European leaders balk at Kiev’s pleas to fill $15bn funding gap

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European leaders are balking at providing additional financial aid for Ukraine despite an urgent need to fill a $15bn funding gap as criticism of Kiev’s reform efforts mounts.

The International Monetary Fund has identified the hole in Ukraine’s public finances, prompting Kiev to seek assistance from European and other governments to avoid a possible default.

Addressing journalists on Monday, Valeriy Chaly, deputy head of Ukraine’s presidential administration, warned: “Without additional resources, it’s almost impossible to cover financial gaps . . . to conduct reforms and avert default.”

Ukraine must close the hole by the end of next month or risk its access to a badly-needed $17bn assistance programme it agreed with the IMF earlier this year.

But officials in Warsaw, Brussels and Berlin are warning that the country’s failure to make tangible progress on economic reform makes increased assistance politically unpalatable.

EU leaders are expected to discuss the $15bn shortfall over dinner on Thursday night at a summit in Brussels. Senior officials involved in the meeting’s planning said there was dwindling appetite for another EU financial assistance programme — on top of two existing ones — without concrete evidence that the new government in Kiev is moving on the reforms required under the IMF programme.

“Our table is full of promises,” said one EU diplomat involved in summit preparations.

Diplomats said no decision on the future of the programme is expected at the summit, and a draft of the summit’s communiqué distributed to national capitals on Wednesday only calls on Ukraine to abide by the reform agenda put forward by the IMF.

“The EU and its member states stand ready to further facilitate and support Ukraine’s reform process, together with other donors and in line with IMF conditionality,” a draft obtained by the FT reads.

Downing Street said it wanted to “encourage Ukraine down the path of reform” but said Britain “recognised the importance of supporting the Ukraine government in the huge economic challenges it faces”.

The financial crisis represents another pressing challenge for a new Ukrainian government already contending with Russian-backed separatists in the eastern provinces in a conflict that has so far killed more than 4,700 people. It was precipitated by Ukrainians’ determination to sign a political accord more closely linking their nation with Europe.

Ukrainian officials have pleaded with EU states to increase their financial commitments to the country. Kiev’s central bank is burning through its foreign currency reserves at a rate of nearly $3bn a month, meaning the country may have to either drastically slash its budget or restructure its sovereign debt if it does not receive the IMF funds.

Poland, one of Kiev’s staunchest western allies, announced on Wednesday it would send €5m worth of food and winter supplies to the country as Petro Poroshenko, Ukraine’s president, visited Warsaw.

But in private, Polish diplomats and politicians are sceptical of the merits of writing more cheques. “Without visible progress on reforms we cannot even start to think about more funds. It just does not make sense,” said a senior Polish government official.

Foreign ministers from the Visegrad Group of Poland, Hungary, the Czech Republic and Slovakia told Mr Poroshenko at a meeting in Kiev this week that the bloc would not provide more financial aid or support pan-European efforts to raise a bailout package without promises on reform.

Mr Poroshenko promised a “concrete timetable” of reform plans in response, according to a person present at the meeting.

“Ukraine is determined . . . to show we are capable of reforming our country and transforming so that we are European,” Mr Poroshenko told Polish parliamentarians on Wednesday.

Meanwhile in Kiev, the country’s prime minister pledged to crack down on domestic oligarchs by closing tax loopholes with Cyprus and other offshore zones as part of new tax reforms accompanying an austere 2015 budget.

“There are only so many ways to split the bill,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “Lending to Ukraine is a geopolitical imperative so the IMF will make a gesture, but it can’t foot the whole bill given the government’s minimal reforms. So the private sector will have to make a contribution.”

Under IMF rules, a government must have 12 months of financing in place before the fund can release its own assistance. Without the extra $15bn before an end-January board meeting, the fund would likely be unable to distribute aid from the previously agreed $17bn bailout package.

“It’s really important that the donor community step up and provide financing to Ukraine,” IMF spokesman William Murray said last week.

While acknowledging that it is under growing pressure to make a big contribution as part of an EU package, Berlin believes the IMF and the EU should supply the bulk of any new assistance.

European officials worry that indications from Washington that the US and other countries would be prepared to offer Ukraine additional financing could raise expectations in Kiev that EU states follow suit.

“Paying for Ukraine will be like West Germany paying for East Germany, except that Ukraine is bigger than East Germany,” one European diplomat remarked. “Who will pay will be an interesting talk.”

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