The Other War in Ukraine

Ukraine Prime Minister Arseniy Yatsenyuk
Ukrainian Prime Minister Arseniy Yatsenyuk Mike Segar/Reuters

For more than a year now, Ukraine has been at war, as Russian-backed separatists have battled Western-leaning Ukrainian nationalists in the East. But what's happening to the country's economy is just as threatening as the separatists on the battlefield, something Ukrainian Prime Minister Arseniy Yatsenyuk emphasized in his visit to the United States this week and in an interview with Newsweek at Ukraine's Washington, D.C., embassy. That's something Republicans in Congress and on the campaign trail may want to take to heart, even as they amp up their criticism of the White House's military response in Ukraine.

Moscow's decision to annex the Crimean peninsula in the spring of 2014 and its ongoing support of the separatists has taken a huge economic toll on Ukraine, which wasn't in such great shape to begin with. According to a fact sheet compiled by the Ukrainian embassy, the war has destroyed 20 percent of Ukraine's economic potential. Debt has skyrocketed and the currency has gone into a tailspin, which over the winter, led some to worry about economic collapse.

Those jitters have calmed, thanks in large part to a loan package from the International Monetary Fund. But the loans hinge on painful economic reforms and negotiations with private investors to reduce the country's debt. Fighting in the East continues despite a ceasefire agreement the two sides negotiated in Minsk in February, and analysts believe the country will ultimately need much more financial support.

So while Ukraine would certainly welcome U.S. arms—something President Obama continues to resist—what they need even more is long-term financial support. As Yatsenyuk explained in an interview at the country's U.S. embassy in Georgetown, Russian President Vladimir Putin's ultimate goal is for Ukraine to become "a failed state," and for the U.S. and the European Union to fail in their attempts to promote democracy. Below are excerpts from that conversation with Ukraine's prime minister and Finance Minister Natalie Jaresko:

Why have you come to Washington? Is there a particular reason for your visit?

Yatsenyuk: We are fighting against a real aggressor—Mr. Putin and the Kremlin regime—who violate the international law, who illegally grabbed territory of an independent country and who intimidates the world, and frankly speaking who didn't pay the price, not yet. Every aggressor is to pay the price.

So concerted actions of the E.U. and the U.S. are needed. And the best example of this concerted action is the joint statement of G7 leaders. They made it very clear that sanctions will be in place until Putin fully implements the Minsk deal.

Just to put it in a nutshell, what the deal means is: Mr. Putin, get out of Ukraine, including Crimea.

We are facing tremendous economic challenges. Last year we received $9 billion from our international creditors—from the IMF, G7 member states—and this is a great contribution and good gesture on their side. But the thing is that we had to pay back to our creditors $14 billion. We have been promised $25 billion from the IMF and the U.S. and Japan and the E.U. in the forthcoming four years.

But the gap is too big and the reason why is the previous regime easily collected $40 billion, just in the last three years, of additional debt.

So we need to get additional support from the U.S. and the E.U. just to overcome this very terrible and difficult period in Ukrainian history, to make private international investors more collaborative in debt restructuring and to prepare an investment conference, which is to be held on the 13th of July of this year in the U.S.

And you're meeting with the vice president. What's the message you're going to be delivering?

Yatsenyuk: Well, he is a true friend of Ukraine, personally. He visited Ukraine three times, he is a student of Ukraine and he has huge experience on the ground in Ukraine. And we truly and heavily rely on him.

Frankly speaking the key thing is just to express my condolences personally to Vice President Biden, as his son passed 10 days ago. So it's really personal for me.

On the rest of the issues, he knows everything that needs to be done. I just will update him on the latest developments.

You met with members of the Senate, and one of the things they've raised and continue to emphasize is providing Ukraine defensive weapons. The president continues to rule that out for now. Is that something that's important to Ukraine?

Yatsenuk: Oh, extremely important, important not only for Ukraine but this is important for the EU and NATO allies, as Ukraine is a shield against the Russian aggression. It's important to have a Ukrainian military that is durable and capable of containing Russia's well-trained and modernized military.

And Congress is really in support of this idea. We expect the White House to contemplate.

There was a lot of coverage over the winter and even into the spring about Ukraine's debt and concern about potential economic collapse. Is that still a real risk?

Jaresko: I think we've moved forward on stabilization. The IMF program, itself, the first tranche, doubled our national bank reserves. That had a stabilizing effect on the banking system, it had a stabilizing effect on the currency.

So it feels like the worst of that financial crisis is behind us. The only thing I'd say is, it's still very fragile. And it's fragile in the sense that the package that we've been discussing with the IMF, the $40 billion, is made up of three parts—$17.5 billion over three years is from the IMF, $7.2 billion from our bilateral and multilateral partners, including the United States.

But the remaining $15.3 billion is the savings we need to achieve in a debt restructuring. And we haven't yet succeeded in the debt restructuring and as long as it's out there, the situation is still very fragile. To spend 5 percent of GDP on interest on the debt does not make sense for a country that's been in a recession since the financial crisis in 2009. So that burden needs to be resolved.

Yatsenyuk: And the government is very adamant about hammering out the deal with the private investors.