White House Talks Up Aid for Ukraine With Eye on Putin

Photographer: Nicholas Kamm/AFP/Getty Images

A woman chants slogans during a protest against ousted Ukrainian president Viktor Yanukovych in front of the White House in Washington, D.C. on Feb. 23, 2014. Close

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Photographer: Nicholas Kamm/AFP/Getty Images

A woman chants slogans during a protest against ousted Ukrainian president Viktor Yanukovych in front of the White House in Washington, D.C. on Feb. 23, 2014.

The Obama administration is pushing Russia to use diplomacy, and urging its European allies to provide economic aid, in an effort to nudge Ukraine toward democracy after its parliament ousted President Viktor Yanukovych following violent protests.

With no credible military options, the U.S. and its allies have limited leverage over Russia as Ukraine tries to form a new government and seeks to rescue an economy that parliament Speaker Oleh Turchynov called “catastrophic.”

At the same time, though, two U.S. officials said yesterday, the crisis offers U.S. President Barack Obama an opportunity to try to convince Russian President Vladimir Putin that Ukraine’s future is not a zero-sum Cold War replay and that continued chaos in Ukraine -- Russia’s historic breadbasket, industrial hub and home to its navy’s Black Sea fleet -- is not in his country’s interest.

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The turmoil, the officials said, speaking on condition of anonymity to discuss internal deliberations, also is a chance for the U.S. to support the European Union and the International Monetary Fund in using the economic aid that Ukraine needs to prod the country’s leaders to make economic, as well as political, reforms.

White House National Security Adviser Susan Rice said yesterday the U.S. will work with its European partners to help finance Ukraine’s economic recovery.

“They need to reform, and they need financing,” Rice said on NBC’s “Meet the Press” program. “And that will be very much a part of our shared efforts.”

Standard & Poor’s warned on Feb. 21 that Ukraine risks default without “significantly favorable changes” in its political crisis and cut its credit rating to CCC, eight levels below investment grade. Russia halted a $15 billion bailout because of the unrest.

Lew’s Conversation

Treasury Secretary Jacob J. Lew spoke by phone yesterday with Ukrainian leader Arseniy Yatsenyuk en route back to Washington from a Group of 20 meeting in Sydney, Australia, a Treasury official said in an e-mailed statement.

According to the official, Lew said there was broad support at the meeting for an international assistance package centered on the IMF as soon as the transitional Ukrainian government is fully established by the parliament, and he encouraged Ukraine to begin discussions with the fund as quickly thereafter as possible.

While he underscored the need to implement reforms, Lew also said the U,S. and others in the international community are ready to help cushion their impact on low-income Ukrainians.

‘Big Player’

The IMF, which Rice said would be “the big player on the block,” could provide as much as $12 billion of the $15 billion Ukraine needs, with the European Union providing the rest, said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington who specializes in Russian and Eastern European economic policy.

The IMF “will be ready to engage” if Ukraine “wants to actually undertake a reform of its economy,” Managing Director Christine Lagarde said in an interview in Sydney after the meeting of G-20 finance ministers and central bankers.

The conditions the IMF will set for giving aid are sure to test “the will of the corrupt to restrain themselves,” said Martha Brill Olcott, senior associate in the Russia and Eurasia Program at the Carnegie Endowment for International Peace in Washington.

As much as $12 billion of previous aid was likely lost to corruption over the last four years to the family ofYanukovych, Aslund said.

Movie Rerun

“We’ve seen this movie several times before in the Ukraine,” Angela Stent, director of the Center for Eurasian, Russian and East European Studies at Georgetown University in Washington, said yesterday in a telephone interview.

“You’re still dealing with a system that is highly corrupt, and you still have oligarchs that are calling the shots,” she said.

“The IMF is going to rightly demand some reforms, but a delicate balance has to be struck,” said Jim Slattery, an attorney and former congressman from Kansas who represents opposition leader Yulia Tymoshenko, an ex-premier who returned to the political stage over the weekend after being released from a prison hospital.

“The demands cannot be so onerous that the people of Ukraine will rebel against them,” Slattery said.

The U.S. is unlikely to provide more than a token amount of aid, leaving the bulk of assistance to the EU and the IMF, said the Carnegie Endowment’s Olcott.

Backup Role

“To the degree the U.S. can do anything, it has to be encouraging or supporting the Europeans,” she said.

Ukraine will need about $15 billion over the next year, of which the U.S. is likely to offer no more than $200 million, said Aslund of the Peterson Institute.

“The U.S. is not really relevant in the economic picture,” he said. “It is relevant in the geopolitical picture. If the U.S. speaks up to Russia, that will be important.”

A key test for the Obama White House now will be whether it can persuade Putin to avoid military intervention in Ukraine and forgo any effort to split the country in two.

“This is really a legacy issue for Putin, which is what makes it so dangerous,” Olcott said. “You can’t have a great Russian state when Ukraine is pro-European.”

Senator John McCain, an Arizona Republican who serves on the Armed Services Committee, said the U.S. must make clear to Putin that “a partition of the country would not be acceptable” and he must “let the Ukrainian people determine their own future.”

‘Grave Mistake’

Rice yesterday warned that Russia would be making a “grave mistake” if it decides to send troops into Ukraine.

Still, Ukraine’s history sitting between Russia and Poland, endemic corruption, strained U.S.-Russian relations and the need for Putin’s cooperation with the U.S. on other issues, including curbing Iran’s nuclear program and ending Syria’s civil war, all suggest the strategy has limits.

Even if Putin refrains from making intimidating military moves, though, there’s no guarantee that new economic aid from the West could revive the country’s economy and help a new government gain legitimacy.

Any reform effort could be hampered by the political differences that continue to divide Ukraine, said Stent, whose new book “The Limits of Partnership” examines four failed attempts to reset U.S.-Russia relations.

Divided Nation

While much of the western side of the country considers itself European and some of it used to be part of Poland, some of the population in the eastern side remains loyal to Russia. Part of Ukraine, including the Crimean peninsula, used to be part of Russia.

A Gallup poll last year found that 56 percent of Ukrainians think the breakup of the former Soviet Union did more harm than good, while only 23 percent said it was a net benefit. The poll of at least 1,000 adults was conducted between June and August of 2013. The poll had a margin of error of plus or minus 2.7 to 3.8 percentage points.

With no single opposition leader emerging who can unite the country, Stent said, “it makes it much harder for us.”

“There are no easy options here,” she said.

To contact the reporter on this story: David Lerman in Washington at dlerman1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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