jane Perlez David E. Sanger and Michael Wines allows for a consistent and coherent representation of the events which comprise this story. Second, the material that I have seen does not address the issue that the U.S. could have manipulated the IMF to achieve a foreign policy goal. The few authors that do address this issue do not specifically address this case study of loan money dispersed during the Kosovo crisis. Therefore, I believe that the re-construction of events as done through the interpretation by The New York Times authors is the best method by which to answer my research question. The events to be considered for analysis occurred between January 24, 1999 and April 29, 1999. These events are centered around three main issue areas: the U.S. and its influence in the IMF relative to disbursement of loan money to Russia; the political and economic stability of the Yeltsin government; and the Kosovo crisis.

Initial U.S. Policy about the IMF

On January 27, 1999, U.S. Deputy Secretary of the Treasury Lawrence Summers spoke to the Senate Foreign Relations Subcommittee on International Economic Policy and Export/Trade Promotion about reforms made in the IMF (Department of the Treasury, 1999). Summers begins by explaining to the Subcommittee members about the importance of supporting the IMF, even though it has been criticized for its handling of many financial crises (Thailand, Russia, Brazil). Summers states that "...I have no doubt that without an IMF with the capacity to respond to these crises, the costs of these crises would have been higher--and the impact on our own economy and markets much more severe" (Department of the Treasury, 1999).

This decision to speak before the Senate committee is done to dissuade any members from taking action on lessening the U.S. financial, and therefore, voting power in the IMF.

Throughout his address to the subcommittee, Summers attempts to show how the U.S. is now playing a much larger role in the decision making of the organization. He reports "...that in a number of key instances in recent months we have been able to make a difference in areas of particular importance to the United States." Towards the end of his speech, he explains ways in which the U.S. should (Department of the Treasury, 1999)

...work across many fronts to build support through earlier more vigorous "working of the system" by the office of the United States Executive Director Karin Lissakers, with U.S. input provided to IMF staff well before program or surveillance document comes to the Executive Board for discussion. This helps improve the prospects that our views will be taken into consideration early in the process.

Summers' purpose with these statements is to show the committee members that the U.S. can exert a large degree of control over the IMF in its policy decisions.

Issues of Economic and Political Stability in Russia

On Jan. 24, an author discusses the progress of Prime Minister Yevgeny Primakov, and how he has been doing since having been Prime Minister for four months (NYT 1999, Jan. 24). The main focus of the article is the growing concern that President Yeltsin can no longer exercise his authority to lead the country. Also stated is Primakov's ability to cooperate with the Communist dominated Parliament; as opposed to Yeltsin's lack of ability to govern with this body. The article discusses how Primakov has criticized the air strikes that were occurring against Iraq, as well as his criticism of the "...American-dominated International Monetary Fund" (NYT 1999, Jan. 24). Adding to the idea that Yeltsin no longer has much power in his government, this article states that Albright will also meet with three likely presidential candidates. The last sentence of the article states that Russian's positive relationship with Yugoslav President Milosevic might encourage a member of the Russian government to try to convince Milosevic to agree to a previous cease-fire agreement in Kosovo.

On Jan. 26, the issue again focused on the political stability, or lack thereof in Russia (NYT 1999, Jan. 26). Apparently due to the continuing economic decline in the country, the Communist controlled Parliament is considering a vote of no confidence in the Yeltsin government in May. Primakov, in a move to prevent this and to increase his visibility as a potential Presidential candidate, negotiated an agreement with Parliament to give the Communist members (the majority in the lower house) more control over the decision making process. In the World Briefing section of the New York Times on Jan. 30, it states that Russia has reached an agreement with the IMF to refinance their old loans once the IMF "...is satisfied Russia is sticking to its proposed 1999 budget (NYT 1999, Jan. 30). However, the next article dated Jan. 31, discusses how the IMF, and the U.S. could have contributed to the financial crisis in both Russia and Brazil, by encouraging each to raise their interest rates (NYT 1999, Jan. 31). The article states that the logic of raising interest rates is that if this were not done, the currency would have been further devalued. Also discussed is the fact that "Security investors are effectively lenders..." so that one of the goals of raising interest rates is to keep the international situation as stable as possible.

