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Feb 9, 2009 | 23:00 GMT

4 mins read

Ukraine: For Sale?

NATALIA KOLESNIKOVA/AFP/Getty Images
Summary
The Russian Finance Ministry announced Feb. 9 that its Ukrainian counterpart requested a $5 billion loan from Moscow to cover Kiev's budget deficit. Coupled with the International Monetary Fund's wariness of disbursing a second tranche ($1.9 billion) of a $16.5 billion loan agreed upon in November 2008, this move indicates the seriousness of Ukraine's financial state. It also highlights Ukraine's more fundamental economic problems, showing that Kiev ultimately will fall into the orbit of whichever country can come to its aid financially.
Ukraine made an official request to Russia on Feb. 9 for a $5 billion loan to make up for a decrease in budget revenues, the Russian Finance Ministry announced. Ukrainian Prime Minister Yulia Timoshenko has also asked the leaders of the world's richest countries for emergency loans, citing the difficulties her country faces as a result of the global financial crisis. Kiev began its frantic search for loans from "powerful and financially stable countries" after a visit by an International Monetary Fund (IMF) delegation the week of Feb. 1 that did not go well at all. The IMF typically works by doling out loans to troubled countries in tranches, usually attached with strict conditions designed for macroeconomic stabilization. Ukraine received its first such tranche of $4.5 billion (out of a total loan of $16.5 billion) in November. But Kiev has failed to live up to the loan's requirements, which include a deficit-free budget for 2009 — the budget has a 3 percent deficit — and a curtailing of social spending. The latter is an especially dangerous task politically, with Ukrainian unemployment figures soaring above the 1 million mark (out of a population of 46 million) and presidential elections slated for early 2010. Because of Ukraine's shortcomings, the IMF delegation made no promises that a second tranche would be coming in the near future. But Ukraine as a country is fundamentally broken, and its economy — which was far from stable even before the global economic crisis — will not be fixed easily with loans from the IMF, Russia or the West. The Ukrainian government is essentially at odds with itself, split between the pro-Russian and pro-Western movements. The country's political and economic institutions need more than small tweaks, and until they are radically reformed — which would be tremendously difficult to pull off socially — Kiev cannot do without outside assistance. And whoever provides this assistance will hold the most influence over Ukraine. This reality is only intensified by the financial crisis. Kiev depends heavily on manufacturing and industry for its government revenues, and as of December 2008, industrial production had dropped more than 26 percent year on year. Ukraine's currency has fallen dramatically since last summer, losing nearly a third of its value, and the country's gross domestic product for 2009 is expected to contract 5 percent. Financial assistance does not necessarily need to come from the Russians; Kiev simply needs to find whoever will help its economy survive. Previously, Russia's influence in Ukraine was underwritten by natural gas prices that were well below what the Europeans were charged. However, Russia raised those prices significantly, causing a monthlong standoff that affected much of Europe and created more economic problems for Kiev. Though Kiev paid its natural gas bill for January, a representative of Ukrainian energy giant Naftogaz said the renegotiated prices will cause Ukraine to go bankrupt. Currently, the Europeans are in no financial position to bail out Ukraine, so Kiev is calling on Moscow to alleviate Ukraine's financial pains. To be able to proceed, with the IMF's assistance, in trying to tackle its myriad economic problems, Ukraine must first take care of its budget deficit — hence the request to Russia for a $5 billion loan, which would roughly cover the deficit. Any Russian assistance, however, will come with strings attached. While the natural gas situation remains shaky and tense, a $5 billion loan would effectively draw Kiev further into Russia's orbit. And with political infighting and instability the norm in Ukraine, Russia will be sure to take advantage of Kiev's financial weaknesses in any way that it can. This essentially means that Ukraine will be divorced from its Western leanings and will move firmly into Russia's sphere of influence, both economically and politically.

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