A new entry has appeared on the Executive Board Calendar on the IMF’s official website: Reforming the Fund’s Policy on Non-Toleration of Arrears to Official Creditors. Discussion of that topic is planned for Dec. 8, 2015.
There’s a tricky question hiding behind this esoteric wording: will the International Monetary Fund continue to loan money to Ukraine, if that country does not repay its $3 billion debt to Russia by Dec. 20 and goes into full-fledged default?
Let’s get right to the heart of the problem. In late 2013 Russia granted Ukraine a $3 billion loan. In accordance with the loan agreement, Dec. 20 of this year is the deadline for the full and final repayment of that debt. With Washington’s encouragement, the Ukrainian government has stated that it will not repay the loan. Kiev has issued Moscow an ultimatum, demanding that the debt be restructured and granted the same terms under which Ukraine’s debt to its private creditors was restructured last summer (a 20% reduction in the principal). Moscow has refused to consider such an option: the Russian loan is considered an official debt, and thus the debtor has no right to demand it to be restructured. A refusal to repay sovereign debt owed to an official creditor means that the state has defaulted, and the IMF is not permitted to provide financial assistance to such a state.
For decades, the IMF has fine-tuned its rules for financing its member states, polishing those guidelines until they shine. However, that was all prior to last spring, when the US dragged the fund into the crooked games it was playing with Ukraine. Over the last year and a half, the fund has lost what remained of its former reputation, and on Dec. 8 it may end its life by committing suicide.
The shenanigans surrounding Ukraine’s debt to Russia have been going on a long time. Everyone has been waiting for the IMF’s final judgment regarding the status of Russia’s loan to Ukraine. In November the fund officially announced that the money Russia had issued to Ukraine was considered an official credit. IMF officials understood that the decision Washington wanted from them (labeling the loan as private, commercial debt) would spell suicide for the IMF. What is astounding is that after the IMF’s official declaration, Yatsenyuk once again issued Russia an ultimatum, demanding that Moscow take part in the restructuring efforts of Ukraine’s private creditors.
I think that on Dec. 8 Washington and some of its allies on the fund’s executive board will attempt to convince everyone that white is actually black and black is white. It is already clear what the prepared draft of the decision might look like. It will say that if the debtor country (Ukraine) is trying to negotiate a deferral or restructuring of the debt with the creditor state (Russia), but the creditor does not agree to this, then two conclusions can be drawn.
1. The first of these two states is a debtor in «good faith».
2. Even if the «unscrupulous» creditor state declares that the «good faith» debtor has defaulted on its debt, the IMF can continue to lend to the «good faith» debtor.
Let’s take a closer look at the actions over the past few months of the «unscrupulous» creditor state (the Russian Federation) and the «good faith» debtor (Ukraine).
The actions of the «unscrupulous» creditor
The first action (or, to be more precise – «inaction»). Last March, after a sharp devaluation of the hryvnia, Ukraine’s level of sovereign debt crossed the «red line» of 70% of that country’s gross domestic product (GDP). The loan agreement between Russia and Ukraine states that the creditor has the right to demand full repayment of the debt if the debtor’s financial position dramatically deteriorates. The «red line» of 70% of GDP was specifically noted. Since March 2015 Russia has never once raised the issue of early repayment of the debt. Is this the behavior of an «unscrupulous» creditor?!
The second action. In October, Russian President Putin instructed his minister of finance, Anton Siluanov, to work with the IMF regarding the fund’s potential transfer of $3 billion, which could then be used by Ukraine to repay its obligations to Russia on time and in full. Is this the behavior of an «unscrupulous» creditor?! Incidentally, the fund had quite the opposite reaction to Putin’s initiative. In accordance with the schedule, the fund was supposed to transfer the next tranche of a loan to Kiev in the fall that just could have helped Ukraine to free itself from this tangle of debt. However, the IMF officials suddenly discovered a great many violations in Ukraine and announced that the tranche would not be transferred before the end of the year. I believe that the scheduled tranche was deliberately delayed in order to punish the «unscrupulous» creditor (Russia).
The third action. At the G20 summit in November, the «unscrupulous» lender proposed that the debt payments instead be spread out in equal installments (of $1 billion) over three years (2016-2018), and asked the US and its allies to act as guarantors of Ukraine’s debt to Russia. But that proposal got no response for quite a while, and finally Russia’s Finance Ministry announced on Dec. 5 that not only had the US turned down Russia’s suggestion to let Ukraine pay its sovereign debt in installments, but that the US also did not intend to act as a guarantor of Ukraine’s obligations. This was an eloquent answer, shedding light on Ukraine’s financial position, as well as the actual US goals.
The actions of a «good faith» debtor
Of course we know that any parties involved in a credit transaction must act in accordance with the IMF’s rules (the ones that no one has yet managed to rewrite). Specifically, this means that any initiative concerning a change to the original terms of a loan must be introduced by the debtor, not the creditor. This is international finance 101. Russia’s Ministry of Finance has stated many times that Kiev has not negotiated with them regarding the debt, and that Kiev has not requested any such negotiations. What’s more, the Russian Ministry of Finance only knows about Yatsenyuk’s ultimatum based on reports they have seen on the Internet and television.
Now Washington is expecting the executive board to make a decision on Dec. 8, the framework of which I have outlined above. It’s hard to envy the IMF officials. If the fund complies with Washington’s demands, many states might feel free to follow Ukraine’s example. Just last summer Greece was teetering on the brink of default, and at that time Athens was browbeaten with the threat that if it defaulted, neither the IMF, nor the IBRD, ECB, or any other international financial institution would do business with them. And there are many countries in a similar position today.
Probably dozens of the IMF’s member states would be grateful for such an approach. And eventually that would send the IMF into full bankruptcy. Even if a default and moratorium are declared, sovereign creditors will demand repayment of debts from bankrupt states. They will press charges in international courts. It is hard to imagine how the IMF will continue to finance such bankrupt entities. Anyone with even a rudimentary understanding of credit will understand what kind of chaos would engulf the world of international finance.
I do not know how the Dec. 8 meeting of the IMF board will end. I hope that a majority of the board members (the fund has a total of 24 directors) will have enough good sense and backbone to refrain from giving Washington the decision it wants. After all, the US can cast only 17% of the votes in the fund, and even with all its G7 allies it controls only 42% of the vote. That is not enough to force the International Monetary Fund to decide in favor of financing bankrupt states. I am not even sure that all the US allies would support such a suicidal resolution. And the BRICS nations, if they manage to win over a few more countries, will be able to block such an insane decision (15% of the vote is required for a veto).
America’s influence over the IMF is dwindling. This can be seen in the fund’s decision to recognize the loan from Russia as official debt. Another example is the fund’s decision to include China’s yuan in the IMF’s basket of currencies – a ruling that also ran counter to Washington’s interests. The atmosphere inside the IMF is growing increasingly heated. And by the time the fund celebrates its 70th birthday in late December that mood will be quite hot indeed.