Reinforcing the Treasury’s hard line was the assessment that, unlike the crisis in South Korea—a much larger economy—Indonesia’s meltdown appeared to pose little risk to the global financial system as a whole. Whereas in Korea, the world might have been shocked by a single, dramatic moment of default, many Indonesian companies had gradually stopped servicing their foreign debts because they couldn’t afford to pay, and the country’s creaky, corrupt bankruptcy system allowed little chance for foreign creditors to press claims in a timely manner. Indonesia might be sinking deeper by the day into national insolvency, but international investors seemed capable of differentiating it from Korea and Thailand, whose financial markets and currencies were rebounding nicely in the first four months of 1998.
The Treasury’s new stance sparked an uproar at the State Department and the Pentagon and among some at the NSC, who were viscerally opposed to any move that smacked of trying to undermine Suharto. “There were nearly fisticuffs in Erskine’s office,” recalled Kristoff, referring to White House chief of staff Erskine Bowles. It was one thing for Rubin and Summers to dominate debates over international economic policy, but now they were venturing into areas in which they were amateurs.
“They thought we were a bunch of ignoramuses poaching on their turf,” said Boorstin. “And we thought they were willing to give any amount of money to anyone under the naïve assumption that it would actually stabilize the country.”
Members of the foreign policy team conceded that Suharto had become a hindrance to economic recovery, but they dismissed as fanciful suggestions that his power was threatened or that the country could stabilize without him. “Suharto will be here three years from now,” Stanley Roth, the assistant secretary of state for East Asia, predicted flatly in one of the White House donnybrooks.
Roth and other foreign policy officials drew a stark contrast between Indonesia and the Philippines, whose dictator Ferdinand Marcos had stepped aside under U.S. pressure in 1986. Whereas a clear alternative had existed to Marcos—Corazon Aquino, the popular widow of a slain opposition politician—no one in Indonesia other than Suharto appeared capable of holding the fractious archipelago together. The State Department and the Pentagon worried that if Suharto were somehow forced out, the country would be engulfed in bloodshed, with the powerful military perhaps split between rival factions, leading eventually to civil war. Furthermore, even if Suharto’s ouster were desirable, any move that appeared to be encouraging it would surely prove destabilizing, with the Indonesian president circling the wagons and turning antagonistic toward the United States. Stapleton Roy, the U.S. ambassador to Indonesia, denounced as a fantastic conceit the suggestion that Washington could tell a leader as proud as Suharto how to run his country’s internal political affairs.
The battle between the two sides reached a crescendo over a plan hatched in late February to send a special presidential envoy to Jakarta to meet Suharto. The White House settled on Walter Mondale, the former vice president and former ambassador to Japan, whose stature, U.S. officials hoped, would convey the message to Indonesians that the United States wanted at least to try to help their important country. Long, intense debates were held to discuss the nuances of what Mondale should say—the Treasury favoring a tough message, the foreign policy types a more muted one.
The debates proved largely a waste of time, for Suharto wasn’t of much mind to listen. On March 3, Mondale—accompanied by Lipton—arrived at the presidential palace in Jakarta for his audience with Suharto, who treated his visitors to a forty-minute monologue on Indonesia’s economic development.
Mondale’s message was that the United States wanted to see Indonesia recover, and if Suharto acted in a way that would cause that to happen, Washington would be supportive. But when Mondale admonished Suharto on the need to comply with IMF conditions, the Indonesian president made it clear that “he thought that the IMF wanted to overthrow him and didn’t like him,” Mondale said. Nor was Suharto receptive to Mondale’s suggestions about how the Indonesian president, who was Just starting his seventh term in office, ought to fill his new government with honest faces from outside his inner circle.
