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IMF Dithers as Ukraine Defaults on Russia Loan

Contradictory decisions by IMF Executive Board point to a split within the IMF as political crisis in Ukraine deepens

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This post first appeared on Russia Insider


The issue of the $3 billion loan Ukraine owes Russia is becoming increasingly complicated.

The IMF has in recent days made a series of announcements which everyone knows relate to the Russian loan but which appear to contradict each other.

One is to say that the loan is indeed “public” (“Paris Club”) debt as opposed to “private” (“London Club”) debt.

The other is to change its rules so that it can continue to provide funding to a country if it defaults on its “public” debt provided that country attempts to negotiate a restructuring of that debt in “good faith”.

At the same time IMF officials have made clear that they do not consider Ukraine has made a real effort in “good faith” to restructure the Russian loan. On the face of it, unless Ukraine now does so, despite the change in the rules, IMF support for Ukraine will end if Ukraine defaults on the loan - as it has all but said it will do.  

The time left to repay or restructure the loan so as to avoid default is now desperately short and can be numbered in just a few days.  

The Russians say Ukraine will be in default on the loan if it is not repaid or restructured by 20th December 2015 - i.e. by this Sunday. 

If Ukraine does not repay the loan by that date - or does not make a serious proposal to restructure it - then on Monday 21st December 2015 Ukraine will be in default and the Russians will begin legal proceedings against Ukraine in the High Court in London.

The Russians say they have already prepared the necessary paperwork to start this case. 

In light of the IMF’s admission that the debt is “public” debt Ukraine has no real defence if the Russians bring a case as they say they will do.  

Though efforts may be made to delay the hearing of the case, in the absence of any real defence it is not impossible the Russians could win a Judgment from the High Court within months or even weeks.

On the face of it this puts an impossible time limit on Ukraine to negotiate a restructuring with the Russians bearing in mind that any proposals they make after Monday could compromise their position further in the court case.  

Presumably the IMF intends to allow Ukraine time beyond Monday to negotiate with Russia before IMF funding is withdrawn. 

However the IMF has not made clear how much time it is prepared to give or whether Ukraine will continue to receive IMF funding in the interim. 

Nor has the IMF explained how providing funding to Ukraine after Monday would be compatible with the fact that a court case against Ukraine was underway, given that this might eventually lead to enforcement action by the Russians (once they obtained a court Judgment) against the bailout funds the IMF is providing Ukraine.

To add to the confusion, Ukraine’s government for the moment refuses to budge from the position it has taken up to now - and which the IMF considers inadequate - that Russia accept as a take it or leave it offer a restructuring of the loan on the same terms as those agreed by Ukraine’s private creditors.  

On the face of it, if Ukraine refuses to budge from this position and refuses to sit down with Russia and negotiate, IMF funding will have to stop.

Given what the Ukrainian government has been saying about the Russian loan - with no less a person than Poroshenko saying it was a bribe for Yanukovich - it is going to be politically very difficult for the Ukrainian government to reverse itself and withdraw from this position and negotiate in “good faith” with Russia about restructuring the loan.

Meanwhile, adding to the sense of a looming crisis, there appears to be growing opposition in Ukraine to the Ukrainian government’s austerity budget - insisted on by the IMF as a condition for further funding - with Tymoshenko saying she will never under any circumstances vote for it and nor will her party.

Meanwhile Ukrainian leaders are quarrelling with each other, with fights in the Rada, shouting matches on television and arguments Ukraine’s new Tax Code threatens disaster.

Why did the IMF after making the extraordinary decision to support Ukraine by changing its own rules add a sting in the tail by demanding Ukraine negotiate with Russia in “good faith”?

It is difficult to avoid the feeling that the IMF is split, with the IMF’s bureaucracy and the non-Western representatives of its Executive Board unhappy at the way the IMF is being converted into a tool to serve the geopolitical purposes of the West.

As I have previously explained, there was never any real doubt that legally speaking the debt Ukraine owes Russia is “public” debt.  

