Late last year the IMF decided upon a seemingly technical policy change that would allow it to continue to lend in support of a country’s economic program even when there are unresolved debt arrears owed to official creditors. In doing so, the decision overturned one of the policy pillars of IMF doctrine. For decades the IMF’s earlier stance, working in close cooperation with the Paris Club of official creditors, served to resolve debt issues by facilitating a timely agreement aiming to provide debt sustainability to the debtor country and financing assurances to the IMF.
Certainly the appearance was that behind this decision loomed the weight of the U.S. as the IMF’s largest member with an influence extending well beyond its 16.1 percent of the ownership. In a nutshell, the IMF’s decision appeared to be the result of blatant political interference and a corresponding abuse by the U.S. of its position to secure its desired short-term policy objective for a client state, Ukraine. Ironically, some twenty years earlier, the U.S. was also accused of applying political pressure on the IMF, but then it was to assist Russia.
In fact, it is not so simple. From what one can gather from public sources, the appearance of gross interference is not nearly so obvious when seen in more of a historical perspective. The IMF, after all, has an internal logic of its own that is not readily grasped by outsiders.
Beyond the actual facts in the IMF’s support for Ukraine’s economic program, it could be that the real ramification of the decision announced December 9 represents a rupture in the fabric of the governance of the international monetary system with the IMF at its core, the beginning of the end of the world as we know it. What comes next will be different, and not necessarily better.
UKRAINE AND RUSSIA DEBT DISPUTE
On April 30, 2014, the IMF approved an initial stand-by arrangement with Ukraine under a two-year arrangement, and disbursed an initial $3.2 billion. On March 11, 2015, the stand-by arrangement was replaced by an extended arrangement of $17.5 billion covering four years, and an initial disbursement of about $5 billion. The size of the IMF support was unusually large by IMF standards (900 percent of Ukraine’s quota) and unusually risky.
A second review of the program, which includes agreement on the 2016 budget, has been on hold since last October. One of the many unresolved issues is a debt of $3 billion in the form of eurobonds provided by Russia to support Ukraine in December 2013, as the previous government had opted for an immediate package with few strings attached rather than an alternative highly conditional support package from the European Union.
The post-Maidan Ukrainian authorities tried to avoid repayment when the Russian loan came due on December 20, 2015, by first considering the bonds as private sector (which the IMF did not accept, finding on December 16, 2015, that the bonds were official). In the meantime, as noted above, on December 9, 2015, the IMF changed a key provision of its lending policies to allow the possibility of continuing to support a member country which incurred arrears on debt to official creditors.
It is clear that the debt dispute between Ukraine and Russia which is being played out in the IMF is just a piece of their much larger, antagonistic bilateral relationship. The Ukrainian side views the $3 billion received as little more than a political bribe to shore up a bankrupt Yanukovich regime, whereas the Russians see their claim as a legitimate loan to a country that no one else was ready to support at a critical time.
The IMF is caught in between these warring members. Both the staff and the executive board have tried to find a path through this dispute that minimizes the implications for IMF policy in support of program countries where official debt in dispute. In my view, they have been astute in trying to find a resolution in the context of the second review of the Ukraine program. That said, it is clear that the U.S. Treasury was adamant that a solution would have to be found that would allow the review to go forward. But I doubt that they had to insist too hard. Many Fund senior staff would be sympathetic to assisting Ukraine—based in Washington, they could hardly be oblivious to the arguments and influence of the mainstream media in the West, which has been overwhelmingly supportive of Ukrainian interests.
So, as admittedly disturbing as this particular debt dispute may be from a creditor point of view, the fact is that debt disputes, by their very nature, are acrimonious, almost irrespective of the particulars of the case. Look at the still unresolved hold-out by private creditors who have refused the terms offered by Argentina after it defaulted on its bonds in 2001 (although maybe finally reaching an agreement after 15 years). The implication is that the Ukrainian debt in general, much less the bonds it sold to Russia, is unlikely to be ever fully repaid.
This should come as no surprise, really. After all, throughout modern history, sovereign lending by governments, as against private lending on presumably commercial terms for profit, is extended at least in part for political reasons. In view of the circumstances prevailing at the time when Russia bought the first $3 billion tranche of Ukrainian bonds, I assume politics was a key factor. As such the Russian government must have, or should have, factored in the possibility or even probability of non-payment. In any case, as a Paris Club member, Russia well knows what happens to official loans, much less private ones, when a country has no choice but to agree to an IMF program with its emphasis on debt sustainability.
Of course, Russia also intimately knows the other side of the story since it was a serial debt re-scheduler itself from 1992 through 1999. That was at a time when debt restructurings were much tougher on middle-income borrowers than more recently. In fact, Russia, as a debtor country, repaid all of its official debt plus cumulative interest. This is unlikely to be the outcome for Ukraine, even under relatively favorable circumstances.
