Ukraine’s financial situation is quite desperate and it is very unlikely, given the current geopolitical situation, that it could turn to its traditional ally, Russia, for support. Instead, the nation must look to the IMF, EU and USA to throw it a financial lifeline – equally, the same geopolitical pressures mean that the EU and USA will offer such support.
As a precursor to the IMF support, Ukraine has had to agree to a significant hike in the prices it charges for domestic gas supply which it has been heavily subsidizing. The move will see domestic consumers pay 50% more for their gas with further rises in the pipeline (sorry…) until 2018. Currently, Ukraine gets about half of its natural gas from Russian giant Gazprom and then supplies its citizens with gas at below international market prices. Price rises will also hit district heating companies (with a 40% hike in July) and industry.
The Ukraine needs IMF support to enable it to meet foreign loan repayments and to cover a hole in the government’s budget. Following the agreement with the IMF, financial support from the US and EU could also be obtained. In common with loans it made to some Eurozone nations in collaboration with the wider Eurozone, the IMF is likely to seek reforms from the Ukraine, aimed to put the economy on a secure footing in the longer term. This is likely to include measures to curb corruption and decouple central bank support for the Ukrainian currency. Ukraine expects its economy to contract by 3% in 2014.
IMF support has been agreed in principle (today) and is said to be worth up to $18 billion over a two year period. The deal would give access to further assistance from the US and EU, reportedly worth a further $1 billion (in loan guarantees) and €1.6 billion of financial support, respectively.