The crisis in Ukraine has unexpectedly breathed new life in the Obama administration’s stalled efforts to pass legislation reforming the International Monetary Fund in Congress this year.
Administration aides have seized on the crisis as an opportunity to piggyback the reforms to the global financing agency long sought by President Obama, which give a greater voting share on the IMF board to rising developing economies such as China and Brazil, onto a bill providing $1 billion in loan guarantees for Ukraine’s West-leaning government.
The aid package — and the IMF’s potential role in aiding the new government in Kiev — will likely come up when Mr. Obama meets for the first time with new Ukrainian Prime Minister Arseniy Yatsenyuk at the White House Wednesday.
Under the administration’s assistance plan, the IMF would lead Western efforts to provide Ukraine with as much as $35 billion in loans in exchange for Ukraine adopting much-needed reforms in its corruption-riddled economy. But the quick action that is needed to help Ukraine avert a default within months may be jeopardized if Congress continues to block the reform bill with its $63 billion increase in the IMF’s lending authority.
Moreover, Treasury Secretary Jack Lew said the U.S. cannot take an aggressive leading role in addressing the crisis, as many in Congress demand, unless lawmakers acts on the reforms. The U.S. in the past has had effective veto power over IMF programs, but the administration’s failure to obtain additional lending power to the international agency from Capitol Hill has been eroding its influence there.
“It is imperative that we secure passage of IMF legislation now so we can show support for the IMF in this critical moment and preserve our leading influential voice in the institution,” Mr. Lew told the Senate Finance Committee, noting that many members of Congress have been “at the forefront of international calls in urging the Fund to play a central and active first-responder role in Ukraine.”
Credibility at stake
International finance analysts say the U.S. will lose credibility in the eyes of the world if it continues to call for action to help the new government in Kiev while holding back the IMF reforms that make that possible. In addition to the IMF receiving increased lending authority in the bill, Ukraine would get greater authority to borrow funds it needs from the IMF to stabilize its ailing economy.
“Since it was the U.S. that spearheaded the 2010 IMF reforms, the legitimacy of U.S. leadership is at stake,” said Jo Marie Griesgraber, executive director of New Rules for Global Finance. “Congressional approval is the only remaining impediment” preventing the reforms from taking effect, she said, as most of the IMF’s other 136 members have already approved them.
“We have heard the calls from Congress for stronger U.S. leadership on Ukraine. This would be an excellent time for Congress to approve the IMF reforms,” she said. “This is a win-win for members of Congress who wish to strengthen U.S. global leadership, specifically its position on Ukraine vis—vis Russia, without additional costs to U.S. taxpayers.”
The administration and IMF proponents argue that the increased IMF lending authority would do little to increase the budget deficit since it involves a reprogramming of funds already approved by Congress for emergency IMF loans during the 2009 financial crisis.
While Republican leaders earlier this year were willing to accept the reforms, they sought unsuccessfully for concessions from the administration in return. Some Republican members of Congress have balked at the legislation, contending that the $314 million on-budget cost is not negligible while the IMF lending programs leave U.S. taxpayers open to potentially large costs if borrowers do not repay their loans — something that has never happened in the IMF’s history.
“According to the Congressional Research Service, the U.S. has never lost money on quota commitments. In fact, there is some nominal interest earned on these commitments,” said Ms. Griesgraber.
Some faulted President Obama for failing to push the IMF package earlier, after the organization’s board endorsed the changes in December 2010. When lawmakers agreed on a bipartisan spending accord in January of this year, authorization for the IMF reforms was dropped from the final bill.
Even as Russian President Vladimir Putin’s military move into Ukraine’s Crimea region helped spark an international crisis, Moscow agrees with Western nations that Ukraine needs assistance and guidance from the IMF — “a rare instance” of accord between the two sides, said Ms. Griesgraber.
IMF financiers are currently in Ukraine discussing a possible loan-for-reforms package with the new government. The European Union has announced it will provide Ukraine with $15 billion in funding, but that would be contingent on Ukraine sealing a deal with the IMF.
The reform bill would increase Ukraine’s borrowing “quota” by about 50 percent, reflecting the growth in its economy since its current allotment was established many decades ago.
But the reform package would go much farther in addressing momentous changes in the global economic pecking order. The overhaul would give China, which is now the world’s second largest economy, a greater say in IMF decisions while taking some voting power away from small European governments which currently enjoy disproportionate representation on the IMF board. The U.S.’s 17 percent voting share, the largest of any nation, would remain the same.
All sides agree that Ukraine must adopt painful reforms in exchange for any loans, as its economy and government have been plagued with corruption and mismanagement for years. Mr. Yatsenyuk recently disclosed that $37 billion disappeared from state coffers under the government of his ousted predecessor, President Viktor Yanukovych, who fled to Russia in the face of mass public protests last month.
In light of the dire mismanagement of Ukraine’s economy for many years — and its failure to stick to past IMF reform programs — some analysts are dubious about launching a new lending program in the country now.
“Stated simply, Ukraine is the economic equivalent of a failed state,” said Robert Shapiro, former economic adviser to President Clinton. “After gaining independence in 1991, the country moved briefly to liberalize its economy along the same lines as most of Eastern and Central Europe. But Ukraine soon jettisoned its reforms in favor of the state-oligarch model also evolving in Russia. Some 20 years later, Ukraine’s [economy] has shrunk 30 percent.”
The U.S. and EU will pay a dear price to draw Ukraine into their orbit now and force it to finally straighten out its economy, since the country will very shortly face default on its debts without huge cash infusions from the West, he said. Russia also retains significant leverage over the country’s finances as Kiev’s dominant energy supplier.
“Ukraine’s economic performance has been so terrible, for so long, that its sovereign debts are now considered the equivalent of junk bonds,” he said. “Even before the crisis, Ukraine’s credit rating was worse than Greece’s — no small feat — and no better than that of Argentina, a global financial pariah” which has defaulted repeatedly on its debts to global lenders.
But other analysts are optimistic that Ukraine is ready to finally straighten out and reform its economy after suffering through the gross mismanagement and greed of the previous regime.
“In Ukraine, financial stabilization primarily means an anticorruption program, which should be carried out fast to prevent new players from exploiting old opportunities,” said Anders Aslund of the Peterson Institute on International Economics. “The first measure should be to identify and freeze the embezzled and extorted assets of the Yanukovych family and its closest conspirators. … That could significantly improve Ukraine’s financial situation.”
Mr. Aslund conceded that hopes for Ukrainian reform are “hugely ambitious. But there are encouraging precedents. Georgia is an example of a former Soviet republic that has conquered corruption,” he said.