Ukraine - why can’t the G7 just be honest?

It’s been interesting to see the response to my piece from yesterday (see below) on the publication of the IMF eighth review under the EFF. One commentary, from a trusted source, tells me that G7 countries privately accept that the base line financing position no longer adds up, given the longer war scenario, and they are just waiting for the IMF to move to their “downside scenario”. The IMF seems to be the adjudicators herein with the G7 countries kind of caught in the headlights - unable to make their own determination of what should be obvious to all now. The IMF opted to buy time/make no decision by keeping their base case in this last review but its only a question of time, and likely at the next review point later this year, when they do indeed move to their downside financing scenario.

Some ask me why I have such beef with the IMF financing approach, why do I keep giving them such a hard time?

The answer is that Ukraine is highly unusual in terms of having a programme while at war - the exception. And you cannot look at it thru the same budget/BOP financing lenses as a normal programme country. Sure, all things being equal, Ukraine’s budget and BOP financing needs are currently running at $40 billion while at war. But all things are not equal, Ukraine needs military support ($60bn plus) and the $40 billion annual budget BOP support, with the annual cost to G7 taxpayers of $100 billion of keeping Ukraine in the war. Not accepting the broader cost, not spelling it out to Western taxpayers, and indeed now not accepting the reality that we are no longer in the IMF base case but the downside scenario, is dishonest to Western taxpayers. I am not saying we should not support Ukraine - quite the opposite, I think we should do more, much more to ensure a Ukrainian victory, which is in our own interest, but that to do more we have to be honest with our own taxpayers over the true costs and the costs to us if we do not support Ukraine to win. For three and half years we have been in denial, or hiding the true costs on both sides, and the result has been that we have underfunded Ukraine, and the result has been an extended war.

As I tried to do in my piece yesterday I spelt out the likely costs of supporting Ukraine to win the war ($150 billion a year), and the costs of failing to support Ukraine - likely $4.5 trillion in increased defence spending over the next decade for European NATO.

I would also argue that if we were honest about the costs of supporting Ukraine to win, then a decision would have already been made to freeze, seize and allocate the $330 billion in immobilised CBR assets to Ukraine, to ensure a Ukrainian victory. This would also be the honest thing to do for our own taxpayers - as I have long argued why are Western taxpayers paying to help Ukraine defend itself against Russian aggression, while Russian taxpayer money is being protected in Western jurisdictions by our own central banks and treasuries. Our own central banks and treasuries are not acting in the best interests of their own taxpayers - that should be a political scandal which should see the leaders of these same institutions called to account. Why are they not being held to account? Why is Lagarde not being called out for this? Well, I am.

On the issue of immobilised CBR assets it’s painful but finally it looks like the powers that be might be following a suggestion I made over three years ago. I proposed back then allowing Ukraine, or a sovereign wealth fund structure, owned by Ukraine/G7 to issue loans/bonds to be bought from the CBR assets held in Euroclear et al. Russian property rights would not be infringed, but whereas their assets were previously held in Bunds, or Gilts they would not be held in some Ukrainian Recovery or Restitution bonds. Ukraine would get access to the full $330bn, it could be managed even by the sovereign wealth fund (AURA - Agency for Ukrainian Recovery and Accession to the EU) to generate a return of 8-10%, some of the underlying capital could be spent to buy arms, or fund investment in critical war related infrastructure. Eventually when the war was won it could be spent on reconstruction or reparations. See my various pieces as below.

But connecting the frozen asset issue, and then IMF/G7 Ukraine financing assumptions, by not being direct with taxpayers about the true cost of supporting Ukraine we put less pressure on our governments to do the right thing by seizing CBR assets for Ukraine, and we delay Ukraine’s victory in the war, even risk its defeat. Actually I would also put the $50 billion ERA facility in the same camp, in that by going down that route a year or so ago, it put off the decision which we should have made which was to seize the underlying assets, not just the interest from the immobilised RU assets. And again by not giving Ukriane the resources to win the war, our actions extended the war. Inaction here has consequences - not seizing CBR assets makes it more likely the war goes on, and that he longer term costs to Western tax payers is multiplies higher than at present, $4.5 trillion higher!