Ukraine and IMF Reform

On March 13,  the Senate Foreign Relations Committee by a vote of 14 to 3 sent a Ukraine aid package to the floor for a full vote of the Senate. This bill differs from the House-passed aid package in that it includes language that endorses the 2010 Seoul package of International Monetary Fund (IMF) quota reforms. The inclusion of the IMF quota reform in the bill has proved to be controversial among some leading Republican lawmakers, who view this as an attempt by the administration and its allies to use the Ukrainian crisis as an excuse to push through an unpopular measure. Further, there are some who believe that IMF quota reform is a “giveaway” to Russia. In response to these criticisms, Senator Lindsey Graham (R-SC) recently summed up why these reforms are important, arguing that the IMF “can provide stability at a time we need it. From the long view, the IMF is a strategic tool for United States foreign policy. We would be shortsighted to not embrace this reform.”

Q1: What is quota reform?

A1: In November 2010, the Obama administration negotiated a package of IMF reforms at the G-20 summit in Seoul. The centerpiece of these reforms is an effort to increase the representation of emerging and developing countries within the IMF by shifting 6 percent of the IMF quota share to these countries. This shift will increase their voting shares, as well as their financial commitments to the IMF. Under the quota reform, the United States—which is the IMF’s largest shareholder and holds veto power over any IMF decision that requires a vote of 85 percent or more—will see its share fall from 17.69 percent to 17.4 percent, a decrease of 0.29 percent. The top 10 shareholders are presently the United States, Japan, Germany, France, the United Kingdom, China, Italy, Saudi Arabia, Canada, and Russia. The quota reform will see the top 10 shift to the United States, Japan, China, Germany, France, the United Kingdom, Italy, India, Russia, and Brazil.

This is not an insignificant shift. It does see the addition of India and Brazil to the top 10 shareholders, and China moves from number six to number three. Further, advanced economies will see their overall voting share decrease from 57.9 percent to 55.3 percent, and emerging market and developing countries will increase from 42.1 percent to 44.7 percent. This package of reforms also includes a provision that will create an all-elected executive board as opposed to having the five largest shareholders appoint executive directors. In addition, the number of seats reserved for European economies would be reduced from 10 to 8.

Under all of these reforms, the United States would still retain its seat on the executive board, the largest voting share by a margin of 11 points, and a veto over any IMF actions that require a total of 85 percent of the shares to pass (i.e., admission of new members, increases in quotas, allocations of special drawing rights, and amendments to the IMF’s Articles of Agreement). Realistically, Europe suffers far more in this reallocation of voting shares and board reform than the United States does, and yet all European countries that are members of the G-20 have endorsed this reform effort.

Q2: What role does IMF quota reform play in supporting Ukraine?

A2: Strictly speaking, IMF quota reform is not necessary to guarantee financial assistance from the IMF to Ukraine. At present, Ukraine has loans in excess of 214 percent of its quota and is seeking an additional $15 billion that would put it at 700 percent of its quota. The IMF does have criteria in place that allows its members to borrow beyond its limit, as Ireland, Portugal, and Greece are all now doing.

This is, however, an exceedingly technical interpretation of why including IMF quota reform in the Ukraine aid package is important. Ultimately, the IMF will likely play a major role in providing financial assistance to the new government in Kyiv, but it will take some persuading to do so given Ukraine’s past relationship with it. The United States will need to spend political capital with the IMF executive board in order to secure this funding. If the United States goes to the board as the only G-20 member state not to have formally endorsed IMF quota reform to argue for a large IMF package for Ukraine, our moral authority to do so will be weak. This is

something that the rest of G-20 wants, it is something that the emerging markets and developing countries want, and it is something that our closest allies want. Our approval is the only thing that stands in the way of this reform being implemented. It will continue to be difficult for the U.S. representative at the IMF to seek support from other countries for important policies if this reform measure is not passed. Quota reform also offers Ukraine a doubling of its “quick draw” money based on the size of its quota under the new arrangement from $500 million to $1 billion—a sizeable difference.

Q3: What is the cost of quota reform to the United States?

A3: Under the IMF quota reform, the United States’ commitment to the IMF will increase by $65 billion to approximately $128 billion. However, the Congressional Budget Office (CBO) estimates that the actual cost to the United States is $315 million due to the fact that much of these additional resources will be reallocated from the “New Agreements to Borrow” (NAB) emergency fund that was created at the IMF in 2009 during the global financial crisis. This money was originally included in the President’s FY2014 Budget Request but was not in the final omnibus funding bill passed earlier this year. The Senate version of the Ukraine aid package funds the $315 million through a series of offsets in the State and Foreign Operations Budget (total FY15 budget request: $46.2 billion) and the Defense Budget (total FY15 budget request: $575 billion). These offsets are split roughly evenly between the two budgets.

Q4: Is this a “giveaway” to Russia?

A4: Some Republicans have raised the idea that IMF quota reform is a “giveaway” to Russia, because that country will see its voting share increase slightly and recently came out in favor of pushing the United States to accept it in the face of the rest of the G-20 having accepted it. Strictly speaking both of these points are true. Russia will see its voting share increase from 2.5 percent to 2.71 percent, an increase of 0.21 percent. And, it is true that Russia (along with India) pressed for early acceptance of IMF quota reform. Yet, to characterize either of these as a giveaway grossly overstates Russia’s benefits from IMF quota reform and the loss that we would incur. A 0.21 percent increase in Russia’s share at the IMF hardly gives it veto power and certainly does not make it beholden to IMF financial largesse.

Q5: What happens if Congress does not pass quota reform?

A5: The other countries can try to pass IMF quota reform without the United States, but because of our veto over major decisions we will continue to block changes, as we have done over the past three years and counting. The problem is that this delay means less money for crises, less cooperation from our developed country allies, and increased willingness to look elsewhere for big money other than the IMF from developed countries (read Russia, China, or a “BRIC” Bank). It is, of course, impossible to say with any certainty what would happen if the United States fails to pass IMF quota reform. U.S. leadership of a critical international financial institution will certainly be called into question, and our ability to lead such an institution will be crippled. Ultimately, as others have pointed out, this is about the credibility of the IMF for countries in the developing world. Do they feel adequately represented before the lender of last resort? The 2010 IMF quota reform was an attempt to maintain this credibility by recognizing that the global economy has shifted and that markets in East Asia, Southeast Asia, South Asia, and sub-Saharan Africa are increasingly important and deserve a larger say in how the international financial system is managed. Nations, especially emerging and developing, may increasingly look to countries with large foreign reserves (i.e., Russia or China) as their lender of last resort rather than the IMF. It may be that the oft-discussed “BRIC Bank” may find added impetus. Passing quota reform as part of the Ukraine aid package will preserve the credibility of the IMF and ensure that the United States retains leadership of the primary lender of last resort.

Daniel F. Runde holds the William A. Schreyer Chair in Global Analysis and directs the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Conor M. Savoy is a fellow with the CSIS Project on Prosperity and Development.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2014 by the Center for Strategic and International Studies. All rights reserved.

Daniel F. Runde
Senior Vice President; William A. Schreyer Chair; Director, Project on Prosperity and Development
Conor M. Savoy

Conor M. Savoy

Former Senior Fellow, Project on Prosperity and Development