Still, Mondale was able to persuade Suharto to open a dialogue between Indonesia’s economic policymakers and Lipton. “If you don’t trust the IMF, how about working more closely with our [U.S.] officials?” he urged. This was, in a way, an odd suggestion, since Lipton came from the department most hostile toward Suharto. But the upshot was one final crack at repairing relations between Washington and the Indonesian leader. Neither side wanted to risk a total rupture; Suharto needed the IMF’s hard currency to ensure that Indonesia could continue to import vital goods, and Washington wanted to avoid social chaos in the world’s fourth most populous country. Rubin was willing to “take another shot at finding a workable set of policies that Suharto could sign on to,” Lipton said, although the Treasury chief considered it “a low probability of success option.”
Lipton traveled back to Jakarta in mid-March, as did Hubert Neiss, who took over responsibility for Indonesia from Aghevli at a time when ties between Jakarta and the IMF were reaching a low point. The Fund had delayed disbursement of the second $3 billion tranche of its loan pending Suharto’s choice of a new cabinet, and Suharto responded on March 14 with a gesture widely interpreted as thumbing his nose at the international community, appointing a “crony cabinet” that included one of his daughters and timber baron Bob Hasan. But the Clinton administration and the IMF found one reasonably reform-minded policymaker in the new cabinet— Ginandjar Kartasasmita, who had been named to the key post of coordinating minister for economic affairs. Following negotiations with Ginandjar, a new IMF program was announced on April 8 that allowed Indonesia to receive its $3 billion tranche in three dribbledout portions, $1 billion per month. Among the most important elements of the new program was a tight credit policy with clear rules against excessive money creation—an approach pushed hard by Lipton—and this helped the rupiah strengthen in April.
But Indonesia’s economy was still reeling from the blows of January, and Suharto’s hold on the presidency was loosening far more quickly than outsiders like Stanley Roth had realized. Even as Lipton and Neiss were discussing the terms of the IMF’s new program, student demonstrations demanding Suharto’s resignation were spreading on college campuses in major Indonesian cities. Although the students stood little chance by themselves of toppling the regime, their protests were a sign of the combustibility building in the country’s political atmosphere.
The ignition spark came on May 4. On that day, as the IMF disbursed the first $1 billion monthly tranche under the new program, Suharto simultaneously announced increases in the price of many types of fuel, including a 25 percent boost in kerosene and 71 percent for gasoline, to comply with IMF conditions aimed at curbing costly government subsidies. In doing so, he was taking action several months before he was required to under the program, instead of allowing the prices to rise gradually, according to IMF and World Bank officials. One possible explanation for Suharto’s move is that he hoped to sow among the populace discontent with the IMF, whose anti-KKN conditions had become a rallying cry for his critics.
Whatever his reasoning, antigovernment riots soon intensified, with college students defying army orders to keep their demonstrations restricted to their campuses. On May 12, four students at Trisakti University in central Jakarta were killed by sniper fire. Three days later, blazes swept shopping centers throughout the capital, killing hundreds. Students occupied the grounds of Parliament on May 18; the next day, Parliament officially asked Suharto to resign, and the following day, even U.S. Secretary of State Albright went public to say that the time had come for him to go. The Indonesian leader finally handed the presidency to his handpicked successor, B. J. Habibie, on May 21.
One interpretation of the Indonesian crisis is that Suharto’s suspicions were essentially correct—that is, the West was seeking his overthrow, and the IMF was used as an instrument to achi
eve that aim. But the events previously described do not support so extreme a thesis, despite the desire among some in the U.S. government to see the Indonesian leader step aside in spring 1998. Even the U.S. Treasury fell in line behind the third IMF program in April, and all the evidence suggests that the efforts by Lipton and Neiss to make the program a success were sincere.
It is fair to say—as Camdessus has publicly acknowledged—that the IMF programs had the effect of helping to foment Suharto’s ouster, even if that was not the intention, because by demanding such extensive reforms, the Fund threw a spotlight on the ugly, corrupt aspects of his regime and inflamed popular sentiment against him. But this perspective on the Indonesian story misses the big picture. Up to the time of the January 15 program, the IMF and the High Command, including the Treasury, were desperately trying to ameliorate the crisis, and little thought was being given to an Indonesia without Suharto. His downfall was not the result of a Machiavellian scheme to topple an autocrat; it was the upshot of an international rescue attempt gone badly, embarrassingly, and tragically awry. In the end, Suharto fell because the economic prosperity that underpinned his legitimacy as a ruler had crumbled, and although his departure from office may have been a good thing, the economic developments that caused it were anything but.
