When helping Ukraine means filling Russia’s coffers

May 1, 2014
May 1, 2014

The International Monetary Fund is going long Ukraine with a $17-billion loan package for the troubled European country.

The first $3.2 billion of the package will be disbursed immediately, with the rest contingent on the performance of the new Ukrainian government as it implements fiscal reforms, including cuts to popular public subsidies and a free-floating currency. Ukraine has already failed to comply with the stipulations of two IMF loan programs since 2008, and whatever government emerges from this month’s elections will have a hard time implementing the new package while clinging to the eastern part of the country (where acting president Oleksandyr Turkanov described security forces as helpless and treasonous in the face of advancing pro-Russian forces).

But the big fear in IMF headquarters is that this Western money, intended to fuel an open government and protect Ukraine from falling further under the influence of Russian president Vladimir Putin, will instead mostly be spent paying off Russian state oil companies. Most of Ukraine’s fiscal problems come from its dependence on gas from Russia, and Russia has been jacking up the price of that gas; now Russia claims that Ukraine is in arrears to the tune of $3.4 billion.

The IMF does not want to see those funds flow to the Russians, especially with most of its leading member governments putting economic sanctions in place around the increasingly belligerent Russian state.

But the need to bolster an independent Ukraine apparently overrode these concerns: The IMF agreement will allow other lenders, including the World Bank and individual countries such as Germany and the United States, to provide aid and loan guarantees to Ukraine. It will also shift Ukraine away from dependence on higher-interest loans from Russia.

The complications underscore how the interconnected global economy has complicated 19th-century-style territorial expansion: Even as Putin and US president Barack Obama contemplate an oil war, some American executives are gearing up to visit St. Petersburg for an economic cooperation summit.

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