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 equivalent to approximately $650 billion and provided all IMF members with additional access to hard currency.
In contrast to the IMF’s and the World Bank’s general practice of conditioning assistance on policy, fiduciary and economic management parameters to ensure that funds are spent as intended, there are essentially no restrictions on how IMF members can use SDRs.
We recently warned that the immediate negative consequences of the latest SDR allocation outweighed its hypothetical benefits, and that the World Bank’s International Development Association was a better vehicle for channeling aid to the world’s poorest countries. This case has only strengthened in recent months, given the lack of evidence that wealthy 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.
Now, Russia’s brazen invasion of Ukraine has brought one of the worst results of the SDR allocation into focus.
The Trump administration opposed an SDR allocation because it must be distributed to all IMF members in proportion to their IMF shareholding, rather than targeted based on need. As a result of this formula, Russia received SDRs worth approximately $17 billion, or roughly the same share as all low-income countries combined. The complicit Belarusian government also received approximately $1 billion.
SDR proponents such as the United States and European Union (EU) now must face the question of how to deal with the SDRs that they helped hand to Russia (and other rogue regimes) just a few months ago.
To be sure, the new SDRs are only a small portion of Russia’s more than $600 billion in reserves. But increasing pressure on the Russian economy requires vigilance against all potential Russian financial resources, including SDRs.
Using SDRs requires finding an IMF member counter-party with which to trade. Fortunately, Russia most likely would have a hard time finding a counter-party as a result of the strong sanctions against the Central Bank of Russia announced by the United States and the EU. Even if there is no formal prohibition on Russian and Belarusian exchanges, the global response and outrage in the immediate aftermath of the invasion is likely to serve as a deterrent.
But the United States should still work to ensure formal agreement at the IMF that all member countries will refuse to exchange Russia’s or Belarus’s SDRs for hard currency or engage in any other financial transaction related to their SDRs.
As the conflict moves into a protracted phase, there will be sanctions fatigue on both sides. Russia will seek to evade sanctions and chip away at financial restrictions. As a preventative measure, it is critical to establish a default rule at the IMF that Russia and Belarus will not be able to use their SDRs without ending their aggression. On-background statements regarding the Treasury Department’s intent 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 prohibition at the IMF.
Additionally, the IMF should commit to immediate transparency regarding Russian or Belarusian SDR exchanges, even if an IMF member such as China refuses to abide by a prohibition on transfers. The IMF also must ensure that the Ukrainian government will continue to be able to access the financing available under its existing IMF program.
Similarly, the World Bank must decide how to engage with Ukraine. Thus far, it has offered strong rhetorical support for the Ukrainian people. Yet, difficult questions lie ahead if Russia’s aim of toppling the Ukrainian government succeeds, given the $1 billion in loans currently outstanding. The World Bank’s private-sector lending arm, the International Finance Corporation (IFC), provides roughly half of its investments to financial intermediaries, whose on-lending potentially could provide funding to entities with Russian ownership or affiliation. The IFC must not allow that to happen, and it also should steer investments away from all Russian companies.
Congress has been playing an important role in ensuring accountability, given how generously American taxpayers have supported these multilateral institutions over the past 75 years. As a result of the bipartisan consensus on the need to respond to Russia’s aggression through economic pressure, Congress, led by Rep. French Hill (R-Ark.) and Sen. Bill Hagerty (R-Tenn.), is rightfully demanding an accounting from Treasury Secretary Janet YellenJanet YellenBiden, world leaders to announce natural gas plan for Europe: report White House meets with oil, bank, other companies about Russia invasion Biden argues gender equality benefits everybody to mark Women’s History Month MORE of how the Biden administration plans to work with the IMF to ensure that Russia is unable to benefit from its SDRs.
Congressional progressives should abandon their misguided push for the IMF to allocate an additional $2.1 trillion in SDRs. Most importantly, Congress should review the Special Drawing Rights Act and consider whether to require congressional approval for all SDR allocations given these latest developments. The act was last amended in 1983 and is past due for reconsideration, given the dramatic expansion in the use of SDRs since the 2007-08 financial crisis.
Longer term, the problems associated with SDRs revealed by Russia’s assault on Ukraine should serve as a warning against future calls for SDR allocations. 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, 2019-21, and is a fellow at the University of Virginia’s Darden School of Business and a nonresident senior adviser at the Center for Strategic and International Studies. Follow her on Twitter @DJNordquist.
Dan Katz served as a senior adviser at the Treasury Department, 2019-21, and is a co-founder and portfolio manager at Amberwave Partners, an investment manager focused on U.S. jobs, security and growth. Follow Amberwave on Twitter @Amberwave.