The Ukraine, IMF Aid And Economic Sanctions

IMF Reform Postponed Over Ukraine

In order to more quickly transfer the funds of Western tax cows to the Ukraine,  the US senate has apparently decided to drop an IMF reform clause from the aid bill.According to the FT, the IMF chief, Ms. Lagarde, was less than happy about this development:

“The measure would have shifted $63bn towards fulfilling US obligations to the IMF under a new system that increases the body’s lending capacity and gives emerging markets a bigger say. The reforms were agreed by the G20 in 2010, but cannot take effect unless the US approves them.

The Obama administration and congressional Democrats felt the Ukraine crisis offered an opportunity to force the issue, given that Ukraine was likely to benefit from access to IMF funds. However, Republicans held their ground, warning that the stand-off could drag on for weeks unless Democrats backed down.

This reality prompted Democratic leaders in the Senate to concede defeat and relent on their demand, on the grounds that further delay in aiding Ukraine would send a “dangerous message” to Russia. “It’s impossible to know whether events would have unfolded differently if the United States had responded to Russian aggression with a strong, unified voice,” said Harry Reid, Senate majority leader.

The decision by Senate Democrats was greeted with dismay at the US Treasury and the IMF. “We are deeply disappointed by the news that Republican opposition has forced the Senate to remove the IMF quota and governance reforms from the Ukraine assistance package,” a Treasury spokeswoman said. “Despite this setback, we remain committed to providing the IMF with the resources it needs as well as updating the Fund’s governance to reflect the global economy.”

Meanwhile, Christine Lagarde, IMF managing director, said she too was “deeply disappointed that the necessary legislative steps have not been taken by the US Congress to allow these important reforms to be implemented without further delay”. Ms Lagarde said she hoped the US authorities would give the matter “the high priority it deserves”.

In a separate statement, Ms. Lagarde also mentioned that there is actually no hurry to decide on IMF assistance to the Ukraine and that the government in Kiev is exaggerating the urgency (the IMF’s experiences with the Ukraine are decidedly ‘mixed’. Reform promises were not kept).

“The head of the International Monetary Fund said on Friday that there was no need to “panic” in terms of delivering economic aid to Ukraine, as she cast doubt the nation would need as much immediate help as its new leaders claim.

“We do not see anything that is critical, that is worthy of panic at the moment,” IMF Managing Director Christine Lagarde told reporters. “We would certainly hope that the (Ukrainian) authorities refrain from throwing lots of numbers which are really meaningless until they’ve been assessed properly.”

Ukraine’s government coffers have been depleted by huge debt repayments, efforts to protect its currency and high energy costs. The country’s new leaders, appointed after President Viktor Yanukovich was ousted last weekend, say they need $35 billion over two years to avoid default, and may need $4 billion immediately.

Yanukovich, fearing a political backlash, avoided unpopular economic policies recommended by the IMF, such as letting the hryvnia currency float and phasing out costly energy subsidies. He managed to secure a $15 billion aid package from Ukraine’s former Soviet master Russia last year, but only $3 billion has been disbursed and the rest is in doubt. Yanukovich’s government fell after weeks of street protests against his government and closer ties with Russia.

Now, support from the Washington-based IMF is seen as critical to shore up Ukraine’s collapsing finances and get its economy on the right track. The United States and European Union say they are willing to provide funds alongside an IMF program. Russia also supports the Fund’s involvement.

An IMF team is set to arrive in Kiev early next week to collect information and start working on a loan program. “I think it’s highly premature to assess financial needs, numbers here, numbers there,” Lagarde said after meeting with German Foreign Minister Frank-Walter Steinmeier. “We need to rely on facts, we need to rely on the situation as it is.”