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Germany, Stuck with Massive Bill for Ukraine, Asks Russia for Help

  • IMF: Ukraine Weeks Away from Economic Collapse - $15 billion urgently needed
  • With 1 hand EU asks Russia for financial help, with other it bombs ethnic Russians in East Ukraine, sanctions Russian economy...
  • Black hole of Ukraine finances becoming a political liability for EU leaders
  • EU demanding austerity from Ukraine while population struggles with grinding poverty, economic collapse
  • EU policy towards Russia/Ukraine poorly conceived, in danger of collapsing due to contradictions
MORE: Ukraine

This post first appeared on Russia Insider

As this article in the Financial Times shows, the wheels are coming off  Ukraines economy, with the IMF now admitting it needs a further $15 billion on top of the money already given within weeks to avoid total collapse.

This has come after news the Ukrainian Central Banks foreign exchange reserves have fallen below $10 billion. 

Ukraine must pay a further $1.6 billion from these reserves before year end to fulfil its part of the gas deal the EU brokered between Ukraine and Russia on 30th October 2014. 

This will push the Central Banks foreign exchange reserves down to even more critical levels.

Meanwhile Gazprom has said that despite Ukraines recent purchase of 1 billion cubic meters of gas from Russia, Ukraines total gas reserves are close to critical levels, endangering transit of Russian gas to Europe.

The article however exposes something else, which is perhaps even more important.

The last two paragraphs in the article show that the German Finance Minister Wolfgang Schauble has been obliged to telephone Anton Siluanov, Russias Finance Minister, to ask him not to call in Russias $3 billion loan, which becomes automatically repayable when Ukraines debt exceeds 60% of its GDP, something which everybody knows has now happened. 

It also says that George Osborne, the UK finance minister, expressed surprise at the request, attendees said, saying the EU was now asking for help from Russia at the same time it was sanctioning the Kremlin for its actions in Ukraine.”

In other words in order to saveUkraine (and their own political reputations) the European leadership is now being forced to turn to Russia for help - the same country they accuse of invading and destabilising Ukraine and which they have sanctioned.

The background to this is that Russia is Ukraine’s biggest creditor with Ukraine owing Russia around $35 billion.  Money the IMF gives to Ukraine therefore inevitably ends up in Russia by way of debt repayments.

As we previously reported, another article in the Financial Times has confirmed what many have suspected - the western powers have been looking for excuses for Ukraine to renege on its debts to Russia whilst pretending it is not a default.   To their intense frustration the western powers have discovered that the Russians were extremely careful to make their loans to Ukraine totally full-proof. The option of reneging on the loans does not therefore exist.

Transfers of yet more money to Ukraine from the West are now becoming so large and so open-ended that the point is probably soon coming (if it has not already come) when more transfers including the $15 billion the IMF is talking about would have to be authorised by national parliaments before they could legally happen. 

At a time of economic austerity that might be very difficult to pull off, especially once it got known that most or even all the money would ultimately end up in Russia.  At the very least it might lead to Western governments being asked serious questions in their parliaments about the policy in Ukraine they have been following - questions the governments might not want to answer or to have asked.

The result is that Western governments are turning to Russia for help since, as has been obvious from the start, it is only with Russia’s help that Ukraine can be stabilised politically and economically. 

At the same time, as Merkel’s most recent comments show, they don’t want to make any concessions to Russia over Ukraine or modify their policy there. 

This is the delusion the West’s Ukrainian policy has suffered from ever since talks about Ukraine’s association agreement with the EU first got started. 

The West wants Ukraine to follow a pro-West pro-EU anti-Russia line.  At the same time they want and expect Russia to pay the bills. They are then baffled and angry when Russia says no. 

Though Russia goes on saying no, they refuse to take no for an answer.   Instead they threaten and pass more sanctions and vilify and abuse Russia’s leadership in what is looking like an increasingly desperate hope that this will force Russia to back down and change its policy.

When that doesn’t happen they are left looking like a card sharp with no cards left to play.

The latest report from the IMF shows that the moment when this delusional policy finally comes crashing down to earth may not now be so far off. 

The International Monetary Fund has identified a $15bn shortfall in its bailout for war-torn Ukraine and warned western governments the gap will need to be filled within weeks to avoid financial collapse.

The IMF’s calculations lay bare the perilous state of Ukraine’s economy and hint at the financial burden of propping up Kiev as it battles Russian-backed separatist rebels in its eastern regions.

The additional cash needed would come on top of the $17bn IMF rescue announced in April and due to last until 2016. Senior western officials involved in the talks said there is only tepid support for such a sizeable increase at a time Kiev has dragged its feet over the economic and administrative reforms required by the programme.

“It’s not going to be easy,” said one official involved in the talks. “There’s not that much money out there.”

People briefed on the IMF warning said the fiscal gap has opened up because of a 7 per cent contraction in Ukraine’s gross domestic product and a collapse in exports to Russia, the country’s biggest trading partner, leading to massive capital outflows and a rundown in central bank reserves.

The breakaway regions of the east accounted for nearly 16 per cent of Ukraine’s economic output before the start of hostilities.

Without additional aid, Kiev would have to massively slash its budget or be forced to default on its sovereign debt obligations. Since the bailout programme began in April, Ukraine has received $8.2bn in funding from the IMF and other international creditors.

Pierre Moscovici, the EU economics chief, said the European Commission was weighing a third rescue programme on top of the €1.6bn ($2bn) it has already committed to Kiev; the Ukrainian government has requested an additional €2bn from Brussels.

But Pier Carlo Padoan, the Italian finance minister who chaired a discussion of Ukraine’s financial situation at a meeting of his EU counterparts on Tuesday, said EU resources should only be mobilised if Kiev made a “stronger effort” towards implementing reforms.

At a meeting of his cabinet in Kiev, Ukraine’s prime minister, Arseniy Yatseniuk, insisted his government was prepared to put in place unpopular measures, including deep cuts in spending, a crackdown on the massive shadow economy and moves to deregulate the country’s uncompetitive economy.

“It’s hard for us to make ends meet ourselves,” Mr Yatseniuk said. “We are not begging for money, we are not moaning. We are saying: we are partners. If we are partners, then help us and this help will go both ways.”

Under IMF rules, the fund cannot distribute aid unless it has certainty a donor country can meet its financing obligations for the next 12 months, meaning the fund is unlikely to be able to send any additional cash to Kiev until the $15bn gap is closed.

The scale of the problem became clearer last week after Ukraine’s central bank revealed its foreign currency reserves had dropped from $16.3bn in May to just $9bn in November. The data also showed the value of its gold reserves had dropped by nearly half over the same period.

A person with direct knowledge of the central bank’s policy said part of the drop had been due to large-scale gold sales.

An IMF mission is currently in Kiev for talks with the government on the future of the programme.

According to two people who attended the EU meeting, concern over Ukrainian finances has become so severe that Wolfgang Schäuble, the German finance minister, said he had called his Russian counterpart, Anton Siluanov, to ask him to roll over a $3bn loan the Kremlin made to Kiev last year.

George Osborne, the UK finance minister, expressed surprise at the request, attendees said, saying the EU was now asking for help from Russia at the same time it was sanctioning the Kremlin for its actions in Ukraine.

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