assessments

Ukraine Needs More Money

4 MINS READMar 11, 2015 | 21:40 GMT
Despite A New Loan Package, Ukraine Needs More
(Sean Gallup/Getty Images)
A woman begs for money outside a Kiev subway station in February.

The International Monetary Fund's board of governors approved a $17.5 billion aid package for Ukraine on March 11. Finance Minister Natalie Jaresko said she expects the body to issue the first tranche of $5 billion in the coming days. The package will help Ukraine meet some of its financial obligations, but it will not solve all the country's problems. Kiev will likely need further assistance from the international community and its creditors to avoid bankruptcy.

The IMF approved the package following the Ukrainian parliament's agreement to raise domestic energy prices. The National Bank of Ukraine also moved to allow the country's currency, the hryvnia, to float. The IMF demanded that Kiev make certain concessions before any new package was granted. The first tranche of funding, however, will be less than the $10 billion the Ukrainian government had hoped to receive upfront.

The $17.5 billion allotted by the IMF is part of a planned four-year, $40 billion package that will be provided by the European Union, United States and other international bodies as well as the IMF. However, the success of Ukraine's new aid package will largely depend on upcoming talks with its bondholders. With less than $6 billion in international reserves and national bank expenditures at about $1 billion per month, Ukraine will need to negotiate with some of its major bondholders to either reduce bond principals or cut interest rates. Ukraine's debt is estimated to be the equivalent of about 90 percent of its GDP after a sharp fall in the value of the hryvnia. Thus, Ukraine will need to negotiate with its creditors to meet its financial obligations — most importantly the Franklin Templeton Fund, which reportedly owns $8 billion of Ukraine's $17 billion in eurobonds. There are indications that, even if the hryvnia stabilizes at around 25 per U.S. dollar, Ukraine could try to cut its eurobonds by as much as half.

Despite plans for a $40 billion international aid package, Ukraine will likely need to seek additional funding from its Western allies. This aid may come in the form of planned assistance packages through the European Union's Eastern Partnership program or further loans from the European Commission or U.S. government. Earlier in the week, the European Commission's vice-president for budget and human resources, Kristalina Georgieva, noted that Ukraine would likely need more financial aid over the coming years than previously projected. As long as Ukraine's defense expenditures grow and the conflict in the east continues, the government will struggle to implement the comprehensive reforms needed to build a new, professional state bureaucracy. Moreover, significant amounts of much-needed foreign investment are unlikely to flow into the country as long as uncertainty over the status of the Donbas region and Ukraine's domestic reforms persists.

Russia's goal is to keep Ukraine a weak and divided country. The IMF package and other international assistance packages are designed to strengthen Ukraine's financial position and its leaders' abilities to continue governing effectively. Continued financial assistance to Ukraine will be key in boosting the position of the Western-oriented government in Kiev, which is facing rising defense expenditures at a time when the country's economy is shrinking. Ukraine will also negotiate with its creditors to seek a significant restructuring of its debts to meet its financial obligations.

The Ukrainian government will continue its efforts to meet the IMF's demands for the country to remain financially viable. Kiev has already adopted substantial austerity measures, including job cuts in the public sector and price hikes for domestic energy consumers, in order to qualify for international assistance. Despite some objections, the majority of the public will support the government's decision to implement reforms and austerity measures. The main effort for the government, at least in the near- to medium-term, is to prioritize achieving macroeconomic stability while financing military operations in the country's east.

Connected Content

Regions & Countries
Topics

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.

GET THE MOBILE APPGoogle Play