Ukraine’s Other War

By | Updated April 11, 2016 9:50 AM UTC

Ukraine is fighting two wars. One is its struggle to dislodge pro-Russian separatists from its easternmost provinces. The other is a battle to reshape an economy that’s buckling under the weight of corruption, mismanagement and two decades of post-Soviet neglect. The shooting war involves grappling with a big enemy, Russia. The economic one requires grappling with Russia too, but also with big friends, including the U.S. and European Union. They’ve arranged for $40 billion in aid that comes with taut strings attached. It’s conditioned on fighting graft, along with unpopular measures to curb subsidies that citizens use to pay for heat.

The Situation

President Petro Poroshenko is leading a revamp of Ukraine’s fragile ruling coalition, as Prime Minister Arseniy Yatsenyuk resigned in April after months of infighting created a political quagmire. The country needs to fulfill pledges to combat corruption and overhaul its economy to keep funds flowing from the International Monetary Fund, Managing Director Christine Lagarde warned in February. Ukraine overcame its most pressing economic problem in October, when it convinced foreign creditors holding $15 billion of bonds to accept a 20 percent cut to the amount owed and delayed payment. The next debt hurdle is Russia, which refused to accept the same terms on a $3 billion bond it bought from Ukraine’s former president in 2013. Ukraine defaulted on the bond Dec. 18, and Russia filed a claim at the High Court in London to force a repayment. The long-term challenge is at least as thorny: convincing foreign companies that Ukraine is a safe place to invest, despite the military standstill in the east. Armed conflict has decimated Ukraine’s industrial heartland, home to much of the nation’s coal, steel and machine-building. The economy shrank almost 10 percent in 2015, and Ukraine’s National Bank predicts it will expand by about 1 percent in 2016. The slump has turned the currency, the hryvnia, into one of the world’s worst performers, making it harder for the government to repay its foreign debt.

The Background

Torn between Russia and the rest of Europe, Ukraine’s 44 million people have made little economic headway since the Soviet Union’s demise. Reformers who came to power in the nonviolent 2004 protest movement dubbed the Orange Revolution failed to deliver on promises to steer the country toward the European mainstream, leaving a clique of billionaire businessmen in control. These oligarchs ran the nation’s biggest enterprises and were represented by conflicting factions in parliament. Corruption is rampant: Ukraine ranks 130th of 175 countries in Transparency International’s annual survey of perceived freedom from graft. Economic output per capita has lagged by comparison to the EU’s eastern members. New leaders, led by a generation of self-styled reformers, rose in 2014 after street protests deposed the pro-Russian president, Viktor Yanukovych. They’ve promised to modernize Ukraine’s energy and legal systems and to enforce anti-corruption measures, though progress has been hampered by political infighting, reform fatigue and public discontent over austerity measures and corruption.

The Argument

Ukraine’s route to economic independence and growth is blocked by formidable obstacles. The government’s four-year transformation plan includes reducing subsidies for household energy spending and privatizing state assets. It’s asking citizens to endure cuts in heating subsidies, inflation of more than 40 percent, and a freeze in pensions and wages. That’s while trying to wean itself from dependence on Russian gas. Ukraine also wants to find a way to deepen economic and military cooperation with allies to move toward closer integration with the EU, without upsetting a fragile cease-fire in the east. Military conflict is helping maintain public support for the overhaul program, which faces daunting risks, according to the IMF. Success will mostly depend on Russia. President Vladimir Putin has shown little inclination to tolerate losing a former Soviet republic from his sphere of influence or to bend to U.S. and EU sanctions. Ukrainians say their ability to overcome Russian pressure depends on more help from foreign companies as well as governments. Investor George Soros says Ukraine needs about $55 billion of investments to flourish. So far, Ukraine has seen little of that kind of support: There was a $3.1 billion inflow of foreign direct investment in 2015, after an outflow in 2014.

The Reference Shelf

  • A Bloomberg News analysis of Ukraine’s Russian bond and the scenarios for restructuring.
  • The IMF’s August 2015 report on its emergency loan includes economic forecasts, policy program and loan conditions.
  • Bloomberg QuickTake on the political conflict between Ukraine and Russia.
  • Anders Aslund, senior fellow at the Peterson Institute for International Economics, reports on Ukraine’s economic strategy.
  • Professor Anna Gelpern of Georgetown University Law School argues in a Peterson Institute policy brief that sanctions against Russia could lighten Ukraine’s debt burden.

First published June 8, 2015

To contact the writers of this QuickTake:
Marton Eder in Budapest at
Natasha Doff in London at

To contact the editor responsible for this QuickTake:
Leah Harrison at