KIEV, Ukraine (AP) — Ukraine needs money, and fast — in
weeks, not months. But bailing out the country of 46 million people will
not be as easy as simply writing a big check.
For one, Ukraine
has already burned the main global financial rescuer, the International
Monetary Fund, by failing to keep to the terms of earlier bailouts from
2008 and 2010.
Now it needs help again, and its economic and financial problems are worse than before.
The
currency is sliding, raising concerns that companies that owe money in
foreign currency could go bust. Banks are fragile. A rescue with outside
lenders can’t be agreed until there’s a government. And Russia could
make things worse by demanding payment of money owed for natural gas
supplies.
Even with a bailout, the country would face testing
times. It would likely be asked to make painful reforms — including a
potential doubling in the price of gas — that would hurt standards of
living as the economy recovers.
HOW MUCH?
Estimates vary, in
part due to the country’s less than transparent finances, but analysts
say Ukraine might need a total of $20 billion to $25 billion for 2014
and 2015, perhaps $15 billion this year and $10 billion the next. The
money would help pay salaries and pensions and maturing bonds. Acting
President Oleksandr Turchynov says the treasury account used to pay
bills is almost empty.
Ukraine’s acting finance minister, Yuriy
Kolobov, says the country needs $35 billion to cover this year and next
and expressed hope that Europe or the United States would help within
the next two weeks. Ukraine has major debt repayments coming up in June
but analysts indicate it will have difficulty making it that far without
help.
The Institute of International Finance, a Washington-based
association of banks and financial companies, warned that Ukraine’s
finances "are on the verge of collapse."
"It’s crunch time for the
economy," said Lilit Gevorgyan, an analyst with IHS Global Insight in
London. "All those issues they have swept under the rug are
re-emerging."
FROM WHERE?
The main rescue lender would be
the IMF, but it could take time for it to formally agree on the bailout
conditions. Until then, it is likely to get temporary support from
individual countries in Europe or the U.S.
EU foreign policy chief
Catherine Ashton said Tuesday that the EU and its member nations are
ready to help bridge Ukraine’s short-term financing needs until a new
government can negotiate a full-fledged assistance package with the IMF.
"Bills have to be paid," she said, adding that it is important that Russia also help out.
Ukraine
had a promise of $15 billion in help from Russia — but that’s on hold
after parliament voted Saturday to remove pro-Russian President Viktor
Yanukovych. The country has only gotten $3 billion of the money.
EXISTING PROBLEMS
Ukraine
is battling to keep its currency, the hryvnia, from collapsing, which
would bring down banks and companies that owe money in foreign
currencies.
The central bank spent some $2.8 billion of its
reserves since the start of the start of the year and has only about $16
billion left. Still the hryvnia has fallen a sharp 18 percent during
that period, hitting a record low against the dollar on Tuesday.
The
government also spends way more than it takes in, largely because the
state-owned gas company Naftogaz charges customers as little as
one-fifth the cost of gas imported from Russia. The IMF halted payouts
under earlier bailouts because the government refused to halt that
practice.
The economy is estimated to be in a deepening recession, with industrial production, consumer spending
and exports all dropping.
BAILOUT CONDITIONS
Yet
a bailout involving the IMF would involve cutbacks and reforms that
could quickly douse any euphoria over the country’s political changes.
To
begin with, the IMF would probably insist on letting the currency fall,
by as much as 30 percent, according to the IIF, the global banks’
association. That would be painful upfront — some banks may need
bailouts as their foreign debts balloon. And quality of life would drop
as imports soar in price.
Eventually, the currency drop would help
exports and make Ukraine a cheaper place for foreigners to invest,
particularly if they see that the government is committed to reforming
the economy by cutting bureaucracy and fighting corruption.
The
government would also have to sharply raise the price of natural gas,
which it is subsidizing heavily. The IIF estimates natural gas prices
may have to be doubled, which would be a heavy blow to consumers and
businesses.
CAVEATS
There remain several stumbling blocks.
The
IMF, for one, might be reluctant to sign on for a large loan, given
Ukraine’s track record of not holding to agreements. Instead, it might
prefer to give smaller loans of $3 billion to $5 billion at intervals,
according Gevorgyan, the analyst. One now, one after the presidential
election, and so on, "to make sure they remain on the path of reform."
Also, Russia, Ukraine’s larger neighbor, could intensify the country’s troubles by getting tough on its
supplies of natural gas.
Russia
almost halved the price of its gas supplies to Ukraine in December as
it sought to woo the country away from closer ties with the EU. That
price cut is up for review every three months. Russia could also stop
letting Ukraine delay monthly payments that are as large as $1.8
billion.
Russian officials have reacted with angry statements to
the vote to remove Yanukovych. Yet it’s not clear what Russia will do.
Past behavior suggests they have been willing to take it easy on Ukraine
— a major trading partner who now owes them money — when it’s in their
interest.
___
Baetz reported from Brussels.
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