Illustration: Aïda Amer/Axios
As Russia’s war on Ukraine rolled into a second agonizing year, the International Monetary Fund found itself with a problem: Ukraine needed more money, but the fund’s hands were tied.
Why it matters: The fund ultimately changed its own lending rules, paving the way for it to provide a loan to Ukraine. It’s the first-ever IMF lending program to a country at war, yet another sign of the degree to which the invasion of Ukraine has galvanized much of the international community.
- Still, the institution — which has long tried to position itself as technocratic and apolitical — could be perceived as more overtly acting as a policy tool of the U.S. and Europe.
- It could also face questions from other struggling countries wondering: “What about us?”
The big picture: This comes as some IMF member countries, including China, are somewhat sympathetic to Russia — and as the IMF is dealing with the challenges brought on by China's role in the evolving landscape of global finance.
- “The fund was in an awkward position. This is a war commenced by one of its members against another — and technically, they're not supposed to take sides,” sovereign debt restructuring veteran Lee Buchheit tells Axios.
- “You could argue that exceptional times require exceptional steps — and I agree with that, I'm all for supporting Ukraine. But, you could also argue that the IMF was not established for funding this type of program,” says Doug Rediker, managing partner at advisory firm International Capital Strategies. Rediker previously represented the U.S. on the IMF’s board.
Background: The IMF is run and funded by its 190 member countries.
- One of the most visible things the IMF does is provide loan programs to struggling nations.
In the weeds: Historically, the IMF's lending program has required countries seeking funds to show in advance they have a plan to pay the money back — which could involve making hard choices when it comes to budgets and spending.
- But the new rules, approved last month, allow that in “situations of exceptionally high uncertainty,” the fund can step in, absent a plan that meets the usual criteria for debt sustainability.
State of play: The key to the IMF's loan to Ukraine, announced a few weeks later, is "financing assurances" from the G7 countries and the EU — meaning that these countries may be on the hook if Ukraine can't repay.
- Yes, but: In the U.S., additional funding from Congress in the years to come is by no means a given — meaning Ukraine may have little visibility into when and how it can repay the IMF.
Worth noting: Given the difficulties forecasting, the IMF built in extra safeguards, a source familiar with the matter tells Axios. For instance, the financing assurances need to be provided every 12 months, and if they can’t be, then the program won’t go forward.
- “In any program, there's a risk,” the source says. “But the IMF was convinced that there were enough partners that, in the long term, they would expect that the capacity to repay would be there.”
- Also: One reason the U.S. and Europe wanted to bring in the IMF was because of its expertise — and past history — in monitoring governance and anti-corruption reforms, the source adds.
Context: The fund has made rule changes before. It did so in 2015, for example — also for the benefit of Ukraine, in a move that irked Russia.
For the record: "The IMF has consistently been agile and adaptable in meeting the evolving needs of its membership," the IMF tells Axios.
- "We are doing so again, at this moment, in the face of unprecedented and continuing global shocks. In adapting our lending policies and toolkit, we have taken action to fill a gap that previously prevented us from lending to any country facing exceptionally high uncertainty."
What we’re hearing: Other struggling nations — with their own crises and highly uncertain situations — are paying attention.
- The IMF tells Axios that last month's rule change is "a framework to support countries — any country — in circumstances of exceptionally high uncertainty, including, but not limited to, in cases of active conflict."
- Nonetheless, at last week's IMF and World Bank Spring Meetings in Washington, the big question from global finance ministers was whether this ushers in a new era of a more flexible IMF — or if it will end up being a one-off for Ukraine, says Josh Lipsky, senior director of the Atlantic Council's GeoEconomics Center.