In the end, the Ukraine-Russia debt dispute is likely to be just one of many unresolved and festering issues that will endure.
WHAT ABOUT THE IMF?
More than likely, even for sophisticated observers, this debt dispute involving the IMF may seem wearily technical and obtuse. In fact, it could be a key element, maybe even a turning point, in the evolution of the international monetary system with the IMF as its core.
It’s important to recall that the IMF, unlike most international institutions, operates with a disproportionate voting structure in which each of its members has a quota that should broadly reflect its relative weight in the global economic system, even if, in practice, it operates on the basis of consensus without formal voting.
It would also be no surprise to assert that the IMF is a political organization. It is indeed managed by politically appointed individuals from member countries, and the political interests of its members influence its decisions. There is a rich literature on the political squabbles related to the appointment of IMF managing directors. And although the IMF staff is less directly linked to national governments, the executive board must approve all proposed programs. The familiarity of its staff members with the preferences of the board discourages them from submitting program proposals that would not be approved.
However, a crucial element of the IMF’s effectiveness has been not only having a key group of active members—led by the U.S.—seen as devoted to its principles (even if not always to their actual application) but even more by the quiet acknowledgment of most of the other members to go along with the views of the core group. In fact, the leadership of key, vocal, and politically important members and the willingness of the rest of the membership to accept these political priorities as their own is why the IMF has generally been effective. Unsurprisingly, the IMF staff members were usually enthusiastic promoters of a consensus gelling around pursuit of the key policy principles of the Fund, such as fostering global monetary cooperation, securing financial stability, facilitating international trade, promoting high employment and sustainable economic growth, and reducing poverty around the world. I know since I was also one of those true believers during my long career in the IMF.
This is not to say that there were no frictions. There were. The IMF is not monolithic. And even under its more competent and technocratic managing directors such as Larosiere and Camdessus (cumulatively from 1981-2003), there were numerous instances where there were sharp differences of view within the staff. These only rarely spilt over into the public domain such as when David Finch, as head of the IMF’s legendary policy department, resigned in 1987 in protest against what he felt was pressure from the major shareholders on the staff to support weak programs in Egypt and Poland.
In my view, one cannot blame members for trying to use their positions to achieve political objectives. It is revealing that the continuing importance of the IMF is underscored by the very efforts of its members to influence its policies, whether the inclusion of the Chinese currency in the SDR basket or the redistribution of quotas to reflect changes in the world economy. But usually such discussions are technical and limited in the end by the need to form a broad consensus, by the character of the managing director, by strongly-held views of senior staff, and by an appreciation of trade-offs over time.
WAS IT REALLY ABOUT UKRAINE?
The ramifications from the IMF’s efforts to try to square the circle in the Ukrainian debt case are not so much about the debt dispute itself, but rather what they imply about the increasing dysfunctional nature of multilateralism in practice. The way in which it was handled is a glaring piece of evidence of an accelerating fragmentation of the current international order.
According to the IMF, the rule revision about lending into official arrears had been in consideration at the board level since 2013, well before the eruption of the Ukraine crisis. In a 2013 staff report, there was a concern about the growing role and changing composition of official lending that required a clearer framework for official sector involvement, especially with regard to non-Paris Club creditors. Even though it seemed the IMF originally intended to revise its policy only this spring, the dispute over Russia’s $3 billion loan to Ukraine accelerated an otherwise slow decision-making process. The timing of last December’s decision, just days before the Ukrainian bonds fell due, certainly conveys the impression that it was an ad hoc decision.
It should be noted that the logic behind the longstanding IMF policy against lending into arrears was that making IMF lending to a country that fell into payment arrears dependent on its negotiating in good faith to reach agreement with its official creditors would ensure a timely resolution of the debt and help to ensure the financing of the program. So dropping this condition, say in the case of Ukraine, logically would open the possibility for other countries to insist on a similar waiver and avoid making serious and sincere efforts to reach payment agreements with creditor governments. Ironically, before Russia became a member of the Paris Club in 1997, there were serious issues of discriminatory treatment of its official debt in some cases.
Ukraine may have been the proximate cause, but it seems the concern really was that nontraditional creditors, such as China, had started providing developing countries with large loans. In many cases such loans were not in conformity with IMF and World Bank standards on concessionality and, perhaps more important, China wasn’t a member of the Paris Club, where loan restructuring is usually discussed.
