(Updates with Lagarde comments)
By Anna Yukhananov
WASHINGTON, April 30 (Reuters) - The International Monetary Fund’s board signed off on a $17 billion two-year aid program for Ukraine on Wednesday to help the former Soviet republic’s economy recover after months of turmoil.
The IMF aid will allow the immediate disbursement of $3.2 billion to Kiev, and unlock further credits from other donors of about $15 billion, intended to help Ukraine stabilize its economy amid its worst civil turmoil since independence in 1991.
IMF Managing Director Christine Lagarde admitted the program faces geopolitical risks, along with uncertainty about the government’s ability to carry out the politically unpopular measures necessary to get its finances in order.
“On the implementation front, we are taking all the precautions we can in order to mitigate those risks,” Lagarde told reporters after the board’s decision.
The IMF’s board decided to meet every two months for the next couple reviews of Ukraine’s program, rather than following the typical three-month schedule, in order to closely track the government’s continued commitment to economic reforms, such as floating the currency and cutting fiscal deficits.
“On the geopolitical front, clearly the bilateral international support, and the cooperation of all parties, will be extremely helpful to reinforce the position of the economy of Ukraine,” Lagarde said.
Pro-Moscow separatists seized government offices in more Ukrainian towns on Wednesday, a further sign authorities in Kiev are losing control of the country’s eastern industrial heartland bordering Russia.
The unrest in the east follows months of upheaval from anti-government protests and Russia’s subsequent annexation of the Crimea region, which had already edged Ukraine’s economy to the brink of bankruptcy.
Ukrainian authorities have said the economy will likely contract by 3 percent by the end of this year as a result of the chaos and mismanagement. Economic output fell 1.1 percent in the first three months of the year.
Kiev is also in a dispute with Moscow over the price it will pay for natural gas exports in the future, and over money owed for prior gas purchases.
Ukraine’s economy may further suffer if sanctions intensify on its neighbor Russia, a key market for Ukrainian exports. Western nations have placed visa bans and asset freezes on Russian individuals and companies over what they see as Russian meddling in Ukraine.
“Clearly on the front of sanctions, anything that undermines the economic situation of the country will jeopardize the implementation of the program, which is why we very strongly encourage the parties to negotiate, to come to terms,” Lagarde said.
The political unrest makes it even more difficult for Ukraine to get its economy back into shape, even though the country’s new government pledged to pursue politically unpopular reforms as a condition for receiving IMF aid.
Ukraine’s previous two IMF programs were suspended after the government failed to follow through on promised reforms.
The IMF expects Ukraine to implement major reforms in its energy and financial sectors, including raising the price of gas for domestic consumers. The government, in power until elections on May 25, has already promised to raise gas prices by more than 50 percent from this Thursday.
“(Ukraine) has demonstrated in the last few weeks that it can undertake comprehensive reforms and has actually addressed some of the issues that have been outstanding for a long time,” Lagarde said. “We believe that Ukraine has an opportunity to seize the moment, to break away from previous practices, both from the fiscal, from the monetary, and from the governance point of view.”
The decision from the IMF’s 24-member board, which includes representatives from Russia and the United States, clears the way for an immediate disbursement of $3.2 billion to Ukraine’s cash-strapped government, allowing it to meet looming obligations and avoid a potential debt default. Of that first tranche, $2 billion will be targeted at supporting the budget. (Reporting by Anna Yukhananov; Editing by Chris Reese, Meredith Mazzilli and Gunna Dickson)