The IMF is seeking to limit its share of the aid burden in discussions on an expanded bailout for Ukraine, according to two people with knowledge of the institution’s stance, as a military conflict pushes the former Soviet republic closer to default.
The deliberations come as Ukraine loosened controls on its currency in a step aimed at winning new aid from the lender.
In April, the International Monetary Fund’s $17 billion loan package accounted for close to two-thirds of the $27 billion committed by donors including the U.S., European Union and Japan. The IMF doesn’t want to go above the two-thirds threshold in negotiating a new loan, said one of the people, who requested anonymity because the discussions are private.
The Washington-based lender is making its decision in a high-stakes environment. With Ukraine needing $15 billion in additional funding, the country’s fiscal and economic condition will help determine whether it remains oriented toward the U.S. and EU or is drawn into Russia’s orbit amid the worst standoff since the end of the Cold War.
“Ukraine from the beginning has been a political issue, not an economic issue,” said Andrea Montanino, who stepped down as Italy’s representative to the IMF last year and is now director of the Atlantic Council’s global business and economics program in Washington.
The hryvnia plummeted 32 percent to a record low against the dollar on Thursday after the government loosened its reins on the currency.
Gerry Rice, an IMF spokesman, said Thursday that he didn’t think the fund had a specific ratio in mind for its share of the Ukraine bailout. The IMF wants to ensure that there’s enough cash to meet the nation’s financing needs and carry out the program, and the institution tries to be a “catalyst” that encourages other donors to lend, he said at a briefing.
The central bank has agreed on terms with the IMF, which is now working with the energy and finance ministries, Governor Valeriya Gontareva said Thursday. She said she hopes fund staffers will complete the aid proposal within two days and expects the IMF’s board to meet in two or three weeks.
Ukraine, the U.S. and its allies say Russia is supporting militias with hardware, cash and thousands of troops, accusations the Kremlin denies. Russia says the government in Kiev is waging war against its own citizens and discriminating against Russian speakers, who make up the majority of the Donetsk and Luhansk regions in eastern Ukraine.
The intensifying violence has shattered economic-growth projections, making the IMF’s decision more challenging. Limiting the proportion of aid would potentially allow the IMF to shield itself from any additional risk of a default and avoid becoming more deeply enmeshed in a geopolitical crisis.
“The IMF doesn’t want to be too exposed on its own,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington.
Ukrainian Finance Minister Natalie Jaresko has pledged a range of steps to bolster the nation’s finances and generate growth, such as laying off public servants and privatizing state-owned companies. It’s a refrain the lender, which has provided three aid packages to Ukraine since the financial crisis, has heard before.
Now the fund is in a trickier spot after assuming the conflict would end within months, paving the way for policy changes that support growth.
The IMF was conceived in 1944 to promote global economic cooperation and provide emergency lending to countries in danger of default. Yet in the case of Ukraine, it’s also playing a key role in buttressing the administration of President Petro Poroshenko.
Just nine months ago, fund staff members expressed uncertainty about the outcome of the conflict after Russia annexed Ukraine’s Crimea region. The IMF expected the Ukrainian economy would grow 2 percent this year after shrinking 5 percent in 2014. Unemployment would ease, and the government would begin trimming its debt.
The assumptions underpinned the IMF’s two-year loan to Ukraine. By September, the fund had cut its growth forecast to 1 percent this year, while assuming the conflict would subside “in the coming months.” The central bank is now forecasting a contraction of 4 percent to 5 percent this year following a 6.7 percent decline in 2014.
Meanwhile, the conflict has flared up again in recent days, as a tentative truce negotiated in September has fallen apart. Ukrainian authorities have requested a financial aid package of as long as four years to replace the current one and Jaresko said her government would discuss her country’s “debt sustainability” with sovereign bondholders.
IMF Managing Director Christine Lagarde said she’s prepared to support the aid request, which requires approval from the board of the 188-nation institution.
While neither Ukraine nor the fund has disclosed the amount of the request, Montanino said he expects Ukraine to receive an additional $5 billion to $6 billion from the fund. That will put pressure on the U.S. and EU along with other institutions such as the World Bank to come up with the remaining $9 billion to $10 billion.
Ukraine had drawn down about $4.2 billion of the IMF loan as of Dec. 31, according to the fund’s website.
There are growing calls for the U.S. to step up engagement. Eight former top American diplomatic and defense officials this week urged the White House to send $3 billion in military aid, including lethal weaponry, to Ukraine. Ashton Carter, President Barack Obama’s nominee for defense secretary, told Congress on Wednesday that he’s “very much inclined” to support sending weapons, differing from White House policy.
Secretary of State John Kerry, speaking with Poroshenko in Kiev on Thursday, said the U.S. seeks a diplomatic resolution in Ukraine.
Military aid could boost the nation’s forces, improving the IMF and Ukrainian government’s chances of stabilizing the economy and pursuing a political settlement, said Steven Pifer, one of the ex-officials and a former U.S. ambassador to Ukraine.
“Europe doesn’t want a state the size of Ukraine failing on its doorstep,” said Pifer, now director of the Arms Control and Non-Proliferation Initiative at the Brookings Institution in Washington.