September 16, 2016
MGIMO International Finance professor, Doctor of Economics, member-correspondent of the Academy of Economics and Business
Translated from Russian by Kristina Kharlova
The branch on which sat the International Monetary Fund seems to be finally cut down. The meeting of the board of directors of the International Monetary Fund (IMF) was held in Washington in the evening of September 14. The main item on the agenda was the allocation of $1 billion to Ukraine. And the decision was made. The director of IMF from Russia voted against it. An extra-ordinary event occurred that will have an impact primarily on the future of the International Monetary Fund.
Let me remind you that we are talking about the money in the framework of loan agreement to Ukraine for a total amount of $17.5 billion. It is provided under a four-year program of reforms of Ukrainian economy, compiled with the active participation of the IMF. The total amount of external funding, including the fund loan – $40 billion.
Under this program, Kiev received the first tranche of $5 billion, then the second ($1.7 billion) and was expecting more. However, the third tranche did not arrive before the end of 2015. The process has stalled. The official explanation was that Ukraine is not able to perform its obligations. Especially on the part of the various reforms – of the tax system, social security system, utilities tariffs, etc.
In addition, the IMF complained about the lack of progress in the fight against corruption, privatization, etc. Almost every month a list of these claims was updated and changed. For reference, I note that to date Ukraine managed to obtain about $20 billion from the IMF (since 1994). If you look at the files from those years, you will find: Ukraine never fulfilled its obligations, but received the money without delay. So the dog is buried somewhere else.
With the emergence in the beginning of 2014 of the Ukrainian issue as a matter of international policy, the U.S. began to use it to put pressure on Russia – and the IMF began to undergo a radical change. Uncle Sam, being the main shareholder of the Fund (who owns a blocking share in capital and votes of this ‘International’ financial organization), began using the IMF as a tool of its policy in Ukraine in the most shameless way. The decision of the fund to grant the last loan in the beginning of last year was taken under unprecedented pressure from the top shareholder. It was illegal, which all the members of the board of directors are aware of, including the executive director, Christine Lagarde.
First of all, the previous credit agreement with Ukraine from 2014 was terminated. The reason is very simple – the borrower is insolvent. At this point, it would seem that it was time to put an end to the relations between the IMF and the client. This is what the fund has done with many countries over decades. However, what followed was unheard of: the insolvent client was offered a new credit agreement in the spring of 2015, and on much more favorable terms than the previous one.
Second, more importantly: the IMF had no right to provide credit for political reasons. The rules of the organization say in black and white: loans are not granted to those countries with war underway on their territory. Only the blind can not see that a bloody war was raging on the territory of Ukraine since spring of 2014. However, Madame Lagarde and other fund officials were given a command by the main shareholder to turn blind. And in this state they made the decision on loan agreement with Ukraine.
The IMF has always been a politicized organization, an essential tool of U.S. foreign policy. However, both Washington and the IMF for a long time adhered to minimum standards of decency, acting within the rules, which were formally approved by all the members of the organization. Or seeking to change these rules in needed direction, but under existing procedures.
Today, all formalities were cast aside. At the end of last year the loan agreement signed in December 2013 with Russia had expired. Loan amount – $3 billion. It was provided by Russia from the National Welfare Fund and was designed in the form of purchases of Eurobonds issued by the Treasury of Ukraine.
Abetted by Washington Ukrainian authorities declared that they will not pay long before the date of repayment of the loan, and demand that Moscow restructure the debt in the same way, as when Kiev managed to restructure other external debts on Eurobonds. That, however, was a restructuring of debt securities purchased by private investors. Russia is not included in this category. Kiev’s debt in the amount of $3 billion to Moscow – is a classic sovereign debt. Kiev did not want to recognize this, equating this debt to the debt to private holders of Eurobonds.
The IMF was pretending that the dispute between Moscow and Kiev is irrelevant. Meanwhile Christine Lagarde, and other fund officials were aware that the issue of this debt could seriously affect the future of the IMF. After all, if Kiev refused to repay the debt to Moscow, it will mean a full-scale default of Ukraine. Then the entire program of restoration of the Ukrainian economy along with the latest loan agreement can be written off. This can’t be allowed, as the main shareholder demands unconditional support for the Kiev regime from the IMF.
Last year the IMF had to admit that 2 X 2 = 4. That the debt of Ukraine to Russia is sovereign. At the same time the IMF under pressure from Washington made another move. It introduced revolutionary changes in lending rules, specially tailored to Ukraine. The new rules allow the ability to continue to lend to the country, even in the event of a complete default on sovereign debt. An amendment stated that the continuation of lending is possible only if the debtor county demonstrates a “good faith attempt” to resolve the relationship with the country-creditor.
Further everything unfolded like clockwork. In December 2015, Kiev officially declared that it will not repay the loan to Russia, triggering a full-scale default on sovereign debt of Ukraine. And the IMF failed to notice this event! Even the world’s leading rating agencies failed to notice it, which usually change their assessments after every ‘sneeze’ from the debtor country.
Kiev, emboldened by uncle Sam, and with unprecedented audacity, announced that it will never pay its debt to Russia. No attempts were made to even create the appearance that the debtor country is trying “in good faith” to resolve their debt problems with country-creditor. Moscow filed a lawsuit with international court, but it seems like the court will consider this case with turtle speed.
It is no exaggeration to say that the end of 2015 marked a revolution in global finance. Over time it will cause a powerful wave of chaos in the global financial system. This system has been deprived of basic rules and norms, which served as a sort of guarantee to prevent financial entropy on global markets.
The executive director of the IMF Christine Lagarde had a difficult year. She understands that the triumph of nihilism at the IMF could end badly for the organization. As much as possible she resisted the pressure from the main shareholder, and then Uncle Sam resorted to the tried and tested means of pressure. Suddenly last year the court of France has opened a case against her involving the possible abuse of Lagarde during her tenure as French Minister of Finance. Soon, however, the story went silent, and it was a signal – the executive director of the IMF had agreed with the arguments of the main shareholder.
For several months Lagarde was trying to prevent the nightmare that happened on the evening of September 14 at the meeting of the IMF board of directors. Constant postponements of the issue on granting the next tranche to Ukraine was not due to Kiev not fulfilling something, which is not able to fulfill anything. It was a show organized by Madame Lagarde. Finally, the chief director Uncle Sam interfered, saying: “Enough is enough!” Uncle Sam doesn’t care about the ‘economic recovery’ of Ukraine, but it needs it (under the current regime) as a tool of continuous pressure on Russia. Pressure not only political and military but also financial. Which is IMF’s purpose.
Washington is behaving towards IMF lately as a legendary Herostratus. For seven decades the IMF was a faithful instrument of U.S. foreign policy, but today this golden time for Washington is running out. The vast majority of IMF member countries are dissatisfied with the dictate of the United States. The discontent eventually led to the beginning of reform process, particularly – revision of quotas of member countries in capital and votes. In the near future this may lead to the loss of the United States of controlling interest in IMF capital and votes. Uncle Sam does not need this kind of fund.
The September 14 vote of the IMF Board of Directors was not a blow struck on Russia. The main blow was inflicted on the fund itself. And also on the global financial system, which developed over seven decades.