Analysis: Putin key to Ukraine success with IMF loan

AP News
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Posted: Jun 06, 2015 3:13 AM
Analysis: Putin key to Ukraine success with IMF loan

WASHINGTON (AP) — So far, the International Monetary Fund is giving Ukraine a passing grade on early efforts at political and economic reforms as it spends a first installment from a four-year, $17.5 billion loan program. But in the end, Russian President Vladimir Putin holds the trump cards in Ukraine's drive to extract itself from Moscow's orbit.

Until Wednesday, there had been a lull in the war between Ukrainian forces and Moscow-backed Russian separatists in the key industrial and coal-mining region in the east of Ukraine. The Putin-friendly separatists and Ukrainian regular forces again engaged in heavy fighting on Wednesday, a spike in violence that tapered again on Thursday. It appeared, as fighting diminished at the end of the week, that Putin was not ready yet to play his trump. So far more than 6,400 people have died in the on-again-off-again battles that have severely damaged the Ukraine economy and disrupted critical trade with Moscow.

Andrew Weiss of the Carnegie Endowment says the IMF is in "a race against time."

"The fragility of the Ukrainian state is such that if Moscow significantly ratchets up the pressure it may be very hard for the (Ukrainian President Petro) Poroshenko to deliver on ambitions for significant economic reform and changes in the political system," Weiss said. "If you take that pressure alongside of the bad habits and business-as-usual conduct of the Ukrainian elite who have led the country for most of the past 25 years, the prospects for the reformist movement in Ukraine look quite challenging."

The IMF sees things differently.

At the end of a May 12-29 assessment visit, IMF Ukraine mission chief Nikolay Gueorguiev said goals set for Ukraine in March had been met and "all structural benchmarks due in the spring are on course to be met, albeit some with a delay." The IMF would not be specific about goals.

Even so, Gueorguiev issued a mixed first review of Ukraine's progress in using the fund's first $5 billion tranche of the total four-year loan of $17.5 billion to reverse the former Soviet republic's slide into bankruptcy and to root out endemic corruption.

The bad news: The IMF projected a 9 percent contraction in the already faltering Ukrainian economy this year, with inflation topping 46 percent.

The good news: The shrinking GDP forecast actually suggested signs of stabilization, given that it includes a horrendous 17.6 percent contraction in the first quarter of 2015. And, said Gueorguiev, the Kiev government's "commitment to the reform program remains strong."

The IMF put Ukraine under what is known as an Extended Fund Facility, the $17.5 billion loan program, after earlier and more limited IMF assistance programs failed under the leadership of ousted pro-Russian President Victor Yanukovych. He was forced from office after months of protests by Ukrainian activists disgusted with the corruption and his having reneged on promises of closer ties to the European Union. He fled to Moscow, and new elections put Petro Poroshenko in the president's office.

Ukraine had been under Moscow's thumb because of a deep history of trade links during Soviet times. And the bulk of its energy supplies came from Russia. Now, the country is struggling to build a system of other suppliers.

What's more, Putin took revenge for Yanukovych's ouster by seizing the strategically important Crimean peninsula. He also began — the United States and other Western allies claim — sending arms and troops to mainly Russian-speaking separatists in the eastern portion of Ukraine. Putin denies Russian involvement in the fighting.

At stake for the 188 member-nation IMF is repayment of the $17.5 billion loan. The government must show it is meeting goals for the next tranche of $1.7 billion. The big and risky IMF four-year loan program was heavily front-loaded with a $5 billion disbursement shortly after the program was announced in March.

"In recent months, signs that economic stability is gradually taking hold are steadily emerging," Gueorguiev said in his statement about the review.

And the forecast for a big jump in inflation, he said, was mainly the result of one-time currency devaluation and a big boost in energy prices as the government cut back on subsidies for oil and gas.

Another big snag that could upend the IMF program — beyond a resumption of all-out war — is the expectation that Kiev will be able to get out from under or reschedule $15.3 billion indebtedness and interest payments. Negotiations with debt-holders is said to be going badly and could snarl progress in the IMF loan program.

Putin won't be on the guest list when President Barack Obama and other world leaders assemble in Germany this weekend. Russia was kicked out of the group of powerful countries, then known as the G-8 (now the G-7) because of its actions in Ukraine. It appears unlikely, however, that the U.S. and Europe will toughen sanctions on Moscow without a major increase in Russian aggression. European nations with strong financial ties with Russia fear the sanctions could damage their own economies.

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EDITOR'S NOTE — Steven R. Hurst is The Associated Press' international political writer. He reported from Moscow for 12 years.