Ukraine Needs the IMF's Tough Love

It'll be good for you.

Photographer: ANDREW KRAVCHENKO/AP/GETTY IMAGES

The International Monetary Fund has threatened to cut off aid to Ukraine unless the government finally cracks down on corruption. It’s the right message, and the fund should be prepared to follow through if President Petro Poroshenko fails to deliver.

Make no mistake: This would be a devastating blow for a country still struggling with a Russia-inspired insurgency in its eastern provinces. The IMF-led $40 billion aid program is keeping Ukraine’s economy alive, if just barely.

QuickTake Ukraine's Other War

The unfortunate truth is, independent Ukraine has so far shown itself incapable of reform. It’s been almost two years since former President Viktor Yanukovych was ousted (and Russia, in response, annexed Crimea). With the conflict in the eastern Donbas region now merely simmering, the greatest threat to Ukraine’s continued existence as an independent state is its own corruption.

The country’s persistent vulnerability to this problem has inspired two popular uprisings, in 2004 and 2013. And corruption, especially in the energy field, is what has exposed the country to manipulation -- and, later, invasion -- by Russia.

So what to do? After IMF Managing Director Christine Lagarde issued her threat, Poroshenko promised to deliver a road map to reform. It should include at least three proposals.

First, Ukraine needs an enforceable schedule for the privatizing most of the country’s 3,000-plus state-owned companies, whose losses are bleeding the budget dry. Under the country’s post-Soviet system, the profits these companies earn are privatized, but assets and losses remain the responsibility of the state. So, oligarchs pay stooges in parliament and government ministries to ensure that their people are put in charge of state enterprises. These appointees, in turn, can siphon revenues to their bosses -- and pass losses on to the state.

Naturally, it will take time to sell so many companies. In the meantime, Ukraine should form an independent committee of technocrats to cull corrupt managers and replace them with professionals.

Also, special prosecutors, who at last are being hired to work with the new National Anti-Corruption Bureau, need to be protected from interference, so that corrupt officials can be brought to trial. Ideally their trials will be held before special corruption courts run by judges from outside Ukraine’s compromised judiciary -- if need be, from abroad.

Poroshenko must understand that Ukraine has reached a tipping point. Its Western donors are running out of patience, and so are some of its own leaders. Earlier this month, Aivaras Abromavicius, the reformist economy minister, resigned, protesting that he could no longer act as a “smokescreen” for malfeasance, including meddling in state enterprise appointments by a legislator who is a close business associate of Poroshenko’s. Finance Minister Natalie Jaresko and other technocrats who had hoped to produce change are also threatening to resign.

Poroshenko’s promised road map will need to satisfy Western donors and reformist ministers alike. Indeed, the proposals it contains should be solid enough to persuade Abromavicius to return to his job. No one is in a better position to judge whether the government is getting serious about reform.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.