The various arguments that argue otherwise - or which claim that Ukraine is legally entitled to default on this debt - might look superficially attractive to a non-lawyer. To anyone at all familiar with the law and the practice of the High Court in London they look impossibly farfetched.

The IMF therefore had no real option but than to admit that the debt is “public” debt, and to change its rules to allow continue lending to Ukraine, if it is to continue supporting Ukraine in the event of default as the US and its allies want it to do.

However this blatantly political decision - which not only undermines the IMF’s reputation for impartiality, but which also sets a disastrous precedent that will certainly be invoked in the future - seems to have met with strong criticism from within the IMF bureaucracy and from the non-Western members of the IMF’s Executive Board.

The condition that a state that defaults on its “public” debt can only receive funding if it negotiates a restructuring of its “public” debt in “good faith” was intended as a sop to get the decision through in the face of this criticism with a minimum of fuss.

Apparently the US and its allies on the Executive Board did not realise the IMF bureaucracy - known to be unhappy with the way the IMF is being used to support the West’s Ukrainian project by bailing out a country that is in fact bankrupt - would seize on it to say Ukraine should not get funding because it is not negotiating in good faith.

If the moral of this story is that playing fast and loose with financial rules to achieve geopolitical objectives is a very bad idea, then the political lesson is how fragile political support in the West for its Ukrainian policy has become.

The amount Ukraine owes Russia - $3 billion - may be a make or break amount for Ukraine. For the West it is a pitifully small amount.  

A strong, tough minded and determined Western leader - a John Foster Dulles or a Henry Kissinger -  who was genuinely interested in winning in Ukraine, would without hesitation pay the money to get the Russians off Ukraine’s back.

Instead, not only have Western governments refused to do this. They have even refused Putin’s cheeky suggestion they provide Russia with guarantees so that Russia can defer payment of the debt.

Presumably Western leaders are not confident Western parliaments would authorise putting up money for such a purpose - which is a lamentable comment on their political weakness.

The result is that rather than risk a public row, the West’s leaders have tied the IMF - and Ukraine - in knots by forcing on the IMF a completely misjudged change in its rules, which however at the moment is not achieving its objective.

The reality is that the political imperative to support Ukraine probably remains sufficiently strong so that Ukraine will probably continue to get funding whatever happens, even if or rather when it defaults on the Russian loan. The question is not really whether but how it will be done. The chaotic and ill-judged way in which it is being done - creating any number of problems for the future - however in the meantime tells its own story.

At the same time it is difficult to avoid a sense of growing exasperation amongst Western leaders with Ukraine.

This is not because of any fundamental change of attitude towards Russia.  

It is because Western leaders have gradually discovered what the Russians have known all along - that Ukraine’s Maidan leaders are fanatical, incompetent, corrupt and completely beyond reason.

The result is increasingly despairing articles about Ukraine even from its more fervid supporters - such as this one by Tim Judah in the Financial Times, which contains comments like this

"Last week a farcical brawl followed the decision by the Ukrainian parliament to postpone indefinitely a vote of no confidence in the government.

Further instability is the last thing the country needs but, equally, a government whose credibility has been sapped by allegations of corruption needs a significant reshuffle. It is a tragedy that the nation’s leaders have let it come to this."

This frustration with Ukraine's leaders was already obvious during the Minsk negotiations in February and partly explains the cooling of support for Ukraine from France and Germany that was obvious at the recent talks in Paris.

It was also obvious in the exasperated tone of some of US Vice President Biden’s comments to the Ukrainian parliament last week as he tried unsuccessfully to get Ukraine’s leaders to understand - in a speech heavy with ritualistic anti-Russian rhetoric and insulting references to Putin - that a minimal level of decentralisation in keeping with the terms of the Minsk Agreement, and a genuine effort to address the problem of corruption, are actually in their own interests.

As for the IMF, it has apparently delayed payment of the next tranche to Ukraine, not because Ukraine is about to default on its Russian loan, but because Ukraine’s parliament has still not passed a budget and the “reforms” the IMF is insisting on are going nowhere.  

Those of us with a better knowledge of Ukraine than the IMF would have told it - if asked - that it could not be otherwise.

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