The IMF is due to meet tomorrow Wednesday 14th September 2016 to discuss Ukraine. In advance of that meeting Russian Finance Minister Anton Siluanov has fired a warning shot across the IMF’s bows.
Here is what Russia’s official news agency TASS reports Siluanov as having said:
“The International Monetary Fund has made changes to its policy on the provision of funds to a country, which is in arrears to an official creditor.
The fund set the indicators for reduction of Ukraine’s debt without taking into account the interests of Russia, and our $3 billion of debt was included in the list of liabilities which are to be restructured. Until 2018, the program was made in such a way that Russia will receive no single penny of that debt from Ukraine.
We were going to meet halfway with our neighbours and partner even amid such tensions. As the result of zero export duties Russia’s contribution to the stabilisation of the Ukrainian economy amounted to more than $1 billion, while the total international assistance to Ukraine amounted to $3.6 billion.
Today, we will give the necessary orders to our representative in the International Monetary Fund – during the consideration of the International Monetary Fund’s loan to Ukraine we will vote against this decision, because we believe that it was made in non-compliance with the regulations. It is possible that the fund did not have the full information on negotiations, though, it would seem strange – our negotiating position was entirely open.”
Siluanov is being disingenuous. The IMF did change its rules last year to allow it to provide funding to countries like Ukraine which have defaulted on debts they owe to state creditors. However as Siluanov of course knows that has no bearing on Ukraine’s existing IMF programme.
The reason the IMF has persisted with its programme for Ukraine despite Ukraine’s failure to pay the $3 billion debt it owes Russia is not because the IMF recently changed its rules.
It is because Ukraine is disputing the debt, which is the subject of legal proceedings brought by Russia against Ukraine in London’s Commercial Court. Since the debt is disputed the IMF has to disregard it since it cannot oblige Ukraine to pay a debt the Commercial Court might say Ukraine does not owe.
In other words what Siluanov is doing is taking the decision of the Commercial Court in January for granted, assuming in advance that it will be in Russia’s favour. On the strength of that he is telling the IMF that it cannot proceed with its programme for Ukraine, and is saying that on the strength of that Russia’s representative on the IMF Board will now vote against it doing so.
Whilst Siluanov is obviously free to take the Commercial Court’s pending decision in January for granted, the IMF obviously cannot do so. In light of this it has told Siluanov – quite rightly – that its position at the meeting tomorrow will not be changed in response to what he has just said.
The reality is that for many months now Ukraine has received no IMF funding. Ukraine nonetheless continues to include IMF funding it has not received in its budget for this year.
The extent to which this bluff can be kept going is problematic, and especially in light of the court hearing in January – which if it goes in Russia’s favour has the potential to bring IMF funding to a complete stop – someone has apparently decided that some IMF funding has to be given to Ukraine now in order to keep the budget ticking over at least until the hearing of the court case in January.
Reports suggest the sum that is being considered and which the IMF Board is expected to authorise for disbursement to Ukraine on Wednesday is $1 billion, which is less than the $1.7 billion Ukraine was apparently hoping for.
What Siluanov is doing by making this statement is not trying to stop the disbursement being authorised on Wednesday. As the TASS report of his comments show, the Russians know perfectly well that they cannot stop the disbursement being authorised on Wednesday, and that they know that it will be authorised on Wednesday and paid to Ukraine.
Rather what Siluanov is doing is warning the IMF that if the Judgment in January goes in Russia’s favour then Russia will insist that Ukraine’s IMF programme be brought to a stop, with no further disbursements being authorised or made after that date.
Ukraine would at that point be in unequivocal default on its debt to Russia, and what Siluanov is saying is that further IMF funding for Ukraine would in that case be illegal despite the IMF’s recent change of its rules, and would therefore have to stop.
The IMF’s recent change of its rules requires a country like Ukraine in case of default to negotiate in good faith with its creditor before any further IMF funding can be provided. Siluanov in his statement goes to considerable length to show that Ukraine has not negotiated with Russia in good faith
“We have not received an official request from the Ukrainian side to start the negotiation process, the process of debt restructuring. All attempts to conduct any negotiations both at the ministerial level, level of consultants, in fact, were fake.
Colleagues (ie. Ukraine – AM) presented us a proposal to write off through restructuring 36% of the debt. We did not take such proposals seriously because they could also propose writing off their whole debt to Russia and it could also be considered as a proposal.
I remind you that as a result of agreement with Ukraine commercial lenders wrote off about 18-20% of the debt by using the term of discounted value. Ukraine has to provide the Russian side with offers surely on more favourable terms than those proposals made and agreed with commercial creditors.”
(bold italics added)
In saying that Ukraine cannot be expected to treat a state creditor like Russia less favourably than it has its private commercial creditors Siluanov is obviously right. Indeed the IMF has already said as much, and has admitted that Ukraine has so far failed to negotiate repayment of its debt with Russia in good faith. Given that this is so, Siluanov is also obviously right to say that – provided the Commercial Court decides the case in Russia’s favour – once Ukraine is in unequivocal default on its debt to Russia it cannot take advantage of the IMF’s recent change in its rules, and that payments by the IMF to Ukraine would at that point have to be brought to a stop.
Behind Siluanov’s warning to the IMF there is a clear threat of further legal action if IMF funding continues, with Russia looking to enforce its Judgment through the courts against any funds the IMF allocates to Ukraine after the Judgment. This is what Siluanov is clearly hinting at when he says
“….our $3 billion of debt was included in the list of liabilities which are to be restructured. Until 2018, the program was made in such a way that Russia will receive no single penny of that debt from Ukraine”.
Siluanov has a reputation as a colourless technocrat. That was not quite the impression I got of him when I saw him recently at SPIEF. Though he is clearly not in the same league as Kudrin or Nabiullina – two Russian officials I saw him with – he came across to me as non-intellectual but rather tough, which is what an effective finance minister has to be. Here we see an example of him acting tough.