Global Policy Forum

By Jeffrey D. Sachs

Cambridge, Mass. - Treasury Secretary Lawrence Summers has wisely called for a review of International Monetary Fund lending to Russia before any more money is wasted. The I.M.F. programs have been a failure -- a mix of incompetence and neglect of Russia's sordid corruption.

Here are some questions that the Treasury Secretary and Congress should have answers to before we proceed with any more lending.

First, why did the I.M.F. turn a blind eye to the transfer of oil and gas companies to cronies of the Russian Government? It was widely reported, for example, that a huge stake in Gazprom, the Russian natural gas monopoly, was given away during 1994-95 to associates of Viktor Chernomyrdin, then Prime Minister, at a cost of billions (or even tens of billions) of dollars to the Russian Government. Billions more were effectively given away, in full public view, in 1995 in equally crass "loans for shares" deals mainly involving oil companies. Why didn't the reports -- in the Russian press as well as the American press -- on these questionable deals appear to prompt any soul searching by the I.M.F. as it shoveled billions of dollars to Russia at the same time, and as it fulsomely praised Mr. Chernomyrdin as a friendly partner in reform?

Second, have the I.M.F. or other agencies looked into other allegations of high-level corruption? For example, Switzerland is investigating accusations by Russian prosecutors about possible kickback payments from a Swiss construction company, Mabetex, to Kremlin officials to get Russian contracts.

Third, why did the I.M.F. lend $11.2 billion to Russia in July 1998, on the eve of the country's currency collapse? Much of that money ended up abroad, squandered in a useless defense of an overvalued currency. According to the terms of that loan, Russia's reserves were to rise by several billion dollars. In fact, the reserves fell far short of the target, reflecting huge capital flight. Was the loan at the behest of top Russian insiders? Or of American investors, eager to escape the losses of an inevitable devaluation? Or simply a reflection of another I.M.F. misjudgment?

Fourth, why haven't the I.M.F.'s member governments called for an external review of the effectiveness of the fund's lending program in Russia? After all, the I.M.F. made huge mistakes from the very start of its involvement in 1991. Consider just one example. The fund was deeply misguided in delaying the introduction of a new Russian currency after the collapse of the Soviet Union. That mistake delayed the end of Russia's high inflation, angering the public and helping to lead to the dismissal of reformers from the Russian Government at the end of 1992. Ancient history, one might say, except that the official in charge of the I.M.F.'s Russia program in 1992, John Odling-Smee, is still in charge today.

Fifth, how can we rely on an organization that fails to make structural changes after a decade of continuing failure? For example, the I.M.F.'s executive board is supposedly the agency's watchdog, but it is fed documents prepared by the fund's staff itself and thus has incomplete information. The I.M.F., of course, wants to limit any review to a narrow question: was its own money misused by the Russian central bank? Officials say that an investigation the I.M.F. began Monday is unrelated to allegations that Russians illegally diverted I.M.F. money through the Bank of New York. The Treasury Secretary and Congress should insist on a much broader review. The I.M.F. programs have failed -- at an enormous cost to the Russian people and ultimately to global security.

Many types of foreign institutions involved in Russia have faced the issue of corruption. In 1995, more than a year after I resigned as an adviser to Russia, I became director of a university program involving dozens of overseas advisory activities, including an ongoing project in Russia. When I received information concerning the probity of individuals involved in the Russia project, I quickly closed it down. When there is even a hint of corruption, it is important to move rapidly and openly. Russian reform was always going to be against the odds. The Soviet system left the people impoverished, divided, confused and victimized by systematic cruelty and corruption. The Russian Government, especially after reformers were pushed out of real power in 1992 and 1993, has been dominated by recycled Communists, including spymasters like Yevgeny Primakov, the former Prime Minister.

Western policy, to be sure, has had notable successes: Russia has remained peaceful vis-í -vis the rest of the world, and the country is much freer today than at any other time in its history. The Clinton Administration shares credit for these outcomes. But the turmoil in Russia and the unnecessary costs to this generation of Russians have been enormous; the dangers are still great. The West could have done much more to raise the chances for successful reforms. Jeffrey D. Sachs is the director of the Center for International Development at Harvard and serves as an economic adviser to many developing nations. From December 1991 to January 1994, he advised the Russian Government.

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