Financial Asset Recovery Conditions: The IMF’s New Anticorruption Playbook

Since the Euromaidan revolution in 2014, the IMF has provided substantial macroeconomic stabilization assistance to Ukraine, but has conditioned disbursements on, among other things, significant anticorruption reforms—an approach that has been hotly debated, including on GAB (see here, here, here, and here). The most recent financial assistance agreement also targets corruption, but in a more indirect fashion. Last December, the IMF and Ukraine provisionally agreed to a $5 billion financial assistance program. It soon became clear, though, that the launch of the new program hinged on the Ukrainian parliament successfully passing legislation on land and banking reform. Ukraine complied, and the new agreement is likely to be signed in the coming weeks.

The banking bill, which provides a more general bank resolution framework, is clearly designed to address outstanding issues for the country’s largest commercial bank, PrivatBank, which was nationalized in December 2016. The PrivatBank case is particularly complicated due to the historically close relationship between President Volodymyr Zelensky and the bank’s former owner, the oligarch Igor Kolomoisky. (Prior to winning Ukraine’s presidential election in April 2018, Zelensky—a former TV comedian—had no political experience, and his only political connection appeared to be his friendship with Kolomoisky, who owned the television network that broadcast the TV program that catapulted Zelensky’s political career.) Many commentators speculated that the IMF had been delaying a bailout for Ukraine due to concerns that Zelensky’s administration would not aggressively pursue efforts to recoup money stolen from PrivatBank. By successfully leveraging and re-purposing past conditionalities, the IMF has driven a wedge between the Zelensky and Kolomoisky, forcing the new President to abandon his toxic personal relationship with this oligarch in order to unlock international financial assistance. While Ukraine is an interesting case study in its own right, the IMF should make more frequent use of financial asset recovery conditions in other countries. Not only can such conditions support a country’s fiscal sustainability framework, but they may be especially helpful if and when well-intentioned political leaders struggle to break ties with corrupt allies.

To understand the significance of the IMF’s insistence on banking reform as a condition of the most recent aid package, and how this relates to the objective of breaking oligarchs’ hold on Ukrainian politics, some background is in order. Kolomoisky had been the largest owner of PrivatBank until the bank was nationalized in December 2016 to protect depositors and the broader financial system. At the time of nationalization, nearly 80% of PrivatBank’s loans were insider (or intra-party) loans, leaving a hole of $5.5 billion in the bank’s balance sheet. Kolomoisky and his business partner had been effectively using Ukrainian deposits to lend themselves money that they were then siphoning out of the country. Ukraine’s new owner, the National Bank of Ukraine, is in the process of seeking judgements against Kolomoisky in Delaware, London, Israel, Cyprus, and Ukraine. But Kolomoisky has been fighting back. Last year, in April 2019, Kolomoisky succeeded in convincing a Ukrainian court to rule that the PrivatBank nationalization was illegal. And when Zelensky won the presidential elections just three days after this ruling was issued, Kolomoisky returned to Ukraine from self-imposed exile, confident that Zelensky would not comply with a US extradition request. President Zelensky had campaigned on an anticorruption platform, and most observers believe he has good intentions. At the same time, though, many doubted whether Zelensky could deftly extricate himself from Ukraine’s complex political theatre—an environment dominated by oligarchs—and worried in particular about Zelensky’s vulnerability in having such a close relationship with Kolomoisky. Such worries were only intensified by some of President Zelensky’s personnel choices, such as the selection of Andriy Bohdan, Kolomoisky’s former personal lawyer, as Chief of Staff.

In this context, it becomes clearer why the IMF might view driving a wedge between Zelensky and Kolomoisky as important not just for addressing problems in the banking sector and restoring financial sustainability, but also for advancing anticorruption and institutional reform in Ukraine more generally. To be sure, the IMF’s concerns about the Ukrainian banking system are not new. The Fund’s first PrivatBank condition appeared in April 2017, just five months after the nationalization and a full year-and-a half before Zelensky announced his intention to run for President. (That condition focused primarily on the hiring of international firms to pursue financial asset recoveries that would accrue to PrivatBank, and by extension to the Ukrainian people.) And of course the IMF as a lender should encourage, if not demand, that its borrower seek to recover financial resources that have been pilfered. But in addition to general concerns about repayment and a functioning banking system, the IMF and other Western sponsors have likely found the PrivatBank issue to be a useful instrument in pressuring Zelensky to distance himself from Kolomoisky. The new banking bill, which clarifies bank insolvency procedures and effectively negates the April 2019 court decision on the illegality of the PrivatBank nationalization, seems tailored to create such distance. And there’s additional evidence, beyond the passage of the banking bill itself, that the strategy is working. This past February, President Zelensky dismissed Bohdan as Chief of Staff, a move that observers characterized as “a significant personal defeat for Ukrainian oligarch Igor Kolomoisky and a sign of the billionaire’s waning influence over President Zelensky.”

