On the brink of financial collapse, Russia gets an IMF loan. Will it solve this mess?

By ERIN KELLY

hen angry workers blockaded Russia's Trans-Siberian railway earlier this month they expressed their fury by erecting a length of steel track bearing the label "Yeltsin's Rail." It was a bitter reference to President Boris Yeltsin's promise, made seven years ago, to put his head on the rails if his reforms hurt the country's workers. The miners--and millions of other Russians--are certainly hurting, and Yeltsin's reforms are getting much of the blame. The end of the Soviet economy has brought wholesale layoffs, and even those who have jobs are often months behind on pay thanks to a chronic cash shortage.

But Yeltsin may not have to put his head on the rail yet. Last week, just as the Russian economy reached the brink of collapse, the International Monetary Fund came to the rescue, leading a bailout package that could total $22.6 billion. "This is big," says Charles Ryan, head of the United Financial Group, one of Russia's top finance houses. "This is the medicine Russia needed so desperately." Is it big enough? "I think so and the market seems to think so," Ryan insists.

Indeed. The markets soared after the July 13 announcement that the imf, the World Bank and Japan would put up the money. But not everyone is sure that the bailout--which came only after pressure from President Clinton--is enough to solve Russia's financial mess. Many worry that the IMF is throwing money into a black hole of cronyism and waste.

A major reason for the mess is the government's inability to collect billions in taxes from fat-cat companies. But the government's chronic revenue shortfall hasn't stopped it from expanding its payroll and running up huge spending deficits. The government has also saddled itself with payments on treasury bills that have driven up interest rates and bled the Central Bank dry. Before the bailout was announced, the stock market had fallen 60% since the start of the year and the ruble was headed for a devaluation that would have devastated the shaky banking system and perhaps spelled the end for Yeltsin. Rumors of a possible coup--plus worry on Wall Street--persuaded Washington to pressure the IMF. Says a prominent American investment banker in Moscow: "One guy made this call--Bill Clinton."

The resulting bailout package, like all such IMF help these days, has significant strings attached: Russia must approve austerity measures including slashing its budget, restructuring the tax system and dealing with its treasury bills. The Duma, the lower house of parliament, agreed to many of the IMF's demands after a few days of intense debate. But by Friday, Finance Minister Mikhail Zadornov worried that deputies had stymied too many of the government's reform proposals for the IMF to be convinced that Russia is serious about changing.

But approving reforms is one matter. Enforcing them is another. Compelling companies to pay their back taxes will deplete corporate coffers and worsen the plight of the millions of Russian workers who are jobless or unpaid or both. That, in turn, could lead to more unrest of the kind seen in Siberia or in the Far East, where, for example, the city of Vladivostok has been plunged into darkness because the miners' blockades have prevented coal from reaching local power plants. In the Sverdlovsk region of the Urals earlier this month, hungry women blockaded a road, clamoring for bread. Everywhere, Russians are losing faith that austerity and IMF aid will end the pain. They know that past foreign loans have yielded little in an economic system so porous and structurally flawed. "This money will be embezzled, like all other funds they have given this regime before," predicts a worker in the mining and industrial town of Belovo, who gave his name only as Anatoly. "They only want to ruin us, those Americans and other Western 'friends.'"

Seven years ago these Siberian mining towns rallied behind Yeltsin the reformer and helped bring him to power. Now his name and his promises inspire only disgust. And Yeltsin is losing the support of the oligarchs who helped get him re-elected in 1996 but who now believe that he no longer serves their interests. Just before the bailout announcement, the lead story in Nezavisimaya Gazeta, a newspaper controlled by the most prominent of the oligarchs, Boris Berezovsky, bore the ominous headline: "Can the crisis end in a coup?"

The rumors of a coup may have passed for now. But for this latest bailout to succeed Russia needs a government willing and able to enforce the austerity package and to stand behind reforms that are necessary to give the economy any hope of recovery. Instead, the IMF is betting on a government with a tenuous hold on power, a ramshackle economy and a population that has largely lost faith in the leadership. But to international lenders, the possible alternative--the collapse of the banking system and the dreaded rise of extremists to power--is even more frightening. Maybe this time will be different, and the money won't be squandered.

--Reported by Andrew Meier /Moscow and Yuri Zarakhovich /Yurga