Mismanagement of Money

An event reported on February 13, was extremely damaging to any ideas of Russian political or financial stability (NYT 1999, Feb. 13). It was reported that Russia's Central Bank used an offshore company to manage some of its cash reserves. The reason given for this, by two former bank officials, was that it was necessary to do this to hide money from creditors who may have wanted to take Russia's monetary reserves. The charges came out when Yuri Curator, then Russia's prosecutor general, sent a letter to the Parliament reporting what had happened at the Central Bank. Soon after Mr. Skuratov delivered this letter, he "was ousted." An analyst of a Russian investment bank defended the practice of moving money out of the Central Bank, stating this practice in and of itself was not evidence of wrong doing (NYT 1999, Feb. 13).

Two important issues have been raised, both of which have been covered thus far. First, that the political situation in Russia is not stable. Before, this issue centered on Yeltsin's lack of control over the government, but with the "ousting" of the prosecutor general for disclosing unwelcome information, it seems evident that some areas of the government have become corrupt. Second, the IMF has been giving its aid money to Russia through the Central Bank. Therefore, these events should no doubt cause the Fund to question whether further amounts should be given to Russia in this manner, due to the possible misuse of these funds by the Central Bank.

The next report in the Times on February 21, is more of a commentary piece on the IMF and financial stability; but some important points are made with relevance to the relationship between the U.S. and Russia (NYT 1999, Feb. 21). The article states that members of the IMF make frequent trips to Russia to assess whether Primakov has made any advances in putting together a budget to collect taxes, manage interest rates and begin to pay back money owed to the West. The article states that Primakov has been unable to do this and that "...pretending that Russia is rapidly turning into a market economy, and providing billions in loans through the IMF to get it there--is an approach Washington now views as bankrupt" (NYT 1999, Feb. 21). From the last two articles, it appears that Russia will not be receiving any more loan amounts from the IMF, contrary to the statement made by a representative of the IMF on Jan. 30 (see discussion of NYT 1999, Jan. 30).

On March 8, the reported political situation in Russia seemed to be more uncertain. (NYT 1999, March 8). This article states that Yeltsin told Primakov that he was being "complacent" about the economic situation of the country, and was then threatening Primakov's position by stating that changes should be made in the government. Yeltsin's concerns over negotiations with the IMF were voiced through one of his aides, on a television station partly owned by the state. At issue is the $4.5 billion in IMF loans that the government is to repay in 1999, or the government will be forced to default on its repayment. The article states that renegotiation of the loans is extremely important for Yeltsin because he "...has cast the fund's seal of approval as a sign that his nation is still on a reform course" (NYT 1999, March 8).

On March 19, information about the economic situation in Russia seemed to put future loan money to the country in serious doubt (NYT 1999, March 19). In this article, U.S. Treasury Secretary Robert Rubin informed a Congressional panel that a large amount of the $4.8 billion sent to Russia last summer by the IMF "may have been siphoned off improperly." Indications that this occurred center around the fact "...that a huge flow of dollars left Russia immediately after the monetary fund's cash was delivered to the Russian Central Bank..." so that investors would not lose money before the ruble was devalued on August 17, 1998 (NYT 1999, March 19). The timing of Mr. Rubin's statement, and the publication of this article, are important to note because Primakov was due to arrive in the U.S. in five days to try and receive the next payment of loan money. The article also states that "...there is growing pressure on the IMF to lend Russia just enough money to allow it to pay back several billion dollars it owes to the fund in coming months."

President Clinton addressed this issue of IMF loan money to Russia during a Press Conference he gave on the same day that the New York Times article was printed. In answering a question about whether the administration would support the new installment of IMF loan money he stated (White House Press Conference, March 19, 1999)

...it is important, if we are going to help Russia--and we should... that we do things that are actually likely to make a difference, instead of things that will undermine confidence over the long run in Russia, and in the ability of others to invest there.

He added "it will work" (the IMF program) "only if the money doesn't turn around and leave the country as soon as it's put in" (White House Press Conference, March 19, 1999). Thus far, the reporting of events has focused on the political as well as the economic instability in Russia. Specific issues have included; the possible no confidence vote of Yeltsin; the removal of the prosecutor general when he exposed possible financial corruption in the last loan amounts handled by the Central Bank; and whether the IMF will lend Russia more money, even if it is only to make a payment on previous loans.

