What It Will Take to Save Ukraine

Western capital fought Russian arms to a draw over Ukraine last year in a conflict that was more expensive than had been envisioned for all sides. A new phase of the battle began quietly yesterday when a delegation from the International Monetary Fund arrived in Kiev for weeks of scheduled talks with Ukraine’s fledgling government.

The IMF’s immediate agenda is to judge whether the hosts have met conditions to release further tranches of a $17 billion standby credit facility approved last April in the wake of theMaidan revolution in early 2014 and Russia’s subsequent invasion of Crimea。该基金有far disbursed $4.7 billion from this facility. But Ukrainian President Petro Poroshenko and his ministers are hoping for an expanded commitment from the Fund and other donors that could offset the damage inflicted on Ukraine during 2014 and safeguard the country from a threatened debt default.

That will require an additional $15 billion on top of the $17 billion already committed, according to a recent European Union study. Ukraine’s economy shrank by an estimated 7.5 percent last year. It lost 15 percent of its export capacity from land seizure by pro-Russian separatist rebels in the east, whereas another 10 percent is hampered by disrupted transport and supply links, according to Tomas Fiala, CEO of Dragon Capital in Kiev.

The value of the hryvnia, Ukraine’s currency, has halved against the U.S. dollar since the revolution. Reserves have dwindled to some $10 billion, less than two months’ import cover. Depression and devaluation raised the country’s ratio of external debt to gross domestic product from 40 to 70 percent over the course of 2014, according to Moody’s. About $7.3 billion is due to creditors this year, with little hope of repaying it under current circumstances. “Purely on the economics, a default seems almost inevitable,” says William Jackson, senior emerging-markets economist at Capital Economics in London. “But for political reasons it’s unlikely that the U.S. and EU will allow a messy default.”

The IMF talks will signal how committed the Western powers are to bailing out Poroshenko’s Ukraine and averting a bankruptcy, which Russia could claim as a moral victory. Last week Hungarian-born financier and philanthropistGeorge Soroscalled for a superpackage that would provide Kiev with a $50 billion credit line, mostly from funds the EU has already allocated for sharing within its membership. “Europe treats Ukraine as just another country in need of financial assistance, and not even one that is important to the stability of the euro, like Greece or Ireland,”Soros wrote in theNew York Review of Books。

But officials holding the purse strings are moving much more cautiously, trying to walk an uncertain line between letting Ukraine go bust and handing it billions with no conditions attached. European Commission President Jean-Claude Juncker proposed €1.8 billion ($2.1 billion) in additional aid on January 8. A day earlier, the German government announced an extra €500 million in credit guarantees for Kiev.

Bigger sums will depend on whether Poroshenko’s ministers can convince the IMF they are willing and able to push through an ambitious reform program. The government, which was formed in early December after late-October parliamentary elections and a month of interparty wrangling, has nibbled at reform so far. Now it must bite the bullet on painful measures such as eliminating ruinous natural gas subsidies. That will raise heating prices for consumers at least fourfold, Fiala estimates. “It’s reasonable for the Ukrainian government to be afraid of this sort of challenge when they are already seeing certain signs of social discontent,” says Yaroslav Lissovolik, chief economist in Deutsche Bank’s Moscow office.

On the bright side, Ukraine’s tumultuous post-Maidan politics has produced the best leaders the world could reasonably hope for in Poroshenko and Prime Minister Arseniy Yatsenyuk. The two went back and forth for some time after their respective parties polled about evenly for parliament, but they agreed on a government featuring respected private sector veterans in the key financial posts. Finance minister Natalie Jaresko is a U.S. native who previously ran two private equity funds in Ukraine. Economy and Trade minister Aivaras Abromavicius is a Lithuanian-born investor who moved to Kiev in 2008 to head the local office of Swedish asset manager East Capital. Central bank governor Valeria Gontareva is an investment banker with experience at ING and Société Générale. “It’s clear that this is a pretty unique government,” Lissovolik says.

Still, this technocratic dream team may prove unable to rescue Ukraine’s finances without help from another quarter: Russia. That may not be as far-fetched as it sounds, say analysts, given the punishment Russia has endured by way of Western financial sanctions and thedive in oil prices。尽管没有战略和解Ukra东部ine looks imminent, Moscow may want to be helpful on tactical matters in the hope of slowly repairing relations.

Most important among these is a $3 billion Ukrainian bond issue that Russia bought in December 2013 in hopes of propping the government of former president Viktor Yanukovych. The loan, which is nominally due in December 2015, contained a clause allowing it to be called if Ukraine’s debt-to-GDP ratio rose above 60 percent — which it clearly has at this point. Yet so far the Kremlin has resisted going for Kiev’s jugular. Last week Finance minister Anton Siluanov told Russian journalists that although his ministry “has every reason” to demand its $3 billion back, “at the moment no decision to do so has been made.”

That could be a sign of peace feelers behind the scenes, says Tim Ash, head of emerging-markets research at Standard Bank in London. “There have been some hints of deals in recent weeks,” he said. “The West has sent signals that sanctions could be softened in the hope that Russia may be more cooperative.”

Even if Moscow waits another 11 months to collect its money, however, the price of supporting post-Maidan Ukraine has risen sharply since the West implicitly took on the burden last April. “The macro assumptions they made last year basically lie in tatters,” Ash says.

Success will require generous outlays to a nation with a terrible credit history — Ukraine has failed to complete several past IMF programs — and daunting current circumstances. But the price of failure goes beyond dollars and cents.

Get more onemerging marketsand onmacro。