Tuesday, September 30, 2014


Ukraine

Explainer: Why Ukraine Needs Western Economic Help

The tough economic reforms demanded by the EU and IMF were one reason Ukrainian President Viktor Yanukovych (left) said he reneged on the planned Association Agreement with Brussels and accepted money from Moscow instead.
The tough economic reforms demanded by the EU and IMF were one reason Ukrainian President Viktor Yanukovych (left) said he reneged on the planned Association Agreement with Brussels and accepted money from Moscow instead.

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Ukraine's crisis is not just political. The country also desperately needs economic support and hopes to get it from the West. Here are five things to know about what Ukraine needs, and where the money might come from.

How much money does Ukraine need?

U.S. and EU leaders are scrambling to build support for economic aid to Ukraine because they worry Moscow could stop any further payments from a $15 billion bailout package it gave the country under now ousted President Viktor Yanukovych.

But how much Ukraine's new government would need is far from agreed upon.

Ukraine's acting Finance Minister Yuriy Kolobov said on February 24 that the country hopes for some $35 billion in the period of 2014 to 2015.

Top EU officials have stayed away from quoting figures. But they, too, are urging the West to think in large amounts. Oli Rehn, the EU's economic commissioner, said on February 23 that the amount will have to be "measured in in billions rather than hundreds of millions" of dollars.

Just one measure of Ukraine's need: about $12 billion of Ukraine's $73 billion of external and domestic debt falls due this year.

Where might the money come from?

The bulk of any new money would come from the International Monetary Fund (IMF) and other international financial institutions, along with possible additional loans from the EU and Western states.

U.S. Treasury Secretary Jack Lew on February 23 encouraged Kyiv to start discussions with the IMF as soon as possible. He also said Washington was ready to "cushion" the blow to ordinary Ukrainians from economic reforms necessary to get the IMF loans.

Similarly, U.K. Chancellor of the Exchequer George Osborne said Britain was ready to help through IMF and EU channels, and other EU heavyweights such as Germany and France are expected to do the same.

But any large-scale IMF and Western aid packages will come with conditions, and meeting them may not be easy for Kyiv to do.

What does Ukraine have to do to get the money?

The IMF attached tough demands for economic reforms when it discussed a $15 billion loan to Kyiv under Yanukovych. The tough reforms -- also demanded by the EU -- were one reason Yanukovych said he reneged on the planned Association Agreement with Brussels and accepted money from Moscow instead, inadvertently setting off the revolution that ousted him.

Anders Aslund, an economist with the Washington-based Peterson Institute, says any new aid package would likely require Kyiv to take politically unpopular steps.

"To shore up the domestic and foreign finances of Ukraine means to let the exchange rate fall a bit, probably to 10 hryvnya to the dollar," Aslund says. The hryvnya "has gone half that way so far but it needs to go further. The other part would be to cut budget deficits and that requires, first, decreasing public expenditures and, secondly, to abolish harmful enterprise subsidies."

Abolishing enterprise subsidies includes reducing Kyiv's heavy subsidy of the price of natural gas to Ukrainian homes and industries.

The IMF calculates that the amount Kyiv paid in subsidies was equivalent to about 7.5 percent of the country's GDP in 2012 so that Ukrainians paid a third to a fifth for gas compared to their neighbors in the Baltics and Poland. Previous Ukrainian governments have been loath to reduce the subsidies because the cheap gas program is highly popular.

The question now is whether a new government can convince the public to swallow the bitter pill of losing subsidies on gas in order to get new loans from the IMF and the West.

Might the IMF and the West ease the loan conditions for Ukraine?

The IMF and Western officials will have to balance two factors in answering that question.

International financial institutions want to offer support for Kyiv in trying to restoring the country's political and financial stability. And Western governments want to support efforts to build democracy in Ukraine and bring it closer to the EU.

But lenders also know that major reforms are needed not just to put the country's economy back on track but also to safeguard against any new injections of money being lost to the corruption, plundering of assets, and inefficiency that mark much of Ukraine's economy today.

"With the previous regime of President Yanukovych they definitely needed to have a very tough line because firstly, he was a very untrustworthy man who likes to play poker," says Amanda Paul, a political analyst at the European Policy Center in Brussels.

"With this new government, when it is formed, I guess there is a feeling [in Brussels] that perhaps they don't need to be so tough but still, at the end of the day, Ukraine is in need of reforms and this money needs to go to the right places."

Can Western countries afford to bail out Ukraine?

That, too, is a question EU countries and the United States will have to answer by weighing two factors.

The first one is their own economic needs as they continue to climb out of a tough recession that in the United States, is only now seeing the government begin to ease injections of money into the economy, and in Europe, continues to see some EU members states struggling under tough austerity regimes.

But Paul says Western leaders are more likely to be moved by the need for a stable Ukraine on the EU's border and the desire to acknowledge the sacrifices Ukrainians have made for their dream of a European future.

"In terms of Brussels and the EU leadership, I would say they probably feel almost an obligation to come up with some cash, given what our neighbors in Ukraine have just been through, people have been dying for freedom and, hopefully, for a European future," Paul says.

"So, if they were to be very stingy and say, 'Well, we don't have any money,' I think this would send a very negative signal."

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