Monday, March 10, 2014

Re: The Ukraine - This is what you need to keep an eye on

As things unfold in the Ukraine, it is looking more and more like the thing to watch is what happens to the 2010 IMF funding reform proposal. Most public attention is focused elsewhere, but this may be the biggest key to this whole situation.

Last week the House passed a bill to provide loan guarantees to the Ukraine. But that bill did not include the 2010 IMF reform approval. We have covered that here. As a reminder, these reforms would vastly increase the SDR reserves at the IMF (up to $733 Billion). They also would change the voting power at the IMF to give the BRIC nations more clout. The IMF is waiting on the US this because it cannot pass unless the US approves it. An 85% vote is required to pass the reform package and the US has more than a 15% vote. The US effectively has a veto.

Last week Russia even urged the IMF to move forward with these reforms whether the US approved them or not. Putin has stated clearly that he wants to work with the IMF even while the IMF is offering loans to the very government in the Ukraine he does not accept.

Something is going on here that does not jive with what we see on the surface. Why would Putin be so willing to work with the IMF if they are trying to fund a government he opposes and has called illegal? 

We can only speculate. It appears that the reform package at the IMF is very important to opening the door to major global system changes. Whether by design or not, all the major players in this drama seem to be trying to use this situation in the Ukraine to pressure the US Congress into passing the IMF reforms. Jim Rickards calls this the "Shock Doctrine" (use a crisis to promote a key agenda item).

Use common sense. The IMF and Putin and the Obama Administration all want these reforms passed very badly for some reason. The Senate is also apparently about to include them and send this bill back to the House with the reforms included.

We hear a lot of talk about each side trying to "isolate" the other side over the Ukraine. But more and more, it seems like what they may all really want is to isolate the US House of Representatives. It appears to be them versus everyone else over this IMF reform package.

We will keep an eye on this from that angle. If things get much worse and more scary, will the US House really hold out on this? One can imagine a scenario where they are painted as opening the door to a possible future nuclear confrontation if they don't pass these reforms. Until we see what bill is finally passed (with or without the IMF reforms), this situation is far from over in our view. Once a bill passes we will have better clarity on this speculation.

And a good question to ask is why is this IMF reform package so important? We suspect that some major changes we think are coming in the next 1-3 years will be easier to move forward once the reforms are approved. 

We know that it is hard to get people to accept major change if all is well. Sometimes it takes a crisis to motivate major change. The threat of a return to "cold war" atmosphere probably qualifies as a crisis for most people. 

We think this could end up being the long term impact of the confrontation in the Ukraine. Time will tell. We'll follow it and see how it plays out.

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