When Ukraine’s interim Prime Minister, Arseniy Yatsenyuk, took office this week, he referred to his team as “the government of political kamikazes.”
“To be in this government is to commit political suicide,” he said. “And we need to be very frank and open.”
Given the enormous challenges facing the country he is not being overly dramatic. Ukraine’s economy has been shattered by months of civil unrest, the treasury is empty and there are real fears some regions may separate. The world’s attention has been focused on the upheaval in Crimea and Russia’s military manoeuvres. But the real drama is about to play out in Kiev next week when teams from the International Monetary Fund and the European Union arrive to begin assessing Ukraine’s financial needs.
Until now the EU and Western leaders have offered promises and words of support. Just how much assistance the West is prepared to provide – and at what price remains to be seen. The IMF’s recent experience in Ukraine has not been good; it froze loans twice since 2008 because previous governments would not adhere to required reforms. The EU has also badly misread Ukraine’s protest movement. That became clear last week when the EU brokered a peace deal between opposition politicians and the embattled president Viktor Yanukovych, only to see it scrapped within 24 hours amid outrage from protesters.
The stakes couldn’t be higher. The uprising against Mr.Yanukovych has been largely driven by a desire of many Ukrainians to join the EU, in hopes EU membership would open economic opportunities and force Ukraine to end its crippling corruption and modernize its institutions. The EU sees a chance to expand its trade network farther east and keep Ukraine out of the Russian orbit.
The question now is how much will it cost?
Mr. Yatsenyuk has said the country needs $35-billion (U.S.) over the next two years to stay afloat. The IMF and EU aren’t likely to offer that much, but whatever they provide will come with strings such as sweeping reforms to institutions, an end to generous subsidies and a more open economy. None of those will be easy.
Ending the energy subsidies could see a 40-per-cent jump in energy prices for consumers and businesses, according to some estimates. With the economy already in recession, and getting worse, that could be devastating. And gas prices could climb even more. Ukraine gets most of its gas from Russia and when Mr. Yanukovych turned away from an EU trade deal last November, Russia stepped in with a $15-billion loan package and steep discounts on gas. Those discounts are up for renewal on April 1, and few expect them to remain.
EU requirements to reform institutions and open the economy will run up against Ukraine’s powerful oligarchs, whose businesses enjoy near-monopoly status in some industries and who are not shy about using their financial clout to get their way in parliament. There are other risks for Ukraine in signing on to IMF and EU support programs. The country would have to spend billions of dollars meeting EU regulations and bringing everything from steel mills to railway lines up to EU standards. Russia will likely slap tariffs on Ukrainian imports, cutting off the country’s largest export market.
“All of these IMF, Western aid packages are all very good, long term,” said Chris Weafer, a senior partner at Macro-Advisory Ltd., a Moscow-based firm that specializes in Eastern Europe. “But they all have a considerable amount of pain built in upfront. And that will come on top of this politically disrupted economy.”The immediate economic concerns are enormous. After showing signs of recovery last fall, Ukraine’s economy has sunk since the uprising began in November. Business investment has stopped, consumers have cut back on spending and some economists expect the economy will now shrink by up to 4 per cent this year, on top of a 1 per cent retraction in 2013. Inflation is creeping up and the currency is in free fall. People are scrambling to get hold of dollars or euros and banks are running out of money.
The EU has said it remains eager to help and offered a trade deal as a start. Russia too may feel obliged to participate throgh the G8, which it now chairs, and because its banks hold about $30-billion in Ukrainian loans. The IMF is also trying to play down fears about Ukraine’s troubles, saying it will assess the situation during its review in Kiev next week. “We do not see anything that is critical, that is worthy of panic at the moment,” IMF head Christine Lagarde said Friday.
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The energy needs of Russia, Ukraine and western Europe are intertwined, as this pipeline network shows. About 80 per cent of Russian gas exports to Europe pass through Ukraine; Europe depends on Russia for 40 per cent of its imported fuel.
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