IMF Policy Change Applies Pressure to Force Deal between Ukraine and Russia

The International Monetary Fund (IMF) flexed its considerable economic muscle this week to force a resolution in ongoing disputes between the Ukraine and Russia simply by changing its lending policies. Per the IMF, Ukraine will have to negotiate in “good faith” with Russia to resolve a dispute over a $3 billion bond due this month. Otherwise, the IMF will not allow a loan from the International Monetary Fund to the Ukraine.

The International Monetary Fund (IMF) flexed its considerable economic muscle this week to force a resolution in ongoing disputes between the Ukraine and Russia simply by changing its lending policies. Per the IMF, Ukraine will have to negotiate in “good faith” with Russia to resolve a dispute over a $3 billion bond due this month. Otherwise, the IMF will not allow a loan from the International Monetary Fund to the Ukraine.

Although the policy changes occurred simultaneously with increasingly strained relations between Russia and Ukraine, the IMF insists this represents little more than a happy coincidence. The executive board of the International Monetary Fund approved a change to its operating polices that would allow nations that default on debts to sovereign creditors to continue to receive loan funds. However, the debtor must make “good-faith efforts” to restructure the defaulted debt, or it will no longer qualify. 

According to Bloomberg Business, as applied to the Ukraine, this would mean that it would have to overcome its strained relationship with Russia following the Russian occupation of lands that Ukraine once claimed. On the other hand, it also forces Russia to the table by removing a roadblock to IMF loan programs caused by nations that would want to block funding to another nation for political reasons by obstinately refusing to resolve an arrearage.

At this point in their negotiations, Ukraine has asked Russia to allow a restructuring of its debt to match terms previously agreed to by Ukraine’s commercial creditors — a request Russia has roundly refused.

Although the new policy provides a number of new tools to use lending as a means of effectuating broader political influence, the new policy also sets out a number of restrictions on the IMF’s ability to lend. A big requirement mandates that IMF support, when lending to a country in arrears, be “essential,” and that the borrower must pursue “appropriate” policies. Any loans the IMF gives to nations that remain in arrears on other financing must also not jeopardize the IMF’s ability to provide bailouts to other needy parties.

To determine if a debtor nation has acted in “good faith,” the IMF board will look for evidence that the debtor approached its official creditor and offered to open a “substantive” dialogue about the situation. The debtor should also demonstrate a willingness to “engage with official creditors independently from private creditors.”