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.
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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.
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