Putin key to Ukraine suc­cess with IMF loan, de­spite Crimean cri­sis


So far, the In­ter­na­tional Mon­e­tary Fund is giv­ing Ukraine a pass­ing grade on early ef­forts at po­lit­i­cal and eco­nomic re­forms as it spends a first in­stall­ment from a four-year, US$17.5 bil­lion loan pro­gram. But in the end, Rus­sian Pres­i­dent Vladimir Putin holds the trump cards in Ukraine’s drive to ex­tract it­self from Moscow’s or­bit.

Un­til Wed­nes­day, there had been a lull in the war be­tween Ukrainian forces and Moscow­backed Rus­sian sep­a­ratists in the key industrial and coal-min­ing re­gion in eastern Ukraine. The heavy fight­ing on Wed­nes­day di­min­ished at the end of the week, and it ap­peared that Putin was not ready yet to play his trump. So far, more than 6,400 peo­ple have died in the on-again-offa­gain bat­tles that have se­verely dam­aged the Ukraine econ­omy and dis­rupted crit­i­cal trade with Moscow.

An­drew Weiss of the Carnegie En­dow­ment says the IMF is in a race against time.

“The fragility of the Ukrainian state is such that if Moscow sig­nif­i­cantly ratch­ets up the pres­sure it may be very hard for the (Ukrainian Pres­i­dent Petro) Poroshenko to de­liver on am­bi­tions for sig­nif­i­cant eco­nomic re­form and changes in the po­lit­i­cal sys­tem,” Weiss said. “If you take that pres­sure along­side of the bad habits and busi­ness-as-usual con­duct of the Ukrainian elite who have led the coun­try for most of the past 25 years, the prospects for the re­formist move­ment in Ukraine look quite chal­leng­ing.” The IMF sees things dif­fer­ently. At the end of a May 12-29 as­sess­ment visit, IMF Ukraine mission chief Niko­lay Gue­orguiev said goals set for Ukraine in March had been met and “all struc­tural bench­marks due in the spring are on course to be met, al­beit some with a de­lay.” The IMF was not spe­cific about goals.

Even so, Gue­orguiev is­sued a mixed first re­view of Ukraine’s progress in us­ing the fund’s first US$5 bil­lion tranche of the loan to re­verse the for­mer Soviet repub­lic’s slide into bank­ruptcy and to root out en­demic cor­rup­tion.

The Bad and Good News

The bad news: The IMF pro­jected a 9 per­cent con­trac­tion in the Ukrainian econ­omy this year, with in­fla­tion top­ping 46 per­cent.

The good news: The shrink­ing GDP fore­cast ac­tu­ally sug­gested signs of sta­bi­liza­tion, given that it in­cludes a 17.6 per­cent con­trac­tion in the first quar­ter of 2015. And Gue­orguiev said the Kiev gov­ern­ment’s “com­mit­ment to the re­form pro­gram re­mains strong.”

The IMF put Ukraine un­der what is known as an Ex­tended Fund Fa­cil­ity, the US$17.5 bil­lion loan pro­gram, af­ter ear­lier and more limited IMF as­sis­tance pro­grams failed un­der the lead­er­ship of ousted pro-Rus­sian Pres­i­dent Vic­tor Yanukovych. He was forced from of­fice af­ter months of protests by Ukrainian ac­tivists dis­gusted with the cor­rup­tion and his hav­ing re­neged on prom­ises of closer ties to the Euro­pean Union. He fled to Moscow, and new elec­tions put Poroshenko in the pres­i­dent’s of­fice.

Ukraine had been un­der Moscow’s thumb be­cause of a deep his­tory of trade links dur­ing Soviet times. And the bulk of its en­ergy sup­plies has come from Rus­sia. Now the coun­try is strug­gling to build a sys­tem of other sup­pli­ers.

What’s more, Putin took re- venge for Yanukovych’s ouster by seiz­ing the strate­gi­cally im­por­tant Crimean penin­sula. The United States and other West­ern al­lies claim that he also be­gan send­ing arms and troops to mainly Rus­sian-speak­ing sep­a­ratists in eastern Ukraine. Putin de­nies Rus­sian in­volve­ment in the fight­ing.

At stake for the 188 mem­ber­na­tion IMF is re­pay­ment of the US$17.5 bil­lion loan. The gov­ern­ment must show it is meet­ing goals for the next tranche of US$1.7 bil­lion.

“In re­cent months, signs that eco­nomic sta­bil­ity is grad­u­ally tak­ing hold are steadily emerg­ing,” Gue­orguiev said in his state­ment about the re­view.

And the fore­cast for a big jump in in­fla­tion, he said, was mainly the re­sult of one-time cur­rency de­val­u­a­tion and a big boost in en­ergy prices as the gov­ern­ment cut back on sub­si­dies for oil and gas.

An­other big snag that could up­end the IMF pro­gram, be­yond a re­sump­tion of all-out war, is the ex­pec­ta­tion that Kiev will be able to get out from un­der, or resched­ule, US$15.3 bil­lion in­debt­ed­ness and in­ter­est pay­ments. Ne­go­ti­a­tions with debt-hold­ers are said to be go­ing badly.

Putin won’t be on the guest list when Pres­i­dent Barack Obama and other world lead­ers as­sem­ble in Ger­many this week­end. Rus­sia was kicked out of the group of pow­er­ful coun­tries, then known as the G-8 (now the G-7) be­cause of its ac­tions in Ukraine. It ap­pears un­likely, how­ever, that the U.S. and Europe will toughen sanc­tions on Moscow with­out a ma­jor in­crease in Rus­sian ag­gres­sion. Euro­pean na­tions with strong fi­nan­cial ties with Rus­sia fear the sanc­tions could dam­age their own economies.

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