Politics and Kosovo

The next report in the Times discusses the issue of the potential NATO bombings on Serbian enclaves in Yugoslavia, and the fact that Russia has denounced any NATO intervention is outlined. (NYT 1999, March 23). Primakov was set to leave for the U.S. on March 24th to discuss the funding Russia wants from the IMF. The article states that some of Russia's policy experts are questioning Russia's support of Milosevic's government, considering the timing of his refusal to stop the attacks on ethnic Albanian's, and the importance to Russia of Primakov's trip to the U.S. However, there is strong sentiment among Russians to support their "fellow Slavs in Yugoslavia" (NYT 1999, March 23). This issue of ethnic cooperation, coupled with the unstable political situation in Russia, could make it likely that in order to encourage nationalistic sentiment, any action taken by NATO would be severely criticized. The article also points out that the credibility of NATO is at stake, if it does not take action against Serbian aggression.

Apparently Primakov decided that Russian international credibility was more important, for the time being, than economic help from the IMF and the U.S. (The Economist 1999, March 27). This is evident in his decision while en route to the U.S. on March 24, to order his pilot to turn the plane around upon hearing from Vice President Gore that NATO attacks on Serbian targets were eminent (NYT 1999, March 24). As previously mentioned, the purpose of Primakov's trip was to discuss with Gore, Clinton, Secretary of State Albright and officials of the IMF, a new funding arrangement for Russia. This article states that officials in the U.S. administration had warned Primakov of the awkwardness of the timing of his visit, since it appeared that the talks with Milosevic were not making progress. However, it seems that Primakov was determined to make the trip until he was informed that air strikes would begin. The article also states the significance of both the decision by Primakov, and of the involvement of U.S. in NATO as "...affect(ing) the broader relationship between the two powers..." (NYT 1999, March 24).

On March 26, largely due to U.S. encouragement, the director of the IMF was sent to go to Moscow to hold talks about Russia's financial situation (NYT 1999, March 26). This move would seem to reflect the desire by the U.S. to work out some financial arrangement for repayment of IMF loans, as well as to give Russia some reason to avoid escalating international tensions as a result of NATO's bombing. Russia's response to the bombing, besides Primakov's turn around back to Russia, had been to recall its representative to NATO, as well as to state that it would not attend the NATO celebration in April in Washington D.C. (NYT 1999, March 26). The article states that Russia's "temperate response" was due to its political, military and economic weaknesses.

However, in subsequent articles, it appeared that Russia did want to have a role in this conflict; specifically by mediating some agreement between Milosevic and the NATO allies. On March 28, it was reported that a Russian delegation had met with U.S. special envoy Richard Holbrooke before the Russian delegation would travel to Yugoslavia to present a plan to Milosevic to end the NATO air strikes (NYT 1999, March 28). The delegation stated that Yeltsin approved their mission, and that the Clinton administration was wrong in believing that bombing Serbian enclaves would be the way to bring Milosevic back to the "negotiating table."

On March 30, the New York Times reports three different articles summarizing events previously discussed. The first (NYT 1999, March 30, a), states that Primakov was among the delegation sent to try to negotiate an end to the bombing. The article states that "...Mr. Primakov's mission is seen as a sign that after five days of bombing, Moscow is ready to commit its own diplomatic muscle and test the influence it has on Mr. Milosevic" (NYT 1999, March 30, a). Also stated is the fact that the bombing has not only strained relations between Russia and the West, which some fear could lead to Russia being isolated, but that the bombing has also stirred up anti-Western feelings among Russia's politicians. The second, (NYT 1999, March 30, b) proclaims that the IMF and Russia agreed on "a broad framework" to continue financial aid to Russia, but that the IMF would not disclose specific amounts. In responding to this announcement, White House officials pointed out that Congress would berate the administration if it approved aid to Russia while Russia was openly supporting Milosevic. The article states that officials were clear that the two issues were related, and a senior official said, "A U.S. judgment about an IMF program would depend on Russian economic policy actions and could also be influenced by broader political developments" (NYT 1999, March 30, b). It seems very likely that the "broader political developments" mentioned refer to the Russian reaction to the Kosovo crisis. This specific statement also makes it clear that IMF loans, in this instance, are related to U.S. foreign policy goals.

