What the West owes Ukraine

Financial Mirror (Cyprus) - - FRONT PAGE -

Ukraine may not be grab­bing as many head­lines now as it did a year ago, but the cri­sis there is far from over. The lat­est cease­fire agree­ment, con­cluded in Minsk in Fe­bru­ary, has con­tained, but not stopped, Rus­sian mil­i­tary ag­gres­sion. And, though the sta­bil­i­sa­tion pro­gramme that Ukraine agreed with the In­ter­na­tional Mon­e­tary Fund last month is su­pe­rior to last year’s deal – this one in­cludes both more fi­nanc­ing from the IMF and a more cred­i­ble eco­nomi­cre­form plan from the gov­ern­ment – it will be in­suf­fi­cient to re­pair the coun­try’s econ­omy. What Ukraine re­ally needs is to es­cape the old Soviet or­der – and, for that, it needs the West’s help.

Ukraine never man­aged to re­cast its state af­ter the Soviet Union’s col­lapse. In­stead, the old Soviet elites held onto power – and most of the coun­try’s wealth – through cor­rupt prac­tices that be­came en­trenched in the coun­try’s econ­omy and po­lit­i­cal sys­tem. Re­form­ing both will be a ma­jor chal­lenge – one that Ukraine’s lead­ers have lately com­mit­ted them­selves to meet­ing.

Since Fe­bru­ary of last year, when the par­lia­ment voted then-Pres­i­dent Vik­tor Yanukovych out of power by more than a two-thirds ma­jor­ity, Ukraine has held fresh elec­tions for both in­sti­tu­tions. Hun­dreds of top of­fi­cials have been re­placed by young, West­ern-ed­u­cated pro­fes­sion­als, and the gov­ern­ment is now work­ing fever­ishly to im­ple­ment deep and com­pre­hen­sive re­forms, in­clud­ing a new law on public pro­cure­ment and a pack­age of anti-cor­rup­tion leg­is­la­tion. Dozens of su­per­flu­ous in­spec­tion agen­cies have been abol­ished, sig­nif­i­cantly re­duc­ing the reg­u­la­tory bur­den. Just last month, Pres­i­dent Petro Poroshenko sacked the gover­nor of the Dnipropetro­vsk re­gion, the bil­lion­aire ty­coon Igor Kolo­moisky

More re­cently, the au­thor­i­ties have been work­ing to re­form the en­ergy sec­tor – a hub of cor­rup­tion. On April 1, house­hold gas prices were quadru­pled, tak­ing them to half the mar­ket price, with off­set­ting com­pen­sa­tion pro­vided to the poor. And the par­lia­ment has en­acted a law that har­monises en­ergy stan­dards with those of the Euro­pean Union, thereby de­lin­eat­ing clearly the state’s role and open­ing the gas mar­ket to in­vestors.

But Ukraine still has a long way to go. The good news is that the public largely un­der­stands and sup­ports the gov­ern­ment’s re­form ef­forts. The bad news is that Ukraine still faces con­sid­er­able desta­bil­is­ing threats – be­gin­ning with a re­newed Rus­sian mil­i­tary of­fen­sive.

A Rus­sian attack on, say, Mariupol, eastern Ukraine’s sec­ond-largest port (ac­count­ing for roughly one-third of the coun­try’s ex­ports), would dev­as­tate an econ­omy that is al­ready tank­ing. Though sev­eral fac­tors – in­clud­ing West­ern sanc­tions, a lack of public sup­port for war in Ukraine, and the Rus­sian econ­omy’s rapid decline – should dis­cour­age the Krem­lin from tak­ing such a step, they may not be enough. Af­ter all, Rus­sia’s lead­ers have shown them­selves to be un­pre­dictable.

Even ab­sent fur­ther Rus­sian ag­gres­sion, Ukraine’s eco­nomic woes could pre­vent fur­ther progress on re­form. The econ­omy con­tracted by 6.8% year on year in 2014, and out­put has plunged by 15% in each of the two last quar­ters. More­over, at the end of Fe­bru­ary, with the coun­try run­ning low on re­serves, Ukraine’s cur­rency, the hryv­nia, lost half its value; as a re­sult, an­nu­alised in­fla­tion surged to 45% in March. A full-scale fi­nan­cial melt­down was avoided only when the IMF pro­vided an early dis­burse­ment that dou­bled Ukraine’s re­serves, to $9.9 bln; by the end of the month, the ex­change rate more or less re­cov­ered.

Nonethe­less, the in­ter­na­tional fi­nanc­ing that Ukraine has re­ceived, though in­valu­able, re­mains in­suf­fi­cient to sup­port gen­uine re­cov­ery and re­form. The lat­est bailout pro­gramme fore­sees about $40 bln in fund­ing, nearly half of which will come from the IMF, over the next four years. That means that, this year, Ukraine will re­ceive only $10 bln – not enough to en­able the coun­try to re­plen­ish its re­serves and ser­vice its debts. In­deed, given Ukraine’s large bond debts, many of which will ma­ture in the next two years, there is a $15.3 bln fund­ing gap in the bailout pack­age, which the IMF and Ukraine’s gov­ern­ment hope to plug with a debt re­struc­tur­ing. But, even if they suc­ceed, Ukraine would need more fund­ing than it is get­ting.

Europe’s lead­ers ar­gue that the cen­tral fo­cus of their pol­icy to­ward Ukraine must be to sup­port its eco­nomic re­cov­ery. But here, too, Europe is do­ing too lit­tle, of­fer­ing paltry cred­its of EUR 1.8 bln ($1.9 bln) this year, when EUR 10 bln would be more ap­pro­pri­ate. If the United States then met Europe half­way (at least), Ukraine’s fi­nan­cial cri­sis could fi­nally be con­tained.

On April 28, Ukraine’s gov­ern­ment will host a donor con­fer­ence in Kyiv. At a time when the coun­try’s lead­ers and public are more com­mit­ted than ever to com­bat­ing cor­rup­tion, build­ing a wel­fare-cre­at­ing econ­omy, and be­com­ing a nor­mal lib­eral democ­racy, Europe should be ea­ger to sup­port it. It is time for West­ern politi­cians to re­mem­ber their ideals – and stand up for them.

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