But the IMF has shown little interest in allowing countries the flexibility to implement capital controls, and is still insisting that Russia restore the full convertibility of the ruble. In this case the IMF not only precipitated the financial crisis, it also prescribed policies that sent the regional economy into a tailspin. With a high level of short-term international debt, a depreciation of the domestic currency increases the cost of debt service. It does not take much to set off a panic, especially if the central bank does not have a high level of foreign currency reserves relative to the short term debt. These reserves shrink further as more and more investors convert their domestic currency and domestic assets into dollars.
Foreign lenders refuse to renew the short-term loans, and the downward spiral continues.
What was needed at the onset of the crisis was a supply of foreign exchange reserves, to assure investors that they did not have to flee the country today in order to avoid further foreign exchange losses tomorrow. After strenuous opposition from the U.S. Treasury Department, which insisted that the IMF must determine the conditions of any bailout before any other funds were committed, the plan was dropped by November. It is impossible to tell how things might have turned out differently, but it is certainly conceivable that not only the depression, but even the worst of the currency collapses could have been avoided if the fund had been assembled and deployed quickly at that time. Even worse, the IMF's insistence on very high interest rates, as well as fiscal austerity, worsened the contraction of the injured economies. The result was that a liquidity crisis, which could have been managed and limited to the financial sphere of the economy, became a major regional depression.