Mercifully, the worst fears of the Clinton administration’s foreign policy team proved unfounded. Post-Suharto Indonesia has suffered from the feeble leadership of two presidents—Habibie and his successor, Abdurrahman Wahid—and separatist movements, emboldened by the country’s weak government, have violently pressed their causes, which has helped keep the economy in a sickly state. But the country has not undergone the horrors of civil war, at least not as of early 2003.
As for the economic impact of Indonesia’s collapse beyond its borders, the Treasury was right to conclude that the repercussions would be modest. But the crisis was moving next to a country with nuclear weapons, where the fallout would be felt far and wide.
9
GETTING TO NYET
David Lipton landed at Moscow’s Sheremetyevo Airport on Wednesday, August 12, 1998. The visit was a hurried one, cooked up the previous weekend over the phone with Larry Summers while Lipton was driving to North Carolina to pick up his children from camp. The Russian leadership, the two U.S. Treasury officials agreed, needed a warning to prepare for the worst.
A $22.5 billion IMF-led rescue package, negotiated with Russia in mid-July, was failing to achieve its aim of stanching an outflow of capital from the country. Russian stocks, the highest of flyers among emerging-market investments a year earlier, had fallen 48 percent in the four weeks since the IMF program’s approval. Investors were dumping Russian treasury bills at a rapid pace, and the government had been forced to cancel its weekly sales of the bills because it didn’t want to pay the 100-plus percent interest rates the markets would have demanded. The turmoil threatened to undo one of the most cherished accomplishments of President Boris Yeltsin’s regime, the stability of the ruble against the U.S. dollar.
To Lipton’s consternation, most of Russian officialdom seemed only dimly aware of how close the country was coming to the financial abyss. Two of the most important policymakers were on vacation: Sergei Dubinin, chairman of the central bank of Russia, was in Italy; Anatoly Chubais, Russia’s top negotiator with the IMF, was in Ireland. And several of the officials who were in Moscow, including Finance Minister Mikhail Zadornov and Prime Minister Sergei Kiriyenko, were taking false comfort, Lipton thought, from projections indicating that the government had enough rubles and dollars to pay its debts coming due over the next few weeks. What they didn’t seem to understand, Lipton told them, was that confidence in the country’s financial soundness was falling alarmingly fast, Just as it had in South Korea, and although the central bank still held hard-currency reserves of about $11 billion, ruble-holders might suddenly demand so many dollars as to wipe out those reserves, leaving the country with nothing to pay its foreign obligations or sustain the ruble’s value.
A world of difference separated this Moscow trip of Lipton’s from one he had taken nearly seven years earlier. At that time, he was working with Harvard’s Jeff Sachs, and the two of them arrived in Moscow on November 6, 1991, the very day Yeltsin named Yegor Gaidar to the posts of finance minister and deputy prime minister. Technically, Russia was still part of the Soviet Union at the time, but the USSR was on the verge of breaking up, and Gaidar—a thirty-five-year-old, fervently market-oriented reformer—was committed to a damn-the-torpedoes approach for converting Russia’s lumbering state-run economy to capitalist principles as quickly as possible. Because Lipton and Sachs had advised the Polish government on its rapid transition from communism, their views were of intense interest to Gaidar, who met them late at night in his office on his first day as finance minister. No one held any illusion that the new government in Moscow had an easy Job, but Lipton and Sachs—and their Russian interlocutors—had a sense of great hope and expectations. The moment seemed laden with possibilities for sweeping aside the wreckage of the Soviet system and building a vibrant free-market economy in its stead.
But now, in August 1998, that vision lay in tatters amid the corruption, criminality, and tax avoidance that infected Russian capitalism, and the country’s venture in free-market economics was nearing a nightmarish climax. Lipton saw no painless way out; part of his message was that if the Russians were counting on an additional dollop of IMF money on top of the disbursements already scheduled, they should forget it.
