Arbitrarily rewrites rules to prop-up Kiev and irritate Russia - but the newly moneyed Chinese are watching
Originally appeared at Centre for International Policy Studies
Power is shifting worldwide. As previously less developed economies grow at a faster rate than those of the West, Western states are becoming relatively less powerful.
It is in the West’s interest, therefore, to use the years of financial, political, and military dominance which remain to it, to embed other rising powers into the system of multilateral institutions which it created in previous decades.
This will only be possible if other states believe that those institutions can serve their interests too. That requires the West to foster rules which treat every state equally.
Unfortunately, the West is not proving very good at this. On Monday, the International Monetary Fund (IMF) voted to change its rules so as to permit it to continue lending to countries that are in default of their debts to other states.
Further lending was already permitted in cases when states failed to repay commercial lenders, but it was prohibited when they failed to repay state-to-state loans (so-called ‘sovereign debt’). Now both are permitted. According to prominent Swedish economist, Anders Aslund:
“The IMF staff started contemplating a rule change in the spring of 2013 because non-traditional creditors, such as China, had started providing developing countries with large loans.
One issue was that these loans were issued on conditions out of line with IMF practice. China wasn’t a member of the Paris Club, where loan restructuring is usually discussed, so it was time to update the rules.
The IMF intended to adopt a new policy in the spring of 2016, but the dispute over Russia’s $3 billion loan to Ukraine has accelerated an otherwise slow decision-making process.”
This is a rather alarming explanation. In effect, what it says is that the Western states, which have a majority of votes in the Executive Board of the IMF, were only happy with an IMF rule requiring that sovereign debt be repaid as long as they were the ones doing the lending.
But once other countries (‘non-traditional creditors’) acquired financial power and made loans, such a rule became inconvenient. ‘Our’ debt has to be protected. Theirs does not.
The timing of the IMF’s decision was no coincidence. Ukraine is about to default on repaying $3 billion borrowed from the Russian Federation two years ago. Under the previous rules, this would have meant that the IMF would have to stop providing funds to Ukraine.
Western nations don’t want that to happen. So they changed the rules.
Moreover, they did so in order to achieve a very specific political objective – propping up the regime in Kiev and punishing Russia.
This is not a suitable way to use what is meant to be an international financial institution supposedly serving the interests of all members of the international community.
It makes the IMF a partisan tool of geopolitics. It also could deter ‘non-traditional creditors’ from lending money to needy states in the future. As Russian Finance Minister Anton Siluanov complained:
“Rules worked out over years have been broken – rules for financing the fund’s programs have existed for years and remained unchanged. Sovereign creditors always had priority over commercial ones.
The rules underlined the special role of the official creditor, which is extremely important in crisis periods, when commercial creditors abandon countries and deprive them of access to resources.
I remind you that only Russia gave economic support to Ukraine and gave it credit, when it had no access to external markets two years ago.”
As financial power shifts away from the United States, new financial institutions are springing up, most notably China’s Asian Infrastructure Investment Bank. Other regional political and security institutions are also emerging in which the West plays no role.
To preserve influence in a changing world, Western states should be looking to strengthen existing multilateral institutions. That requires fairness, not arbitrarily re-writing rules to work in their favour.