Ukraine’s leaders appeal for financial help as government begins to run out of money

President Obama held face-to-face talks with Ukraine’s acting prime minister, Arseniy Yatsenyuk, in the Oval Office. (Reuters)
March 12

Ukraine’s deposed president Viktor Yanukovych left an economy in turmoil when he fled the country last month: The treasury has less than $500,000, and the government says it needs $4 billion just to prevent a default on its debt payments.

With the country quickly running out of money, interim Prime Minister Arseniy Yatsenyuk was in Washington this week to appeal for economic help as well as U.S. support in Ukraine’s standoff with Russia.

An International Monetary Fund mission that was scheduled before the crisis escalated arrived in Kiev last week to assess Ukraine’s needs before finalizing what is expected to be a multibillion-dollar bailout. But Russia’s military offensive in Ukraine’s Crimean Peninsula has made that mission more urgent.

The United States and the European Union have also gone on the alert. In inviting Yatsenyuk to Washington, the Obama administration called on Congress to approve $1 billion in loan guarantees to Ukraine. For its part, the E.U. announced a comprehensive $15 billion assistance program dependent on a go-ahead for an IMF bailout.

Perhaps by coincidence, the E.U. aid matches the $15 billion bailout that Russian President Vladi­mir Putin dangled before Yanukovych in November to persuade him to ditch plans to sign a trade deal with the E.U. in favor of closer ties with Moscow. About $3 billion of the Russian aid package was disbursed in December. But with Yanukovych ousted from office and his anti-Russian opponents in power, the Kremlin is unlikely to sanction the release of further aid.

The E.U. is going forward with plans to sign a political agreement that would anchor Ukraine to Europe.

“We have a debt, a duty of solidarity” with Ukraine, Jose Manuel Barroso, president of the European Commission, said at a summit in Athens over the weekend. “We will work to have them as close as possible to us.”

The E.U. and U.S. aid packages are intended to help sustain Kiev until the IMF finalizes a stabilization program and long-term loan for Ukraine.

Ukraine’s problems are in large part a legacy of 23 years of incompetent economic management since the country became independent from the Soviet Union. When the global financial crisis struck in 2008, Ukraine was forced to turn to the IMF and the E.U. for assistance. World prices for steel, the country’s main export, have yet to recover to pre-2008 levels.

Most of the financial help now will come with conditions obliging the government to push through painful reforms and tackle corruption, which peaked during the Yanukovych presidency. According to Yatsenyuk, at least $70 billion has vanished from the financial system into offshore accounts over the past three years.

International lenders will also demand a crackdown on corrupt business practices that have suffocated enterprise. Measures will probably include the overhaul of the judiciary and an end to arbitrary state procurement processes that allow government friends and cronies to scoop up lucrative contracts at a fraction of their true value.

“Corruption here is really frightening, and it can be physically dangerous,” said Yuriy Shevchenko, the director of ­Transtyazhmash, a machine-building enterprise in the eastern city of Kharkiv. “At any time, tax collectors can arrive and demand that you pay more money.”

The IMF is also expected to insist that the government allow the Ukrainian currency, the hryvnia, to float more freely and to remove subsidies on domestic gas prices that drain the budget and encourage waste.

Timothy Ash, head of emerging markets research at Standard Bank, said the escalating crisis could stimulate a transformational, Western-backed program, turning the page on two decades of corrupt and incompetent economic management.

“The agenda is reform or fail, from an economic perspective and also in terms of sovereignty,” he said.

But as the euphoria of the revolution ebbs, the austerity measures could undermine the new government’s popularity. Public confidence in Kiev’s ability to right the economy is already low.

As a vital trading partner and Ukraine’s main source of energy, Russia has the power to wreak economic havoc. Last week, the Russian state gas company Gazprom demanded that Ukraine settle its $1.89 billion debt or risk disconnection and threatened to jack up the cost of supplies in April.

For this reason as much as any other, Western financial support may not be enough to avert an economic collapse in Ukraine.

In pro-Russian eastern Ukraine, where Soviet-era industrial behemoths depend on Russian markets, a decline in living standards could stoke separatist sentiments.

Protesters in Kharkiv, the country’s second-largest city and just about 30 miles from the Russian border, have taken to the streets to demonstrate against the interim government.

Svetlana, an electrician who declined to give her full name because she feared possible recriminations, said she had no confidence that the interim government would eradicate corruption and provide Ukrainian citizens with a better living. She said it “made no difference” to her whether Ukraine remained independent or became part of Russia.

“I have paid taxes all my life,” she said. “I have no savings. What difference does it make to me if my money lines the pockets of someone like Yanukovych or Vladimir Putin?”

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