Ukraine’s Other War

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.

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.