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The Russians seem to be gambling on the fact that the fund will cave in

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The Russians seem to be gambling on the fact that the fund will cave in, partly because its Western shareholders fear isolating a volatile nuclear power and partly because another Russian default would further damage the IMF's credibility. Russia faces another possible default on a slice of its pounds 94bn external debt; it has already said it can only pay pounds 6bn of the pounds 11bn (including pounds 2.8bn to the IMF itself) that is due this year.The IMF wants promises of good behaviour before signing another cheque, and no rouble printing sprees. Foreign investors fled and tens of thousands of young Russians - the beginnings of an urban middle-class - found themselves out of work as the economy sank back into refrigeration. Russia's annual per capita income - 4 per cent of the United States' - is expected to drop this year to pounds 750 and perhaps lower. Economic output of this vast former superpower is forecast this year to be well short of that of Belgium.The causes of this disasterare rooted in both the chaotic aftermath of the break-up of the Soviet Union and the Communist empire itself.

Chief among them was the failure of Russia's privatisation programme. Industries that should generatewealth were too often sold for a pittance in rigged auctions to cliques of Soviet-era managers intent on excluding outsiders at any cost, and thereby choking investment and growth.The West sought with evangelical fever to impose an economic creed on a society where decades of Soviet management - with its bartering, bogus production figures, institutionalised corruption and centralised government - had created an environment lacking the basic requisites of a market economy. Without the right tools - such as access to long-term cheap credit, functioning laws and real competition - there was never much hope of kick-starting the engine of reform.So what next? The IMF, which has already lent pounds 12bn to Moscow, is trying to decide whether to hand over more. Moscow defaulted on foreign and domestic debts, and abandoned its battle to defend the currency. The rouble dropped in value by 75 per cent.Scattered signs of recovery, brandished by the more optimistic Western economists in 1998, vanished at once.

A pounds 14bn IMF rescue package failed to inspire investor faith. Asian jitters helped to drive interest rates through the roof, locking the government into a mad cyclical scramble to raise money at increasing cost just to stay abreast of maturing short-term debt.In the end, the train came off the rails. With a widening hole in its budget - and the clamour of unpaid miners, doctors, pensioners and many others ringing in its ears - the government relied increasingly on short-term borrowing, selling T-bills often to under-capitalised and criminally controlled banks. A key source of hard currency - the sale of oil and gas - had dropped sharply amid a fall in world prices Tax collection was, as usual, inadequate.

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