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No easy bailout plan for Ukraine

Tuesday - 2/25/2014, 2:48pm  ET

An anti-Yanukovych protester protects the entrance of a shop occupied by demonstrators still camped out on Kiev's Independence Square, the epicenter of the country's current unrest, Ukraine, Tuesday, Feb. 25, 2014. The Ukrainian parliament on Tuesday delayed the formation of a new government, reflecting political tensions and economic challenges following the ouster of the Russia-backed president. Parliament speaker Oleksandr Turchinov, who was named Ukraine's interim leader after President Viktor Yanukovych fled the capital, said that a new government should be in place by Thursday, instead of Tuesday, as he had earlier indicated. (AP Photo/Emilio Morenatti)

Associated Press

KIEV, Ukraine (AP) -- Ukraine needs money, and fast -- in weeks, not months. But bailing out the country of 46 million people will not be as easy as simply writing a big check.

For one, Ukraine has already burned the main global financial rescuer, the International Monetary Fund, by failing to keep to the terms of earlier bailouts from 2008 and 2010.

Now it needs help again, and its economic and financial problems are worse than before.

The currency is sliding, raising concerns that companies that owe money in foreign currency could go bust. Banks are fragile. A rescue with outside lenders can't be agreed until there's a government. And Russia could make things worse by demanding payment of money owed for natural gas supplies.

Even with a bailout, the country would face testing times. It would likely be asked to make painful reforms -- including a potential doubling in the price of gas -- that would hurt standards of living as the economy recovers.


Estimates vary, in part due to the country's less than transparent finances, but analysts say Ukraine might need a total of $20 billion to $25 billion for 2014 and 2015, perhaps $15 billion this year and $10 billion the next. The money would help pay salaries and pensions and maturing bonds. Acting President Oleksandr Turchynov says the treasury account used to pay bills is almost empty.

Ukraine's acting finance minister, Yuriy Kolobov, says the country needs $35 billion to cover this year and next and expressed hope that Europe or the United States would help within the next two weeks. Ukraine has major debt repayments coming up in June but analysts indicate it will have difficulty making it that far without help.

The Institute of International Finance, a Washington-based association of banks and financial companies, warned that Ukraine's finances "are on the verge of collapse."

"It's crunch time for the economy," said Lilit Gevorgyan, an analyst with IHS Global Insight in London. "All those issues they have swept under the rug are re-emerging."


The main rescue lender would be the IMF, but it could take time for it to formally agree on the bailout conditions. Until then, it is likely to get temporary support from individual countries in Europe or the U.S.

EU foreign policy chief Catherine Ashton said Tuesday that the EU and its member nations are ready to help bridge Ukraine's short-term financing needs until a new government can negotiate a full-fledged assistance package with the IMF.

"Bills have to be paid," she said, adding that it is important that Russia also help out.

Ukraine had a promise of $15 billion in help from Russia -- but that's on hold after parliament voted Saturday to remove pro-Russian President Viktor Yanukovych. The country has only gotten $3 billion of the money.


Ukraine is battling to keep its currency, the hryvnia, from collapsing, which would bring down banks and companies that owe money in foreign currencies.

The central bank spent some $2.8 billion of its reserves since the start of the start of the year and has only about $16 billion left. Still the hryvnia has fallen a sharp 18 percent during that period, hitting a record low against the dollar on Tuesday.

The government also spends way more than it takes in, largely because the state-owned gas company Naftogaz charges customers as little as one-fifth the cost of gas imported from Russia. The IMF halted payouts under earlier bailouts because the government refused to halt that practice.

The economy is estimated to be in a deepening recession, with industrial production, consumer spending and exports all dropping.


Yet a bailout involving the IMF would involve cutbacks and reforms that could quickly douse any euphoria over the country's political changes.

To begin with, the IMF would probably insist on letting the currency fall, by as much as 30 percent, according to the IIF, the global banks' association. That would be painful upfront -- some banks may need bailouts as their foreign debts balloon. And quality of life would drop as imports soar in price.

Eventually, the currency drop would help exports and make Ukraine a cheaper place for foreigners to invest, particularly if they see that the government is committed to reforming the economy by cutting bureaucracy and fighting corruption.

The government would also have to sharply raise the price of natural gas, which it is subsidizing heavily. The IIF estimates natural gas prices may have to be doubled, which would be a heavy blow to consumers and businesses.

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