Ukraine crisis poses questions for the IMF
No one is asking it yet, but it is of critical importance for Ukraine, obviously, and the market - but if Putin is successful in taking Kyiv and installing a government will that government ever be recognised?
Somewhat weirdly the IMF has a lynchpin role here, as whoever it recognises as the government in Kyiv (we can debate “de jure” versus “de facto”) gets access to the assets and liabilities of the state. Think end of the USSR here in 1991, and the lynchpin role played then by the IMF, where the IMF money goes ultimately determines recognition of states.
From what I can tell there are no hard and fast rules, the Fund kind of tries to go with the flow of the international community. But the process is quite subjective. It will take a straw poll of shareholders and try and gauge where opinion lies. But herein the difficulty will be that world opinion might be split. Presumably, if Putin imposes a government in Kyiv but does not control the whole of Ukraine or a government emerges in exile, world opinion will be split. The West will side with Free Ukraine (FU - Putin, let’s a call it FUP), while Putin and it’s handful of allies will push for recognition of the Democratic Republic of Ukraine (DRU, the irony always from the GDR past that Moscow will put “democracy” in the name there, even though we all know it will in no way, shape or form would it be “democratic” but indeed anti-democratic).
But imagine a scenario where Putin takes Kyiv, imposes a Yanukovych MK2 regime but a FUP government remains in say Lviv, or outside the country. A disputed situation, in effect. Presumably the bulk of the international community would still want to recognise the FUP government, but de facto control of most of the country would rest with the government imposed by Moscow, DRU. Then it gets very tricky. I assume that aid agencies would want to work across Ukraine and there might be pressure then to recognise the new DRU government in Kyiv just for the practicality of engaging in helping the bulk of the population remaining in occupied territory? That said, the international community did not recognise DPR and LPR and Moscow was left to provide aid et al, and in fact pensions and stipends were still paid by the government in Kyiv to LPR and DPR residents throughout the conflict.
So not sure here that this has to be the case. Some will raise the comparison here with the takeover of Afghanistan by the Taliban. In the end the international community buckled as the the greater good was trying to engage with the Taliban government in Kabul to help however possible the population of Afghanistan.
I guess it is possible that the new government in Kyiv, imposed by Moscow, the DRU, is eventually recognised by the IMF. It would get the liabilities, I.e. the responsibility for servicing the countries debts, but likely would have assets frozen (FX reserves, albeit not sure about SDRs) , as is the case now with Russia, so not much ability to service that debt. That administration likely would go quickly into default. Moscow could, in theory, help it service its debts as has been the case with Belarus, but given the now parlous state of the Russian economy, with most FX reserve frozen, it’s hard to see Moscow providing large cash transfers to enable the regime in Kyiv to service its debts to mostly Western creditors.
Another scenario is whereby a FUP government, say operating out of Lviv, remains the legitimate government is Ukraine, recognised by the IMF, et al. It would retain the assets and liabilities of the state, and would likely get substantial financial support from the West. But presumably that entity would be based out of Western Ukraine, where much less economic activity is present. It might have the assets of the state but much less productive potential to continue to service the debts of Ukraine as a whole. It is also hard to see that entity ultimately avoiding a default.
I guess we can also imagine a scenario where a FUP government goes into exile, and is still recognised as the legitimate government by the international community. It gets assets and liabilities, but has little recourse to GDP to continue to service debts.
I should add here that it is possible that the IMF cannot make a determination as to the de facto government of Ukraine, and it pauses, and waits, while Ukraine drifts. It would then but in doubt who exactly would have access to the assets and liabilities of Ukraine, but presumably then the country goes into default.
Obviously the best case is still that Zelensky fends off Russia, defeats the Russian army, which is forced to withdraw and runs the whole country, supported in scale then by Western financing. And Russia is forced to pay reparations - how about using some of those frozen Russian CBR assets to fund the reconstruction of Ukraine? Let’s hope.
One question above though for the IMF, which also relates to Russia. In a scenario where Russia imposes a government in Kyiv, and that administration is recognised by the IMF, UN et al, but assets are then frozen - NBU reserves. What about SDR allocations? Remarkably at present, although CBR reserves seem frozen, the IMF has not frozen SDR allocations. So in theory Russia can still access these, sell them (say to China) and utilise them to mount a defence against Western sanctions. WTF is the IMF doing? Where is the leadership here?
Other questions for the IMF - why does it still have an office open in Moscow? Presumably it is providing policy advice to in effect help Russia survive sanctions. So let’s get this strait, the bulk of the IMF’s money comes from Western shareholders, who have imposed sanctions on Russia, but IMF resources are in effect being utilised to help Moscow get around those very sanctions! And meanwhile, Moscow still has access to SDRs? Something very wrong here, and if I were an IMF shareholder I would be asking big questions of Georgieva.
Ps, is Mozhin still in a job as Dean of the IMF executive board?