'Heavy Political Cost' Attached to $17.5bn IMF Loan to Kiev

Ukrainian Prime Minister Arseny Yatseniuk (L) and President Petro Poroshenko (R)
Ukraine's President Petro Poroshenko (R) congratulates newly appointed Prime Minister Arseny Yatseniuk during a parliament session in Kiev, November 27, 2014 REUTERS/Gleb Garanich

The IMF today agreed a $17.5 (€15.5) billion loan to Ukraine as part of an economic reform deal, designed to cut state spending, bureaucracy and corruption, and boost the Ukrainian economy in the medium term.

Ukraine was reportedly on the brink of bankruptcy, with the war against pro-Russian separatists costing around $8 million per day, according to the Kiev government.

Political analysts however say the deal comes with a "heavy political cost" for the Ukrainian government, as proposed reforms to the energy sector could lead to increased prices for consumers in Ukraine.

Dr David Cadier, a fellow in international strategy and diplomacy at the London School of Economics says that the deal is similar to one passed over the by the previous Ukrainian regime before the revolution in January 2014.

"Former President Yanukovych had to choose between two packages of money – a deal with Russia with loose conditions, or the IMF money for serious reforms. He thought 'if I opt for the IMF, I'll have to pass reform which would mean Ukrainian citizens would see prices rise'. It could have cost him re-election so he went for the Russian package."

He added: "The lasting problem has been the issue of the energy sector. Reforming this sector will mean higher gas prices for Ukrainian citizens so it will be costly to the Ukrainian government. For [current President] Poroshenko, will the reform be carried out? If you have war raging in the east it will be difficult to reform your state."

The deal was struck on the same morning that a ceasefire was agreed in an attempt to bring an end to the violence that has been raging in the east of the country between Ukrainian troops and Russian separatists.

The head of the IMF Christine Legarde said the deal was "not without risk" but that it is a realistic programme, which replaces a previous IMF loan of which $4.5 (€4) billion was distributed, taking the total IMF financing to $22 (€19.3) billion.

Dr Cadier said the two deals are "both glimpses of hope for restoring the economy of Ukraine which is in a terrible state" but also that "the package is coming with a heavy political cost for current government."

Upon the signing of the deal Nikolay Gueorguiev, the IMF's mission chief for Ukraine, said in a statement: "Structural reforms will aim at improving business climate, attracting investment and enhancing Ukraine's growth potential. To this end, the authorities are advancing efforts toward deregulation and judicial reform and implementation of the anti-corruption measures. They will also proceed with state-owned enterprise reforms, to minimize fiscal risks and improve corporate governance structures and de-monopolization."

Andrew Wilson, author of Ukraine Crisis: What the West Needs to Learn described the negotiations surrounding the deal as "a gigantic game of chicken with the new government in Kiev to do the minimum to get the money", adding that the Ukrainian government spend 5-7% of GDP on subsidising the energy sector.

"In terms of cutbacks to other areas, the key pressure point could be health," Wilson adds. "The government's priorities are national security and dealing with corruption but if you look at public opinion health comes first and it is already pretty threadbare. Paradoxically Ukraine has to cut its public services but also needs to rejuvenate its health care system."