Moscow Carnegie Center 10 February 2011

1. Moscow Carnegie Center 10 February 2011 Sovereign Debt and the IMF: the case of Russia and Lessons for Europe Martin Gilman Director, Centre for Advanced Studies, National Research University – Higher School of Economics, Moscow

2. 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 Based upon my book, No Precedent, No Plan: Inside Russia’s 1998 Default, recently published by MIT Press

3. Main questions covered: • 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?

4. Russia and the IMF were unlikely partners • Russia presented a unique challenge to the IMF • Why the IMF? Why not the World Bank?

5. 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

6. Like many accidents in history, the Russian default was not pre-ordained.  Some have contended that: • 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.

7. 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

8. Public debt in Russia was not so high by international standards Source: IMF

9. 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

10. An avoidable crisis becomes unavoidable. What really was the trigger? • 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?

11. 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. Why is it that no one, including the IMF, was expecting a “default”?

12. The surprising postcrisis recovery • Under Primakov, the meltdown was avoided by chance • Why did the economy rebound? • The friendly divorce with the IMF

13. The legacy of the crisis The 1998 default was a turning-point: • Macroeconomic prudence • Stabilization funds • Tax policy and administration • Musical chairs stopped • Structural reforms until high oil prices bred complacency

14. Scandals associated with the Russian crisis: • Stolen IMF tranche • BONY money-laundering • IMF was tricked

15. History is not doomed to repeat itself • 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?

16. Some of the parallels between the events in Russia almost 13 years ago and current concerns with sovereign debt: • 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

17. 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