So why was the IMF board and its senior staff behind this revision, which would effectively remove the onus of reaching a debt agreement from the debtor and place it rather on official creditors? After all, in earlier periods, when one official creditor in the Paris Club was “holding out” and blocking an obligatory consensus, the rest of the Club members and IMF staff would keep all parties literally at the negotiating table (usually non-stop) until an agreement was forged that everyone could sign. If the real issue was China as a looming creditor, why should the Chinese not be invited to join the Club as Russia was earlier? What’s really going on?
THE SHIFTING OF GEOPOLITICAL TECTONIC PLATES
The stakes are much higher than just debt, as important as it may be. The consensual approach to global decision-making is fraying. In essence, the issue is whether the post-World War II multilateral framework can continue well into the 21st century with a few central institutions, such as the IMF, playing key roles based upon a consensus of its members, or will evolve—slowly or dramatically—into regional alliances, each with its own membership and some form of hopefully cooperative competition.
The core issue is the major challenge that China, but also Russia, India and others pose to the established world order. Chinese lending in Africa is just an example. The litany of concerns of major IMF shareholders is growing. It’s not simply the recent BRICS initiatives to establish what are perceived as rival institutions to the IMF and World Bank, but a pattern of increasingly fraught relations and an unwillingness of many countries to follow blindly (as in the past) the policies proposed by the major advanced countries, and notably the U.S. An early example of eschewing the view of dominant shareholders came in August 2007, when Russia’s Finance Ministry nominated former Czech central banker Josef Tosovsky as managing director of the IMF instead of the mainstream candidate, France’s Dominique Strauss-Kahn.
It could well be that the once stable, cooperative multilateral framework of the IMF, like many institutions inspired and led by the advanced economies, has become afflicted by a democratic zeal as well as growing call for voice and representation of other states and non-state actors. Such a tendency toward seeming anarchy can be seen as a positive development, especially if the old system of cozy relationships is viewed as too self-serving and unrepresentative. However, it has meant that the system itself becomes harder to govern, making it more difficult to agree on even a minimum common denominator.
And, in my view, the U.S. has not been doing itself any favors as far as its longer term interests are concerned. Perhaps with a more subtle and inclusive approach, it might have had even decades of continuing predominance in centrally-managed global institutions like the IMF. Unfortunately for those of us who believe that the world is best served by a liberal order based upon tolerance and political realism, the U.S., rightly or wrongly, has been accused of evolving from a benevolent hegemon to a global bully pursuing its narrow political agenda, much like other countries would do—and not just in the IMF.
In other words, it can no longer be taken for granted that the U.S. will be the world’s shock absorber, much less its savior of last resort. Its actions in almost any domain, from the TPP, its military misadventures, its financial extraterritorial reach, its data surveillance, etc., are increasingly resented in a world where others are asserting their own values and priorities. Ironically for the IMF, the increasingly strident political role of the U.S. arises at a time when other members, especially among the under-represented creditor countries, are less likely to condone such leadership. So, despite the campaign rhetoric in the 2016 U.S. presidential race calling nostalgically for a predominant role for the U.S. on military, economic and indeed moral issues, the reality is that the world is splintering.
My colleague at Moscow’s Higher School of Economics and editor-in-chief of Russia in Global Affairs, Fyodor Lukyanov, has recently written that, more broadly in the international system, a metaphorical Rubicon has been crossed and the world is already fragmenting into more manageable segments. After all, the international monetary system has not always had a single power center like the role played by the U.S. in the IMF and global finance. The gold standard of the 19th and early 20th centuries had many major participants, even if Great Britain was, for a time, the most important one.
Since the U.S., and others which control the voting at the IMF (even after the belated ratification by the U.S. Congress at the end of last year of the quota reallocation within the IMF approved five years earlier) are unlikely to concede the key decision-making to the new creditors, it would seem that Lukyanov’s thesis of a segmented world order is much more likely. It is odd then that the ratification by the U.S. Congress of the IMF 2010 quota reform on December 18 could be seen as a milestone in U.S. multilateral engagement. It remained largely unnoticed. The reform provides for a long overdue shift of voting power to emerging markets, although it may well be too little, too late to prevent the fragmentation which now seems ineluctable. More likely is a continuing evolution towards a world that transforms the contemporary turbulence and flux into a new equilibrium which is increasingly multipolar and yet globalized.
As concerns the IMF, it may not be too late to avoid its eventual irrelevance. For one, even its major shareholders may be willing to loosen their control of the IMF if the world is confronted by monetary and economic shocks that require globally coordinated policies. And second, the IMF is not monolithic. There are many country directors and senior staff who discreetly push back against political pressures—as indeed they did somewhat successfully in the case of Ukraine, considering what might have been. I, for one, am not confident that the forces of the tectonic plates can be resisted.
Perhaps with China chairing the G20 group of world economic powers in 2016, some fresh thinking could be welcome.