There is, buried in the virtual vaults of the International Monetary Fund (IMF) in Washington DC, a little-known treasure trove of funding that can one day turn Ukraine from a panorama of Putinesque destruction into a model example of US-led reconstruction, with an impact on a par with the post-World War II Marshall Plan.
These IMF funds can be used to unlock the vast resources of the democratic world’s private and institutional investors and make a significant impact on Ukraine, a country that will almost certainly need $1 trillion or more to repair Russian depredations.
But the key institution making this happen is not the IMF. It is the United States Congress, which can move forward in the knowledge that the plan set out below won’t cost US taxpayers very much at all, or have much effect on the deficit.
Here’s how it would work:
Rich countries’ IMF shareholders currently have a large amount of money, valued at $40-$90bn in so-called unallocated special drawing rights (SDRs.) These unallocated SDRs would be used as hard-currency collateral for Ukrainian bonds to finance the reconstruction effort (much like Brady bonds.)
This intervention by Western governments and financial institutions would greatly increase Ukrainian creditworthiness and lower the cost of private-sector funding.
The plan could fulfill the goals of major stakeholders — including the United States, the IMF, international investors, and a number of emerging market countries — in rebuilding Ukraine, boosting growth, and helping it attain a sustainable debt profile. Taken as a whole, it will restore the country’s economic health, and underline that the US is the world’s most creative and constructive great power.
There are other benefits. The program would:
- Provide urgently needed debt relief for Ukraine;
- Encourage the private sector to provide significant new funding for Ukraine’s reconstruction in the form of internationally traded debt at more affordable levels than it could access through the traditional Eurobond market;
- Ensure the delivery of the United Nations Sustainable Development Goals (SDGs) through the inclusion of carefully written criteria and conditionality around key performance indicators (KPIs); and
- Build an imaginative public-private partnership with little additional cost to US taxpayers.
The US and its allies have done a great deal to aid Ukraine with military and financial support during almost a year of the war. But even as total US assistance exceeds $100bn, it is evident that Ukraine will emerge with an unsustainable debt burden, likely over 100% of GDP, and with significant reconstruction and recovery costs. Market access for Ukraine will be limited unless innovative solutions can be applied to its debt, and a Brady bond-style solution could be one answer.
The scheme could also be used to aid other countries — including many in Sub-Saharan Africa — that are struggling amid a severe economic crisis. The Russian invasion, the economic fallout of the COVID-19 pandemic, and pressure on supply chain and commodity prices, causing tighter global liquidity to create headwinds for a number of these countries, have potentially seriously impaired their ability to service debt. The higher cost of debt and increased volatility in core rates have translated into limited access to external funding, especially for those countries that already have substantial debt stock and lack alternative funding sources. There are signs in some countries of imminent economic distress.
How to fund it
The proposed initiative dovetails with the IMF decision in August 2021 to issue new SDRs to provide economies, particularly poorer lower-income countries, with more fiscal space to tackle the challenges resulting from the COVID-19 pandemic.
Since SDRs are reserve assets, their reallocation involves limited additional fiscal costs to the donor nations. Yet for relatively small economies, these allocations have the potential to produce a significant positive impact.
In 2021, G-20 members of the IMF agreed to earmark $100bn of their SDRs to poorer countries. Around $40bn of this sum remains unallocated. This rises to $90bn if G-7 countries follow the French lead to reallocate 30% of the original SDR allocation to poorer countries. The proposal is that these funds be channeled into a newly created IMF vehicle, a Brady bond-style collateralized restructuring facility, in order to create meaningful positive multiplier effects for qualifying countries.
US Congressional action
The US Congress has not yet signed off on the G-20 pledge to reallocate 20% of the new US SDR allocation, amounting to a sum of around $22bn.
We would propose that the US Congress agrees with the existing G-20 commitment and gives serious consideration to raising it somewhat.
SDR reallocation is a means to enable much more generous private sector treatment of Ukrainian debt, and that of any other country included in this program. This could allow the Ukrainian government much earlier market access and help lower borrowing costs at a critical time in the recovery process. It will also enable the private sector to share the burden with the public sector in Ukraine’s reconstruction needs.
Private Sector Role
The likelihood of private sector participation in this proposal, using a more comprehensive approach to funding Ukraine and a number of other countries, is based on a set of incentives.
As international investors evaluate the creditworthiness of poorer credit-seeking countries, their risk assessment would be greatly enhanced by the backing of governments and international organizations in the form of collateral, as well as commitments from the borrowing nations, both structural and legal, regarding transparency and use of proceeds.
Polina Kurdyavko is head of Emerging Market Debt at Bluebay Asset Management
Tim Ash is a Senior Strategist also at Bluebay. Tim is also an Associate Fellow at Chatham House on their Russia and Eurasian programme.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.