It’s hard to say how significant IMF pressure was in pushing Zelensky away from Kolomoisky; other factors may well have contributed to the waning of Kolomoisky’s influence. Yet it seems plausible that the prospect of losing IMF assistance was a significant factor that influenced President Zelensky to pursue reforms that his former patron staunchly opposed, and in doing so weakened oligarchic influence over policy. The IMF could and should begin laying the necessary groundwork in other countries, so that it can employ this type of playbook—financial asset recoveries targeted at corrupt political operatives and former politicians—in the future.

Consider, for example, Angola and Ecuador, two oil-producing countries that signed IMF assistance packages over the last two years. Both countries will need to restructure their agreements with the IMF in light of the COVID-19 pandemic and the collapse in international oil markets. Moreover, the presidents of both countries (João Lourenço in Angola and Lenín Moreno in Ecuador), both of whom were elected in 2017, broke with their party’s corrupt leaders (Jose Eduardo dos Santos and Rafael Correa, respectively) to lead aggressive economic reform and anticorruption drives. While both presidents have demonstrated the political will to tackle corruption and prosecute top officials, political winds tend to shift quickly. Because tomorrow’s political leaders may be more vulnerable to political influence from corrupt individuals, the IMF should do more to encourage the current administrations to keep up the pressure. The IMF has previously asked Angola’s Attorney General’s Office to publish audited financial statements for all state-owned enterprises, but it should also request additional resources, especially from international firms, for Angola’s asset recovery agency—similar to the April 2017 PrivatBank conditions. And in Ecuador, while the IMF awaits anticorruption legislation (one of the structural benchmark’s in its IMF program), it should also explore ways to help Ecuador institutionalize the recovery of embezzled funds.

By designing conditionalities that encourage and support Angola and Ecuador’s financial asset recoveries (especially against the dos Santos family and Correa), the IMF is supporting these countries’ repayment abilities—a clear first-order concern—while also insulating future heads of state. In Ecuador, when President Moreno visibly diverged from Correa’s agenda, the former President formed his own political party, taking over 40% of Moreno’s members of congress with him. With elections set for 2021, many worry that a presidential hopeful may strike a deal with Correa for political support in exchange for corruption leniency. But if the IMF begins conditioning future disbursements on financial asset recoveries from Correa and his associates (like Vice President Jorge Glas), it would be much harder for a new president to strike or honor such a deal, much as the IMF’s insistence that Ukraine address the PrivatBank issues has made it difficult for Kolomoisky to leverage his alliance with President Zelensky to sweep these issues under the rug. By imposing conditions that not only require new anticorruption legislation, but that also force government heads to pursue policies that powerful corrupt interests oppose, the IMF may have found a new blueprint for combating corruption and disrupting alliances between political leaders and corrupt would-be kingmakers.

3 thoughts on “Financial Asset Recovery Conditions: The IMF’s New Anticorruption Playbook

  1. Thanks Jason for this super interesting piece. I agree that this new IMF approach seems promising for its ability to prompt more serious progress on anticorruption reforms but had a few questions about how asset recovery and IMF assistance work in practice. For example, in the Ukrainian context, does the funding get dispersed once legislation is passed or implemented? Furthermore, is IMF assistance dispersed gradually and contingent/adjusted based upon actual recovery of stolen assets? If the IMF conditions aren’t this strict, do you think they should be or is that too unreasonable? When talking about the return of stolen assets I also think about the IMF’s role in making sure they are then invested back into government budgets/communities in ways that also don’t leave them susceptible to embezzlement once again. How does the IMF work with recipient governments to ensure that the return process is completed effectively?

    • Megan,

      For Ukraine’s most recent financial assistance program, passing a banking reform bill in parliament was a precondition to receiving any new money from the IMF. In other cases, these types of measures could be included as “structural benchmarks” where future disbursements may be withheld if the country fails to achieve make sufficient progress. Most programs are structured as a set of disbursements conditional on IMF reviews; it is ultimately the IMF’s judgement on how strict to be on whether sufficient progress has been made.

      There are also quantitative and indicative targets, which are like structural benchmarks, except that they are numerical targets. One could imagine “$mm collected and returned” as a target, but it would be quite hard for Ukrainian authorities to commit to something like this in writing given that financial recoveries depend heavily on legal processes in international jurisdictions. Nevertheless, there is an open dialogue between the IMF and Ukrainian authorities, so there are likely to be unwritten or implicit targets that help demonstrate program commitment; in turn, this may signal to the IMF on how strict or lenient to be with respect to other benchmarks and targets.

      Your final question is an interesting one, but not one where I have a ton of expertise. At least for Privatbank, any financial recoveries would contribute to the bank’s net equity position. The nationalized bank is currently owned by the National Bank of Ukraine and is likely to be sold/privatized in the next several years. Privatization proceeds would likely provide general budget support.

  2. Hi Jason. Thank you very much for this interesting post. Developing and underdeveloped countries are usually controlled by political and economic elites that oppose anticorruption reforms. The international community, including international organizations, like the IMF, through pressure and conditionalities, is often the only alternative of improvement in this area.

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