Finally, the terms that will be acceptable to Milosevic, before he participates in any peace talks, are outlined (NYT 1999, March 30, c). Primakov held talks with Milosevic for six hours, upon which he reported that Milosevic would cut his forces in Kosovo and work for a political solution, if NATO would first stop the bombing. This proposal was deemed "unacceptable" to NATO.

The U.S. Involves Russia

In a sign that the U.S. may be taking Russia up on its offer to help broker a peace agreement, Vice President Gore called Prime Minister Primakov, and asked for his assistance in convincing the government of Yugoslavia to resume negotiations (NYT 1999, April 6). The article states that Milosevic is not willing to deal directly with the United States therefore; involving Russia in the negotiations would be necessary. This action would also help calm relations between Russia and the U.S., which have been strained since the bombing started (NYT 1999, April 6). However, this particular article also states that some members of the U.S. Congress are talking about sending ground troops into the region to end the conflict, a decision that the administration thus far is not supporting. So, the decision to contact Primakov may have been viewed as a more favorable one, in the hopes that this would allay any further talk of ground troops. These actions taken by the U.S. Administration indicate that the U.S. has decided to pursue a policy of engagement with the Russians in order to further its foreign policy goals.

A situation that could be damaging to the U.S. policy of engagement is the attitude of the Russian people toward the U.S. First, it was earlier reported that that many of the Russians would feel the need to support their fellow Slavs in this conflict (NYT 1999, March 23). Second, it was recognized that there were "...anti-American feelings...driving Russian policy, both foreign and domestic" (NYT 1999, April 11). The uncomfortable position that Yeltsin is in is also discussed. Yeltsin is not popular domestically, yet he knows that his government needs the credibility gained by the IMF loans, and therefore would not want to antagonize the U.S. The domestic situation in Russia improved due to the fact that the Russian parliament voted to delay impeachment proceedings against Yeltsin (NTY 1999, April 12). It seems that parliament believed that Yeltsin was considering firing Primakov and then disbanding parliament. Yeltsin cannot disband parliament once a vote to impeach has been taken. As a result of this action taken by Parliament it appears that Yeltsin is back in a position of power, or as the title of a later article states,"Yeltsin's Back in the Swim..." (NYT 1999, April 14, a).

Even though this chronology of events began with the alarming idea that anti-U.S. sentiment was growing in Russia; the reports concluded in a positive light about the political situation in Russia. The issue of why parliament decided to stop the impeachment proceedings was not discussed in this chronology. It is a possibility that even though the majority of the members of parliament are members of the Communist party, the members may have realized the difficulties of pursuing a vote of impeachment considering the international situation. If Yeltsin were not in power, it would be very unlikely that the IMF would grant Russia any more loans. The removal of Yeltsin may have invoked more nationalistic feelings to help the Serbs, however Russia does not have the finances or the military capabilities to provide this assistance. The members of parliament may have decided that by keeping Yeltsin, that they would not have to deal with these issues. It is also possible that they changed their minds about the benefits of removing Yeltsin after the decision by the U.S. to engage Russia in a solution to the situation in Yugoslavia.

Yeltsin's Representative

To demonstrate Yeltsin's newly acquired political strength, he chose his former prime minister, Viktor Chernomyrdin, to be his personal envoy to try and achieve a settlement in the conflict in Yugoslavia (NYT 1999, April 14, b). The article states that this decision was taken for domestic as well as foreign considerations (NYT 1999, April 14, b). Yeltsin has been concerned about the growing power of Primakov, and possibly he made this decision to enlist someone whom he had more trust in, and someone who could make more progress in the negotiations than Primakov has thus far.

