Ukraine - the IMF is living a fantasy
The IMF has published the latest staff report for the third review under the $15.6 billion EFF for Ukraine. See link:
https://www.imf.org/-/media/Files/Publications/CR/2024/English/1UKREA2024001.ashx
It provides minor updates to the last review document published in December, with minor changes to the DSA.
As per December, I have numerous problems with this document as it relates to the plan for a debt relief operation which aims to deliver a $14.8 billion financing contribution to overall financing provision of $122 billion over the programme period.
The first, and most obvious problem, is that the IMF make heroic and just totally unrealistic assumption in terms of Western financing assurances for Ukraine. These bear no resemblance to the political reality now in the Western world.
In particular, a weight of the financing is supposed to be made up by commitments from the US, but with $61 billion in US funding stuck in Congress since November, it is hard to be optimistic that these funds will be forthcoming. And yet in point 51 in the programme document, the Fund argues that:
“Firm commitments are in place for the next 12 months (i.e April 2024 through March 2025), including on the basis of the Biden administration’s budget proposal and the approval of the EC facility, and there are good prospects on financing for the remainder of the programme facility”.
How can this really be described as “firm”?
You have to ask what planet the IMF live on. Evidently one different compared to the rest of us. The US money has been stuck for months in the House, and the monies show little prospect of being green lighted. As to the future, there is a real possibility (60% perhaps) that Trump will secure the 2024 elections, and he has promised to cut off funding to Ukraine. Looking at fiscal funding of Ukraine to date, from the onset of the full scale invasion, the US has provided around one third of the budget financing provided to Ukraine - $23 billion of the $75 billion provided to date (Ukraine MOF data). The loss of one third of budget financing would be a huge blow to Ukraine’s financing and would question then the sustainability of the IMF’s framework. The assumption is that the rest of the G7, particularly the EU, could step up and fill the void, perhaps front loading disbursements from the €50 billion four year facility for Ukraine agreed at the EC Council meeting in December. However, given the travails of getting that facility over the line, with opposition by Viktor Orban, and the risks of a changing political map in Europe after looming EP elections in May, this can hardly be taken for granted.
But keeping Ukraine functioning is not only dependent on the fiscal/BOP ask, but also the military supply equation which the IMF fails to consider at all. And herein, the US has done most of the heavy lifting, providing around $42 billion of the estimated $95 billion military commitment to supporting Ukraine militarily for 2022-23 (www.ifw-kiel.de), or 44% of the total. Without the US commitment Ukraine simply could not sustain the war. And both in its size and technical composition other Western allies simply could not replace the US military backing. Without the US provision - now surely seriously in doubt given developments in the US Republican Party - the risk of Ukraine losing the war, or major military setbacks is significant.
This is the key flaw now in IMF maths/thinking, that you cannot construct an economy at war’s macro framework by just looking at the fiscal and balance of payments, you have to look at the whole macro - military financing position. And without support from the US, Ukraine’s numbers simply do not add up. Without the military funding from the US, Ukraine could lose the war, which could have a range of outcomes from a huge hit to the macro story, to questions about the very survival and sustainability of Ukraine as a state.
Second, and related to point, one, it is hard to credibly provide a macro framework for a country at war. The IMF macro projections are just fingers in the air, and the Fund has zero experiecne and credibility in predicting war macro outcomes. How can you produce a DSA on this basis? It just makes no sense - the war could end in six months or six years, with hugely divergent outcomes. See above.
Third, and as I have long argued, given above, Ukraine’s macro financing picture only adds up if the West, and the IMF wake up to the reality that the $330 billion plus in as yet immobilised Russian assets are used to fund Ukraine’s war and its reconstruction. Why is there zero mention of this in the IMF report? This is total head in the sand thinking from the IMF. It is sustaining the myth here that Ukraine is sustainable without resort to tapping immobilised Russian assets. It is absolutely not. As is, the IMF’s numbers are just not credible.
Fourth, the IMF is big on “burden sharing” as it includes debt relief as a big part of financing programmes for countries coming out of debt distress. Typically the private sector has to take its share of the strain or burden. But what is incredible about this document is that in not talking about the use of immobilised Russian assets the fund is sustaining the indefensible that the culprit for the war in Ukraine and the macro displacement in Ukraine, Russia, will not be made to pay. But instead the IMF is sustaining an unjust and actually immoral set of outcomes where:
* Western tax payers are being made to pay for Ukraine’s fight in the war and peace, rather than going after the assets of the Russian tax payers. Western tax payers are being made subordinate to Russian tax payers.
* Western tax payers are being made subordinate to those Western businesses who continued to do business in Russia, well after the invasion. Remember here that one argument for not going after immobilised Russian assets is the fear that Western assets in Russia will be seized. This is insane, and totally unjust/immoral. Remember these companies made bad investment decisions, and made windfall profits from the fascist Putin regime over many years. Why are Western national security interests, and the interests of Western tax payers being made subordinate to the interests of these greedy companies? Why also are the interests of Belgium and Euroclear being put ahead of the interests of Western tax payers and Western pensioners? A question has been asked as to why Belgium is still sitting on the interest earned on immobilised Russian assets from 2022-23, to the tune of €6-7 billion, which is 40% of the financing contribution now being demanded from debt relief for Ukraine from private creditors. How is this fair?
* Western pensioners (the ultimate creditors/holders of Ukrainian debt are being made to pay for Ukraine’s fight in the war and peace, by being forced to offer debt relief, rather than going after the assets of the Russian tax payers. Western pensioners are being made subordinate to Russian tax payers.
In summary, Ukraine’s financing outlook is in crisis, given the risks now to US funding. The only way that Ukraine’s financing needs in war and peace can be assured is by tapping the $330 billion in as yet immobilised assets. Ukraine can win this war if it gets those assets and can then use them to fund its on defence over the longer term. This IMF documents totally fails to understand this harsh reality. It sustains a myth here and that myth poses serious dangers to Ukraine’s defence.