The cost of (not) bailing out Ukraine | VoxUkraine

The cost of (not) bailing out Ukraine

Photo: Reformed African American Network
11 December 2014

Despite securing sizeable financial support from western lenders in April — $27bn for two year — Ukraine is again finding itself precipitously close to a financial meltdown. Ukraine needs $12-15bn of additional external funding next year, on top of the $16bn scheduled under the current support package.

Were Ukrainian authorities solely responsible for pushing the country to the brink of disaster? Not this time. The government and the central bank met virtually all the requirements of the International Monetary Fund and other donors. The critical issue was that the financial support package approved in April assumed that a separatist conflict in eastern Ukraine, which had not yet turned into all-out war at the time, would end quickly and produce no significant damage. The reality proved less rosy. Ukraine effectively lost control over 7 per cent of its territory this year, including the Russia-annexed Crimea and the territory in the east controlled by Russian-backed rebels.

Western countries seem to question the expediency of providing additional financing to a country fighting with an external aggressor and plagued by domestic vested interests. But positive changes are there. The central bank, managed by a team of private sector professionals, is actively overhauling itself, downsizing its staff, cutting red tape and getting rid of non-core assets. The banking system is being cleaned from money-laundering institutions and unviable banks despite the continuing resistance of vested interests.

Ukraine’s incipient reform steps need strong external backing. If the West wants to keep Ukraine moving forward, it should provide sufficient additional support, strictly conditioning it on a broad-based and radical reform programme covering anti-corruption policies, business deregulation and other areas. In fact, western creditors stand to put a relatively small amount of money at risk. Even with the additional financing needs fully covered by official creditors, the west would need to disburse some $40bn to Ukraine, only a fraction of the $300bn (€240bn) spent to bail out Greece.

But the cost of inaction could be much higher, and will come in non-monetary form. Without additional aid, Ukraine will hardy be able to avoid a financial meltdown and a new wave of social unrest. This would give Russia another ideal opportunity to regain its grip on Ukraine and ultimately win its geopolitical showdown with the west.

Full text was published by Financial Times (free access upon registration)



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