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The Foreign Ministers of Russia, Ukraine, the EU, and Secretary of State Kerry are scheduled to meet for de-escalation negotiations in Geneva tomorrow. It’s hard to imagine what the parties involved will talk about when they don’t agree at all on the facts, if the media reports can be believed. But the media reports can’t be believed and, for all we know, the whole crisis may evaporate before the weekend, just like the one in Syria seemed to do last September.  

What does the Kremlin’s English language website say these days? It’s worth a look. Sometimes, the transcripts of cabinet-level conversations on the website are candid and revealing enough to make we wonder whether someone forgot to redact them.

Over the last few days, discussions about Ukraine sound nothing like any of the conflicting mass media reports carried in the US, the EU, or Russia.

  • The Finance Minister reported that his counterpart in Kyiv requested assistance from Russia in the form of another $3 billion tranche in Eurobonds like the one sold last December. Russia expects the interest on the first tranche to be paid by Ukraine on time in June. The second tranche doesn't seem to be out of the question.
  • Ukraine’s natural gas payments are overdue and Russia intends to keep delivering and transporting through Ukraine’s pipeline. The cost of supplying natural gas to Ukraine through the end of the year, as cited by Putin, implies that Russia is willing to extend  the discounted rate announced last December.
  • The dollar amount owed by Russia to Ukraine to pay for commercial products and military procurements offsets 90% of what Ukraine owes Russia.
  • To keep Ukraine from falling into chaos, Purin calls on the US to contribute more than the $1 billion loan guarantee it approved. His  exact words were:
    “This will take more than handing out pies at the Maidan.”
  • Ukraine hasn’t received a penny of the IMF loan that was recently announced and EU officials appear aloof and disinterested.

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At the IMF website, there is news about the proposed loan program for Ukraine.  The board isn't ready to approve the plan.  Managing Director, Christine Lagarde issued a statement:
“I met with National Bank of Ukraine Governor Kubiv and Finance Minister Shlapak and Economic Development Minister Sheremeta, and their colleagues. We discussed recent economic developments in Ukraine and the good progress made by the authorities in implementing the policy actions, completion of which would enable consideration of the request for a Stand By Arrangement by the IMF Executive Board. I expect the Board will be in a position to consider this in the coming weeks. There is still work to do in terms of finalizing some of the actions and ensuring the program is financed. If all goes well, we expect our Board will consider the program to support Ukraine in late April or early May.”
In a press conference, LaGarde referred to geopolitical issues that were complicating Ukraine’s economic and financial problems.

For the IMF, the geopolitical risk is that Ukraine may no longer exist as a sovereign entity when loan repayment would be expected to begin. In effect, this is already true for part of the balance of a previous IMF loan to Ukraine. The loan was paid to an entity that included Crimea and there are no provisions for repayment of Crimea’s share of it. The IMF will survive if it has to absorb a resulting $1.6 billion write off. However, it may not even be able to find 100% of the international portion of the $27 billion for the new financing program.

In the past, the IMF’s board approved loans to Ukraine without waiting for it to complete the actions assigned. In this case, Ukraine already  did implement most of the IMF recommendations:

  • The central bank announced that Ukraine’s currency, the  hryvinia, would begin floating on February 7, when Yanukovych was still in power.
  • The banking system is intact.
  • A budget was passed by parliament reducing the deficit.
  • The tax system was reformed with a progressive scale of graduated income tax rates to replace the flat tax that was in effect.
  • The energy subsidies depend on the price Russia charges Ukraine for natural gas. The Ukrainian Parliament passed legislation to preserve the current subsidies for one-third of the population at the bottom of the income scale.
  • Ten percent of government jobs are to be eliminated.

It would be interesting to research whether the unrest in the eastern cities is in reaction to any or all of these changes. There are indications that the crisis already affected the economy in Ukraine and Russia before the interim government rolled out new legislation.  Since the Maidan protests began, the ruble lost about 10% of its value against the dollar and Ukraine’s currency lost about 35% of its value against the dollar.  Russia’s broad stock exchange indices  depreciated on average by 20% while Ukraine’s exchange appreciated in value by 20%.
Ukraine’s financial needs are immediate. It would be no surprise if it turned to Russia for assistance. The potential for chaos spilling over the border and the possibility of reunification with Ukraine are vital issues for Russia, not abstract ones.

With the potential for transportation disruptions ahead, food security should be a primary concern. The water supply from Ukraine to Crimea which uses it for irrigation should be a primary concern. For Russia, the possibility that escalation could lead to a million or more ethnic Russians crossing the border as refugees should be a primary concern.

The IMF’s delay seems to confirm that Ukraine is Russia’s problem. It’s ironic for Putin to gripe about having to foot the bill and to call for “more than handing out pies at Maidan” when he condemns  foreign money as suspicious.

Tomorrow, at noon in Moscow, 4AM EDT, 1AM PST, Putin will appear on Direct Line, an annual televised event when he answers questions submitted by the public. It’s carried by Channel One, Rossiya-1 and Rossiya-24 for those who are interested.
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