IMF Announces Ukrainian Bailout at a Price

By Agence France-Presse
From Globalpost

The International Monetary Fund announced on Thursday a $14-$18 billion bailout for Ukraine to avoid bankruptcy amid the country's escalating standoff with Russia. But it's tied to painful and unpopular reforms.

The agreement in principle — worth the equivalent of 10.8-13.1 billion euros — imposes tough economic conditions that will alter the lives of Ukrainians who have grown accustomed to the comforts of Soviet-era subsidies and social welfare benefits. But its also appears to herald a fundamental shift in Kyiv from a reliance on Russian help to save a crumbling system to a commitment to the types of free-market efficiencies that could one day bring Ukraine far closer to the West.

"Ukraine's macroeconomic imbalances became unsustainable over the past year," the Fund's Ukrainian mission chief Nikolai Georgiyev told reporters.

$27 billion in world aid

The IMF's rescue will form the heart of a broader package released by other governments and agencies amounting to $27 billion (19.6 billion euros) over the next two years. Georgiyev said the actual size of the "standby arrangement" would be determined only once the new Western-backed leaders in Kyiv made the first firm steps to implement reforms the Fund had sought in vain from the cabinet of Kremlin-backed president Viktor Yanukovych.

That government was toppled in February by three months of deadly protests that claimed 100 lives and forced Yanukovych to seek shelter in Russia. The unrest resulted in the Kremlin seizing Ukraine's Russian-speaking Black Sea peninsula of Crimea in a lightning offensive that sparked the worst East-West standoff since the Cold War.

"The program will be approved by the IMF board when the steps that I mentioned are implemented," Georgiyev told reporters after holding a decisive round of talks with Ukrainian President Arseniy Yatsenyuk on Wednesday. "We expect (the approval) by the end of April." The Fund has made an immediate end to Ukraine's costly gas subsidies its main condition for the programme's approval. It also wants the central bank to stop propping up the Ukrainian currency and for the government to cut down on corruption and red tape.

Georgiyev called these steps "the foundation for stable and sustainable growth". The IMF's announcement came one day after Ukraine's state energy company Naftogaz said it would increase domestic heating gas prices by 50 percent on May 1.

Ukraine's central bank has already limited its currency interventions — a decision that has resulted in the hryvnia losing about a third of its value against the dollar since the start of the year. The IMF program's formal approval in April will set in motion the release of further assistance from both Washington and the European Union. Economist believe that the Fund may have speeded up its procedures because of concerns that the Ukrainian government could become insolvent within a matter of months.

Ukraine's fast-depleting reserves — spent in previous years on propping up the currency at artificially high rates in order to avoid public discontent — had reached levels sufficient to cover just two months of imports.
The government needs to service $33.4 billion (24.3 billion euros) in interest and debt payments through 2016.

'Opposition from vested interests'

The Fund's package became essential for Ukraine once Russia froze payments on a $15 billion (10.9 billion euro) loan it awarded Yanukovych for his decision to ditch an EU trade and political relations agreement.
Yatsenyuk has now made sure that Ukraine will be getting even more money from the West after earlier signing the political portion of the EU pact ditched by Yanukovych — moves that are likely to further unsettle the Kremlin.

One of Yatsenyuk's main outstanding worries is that higher gas prices and limited state subsidies will most dramatically impact the big steel mills and other heavy industries that dot the heavily Russified southeast of the vast nation of 46 million people.

Big eastern cities such as Donetsk and Kharkiv have recently witnessed bloody protests against the new pro-European authorities in Kiev that rely on political backing from the ethnic Ukrainian west.
"Many of these reforms will be unpopular or will run into opposition from vested interests," the London-based Capital Economics consultancy warned.

"The volatile political situation and Ukraine's poor track record in implementing reforms demanded by the Fund mean that there will still be many doubts about whether politicians will be able to push substantial changes through this time," it observed.