As an even further indicator of the importance of Yeltsin in the Yugoslav crisis, on April 19, President Clinton called Yeltsin "...to press for Russian participation in a political resolution in Kosovo that would involve Russian troops in an international security force there" (NYT 1999, April 19). The article also states that this is the first time that the two leaders have talked since the bombing began. There is also a sense by the Clinton Administration that a diplomatic solution to the crisis would be harder to obtain if the bombings continue, and that any solution would then be less likely to include Russia. Also there is the belief that Russia would need to be involved in order to achieve any settlement with Milosevic, due to the close relationship the Serbs seem to have with Russia (NYT 1999, April 19).

In fact, Viktor Chernomyrdin and Milosevic spent nine hours in discussions, but failed to come to a concrete agreement on an end to the conflict (NYT 1999, April 22). Chernomyrdin stated that Milosevic had agreed to "an international presence in Kosovo under United Nations auspices", but there was no decision on what type of forces these would be (ie. peace keeping or combat), or on which countries would comprise the forces (NYT 1999, April 22). The reaction by both the U.S., and NATO was that neither was encouraged by this news because of the vagueness of the agreement. Five days later, Chernomyrdin met with Deputy Secretary of State Strobe Talbott to discuss how Kosovo could be "resettled" and administered once the hostilities ended (NYT 1999, April 27).

Talbott gave a "positive assessment" of his meetings, and stated that the U.S. and Russia would work together on a solution to the conflict. The disagreements between Talbott and Chernomyrdin focused on how Kosovo would be administered, the makeup of a peacekeeping force, and the number of Serbian troops that would be allowed to remain in the region (NYT 1999, April 27). For all of the involvement of the Russians, it is still unclear how much influence Russia does have over Milosevic or his administration. However, delegates from Russia appear to be the only group that Milosevic is willing to meet to discuss terms for a settlement.

The IMF Makes its Decision

On April 28, Russia finally got the news it was waiting for; the IMF announced an agreement to "lend" Russia $4.5 billion over the next eighteen months (NYT 1999, April 28). It has been stated that, "...Russia may well be let off the hook again - partly, perhaps, because of Yugoslavia, and partly because elections are coming" (The Economist, 1999 May 1). ₁ There was, however, an unusual method by which the money would be distributed. In fact, the money will never physically be sent to Moscow. Instead, "...at the insistence of the United States Treasury and some European nations, the loans will essentially be transferred from one of the IMF's accounts to another - allowing Russia to avoid default on money it owes the lending agency this year and next" (NYT 1999, April 28). The reason for this irregular "dispersement" of loan money was that there was concern about mismanagement of previous IMF loan money, specifically, questionable decisions made earlier by the Central Bank in its placement of the money (see discussion of NYT 1999, Feb. 13).

Summation

The decision by the IMF to grant Russia any loan money, regardless of the circumstances of the transfer of that money, definitely had the support of the U.S. The article which outlined the IMF's decision stated that, "...the renewed drive by the West to complete the deal this week reflected a wish to avoid another nasty dispute with the Russians at a moment when Moscow is being courted to play the role of mediator in the Kosovo conflict" (NYT 1999, April 28). Even though there was evidence that previous IMF loans had been used improperly, and that the domestic situation in Russia was still relatively unstable, the U.S. administration felt that it was still more important for Russia to receive IMF loans.

Changing circumstances in the international system have demonstrated policy changes in three areas: military, political and economic. By tracing developments occurring domestically and internationally in Russia and the U.S., at least two conclusions can be drawn. First, the political and economic stability of Russia is of vital importance to the U.S. and to the international community. Second, because Russia is still an important player in the international system, the U.S. will have to consider responses from the Russian administration when making decisions about international issues. It is important when following international events to remember that there are different motivating factors that are connected to each decision that is made.

In this case study, a decision by the IMF to disperse loan money was influenced to a large degree by one of its influential member states. International monetary institutions should not be used as instruments to achieve the policy objectives of their member states. However, this paper has shown that the U.S. had a specific policy concern regarding the Kosovo crisis and understood that it could manipulate the IMF to achieve its policy.

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Endnotes

Note 1: Parliamentary elections were to be held in Russia on December 19, 1999. The U.S. presumably did not want a majority of the seats to go to members of the Communist Party. The desire by the U.S. to prevent this potential outcome is given as another possible reason for the decision to grant the IMF loan. Back