Focus: Ever wondered what happens to your tax money given to IMF?

Furores in the Right-wing press about Britain frittering away taxpayers’ money on foreign aid might have missed a trick. Though the Department for International Development makes the occasional blooper, splurging a hundred thousand here or there on the odd frivolous project, some say far bigger sums of western taxpayers’ money are put at risk by the International Monetary Fund.

Britain contributes 4.2% of the IMF’s budget for special loans, which it, in turn, puts to such uses as bailing out bankrupt countries in the hope of stabilising them while they rebuild their economy. The idea is that the world’s poorest benefit. Fewer people starve. It doesn’t always work out like that. Take Ukraine. In the wake of the 2014 revolution, Russia’s annexation of Crimea and conflict in the Donbass, Ukraine’s economy teetered on the brink. After months of negotiations, in April 2014, the IMF agreed a $17.5 billion loan in staged payments to stabilise the country.

The delay was partly because IMF officials worried the money would end up disappearing into the pockets of the deeply corrupt business and political elite. Assurances were made that no such thing would happen. The IMF has, in chunks, been handing over the money ever since.

Part of the proceeds were to go towards stabilising the country’s financial system, which was hit by huge losses as the political and military chaos triggered bankruptcies and economic stagnation.

The biggest worry was that the country’s largest independent bank — PrivatBank — would go under. With a third of all Ukraine’s deposits, it was deemed too big to fail. Yet PrivatBank was haemorrhaging cash.

The government started pouring money into the bank to shore it up. Month after month in 2014, 2015 and 2016, it pumped in hundreds of millions of dollars in “stabilisation loans” until eventually, cheered on by the IMF’s managing director Christine Lagarde, it nationalised it altogether. That was just before Christmas 2016.

In all, the country’s finance ministry plugged a $5.6 billion (£4 billion) hole in the bank’s balance sheet — much of which was arguably recycled from the IMF’s loans to the central bank. The IMF disputes that latter point, saying it only gave its loans to the central bank, to bolster its foreign exchange reserves. It was the Ukrainian government that bailed out PrivatBank, it argues, not us.

Professor Jeffrey Sommers of the University of Wisconsin-Milwaukee says that’s just a technicality; without the IMF loan propping up the foreign currency reserves, he says, Ukraine would not have been able to arrange PrivatBank’s bailout cash without tanking its currency.

“The IMF may not be a hosepipe flowing cash directly into PrivatBank,” he says. “But it is a lawn sprinkler, spraying cash into the air with lots of Ukrainian money buckets (of which PrivatBank’s is one of the biggest) to catch it.”

Anyway, the trouble with the PrivatBank bail-out, according to a legal action now being brought against the bank’s former owners, is that before the nationalisation, $1.9 billion of its funds were “misappropriated”, largely using companies in the UK.

The “new” PrivatBank — now owned by the state, remember — is suing the two former owners, a pair of billionaire oligarchs. In December, the High Court in London granted a $2.5 billion freezing order on their worldwide assets. Then, in another London hearing last month, PrivatBank disclosed how it reckons the two oligarchs salted away the cash.

Their modus operandi, the bank alleges, was to set up companies in Ukraine and England to carry out sham transactions financed by loans from PrivatBank. As is so often the case, Britain — with its lax rules on setting up companies — was at the heart of the alleged scam.

According to the bank, three companies in the UK and a further two in the British Virgin Islands were set up as “suppliers” to the oligarchs’ Ukrainian “buyers”. PrivatBank allegedly then lent cash to the buyers to buy the suppliers’ goods.

The thing is, the bank alleges, the orders were never fulfilled; they were a sham to extract loans from the bank that were never repaid.

The alleged supply deals ranged from the sublime to the ridiculous. On one occasion, according to the bank, the Ukrainian buyer entered into a deal to buy 126,015 tonnes of concentrated apple juice.

Even to the layman, that sounds like a lot, right? Now consider that 126,015 tonnes of apple juice would represent nearly a third of the entire annual output of the world’s biggest apple grower, China. And, though Ukrainians may like their apple juice, in 2014, they imported just 343 tonnes, the legal papers say.

On other occasions, the English suppliers purportedly struck contracts to supply the Ukrainian companies with $1.8 billion of manganese and industrial equipment. Yet, despite the huge value of those deals, in their filings at Companies House, the firms describe themselves as “non-trading” and merely “service” companies. Each declared themselves so small they were exempt from having to file full accounts.

A spokesman for the former owners — Gennadiy Bogolyubov and Igor Kolomoisky — said the allegations are part of a Ukraine government-run attempt to defame and vilify them.

“There are substantial indications that PrivatBank was deliberately targeted for nationalisation… as part of a power play by the president of Ukraine, Petro Poroshenko, aimed at his fellow oligarch, Igor Kolomoisky... As for the specific allegations, Mr Kolomoisky’s and Mr Bogolyubov’s legal teams confidently look forward to addressing them before the High Court at the appropriate time”.

But what of the British taxpayer’s exposure to all this? The UK Treasury said it was “confident” Ukraine is good for the money the IMF is lending: “This loan is expected to be paid back in full and is considered low-risk,” said a spokesman.

Professor Sommers is less optimistic. He fears a return to the Nineties days of the IMF, when threats of the return of communism were used by Russian oligarchs “to bilk western governments of billions of dollars”.

“I fear the same with Ukraine today,” he says, “Regardless of the noble intention of preserving Ukrainian independence.”

Let’s hope he’s wrong.