By Gateway House

The IMF will soon consider an important change to its policy on lending that may help continue its bailout programme to Ukraine, even if Ukraine defaults on a loan from Russia that matures in December 2015. If it does make the change, the IMF could be staking its credibility to favour the West’s political agenda

By Sharmadha Srinivasan*

The International Monetary Fund (IMF) is scheduled to hold a meeting towards the end of November to review its “lending-into-arrears” policy. [1] This has important geopolitical implications for the ongoing Ukraine-Russia debt negotiations—Russia has given a $3 billion Russian loan to Ukraine, which will mature in December 2015. [2]

The IMF’s policy on sovereign arrears stipulates that the institution cannot lend to a country that has defaulted on a loan from a government—and it is this policy that will influence the trajectory of the Ukraine-Russia negotiations. [3]

At the G20 Summit in Turkey on 16 November, Russia reportedly put forth a more positive repayment proposal than it had initially offered. Ukraine has not yet responded. But if it does not accept the deal (the details of which are still unknown), will the IMF alter its lending policy to continue funding Ukraine?

The Ukraine-Russia negotiations and the IMF’s possible policy change—whereby it can continue lending to a country that has defaulted on a sovereign loan—raises pertinent questions: Can geopolitics drive the agenda of a technocratic institution such as the IMF, and if so, will the Ukraine debt negotiations bury the IMF’s credibility as a non-partisan lender?

The IMF has frequently been criticised for its policy recommendations to countries in economic crises. This has led to debates about whether the Fund’s prescriptions, ranging from structural reforms to austerity measures to curb debt, actually benefit the country in crisis. But that is not necessarily an accusation that the IMF’s policies are driven by the political agenda of the West.

Now, for the first time, it’s being asked if the IMF will bend its long-standing policy on lending by maintaining its own financial lifeline to Ukraine, in order to secure the geopolitical interests of the West.

This will be known when Ukraine’s loan from Russia matures in December. [4] The loan was part of a larger $15 billion aid package from Russia to Ukraine in December 2013; it was aimed at securing the allegiance of the country, amidst the political chaos of that time. [5]

But after an initial tranche of $3 billion, Russia stopped further disbursements in February 2014, when Ukrainian President Viktor Yanukovych was ousted from power and a new, West-friendly government headed by Petro Poroshenko was elected.

The repayment of the $3 billion by Ukraine to Russia has enormous implications for the $17.5 billion bailout package offered by the IMF to Ukraine in March 2015. [6] While two instalments of $5 billion and $1.7 billion have already been given, the IMF will have to discontinue further disbursements if Ukraine even partly defaults on its debt to Russia, because the Fund’s lending policy states that it cannot give loans to a country that is in arrears to sovereign creditors. [7]

If the IMF bailout, provided under its Extended Fund Facility (EFF), is terminated, it will have repercussions on the willingness of other international private creditors to provide financing to Ukraine. It will also make the G7 wary of Ukraine’s vulnerable financial position.

Ukraine is aware of these geopolitics and remains confident that lending will continue even if it defaults on the Russian Eurobond. [8] Strong support to Ukraine from the G7 may indeed push the IMF to bend its rules over sovereign arrears.

At present, the West does not have a plan B to save Ukraine (if Plan A, to change the IMF policy on funding, does not work). Meanwhile, Russia has said that it will question the validity of the IMF’s lending programme in case of non-repayment of Russia’s loan. [9]

Another way that the IMF could overcome the roadblock is by simply declaring the sovereign loan as private debt, though this is less likely because the IMF has already spoken of classifying the debt as official.

If the debt were indeed categorised as private, the IMF could resume disbursing the next tranches under its “lending-into-arrears to private creditors” policy. [10] According to this policy, the Fund can lend to countries which have defaulted on their debt with private creditors, as long as the IMF member is pursuing appropriate policies to restructure the debt, and if the funding is deemed essential for the successful implementation of the member country’s adjustment programme.

Thus, in spite of Ukraine’s private creditors—Franklin Templeton, BTG Pactual (Brazil), TCW Investment Management and T.Rowe Price—taking a 20% principal writedown on a $18 billion loan in a restructured deal in August, the IMF was able to continue its bailout programme.[11] But this will not be the case if Ukraine fails to repay $3 billion to Russia and the IMF classifies the debt as “official.” [12]

A failure to either classify the debt as “official” or to change the lending policy inspite of a Ukrainian default would cast doubts on the IMF’s technocratic profile—of a Fund that gives loans to countries in times of economic crises to tide over their balance of payment problems. At stake here is the credibility of an institution mandated with ensuring the stability of the international monetary system.

