Russia’s economy is looking good. A year of 7 percent growth and high oil prices have provided a much needed windfall for the country. By all appearances, then, it is the wrong time to pick a fight with the West. But the government of President Vladimir Putin seems to be doing just that. It is a pointless exercise: Russia needs the West. Arguing over debts it can afford to repay is no way to get its help.
The debt in question is left over from the former Soviet Union. Russia assumed the $38.7 billion debt that the communist state owed members of the Paris Club of creditor nations. (Russia’s total obligation to the Paris Club now totals $48.3 billion.) Some $3.5 billion in Soviet-era debt is supposed to be repaid this year.
At first, Moscow said it would pay only $300 million in interest payments this year. Then it paid just $31.5 million of the $316.4 million that was due to the Paris Club and claimed that it would seek to restructure the rest. That strategy has divided the government.
Mr. Andrei Illarionov, Mr. Putin’s chief economic adviser, blasted the government’s position. The president himself weighed in, telling visiting German Chancellor Gerhard Schroeder that the debt would be repaid in full. Then Prime Minister Mikhail Kasyanov said complete repayment would create hardship for the country. Mr. Putin responded by reaffirming his intent to repay the whole amount. “Russia has never refused and will not refuse to fulfill its obligations before creditors,” he told the Cabinet.
Apparently that made an impression on the prime minister. Mr. Kasyanov then said that the government would go back to the Parliament to amend the 2001 budget so Russian could repay the debt. Finance Minister Alexei Kudrin told the power brokers at Davos last month that his country would honor all its debts.
The dispute is especially striking because it seems so pointless. The Russian economy is in the best shape it has been in since the collapse of the Soviet Union. In addition to posting 7 percent growth last year, higher oil revenues have pumped up foreign currency reserves: They have more than doubled since the start of 2000 and have reached $28 billion, a higher level than before the 1998 ruble crisis. Industrial output rose 9 percent last year, the best performance since 1991. Inflation is still high — 20.2 percent — but it seems to be under control. Tax reform and oil revenues allowed the government to adopt its first balanced budget since the Soviet collapse.
The government cites the need for a balanced budget when it explains why it wants to hold off on repaying the debt. That position wins little sympathy in the West. IMF negotiators met with their Russian counterparts in Moscow at the beginning of this month to work out a new emergency-credit facility, but the talks were inconclusive. The IMF is in a difficult position. Normally it prefers that government spending be pared back; this time, however, it is calling for a bigger budget. In another irony, the relative health of the Russian economy means that the IMF has less leverage than usual.
If the economic arguments do not work, political ones should. Mr. Putin has ambitions that extend beyond his borders. For example, he wants to be a full-fledged member of the G8. He needs a working relationship with his creditor governments if those goals are to be realized. Antagonizing Germany, which holds 40 percent of Russia’s debt, is a particularly short-sighted move.
The real issue is Mr. Putin’s priorities. He got off to a good start last year. His government passed legislation that overhauled Russia’s antiquated tax system. The price of oil skyrocketed, providing a huge windfall. Instead of seizing the moment and pushing for still more reforms as his advisers suggested, Mr. Putin played the nationalist card: He got a new flag and national anthem. He tried to quash dissent against his government and to re-centralize power in Moscow.
The real problems that plague the Russian economy have not been addressed. Corruption and the absence of an honest and independent legal system continue to deter foreign investment. The failure to make real efforts to fix them only ensures that Russia will encounter another crisis in the future. And when that hits, there will be no cushion. Russia had a chance to make needed changes when times were good; Mr. Putin failed to act. He will regret his inaction and his priorities, most likely sooner than he thinks.
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