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Financial Meddling in Ukraine Comes at a Cost

Feb 26, 2024
  • Gu Bin

    China Forum expert at Tsinghua University, Associate Professor of Law at Beijing Foreign Studies University

Feb. 24 marked two years since the outbreak of the war in Ukraine. The World Bank’s financial assistance to Ukraine has continued to surge: In two years it has committed $41 billion and distributed $33 billion. The International Monetary Fund’s support is no less significant. Both Bretton Woods institutions’ money and distribution speed to Ukraine have been unprecedented. As a result, they have probably committed multiple violations of their charters.

First, on operational prudence, World Bank rules require the organization to consider carefully the prospects of loan repayment in order to safeguard its own financial security. The sizable exposure to Ukraine has caused negative impacts on the bank, according to Fitch, a credit rating agency, which warned that a Ukrainian default would cost the bank its triple-A rating, thereby increasing its borrowing costs in global capital markets.

Second, on economic impartiality, the wildly disproportionate financial support to Ukraine means fewer opportunities for other potentially qualified recipients or borrowers, thus violating the principle of equal treatment among members and the law of impartial economic considerations under both institutions’ charters.

Third, as to political matters, the Bretton Woods institutions are prohibited from interfering in the political affairs of members, be they of an internal or external nature. The IMF and the World Bank jointly condemned the war and expressed strong support for Ukraine. Indeed, as claimed, their assistance is on the financing and policy fronts, not military-related expenditures, but the obvious purpose is to sustain the Ukrainian government, helping it to survive, if not to win, the war.

These charter requirements are written in absolute language; the rhetoric of “no more business as usual” does not exempt members of the organizations from their obligations. In fact, the opposite is true: The twin institutions have not only taken a side in the war but also have assisted a country in war, which is indeed “business unusual.”

It is reminiscent of another episode in the 1980s, when the World Bank was discussing whether to lend for political reforms in borrowing countries, but its general counsel warned of a potential violation of international law. The efficacy of IMF law was similarly challenged when the United States tried to push a human rights agenda as conditionality via a multilateral financing facility.

If the United States and its allies do feel it necessary to have these international organizations involved in politics and war, the correct way is to seek to amend these organizations’ charters — to change their purposes and mandates — which is a herculean task.

Over the past two years, the lion’s share of the World Bank’s financing to Ukraine has been provided by country donors, including the United States, United Kingdom and Japan. It probably reflects some peer organizations’ prudent positions on country donations with political ends. For example, the charter of the Asian Infrastructure Investment Bank (AIIB) forbids accepting country loans or assistance that may prejudice its purpose.

For the IMF, two particular issues implicating the war in Ukraine are noted. Following the historic allocation of a $650 billion equivalent in special drawing rights in 2021, the portion allocated to Russia was suspended, meaning that Russia was stripped of the opportunity to convert its SDRs to any hard currencies for actual use. Meanwhile, the Russian representative on the IMF Board was deprived of the honorary but important title of dean, immediately after the start of the war. Such decisions of the IMF reflect direct and preponderant political motivations.

“Political participation will strengthen an organization, while political decisions will weaken it,” John Maynard Keynes, a leading Bretton Woods system architect, once warned. Maintaining independence and political neutrality is fundamental for these economic organizations, and any decisions inconsistent with their charter provisions should be excluded.

As a new wave of politicizing these organizations arrives amid the U.S.-China power rivalry, as well as geopolitical conflicts such as Russia-Ukraine and Israel-Palestine, their safe and wise response is to remain “absolutely objective and ecumenical, without prejudice or favor,” as Keynes advised again, and to be bound only by the purposes and laws as embodied in their constituent treaties. 

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