The IMF must ensure that Russia cannot access its financial lifeline
Last year, the International Monetary Fund (IMF) celebrated the largest allocation of Special Drawing Rights (SDRs) in its history. This extraordinary act of money creation was worth approximately $650 billion and provided all IMF members with additional access to hard currency.
Contrary to general IMF and World Bank practice of conditioning aid on political, fiduciary and economic management parameters to ensure funds are spent as intended, there are virtually no restrictions on the how IMF members can use SDRs.
We recently warned that the immediate negative consequences of the latest SDR allocation outweigh its hypothetical benefits and that the World Bank’s International Development Association is a better vehicle for channeling aid to the world’s poorest countries. world. This case has only grown stronger in recent months, given the lack of evidence that rich countries and the IMF are delivering on the promises of SDR reallocations to poor countries that they used to justify the allocation in the first place.
Today, Russia’s brazen invasion of Ukraine brought to light one of the worst results of SDR allocation.
The Trump administration has opposed an allocation of SDRs because it should be distributed to all IMF members in proportion to their IMF membership, rather than targeted according to need. Through this formula, Russia received SDRs worth about $17 billion, roughly the same share as all low-income countries combined. The complicit Belarusian government also received around $1 billion.
SDR supporters such as the United States and the European Union (EU) now face the question of how to deal with the SDRs they helped hand over to Russia (and other rogue regimes) just a few months ago.
Admittedly, the new SDRs represent only a small part of Russia’s more than $600 billion in reserves. But the growing pressure on the Russian economy requires vigilance with regard to all potential Russian financial resources, including SDRs.
Using SDRs requires finding an IMF member counterparty to trade with. Fortunately, Russia would probably have a hard time finding a quid pro quo due to the severe sanctions against the Central Bank of Russia announced by the United States and the EU. Even though there is no formal ban on Russian and Belarusian trade, the global backlash and outrage in the aftermath of the invasion is likely to have a chilling effect.
But the United States still needs to work to secure a formal agreement at the IMF that all member countries will refuse to exchange Russia’s or Belarus’ SDRs for hard currency or engage in any other financial transactions related to their SDRs.
As the conflict enters a protracted phase, there will be sanctions fatigue on both sides. Russia will seek to evade sanctions and eliminate financial restrictions. As a preventive measure, it is essential to establish a default rule at the IMF according to which Russia and Belarus cannot use their SDRs without ending their aggression. Substantive statements regarding the Treasury Department’s intention to prevent Russia from using its SDRs are helpful, but the United States should leverage international outrage over Russia’s behavior to formally establish such a ban. at the IMF.
Additionally, the IMF should commit to immediate transparency regarding Russian or Belarusian SDR trading, even if an IMF member like China refuses to comply with a transfer ban. The IMF also needs to ensure that the Ukrainian government will continue to be able to access the financing available under its current IMF program.
Likewise, the World Bank needs to decide how to engage with Ukraine. So far, he has offered strong rhetorical support to the Ukrainian people. Still, tough questions lie ahead if Russia’s goal of overthrowing the Ukrainian government succeeds, given the billion-dollar loans currently outstanding. The World Bank’s private sector lending arm, the International Finance Corporation (IFC), provides about half of its investments to financial intermediaries, the on-lending of which could potentially provide financing to Russian-owned or affiliated entities. The IFC must not allow this to happen, and it should also divert investment from all Russian companies.
Congress has played an important role in ensuring accountability, given the generosity with which American taxpayers have supported these multilateral institutions for the past 75 years. Following bipartisan consensus on the need to respond to Russia’s aggression with economic pressure, Congress, led by Rep. French Hill (R-Ark.) and Sen. Bill Hagerty (R-Tenn.), rightly demands an accounting from the secretary of the treasury Janet YellenJanet YellenWhite House to sanction Putin over Ukraine invasion DC lobby firms cut ties with Russian banks VTB, Sberbank Live coverage: Ukrainian president says Russia will ‘attack’ Kyiv tonight MORE how the Biden administration plans to work with the IMF to ensure that Russia cannot benefit from its SDRs.
Congressional progressives should drop their misguided push for the IMF to allocate an additional $2.1 trillion in SDRs. More importantly, Congress should review the Special Drawing Rights Act and determine whether to require Congressional approval for all SDR allocations given these latest developments. The law was last amended in 1983 and needs to be reviewed, given the dramatic expansion in the use of SDRs since the 2007-08 financial crisis.
In the longer term, the problems associated with SDRs revealed by Russia’s assault on Ukraine should serve as a warning against future calls for SDR allocation. Outside of acute balance of payments crises, the SDR is a solution in search of a problem.
DJ Nordquist served as U.S. Executive Director of the World Bank from 2019 to 2021, and is a Fellow of the University of Virginia’s Darden School of Business and a nonresident Senior Advisor at the Center for Strategic and International Studies. Follow her on Twitter @DJNordquist.
Dan Katz served as a senior adviser to the Treasury Department from 2019 to 2021, and is co-founder and portfolio manager at Amberwave Partners, an investment manager focused on jobs, security and growth in the United States. Follow Amberwave on Twitter @Amberwave.