The urgency of Russia’s plight became clear to Lipton when he met with Sergei Alexashenko, the deputy chairman of the central bank, who had a much better grasp than other top Russian officials of the reality that the country would soon be forced to make extremely unpleasant choices. The two men met at the central bank for an hour and a half on Thursday, August 13, discussing figures showing that the demand for dollars by people exchanging their rubles had depleted the central bank’s reserves by $2.4 billion over the previous eight business days. At the end of the session, Lipton told Alexashenko that he would like their aides to leave the room so they could talk alone.
“I want to ask you one question,” Lipton said when the others had stepped outside. “How many more days can you hold out?”
Alexashenko sighed. “It could all accelerate very fast,” he replied, referring to the outflows of capital. “I don’t think more than three to five days, perhaps a week.”
Almost anyone in the world of international finance will know instantly how close to the mark that comment was, for it came four days before August 17, 1998, an infamous date in financial markets. Most Americans were paying attention to another major development that took place that day—President Clinton’s grilling before a federal grand Jury and his admission in a speech to the nation that night that he had conducted an “inappropriate” relationship with White House intern Monica Lewinsky. But that same day, Russia announced it was devaluing the ruble and effectively defaulting on its treasury bills. The implications for the global financial system were profound: At long last, the IMF and the rest of the High Command were saying “no.” They were standing by and allowing a country to cease paying its full obligations to creditors, instead of throwing fistfuls of dollars to prevent such an eventuality from occurring.
Gosudarstvennye Kratkosrochnye Obligatsii, or “state short-term obligations,” known by the acronym GKO, was the name of the treasury bills upon which Russia suspended payment. Therein lies a tale about how Boris Yeltsin’s Russia, with no malice intended, created a threat more destabilizing to the West than anything the fiends of communism had ever concocted during their decades in the Kremlin. Global capitalism had survived KGB spies, MiG fighter planes, and SS nuclear missiles. Yet of all the acronyms to emanate from Moscow in the twentieth century, the GKO would come closest to bringing the capitalist system to its knees. Had Marx and Lenin lived to witness the events of 1998, they surely would have relished the irony.
That the “no” o
f August 17 applied to Russia meant that the move packed a special wallop, for unlike the Asian-crisis countries, Russia had an extensive and recent history of IMF programs.
During the 1990s, the Russians had usually heard “yes” when it came to seeking aid from the IMF, to the point that the mantra “too big and too nuclear to fail” pervaded the attitudes of many market participants about the country. Russia, after all, was a hard supplicant to refuse, with its tens of thousands of atomic missiles that might fall into the wrong hands should a hostile government come to power in Moscow, and its lethal military technology that might be sold abroad should the country’s need for dollars become sufficiently acute. Beyond the country’s geopolitical importance, top officials of the IMF, as well as the governments of the United States and other major powers, genuinely believed that loans to Russia could produce substantial benefits by advancing the cause of reformers who were battling to ensure that the country would hew to the capitalist road. But in assessing these efforts to encourage Russian reform, when IMF money continued to flow to Moscow throughout periods of glaring financial high Jinks and economic mismanagement, it is reasonable to wonder whether Russia was set up for the colossal letdown of 1998 because it had been told “yes” too many times in the past.
The IMF’s role in Russia was part of a new mission it and the World Bank had been handed in the early 1990s—helping to guide and finance the conversion of the Soviet bloc to the free market. Many experts were calling at the time for the West to mobilize tens of billions of dollars for Moscow in a Marshall Plan-style reconstruction program, but the administration of President George Bush made plain its reluctance to provide such vast sums, especially amid America’s record budget deficits and sluggish economy. So the Fund and the World Bank were charged with doing the best they could on a task that was unprecedented in scope and complexity. The countries involved had spent decades under central planning, with every price and factory production target set by the state. They lacked the basic components of market economies, including viable commercial banking systems, stock and bond markets, and laws to protect private property and enforce contracts.
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