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Russia throws down the gauntlet

When the Executive Directors of the International Monetary Fund meet on Friday to elect a new Managing Director, they will have two candidates to choose from. But there is little mystery in the vote: the next IMF chief, in all probability, will be the former French Finance Minister, Dominique Strauss-Kahn. He was nominated by the European Union, which has 33 per cent of the votes in the IMF, and is supported by the United States with 17 per cent.

This line-up leaves no chance for the rival candidate, former Czech Prime Minister Josef Tosovsky: Russia, which nominated him, has 2.7 per cent of the votes.

Yet the Russian move to block the EU candidate rattled the West. Russia, which a mere 10 years ago went begging for IMF credit to save itself from bankruptcy, today claims the right to decide who should run the IMF.

Its challenge was scornfully dismissed as a selfish and aggressive attempt to assert its new importance and power and opportunistically exploit the growing frustration with the unfair arrangements in the international financial institutions. Mr. Tosovsky was accused of working for the Communist-era secret services.

Ever since the IMF and the World Bank were established more than 60 years ago in the aftermath of the Second World War, they have been the exclusive preserve of the U.S. and Western Europe. Under an unspoken deal between them, Europe chooses the IMF head, while the U.S. names the World Bank chief. The convention has long ceased to reflect global economic realities, but the West has refused to relinquish control of the two institutions.

Calls to end the feudal carve-up multiplied after World Bank President Paul Wolfowitz, best known as an architect of the Iraq war, resigned in disgrace over his role in securing a high-paying job for his girlfriend.

However, the U.S. re-asserted its right to select the next President. Critics said U.S. Deputy Secretary of State Robert Zoellick, who was the choice of the White House, was not fit to run the Bank because he lacked significant experience in economic development in poor countries, but Europe duly welcomed his appointment. “Mr. Zoellick is certainly the right man for the job,” French Foreign Minister Bernard Kouchner said.

Barely a month later, the U.S. reciprocated by endorsing the EU choice of a Frenchman for the top IMF job. If his name is approved by the Executive Board, Mr. Strauss-Kahn will be the fourth French national among the 10 Managing Directors in the history of the IMF. The other six were also all from Western Europe.

In a scathing commentary on Mr. Strauss-Kahn’s nomination, Britain’s Financial Times condemned the EU decision to “foist” on the 185-nation IMF a candidate “who is neither qualified nor legitimate.”

Efforts to re-distribute voting power in the IMF have proved half-hearted and ineffective. In September 2006, the Board of Governors approved a package of phased reforms that marginally increased the quotas of China, South Korea, Mexico, and Turkey. But it put off a second round of quota adjustments till a new formula was decided. India, along with 23 other member-countries, voted against the move, calling it flawed and non-credible.

Prospects for an early agreement on the new formula look bleak, as even the first phase of IMF reforms showed that Europe and the U.S. are determined to keep their grip on the financial institutions.

Even after China’s vote quota in the IMF was increased to 3.72 per cent, it still fell absurdly below Germany’s 5.99 per cent and Britain’s 4.94 per cent. Similarly, India has little hope of increasing significantly its quota of 1.89 per cent, which is less than that of Belgium.

“I can’t think of a single argument in favour of a situation where the European Union has three times more votes than all of Asia’s emerging economies,” said Executive Director for Russia Alexei Mozhin.

According to Mr. Mozhin, Moscow decided to nominate the alternative candidate only when it became clear that no other country would come forward. This was even after the IMF’s Executive Board in July, for the first time, invited all the 185 member-countries to nominate candidates and promised that the selection of the Managing Director would be transparent and democratic. The Group of 24 (G24) developing countries, including Brazil, China, and India, voiced their distrust of the IMF’s intentions.

“Non-European candidates will only be prepared to come forward if there is confidence that the spirit of the aforementioned Executive Board commitment will be respected by all members,” the G24 said in a statement.

So it fell to Russia to throw down the gauntlet to the EU-U.S. combine. And it did so in a subtle and elegant way. First, it nominated a European, as under the current dispensation only a European has a chance to win. Moscow made no secret of its intention to re-enact the scene from 1987. At that point, Michel Camdessus defeated the other European candidate, Onno Ruding, in the race for the top IMF job thanks to the support of developing nations, as European votes split and the U.S. abstained.

Secondly, Russia challenged the EU candidate strictly on the basis of merit. Moscow questioned his competence to lead the IMF at a time when it was undergoing an identity crisis and had to deal with the effects of the international credit squeeze triggered by the U.S. mortgage crisis.

“Nothing in his [Strauss-Kahn’s] biography indicates that he has the technical skills to run the Fund,” said Mr. Mozhin. He added that the EU candidate was a career politician rather than an experienced financier.

By contrast, Mr. Tosovsky had all the necessarily qualifications, Moscow argued. As head of the Czech Central Bank, he steered the country through the painful transition to a market economy and the split of Czechoslovakia into two states. He reined in inflation, and deftly coped with the acute currency crisis of 1997. He now heads the Financial Stability Institute at the Bank of Settlements in Basel, which offers high-quality analyses of global finances.

Russia has rejected Western charges that it nominated Mr. Tosovsky mercurially (with the world’s third largest currency reserves, Russia does not need IMF credit) or to spite Brussels and Washington.

“We have two goals,” Russia’s IMF Director said. “First, we want to have a good IMF Managing Director. Second, we want to create a very positive and useful precedent, which would allow representatives of all countries and regions to participate in such elections. We think Mr. Tosovsky’s victory would put an end to the existing notorious informal deal once and for all.”

“It is depressing when [the IMF’s] Russian executive director speaks more sense about the future of the IMF than does the EU,” The Financial Times wrote.

As is turned out, the trans-Atlantic solidarity prevailed and the Russian candidate looks set to lose. It will still be interesting to see what level of support Russia gets in the straw vote that precedes a “consensus” approval of the IMF head, and how Third World leaders such as India and China vote. Both countries have been non-committal, even as the EU candidate claimed after consultations in Delhi and Beijing that he was assured of their support.

But all the same, Russia will score an important strategic victory. It has called the West’s bluff, challenging Europe and the U.S. to act on their promises to choose the IMF head on merit, rather than on the basis of a backstage deal. Russia has acted as a responsible member of the international community, genuinely concerned that the IMF should regain its strength and authority.

Even though Russia failed to sway the EU on the IMF candidacy, it has wrested from it a pledge to consider nominating non-EU nationals to the post in the future.

“Within the Eurogroup and among the EU’s Finance Ministers, everybody agrees that Strauss-Kahn will probably be the last European to lead the IMF in the foreseeable future,” said Jean-Claude Juncker, Luxembourg Prime Minister and Chairman of the Eurogroup Finance Ministers.

Washington also endorsed in principle Moscow’s idea of competitive elections for the IMF head.

Russia’s nomination of Mr. Tosovsky has served a warning to the West that unless the international financial institutions are reformed to reflect the historic shift in the balance of global power they may face eclipse. Russian President Vladimir Putin has already called for a “new architecture of international economic relations” to guarantee sustained development.

Addressing an economic forum in St. Petersburg in June, Mr. Putin sharply criticised the World Trade Organisation (WTO) and other traditional economic institutions for being “archaic, undemocratic and inflexible,” and dominated by a small group of developed countries which indulge in protectionism. He said it was time to think of establishing “regional Eurasian free trade institutions,” as well as “several reserve world currencies and several financial centres.”

Russia is thus asserting itself as a genuine leader and champion of multipolarity and democratic reforms in international affairs.

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