The IMF can be justifiably accused of many things—particularly of lending tied to Washington Consensus economic policies, such as cutting down on fiscal spending, reducing public and foreign debt, and undertaking structural reforms to make the economy more open. But these are economic considerations, and the Fund so far has not blatantly secured the geopolitical interests of the West. An exception made for Ukraine would be just that.

The IMF counters these doubts by stating that its “lending-into-arrears”policy has been under review since a discussion paper on sovereign debt in 2013. [13] Right now though, the timing of the potential rule change points to less innocuous intentions.

If the IMF supports Ukraine in the case of an eventual default, it will bring up the question of whether the IMF is acting differently because Russia is the creditor. It will also strengthen Greece’s case against the IMF, of unfair treatment. And it will reinforce the view that the bailouts by the European Commission, the European Central bank, and the IMF were advanced because of France and Germany’s exposure to Greece’s debt.

It will also have implications for new multilateral institutions such as the New Development Bank and the Asian Infrastructure Investment Bank, which plan to follow the lending standard set by the IMF. More competition should raise standards, but what happens if the IMF sets a bad precedent?

About the author:

*Sharmadha Srinivasan is a Junior researcher at Gateway House.

Source:

This feature was written for Gateway House: Indian Council on Global Relations.

References:

[1] International Monetary Fund, Transcript of a Press Briefing by Gerry Rice, Director, Communications Department, 12 November 2015,<https://www.imf.org/external/np/tr/2015/tr111215.htm>

[2] Ministry of Finance, Ukraine, Statement from Ukraine Ministry of Finance on talks with German and Russian counterparts, 10 October 2015, <http://www.minfin.gov.ua/en/news/view/zajava-ministerstva-finansiv-schodo-rozmovi-z-kolegami-z-nimechchini-ta-rosii?category=novini-ta-media&subcategory=vsi-novini,>; The Atlantic Council, Ukraine Must Not Pay Russia Back, 2 November 2015, <http://www.atlanticcouncil.org/blogs/new-atlanticist/ukraine-must-not-pay-russia>

[3] International Monetary Fund, Transcript of a Press Briefing by William Murray, Deputy Spokesperson, Communications Department, International Monetary Fund, 26 March 2015,<https://www.imf.org/external/np/tr/2015/tr032615.htm>

[4] The Atlantic Council, Ukraine Must Not Pay Russia Back, 2 November 2015, <http://www.atlanticcouncil.org/blogs/new-atlanticist/ukraine-must-not-pay-russia>

[5] President of Russia, Press statement following a meeting of Russian-Ukrainian Interstate Commission, 17 December 2013,<http://en.kremlin.ru/events/president/transcripts/19854>

[6] International Monetary Fund, Ukriaine : Financial Position in the Fund as of October 31st 2015, <https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberkey1=993&date1Key=2015-10-31>

[7] International Monetary Fund, IMF Executive Board Completes First Review of Ukraine’s EFF and Approves US$1.7 Billion, International Monetary Fund, 31 July 2015,<https://www.imf.org/external/np/sec/pr/2015/pr15364.htm>

[8] Bloomberg, Ukraine Sees IMF Bailout Continuing Even With Russia Bond Unpaid, 6 October 2015,<http://www.bloomberg.com/news/articles/2015-10-05/ukraine-sees-imf-bailout-continuing-even-with-russia-bond-unpaid>

[9] Doff, Natasha and Ilya Arkhipov, Russia Will Question Ukraine’s IMF Program If Bond Not Paid, Bloomberg, 7September 2015,<http://www.bloomberg.com/news/articles/2015-09-07/russia-will-question-ukraine-s-imf-program-if-bond-not-paid>

[10] International Monetary Fund, IMF Managing Director Issues Statement on Ukraine, 12 June 2015,<https://www.imf.org/external/np/sec/pr/2015/pr15272.htm>

[11]Federal Foreign office,Foreign Minister Steinmeier on Ukraine’s agreement with private creditors, 27 August 2015,<http://www.auswaertiges-amt.de/EN/Infoservice/Presse/Meldungen/2015/150827_Ukraine.html>

[12]International Monetary Fund, Transcript of a Press Briefing by William Murray, Deputy Spokesperson, Communications Department, International Monetary Fund, 26 March 2015,<https://www.imf.org/external/np/tr/2015/tr032615.htm>

[13] International Monetary Fund, IMF Executive Board Discusses Strengthening the Contractual Framework in Sovereign Debt Restructuring, 6 October 2014,<https://www.imf.org/external/np/sec/pr/2014/pr14459.htm>