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Ukraine's IMF Bailout Is Small Enough to Work

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Today could be the first day of the rest of Ukraine's life. Along with a new cease-fire agreement, the country now has a four-year bailout deal with the International Monetary Fund. It's still too early to celebrate. Like the cease-fire, the aid package isn't very generous to Ukraine. But if it helps convince Kiev it needs economic reforms, that won't be a bad thing.

In January, financier and philanthropist George Soros suggested putting together a $50 billion rescue deal for Kiev. Today's statement by IMF Managing Director Christine Lagarde mentions $40 billion, but that's pretty meaningless. "Around $40 billion" is the full amount the IMF expects Ukraine to receive from all sources over four years, including contributions from individual countries, international organizations and private creditors, who are expected to agree to a restructuring deal.

There's little reason to think all that money will arrive. In March 2014, when the IMF first agreed to help Ukraine's post-revolutionary government, it spoke of $27 billion from various sources over two years, including somewhere between $14 and$18 billion in IMF funds. In fact, last year the country only received $8.6 billion in foreign loans. 

Not even Ukrainian Prime Minister Arseniy Yatsenyuk appears to believe the new $40 billion figure: He said on Facebook today that he was counting on $25 billion over four years.

About $17.5 billion of that is supposed to come from the IMF. But even if all that money were disbursed immediately, it would only just bring Ukraine's foreign reserves -- which now stand at $6.4 billion -- to the levels they had in January 2013. (That month, the reserves amounted to $24.5 billion.) So the IMF aid is not going to make Ukraine a wealthier country. But the package's small size could spur the country to more efficiency.  If they're no longer able to siphon money away from the state, Ukrainian officials may focus on making the economy more efficient.

In her statement, Lagarde said Ukraine had shown commitment to reform, but the proof she cited was meager. The Ukrainian government did achieve a 2014 deficit of 4.6 percent GDP instead of a projected 5.8 shortfall, but that mainly happened because of a sharp currency devaluation: the hryvnia lost 48 percent of its value against the dollar last year. Apart from that, Lagarde could mention only a few positives: the recent decision to float the hryvnia, which resulted in more devaluation, some favorable legal changes and a natural gas price hike, which began to solve Ukraine's addiction to corruption-feeding energy subsidies. In truth, Ukraine has not done much to reform its bureaucracy-choked  economy since President Viktor Yanukovych was chased from Kiev a year ago. 

That may explain the modesty of the IMF's offer. "The program will require the authorities' steadfast determination to reform the economy," Lagarde said in the statement, adding that the program's success was "subject to risks," especially geopolitical ones. If the cease-fire holds, however, the government will no longer be able to use the war in eastern Ukraine as an excuse to keep putting off meaningful reforms, especially deregulation and tax changes to spur business investment. 

Yatsenyuk says his government isn't looking for excuses. "This reform program is not for the IMF, it is a program for reforms in Ukraine," he wrote in his Facebook post. He promised measures long advocated by Ukraine's well-wishers in academic circles, such as Anders Aslund of the Peterson Institute for International Economics: cuts to government spending, the elimination of high pensions for former officials, further liberalization of energy prices. According to Yatsenyuk, if the conflict with Russia subsides, and his proposed measures are passed, the Ukrainian economy will start growing in 2016. (The economy  contracted about 7.5 percent last year, and is expected to shrink another 2.3 percent this year.)

So far, Ukrainian government bonds -- the three-year one trades at a 37.89 percent yield -- and the hryvnia's exchange rate have shown no positive reaction to the deal, however. The markets don't much trust the current Ukrainian government to do a better job than its predecessors.

Ukraine's best hope is that civil society, empowered by last year's anti-corruption revolution again former president Viktor Yanukovych, will push the political leadership and bureaucracy toward positive change. Until now, the war in eastern Ukraine has kept activists and volunteers too busy to care much about governance and the economy. If the peace holds, that could quickly change. As Valeri Pekar, head of Ukraine's main business lobby, the Union of Industrialists and Entrepreneurs, wrote on Pravda.com.ua, "The political system is too slow in catching up to the growing demands of society. Our job is to help align it with the forces of reform."

Experience tells me the fresh start, offered by the cease-fire and the IMF deal, will be one more in a long series of Ukraine's missed opportunities. Yet I want to believe the country will finally seize this chance. If Ukraine shows that a large post-Soviet country can turn itself into an economically viable democracy, it will be a positive example for its neighbors, rather than a laughingstock or easy prey. That's the only way for it to win a lasting victory over President Vladmir Putin's Russia.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net