WASHINGTON (Reuters) - Ukraine appealed for urgent international aid this week after the fall of Russian-backed president Viktor Yanukovich cast doubt on whether it could get the remaining $12 billion from a bailout deal he struck with Moscow.
Ukraine’s acting president, Oleksander Turchinov, said Kiev would need $35 billion over the next two years, and warned the economy was “heading into the abyss.
The United States and European Union said they were looking at how to help Ukraine, but they indicated any comprehensive package was likely to only take shape after elections in May and in coordination with the International Monetary Fund.
Here are some facts about the IMF and Ukraine:
WHY THE IMF MATTERS
The IMF, made up of 188 member countries, is charged with policing global economic stability. It pools its members’ money to lend to countries in difficulty, but only if they promise to implement rigorous reforms to prevent such crises from occurring again. An IMF bailout sends a signal to investors and other donors that a country’s economy is on the right track, and often catalyzes bilateral aid.
WHAT THE IMF WANTS
The IMF has strict lending conditions to ensure that the funds are not wasted and that a country will be able to fix its economy and keep it healthy. The Fund also wants to ensure any loans get paid back so it can maintain its own solvency.
WHAT UKRAINE MUST DO
The IMF has consistently said that Ukraine’s economic policies would create unsustainable large external and fiscal imbalances. It has called on Kiev to cut its large fiscal deficit, phase out energy subsidies, strengthen the banking sector, and allow the exchange rate to fall. A freely floating hryvnia currency and higher domestic gas prices are unpopular steps previously rejected by the Kiev government. Similar conditions are expected to be attached to any new IMF bailout.
UKRAINE AND IMF’S SHARED HISTORY
The IMF loaned newly independent Ukraine about $3.5 billion in the mid-1990s, several years after the collapse of the Soviet Union, and another $2.2 billion in 1998, an amount it later increased.
Another one-year $600 million loan followed in 2004, and a two-year $16.4 billion loan was provided in 2008.
The IMF last agreed to loan Ukraine $15 billion in 2010, but froze the deal in 2011 after Kiev failed to implement the required reforms, including removing gas price subsidies.
After reviewing why the last bailout went off track, the IMF’s board in December said Kiev should get less money in any future bailout, and should be required to implement more economic reforms before it gets any IMF money.
Ukraine and the IMF launched talks early last year to nail down a new aid package, but the Kiev government later indicated it did not require fresh IMF funds yet because it was able to borrow in the markets. But desperate for cash to cover a big external funding gap, Kiev in December received a $15 billion bailout from Russia after spurning a trade deal with the EU.
The closer relations with Moscow that this bailout represented sparked weeks of sometimes violent street protests, destabilizing Yanukovich’s government and leading parliament to finally strip him of his powers on February 22.
HOW IMF BAILOUTS ARE IMPLEMENTED
Under its rules, the IMF cannot begin discussions with Kiev until the government requests an IMF bailout. The IMF says it has not received a request so far, and Ukraine’s parliament does not plan to vote on the formation of a government until February 27.
After getting such a request, IMF staff would go to Kiev to analyze the government’s finances, see how much money would be required, and set timelines for implementing key reforms. The IMF’s board would have to sign off on any new bailout before the Fund could disburse money. The whole process could be done within a month, but usually takes longer.
The key question is whether Ukraine’s new leaders are more likely to agree to difficult economic changes than the former leaders. The government would have to command strong popular support from all parts of Ukraine to push through difficult reforms. Because of that, any IMF bailout may have to wait until after the May 25 elections.
On the other hand, some analysts say Ukraine’s economic situation is so dire, it cannot wait three months and has no choice but to agree to IMF conditions now.
HOW LONG UKRAINE CAN WAIT
Ukraine’s government says it needs to start getting money in the next week or so.
Ukraine has around $6.5 billion in foreign debt payments to make before the end of 2014 and needs a further $6.5 billion to cover its current account deficit, according to estimates from Commerzbank, which says the nation is also $1 billion in arrears to Russia for gas supplies.
Estimates vary but Goldman Sachs reckons that the central bank’s currency reserves are down to between $12 billion and $14 billion, a sum which its current obligations could wipe out.
The Institute of International Finance, a global financial industry lobby group, says Ukraine would need at least $20 billion this year to avoid a default. If it does not undertake reforms, Kiev may require about $30 billion, according to the
“With Russia unlikely to disburse more funds, at least for now, the collapse can come as early as March, unless the recent acceleration of capital flight is not reversed,” the IIF said in a report on Monday.
The hryvnia fell to an all-time low of 9.70 to the U.S. dollar on Tuesday, reflecting the political uncertainty.
Reporting by Anna Yukhananov; Editing by Paul Simao
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