Opinion
polls show that a great majority of the Ukrainian people now favor EU
integration – 57 to 14 percent, according to one recent poll – as opposed to
hooking back up to Russia in the Commonwealth of Independent States’ Customs/Eurasian
Union, and Ukrainians are voting with their feet and braving the elements in
street demonstrations in favor of Ukraine signing the association and free
trade agreement with the EU. Surely this desire to defend Ukraine’s European
orientation, and the populations’ clear desire for the country to move towards
accepting European core values, should be supported. After all the sums
mentioned as likely needed by Ukraine at this difficult hour, i.e. $15-20 billion,
appear small change relative to the size and strategic importance (energy
supply to Europe) of Ukraine, given the principles of self determination at
stake, and compared to the huge size of Euro-periphery bail-outs.                                      

If
only things were that simple.                                                 

First
thing is first, Ukraine’s need for $15-20 billion in financing is not only
related to the expected costs of trade restrictions already imposed by Russia,
and which are expected to be tightened if Ukraine signs the Deep and Comprehensive
Free Trade Agreement. Even before the imposition of sanctions by Russia earlier
this year, the economy was already in dire difficulties, as reflected by
recession, the maintenance of twin deficits, dwindling central bank foreign
currency reserves and Treasury cash reserves, and a weak/vulnerable banking
sector.

Ukraine’s
problems relate both to difficult market conditions for key exports (metals),
deteriorating terms of trade (higher energy import prices – true from Russia)
but also by years of economic mismanagement which has made the economy that bit
more vulnerable. Prior attempts at reform by the Yanukovych administration –
and admittedly prior Orange and Blue administrations – have failed, and left a
trail of previous failed IMF programs.

The
IMF has on numerous occasions detailed what reform steps the government needs
to pursue and these appear very credible – including rationalization of the
domestic gas pricing/supply market, fiscal consolidation, exchange rate
flexibility and further banking sector reform. The IMF has even detailed a
fairly comprehensive program to cushion the poor/disadvantaged from the impacts
of fiscal consolidation and gas price hikes – but the administration is
resisting, with the only rational explanation being still that in the gas
sector, the administration is still reluctant to root out widespread elite
graft.

Indeed,
the Yanukovych administration has baulked at undertaking these reforms for a
variety of reasons, but primarily as its focus is turning to the close
proximity of the 2015 presidential elections, and the lowly poll ratings of the
incumbent, Viktor Yanukovych. It is asking for the EU, IMF and the West to cut
the administration some slack, and ease off on conditionality, primarily
because of what it has argued is undue pressure from Russia. The reality is
that the Yanukovych administration, which took office early in 2010, has had
more than three years to address these vulnerabilities on the economic policy
front, and for various reasons has baulked at this. It now wants IMF/EU cash
with next to no conditionality – a free lunch in effect, which it hopes will
cement its re-election in the 2015 elections. The question for the IMF/EU is: Is
this administration deserving of large-scale economic assistance, with next to
no conditionality, and with a checkered track record of political and economic
reform, and not much promise of much to come in the future.                                                                   

Second
and related to the first point, providing an IMF-light program, supported by
the EU, at this stage would surely send a bad signal to other potential IMF/EU
borrowers over their potential access to IMF/EU “free money” – if Ukraine now,
what about the Lukashenko regime in Belarus next? European periphery states,
such as Greece and Cyprus, would also surely ask how come this non-EU state is
getting an IMF/EU ‘light’ bail-out when they have been put through the wringer
in exchange for receiving Troika cash. It also does not sell well in the West,
where fiscal austerity is being rolled out across the board, that an
administration that has a checkered track record in meeting Western “norms” on
democracy, application of the rule of law, and protection of human rights, and
economic policy is getting a cheap IMF/EU bail-out.

Third,
and on the issue of meeting Western “norms” as noted above, the Yanukovych
administration has a less than impressive track record, as evidenced by the
recent Lutsenko and Tymoshenko cases, and concern over the conduct of the last
parliamentary elections.                                                

Interestingly,
I don’t think that the West is saying no to providing financial support to
Ukraine (an IMF/EU program of $20 billion is quite possible), only that there
has to be a quid pro quo, i.e. the Yanukovych administration has to agree to
commitments to further enhance democratic standards and reform its economy, as
per recommendations from the IMF. The EU’s request for the release of Yulia
Tymoshenko is part of this “conditionality,” as are requests to amend the
electoral law and rules covering state prosecutions, plus a detailed roadmap
for economic reform as suggested by the IMF in various recent publications and
missions to Kyiv. The problem is that the Yanukovych administration is still balking
at accepting the need for these fairly fundamental but important reforms.

Instead,
it seems to prefer to opt for cheap loans/energy from Russia, with little
domestic political “strings” attached, but still a heavy longer term price in
terms of Ukraine’s sovereignty and independence as it is ultimately pushed into
the CIS Customs Union and back into the Russia orbit.

Timothy Ash is head of emerging market research at the London
office of Standard Bank.