IMF financiers are currently in Ukraine discussing a possible loan-for-reforms package with the new government. The European Union has announced it will provide Ukraine with $15 billion in funding, but that would be contingent on Ukraine sealing a deal with the IMF.
The reform bill would increase Ukraine’s borrowing “quota” by about 50 percent, reflecting the growth in its economy since its current allotment was established many decades ago.
But the reform package would go much farther in addressing momentous changes in the global economic pecking order. The overhaul would give China, which is now the world’s second largest economy, a greater say in IMF decisions while taking some voting power away from small European governments which currently enjoy disproportionate representation on the IMF board. The U.S.’s 17 percent voting share, the largest of any nation, would remain the same.
All sides agree that Ukraine must adopt painful reforms in exchange for any loans, as its economy and government have been plagued with corruption and mismanagement for years. Mr. Yatsenyuk recently disclosed that $37 billion disappeared from state coffers under the government of his ousted predecessor, President Viktor Yanukovych, who fled to Russia in the face of mass public protests last month.
In light of the dire mismanagement of Ukraine’s economy for many years — and its failure to stick to past IMF reform programs — some analysts are dubious about launching a new lending program in the country now.
“Stated simply, Ukraine is the economic equivalent of a failed state,” said Robert Shapiro, former economic adviser to President Clinton. “After gaining independence in 1991, the country moved briefly to liberalize its economy along the same lines as most of Eastern and Central Europe. But Ukraine soon jettisoned its reforms in favor of the state-oligarch model also evolving in Russia. Some 20 years later, Ukraine’s [economy] has shrunk 30 percent.”
The U.S. and EU will pay a dear price to draw Ukraine into their orbit now and force it to finally straighten out its economy, since the country will very shortly face default on its debts without huge cash infusions from the West, he said. Russia also retains significant leverage over the country’s finances as Kiev’s dominant energy supplier.
“Ukraine’s economic performance has been so terrible, for so long, that its sovereign debts are now considered the equivalent of junk bonds,” he said. “Even before the crisis, Ukraine’s credit rating was worse than Greece’s — no small feat — and no better than that of Argentina, a global financial pariah” which has defaulted repeatedly on its debts to global lenders.
But other analysts are optimistic that Ukraine is ready to finally straighten out and reform its economy after suffering through the gross mismanagement and greed of the previous regime.
“In Ukraine, financial stabilization primarily means an anticorruption program, which should be carried out fast to prevent new players from exploiting old opportunities,” said Anders Aslund of the Peterson Institute on International Economics. “The first measure should be to identify and freeze the embezzled and extorted assets of the Yanukovych family and its closest conspirators. … That could significantly improve Ukraine’s financial situation.”
Mr. Aslund conceded that hopes for Ukrainian reform are “hugely ambitious. But there are encouraging precedents. Georgia is an example of a former Soviet republic that has conquered corruption,” he said.