December 5, 2013
Recent developments within Ukrainian political crisis forced economic issues to step aside of national and international attention. But mainly we can treat these issues as a cause of current situation. Ukraine faces evolutional choice between the West and the East where economics play a high scale role.
In this case we have to speak about Scylla and Charybdis of Ukraine’s borrowing prospects. On the one hand, Ukraine has to accept terms issued by the IMF, which are profitable for the Fund’s major shareholders, in order to receive a new credit program. These terms are about reforming “Naftogaz-Ukraine” with raising the price of natural gas for households, establishing Ukraine’s hryvnia currency flexible exchange rate and cutting budget’s deficit. In current situation, it only makes it worse for the Ukrainians and it can push the country further into Russia’s hugs.
On the other hand, if the IMF refuses to soften its terms, Ukraine has to seek its financial rescue from Russian resources. In this case, tight Russian hugs for Ukraine are inevitable. Russian financial market will increase its influence on Ukrainian financial sector particularly and the economy in whole by roping it into the Custom Union led by Moscow.
But if Ukraine finds no foreign credits it faces (for the first time!) partial or complete default. According to the recent forecasts, Ukraine’s financial reserves are expected to shrink to USD19 bln by the end of 2013. Next year it can give Ukraine a real hard time to service previous debts. Until this time Ukraine has had positive story of paying back the IMF credits. During 21 years of cooperation, the IMF has provided Ukraine with USD19,07 bln, and has received USD15,27 bln back, which is 80% of all debt. In 1999-2007, Ukraine’s payments have been higher than receipts from the Fund. In 2002-2007 Ukraine have actually managed to make it without the IMF credits whatsoever. In 2008-2010, Kiev was an active beneficiary of the IMF funds – USD13,57 bln total. In 2012-2013, Ukraine has paid back USD9,19 bln total. Next year Kiev has to pay back USD3,75 bln.
Allowing Ukraine to go default will not only endanger foreign funds given to Kiev but also will sharpen existing crisis in the economics of the European countries. The USA and also Lithuania, which presides now in the EU, send clear messages that they are ready to help Ukraine to receive a new loan from the IMF. But this case lies within the authority of three persons: the IMF managing director Christine Lagarde, the IMF director of communications Gerry Rice and the IMF permanent representative to Ukraine Gerome Vacher.
Presenting Ukraine a new loan from the International Monetary Fund on softer terms will not only reinforce the country’s economy but will support and develop its positive image as a credible borrower on the international markets. Otherwise, uncertain situation around and within Ukraine only feeds Kremlin’s empire ambitions and strengthens its geopolitical force which can damage the EU and the USA positions already shaken by the Syrian crisis and Edward Snowden’s turncoat.