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IMF to Ukraine: End War or Face Aid Cut-Off

IMF head gets tough. Cannot go on supporting a country that is blowing billions on a war without end

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This post first appeared on Russia Insider

Christine Lagarde, the head of the IMF, gave an interview to the French newspaper Le Monde on 24th January 2015 that has attracted little attention but which threatens to knock the final nail into Ukraine’s debt coffin.

For the first time since the start of the conflict Lagarde explicitly linked more financial aid to Ukraine  with the end of the war.  

In Lagarde’s words “No partner of the IMF can consider participating in a support programme if there is a question mark over 20% of the gross domestic product of Ukraine……In order to reform its economy, Ukraine need stable borders, this is indispensable. There is a flagrant link between the economic situation and the military situation.”

This is the logic Ukraine’s leaders have resisted ever since the Maidan coup in February 2014. 

As Lagarde pointed out, the original $17 billion stabilisation package Ukraine agreed with the IMF in spring 2014 presumed there would be a settlement of the conflict in the Donbass before this winter.  

Instead of treating that as a call to compromise with their opponents, Ukraine’s leaders launched a war against them instead.  

By September Ukraine had been defeated and was forced to accept a ceasefire. Instead of using the opportunity to negotiate, as the terms of the ceasefire required, Ukraine’s leaders focused instead on rebuilding the army so they could restart the war again later.

Lagarde’s comments show the IMF has finally lost patience. Her words are a warning that unless Ukraine’s leaders stop the war IMF lending will stop.

Ukraine’s leaders will not heed this warning. The nature of the Maidan regime makes compromise with its opponents all but impossible.

Ukraine’s leaders are not the only ones who reject compromise. Others who do so are some of Ukraine’s Western backers.  

Recently I discussed the plan the US financier George Soros put together during his recent visit to Kiev.  

Based on a report in the Financial Times, I understood this plan to be that in place of a formal debt restructuring (which would have to be agreed with Russia) the IMF would provide Ukraine with a new and much bigger financial package in return for Ukraine’s private Western bondholders accepting a voluntary haircut.

Based on an article by the veteran journalist John Helmer (which we republished here) Soros’s plan is actually far more ambitious.

What Soros proposes is that Ukraine should cut the IMF out completely.   The EU should take over. Soros claims to have found $65 billion left unused in various EU funds, which he thinks the EU should use to support Ukraine.  The IMF’s role would be reduced to doling out the money as the EU paid it out.

Since the EU would take responsibility for Ukraine’s funding there would be no need for a debt restructuring. Ukraine would be free to default on its debts to Russia since this would not effect its funding from the EU. Soros proposed that the $3 billion debt Ukraine owes Russia be simply repudiated unless Russia revised down its payment terms.

This is not a plan to restructure Ukraine’s debts or to stabilise Ukraine’s economy.  It is a plan for the EU to fund Ukraine’s war.  

The EU has rejected it.  

A proposal for the EU to fund a war would always encounter strong opposition.  At a time when the EU is facing severe pressure following the election in Greece, it is a non-starter.

The EU has now approved the 1.8 billion euro package for Ukraine proposed by the EU Commission.  The EU has made it clear that this is the  absolute limit of the help it is prepared to provide.  EU member states have said that the only financial aid package for Ukraine they are prepared to support is one agreed with the IMF.

Ukraine’s leaders now face a choice.  Either they press on with the war, in which case default looks inevitable, or they negotiate. 

Up to now, as I discussed in a TV interview I recently gave RT, they have tried to square this circle by talking peace whilst pursuing war.  

The recent comments from Putin and Lagarde show that both the Russians and the IMF are losing patience with this game Ukraine’s leaders have been playing. If the Ukrainians persist with it, unless there is a complete change of heart on the part of the IMF, default looks inevitable.

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