Ukraine is in the throes of a financial crisis that urgently demands a response from western governments. The security threat to the country may be the primary focus in the west, following Russia’s seizure of Crimea and its military intervention in eastern Ukraine. But Vladimir Putin’s military tactics seem primarily designed to fuel an economic meltdown which destabilises Kiev. Western governments and the International Monetary Fund now need to act fast to bring Ukraine back from the brink of financial collapse.
Ukraine’s economy is under pressure on many fronts. The conflict between Ukrainian and Russian forces has brought production crashing at eastern coalmines and steel mills. Moscow threatens to impose sanctions on Ukraine and to cut off gas supplies. As a result, economic output is set to contract by at least 7 per cent this year. At the end of October, Ukraine’s international reserves fell to $12.6bn, below the critical threshold for solvency. This toxic mix has swelled fears of a sovereign debt default, triggering calls for a new international bailout.
In May a meltdown was averted when the IMF pledged $17bn of support plus $10bn from other donors. But that deal was agreed before Russian-backed separatists stoked the war in eastern Ukraine. Western experts now say a further $12bn to $15bn in external financing is needed to stabilise Ukraine’s economy; but donors seem reluctant to stump up the cash.
Such reluctance is understandable. Ukraine faces chronic instability, with no immediate likelihood of peace between Moscow and Kiev. As a result, the country is suffering significant capital outflows and a drain on reserves. Officials in the IMF and donor nations might therefore wonder what possible point there can be in pouring billions more dollars into the country.
Such scepticism must be brushed aside. Granting Ukraine $15bn may be a risk. But it is a fraction of the hundreds of billions of dollars that the EU and other lenders pumped into Greece. Critics argue that the Greek crisis posed a huge risk to the eurozone and that this does not apply in Ukraine’s case. But the future of Ukraine is of immense importance for European security.
Nor should concern about capital flight be an objection to a new round of external financing. If billions of dollars of cash are injected into the Ukrainian economy, there is a chance that this will shore up economic confidence, attract private investors into the market and staunch capital outflows. A new round of external financing may not work – but it is worth a try.
The IMF and western donors should not make these pledges without explicit reform commitments from the new Ukrainian government. President Petro Poroshenko and prime minister Arseniy Yatseniuk lead the most pro-western and competent government Ukraine has had since independence. They now need to accelerate reforms to eliminate corruption and embed the rule of law. The new government must remove fuel subsidies and unify energy prices at the international market level. This is vital to end one of the main sources of corruption: the arbitrage between low state-controlled prices and market prices.
As the Ukraine crisis intensifies, the west faces limited choices. Applying more sanctions on Russia is unlikely to stop Mr Putin destabilising Ukraine. Supplying arms to the Kiev government will dangerously inflame east-west tensions. But granting $15bn to Ukraine might allow the country to head off the Kremlin’s political and economic challenge. It is worth taking the risk.
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