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The main obstacle to aid for Ukraine? Republicans

The Republican hardliners who rushed the U.S. Congress in 2010, taking the legislative process hostage, are inspired by former president Ronald Reagan. For them, he symbolizes a time when tax cuts equated to jobs and America's economic might ruled the world.

It's a flawed world view, which is apparent to the majority of Americans who live outside these lawmakers' gerrymandered districts. As the Tea Party Republicans pump themselves up for diplomatic battle with Mr. Reagan's old foe, Russia, they are about to learn that American influence isn't what it was in 1984.

The Group of Seven, which consists of the U.S., Japan, the big European economies and Canada, threatened Russian President Vladimir Putin Wednesday with "further action" if he annexes the Ukrainian territory of Crimea, where local authorities have scheduled a referendum for this weekend on breaking away from Ukraine.

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Sanctions, and the threat of sanctions, will be necessary to get Russia to loosen its grip on Crimea. But if the U.S. and Europe want to win the hearts and minds of Ukrainians, they will have to quickly, and generously, stabilize the country's economy. President Barack Obama and the leaders of Europe are willing to do this. However, the hard-core conservatives in Congress are standing in the way.

The issue is the International Monetary Fund. The Obama administration is ready to extend to the Ukraine loan guarantees of $1-billion (U.S.), and lawmakers appear willing to endorse that amount. That is nowhere near enough. It will be the IMF – which was created at the end of the Second World War to stabilize the global economy at times like these – that will put the real money on the table. And the IMF may not be as willing to go along as some in Washington and other global capitals imagine.

The IMF has a fraught relationship with Ukraine. Twice since 2008, the fund froze loans to the former Soviet republic after the government failed to keep promises that were conditions of the IMF's support. Brazil's representative on the fund's 24-member board of directors, Paulo Nogueira Batista, said last week that the IMF shouldn't bend its rules to "meet the urgencies of a member country or the foreign policy agenda of some of its main shareholders."

Back in Mr. Reagan's day, the warnings of an international bureaucrat from Brasilia wouldn't count for much. But Mr. Obama is president now, and Brazil is one of the world's leading economies. The U.S. and Europe still effectively control the fund because they created it, making them the majority shareholders. But they no longer operate in a world where they can dictate the IMF's agenda. Countries such as Brazil and China can't block the Group of Seven, but they can slow things down, if they so choose.

The reason they may choose to do so is because the U.S. has lost considerable credibility as the IMF's de facto leader. In 2010, the IMF agreed to update its share structure to reflect changes in the global economy. China would become the third largest shareholder, after the U.S. and Japan, moving ahead of countries such as Germany and France. India, Brazil and Russia would move ahead of Canada. The changes also included a doubling of IMF quota, the money individual countries contribute for the fund's use.

The changes required legislative approval in most of the IMF's member countries, something which has occurred in every country but one: the United States. The Obama administration has attempted on several occasions to win congressional approval of the IMF reforms, and has been denied each time. Republican lawmakers balked at the sight of a budget change that has the appearance of U.S. tax dollars being used to bail out countries such as Greece. (In fact, no new money is necessary, as the U.S. simply would use an early commitment to an IMF credit line to meet its share of the quota increase.)

Republican intransigence now is hurting the U.S.'s ability to lead the economic bailout of Ukraine. That's because the reforms agreed three years ago still haven't gone into effect. Major changes at the IMF require the approval of 85 per cent of voting shares. The U.S. controls almost 18 per cent, so the overhaul can't proceed until Congress agrees.

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"At a time when the United States is at the forefront of international calls in urging the fund to play a central and active first responder role in Ukraine, it is imperative we secure passage of IMF legislation now so that the IMF can provide the most effective assistance to Ukraine in this vulnerable moment and we can preserve our influential voice in this indispensable institution," Treasury Secretary Jacob Lew said in testimony Wednesday at the Senate Banking Committee.

Robert Menendez, the Democratic head of the Senate Foreign Relations Committee, said his Ukraine legislation would include language necessary to complete the IMF reforms. However, the House leadership ignored White House requests to include the IMF quota changes in its version of the bill. Republicans have warned that if the Mr. Obama is serious about helping Ukraine, he will forget about the IMF, as the party's legislators want no part of it ahead of midterm elections.

Ukrainian interim prime minister Arseniy Yatsenyuk is in Washington Wednesday for meetings with Mr. Obama and the head of the IMF, Christine Lagarde. Many are asking if he will leave with the financial commitments he is seeking to stabilize his country. The answer is, "No."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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