You're reading: IMF says Ukraine needs more money amid crisis and contagion risk

The International Monetary Fund sees the ongoing crisis in Ukrainian as a major risk for the global economy that is experiencing substantial turbulence, which could spread to other emerging markets.

“The crisis
in Ukraine is a danger which is very difficult to gauge (and) whose contagion
risk for other countries can barely be predicted,” said IMF managing
director Christine Lagarde in an interview with German newspaper Handelsblatt
on May 12.

“All the
same, it can have severe economic consequences,” she added.

Asked where the biggest dangers lie,
the IMF chief pointed to the pro-Russian separatism turmoil in Ukraine having
an impact on international trade, foreign direct investment, international
capital flows and Europe’s energy supply.

Tension in Ukraine has been a reason
for significant volatility on financial markets. Investors have started selling
emerging market currencies, bonds and equity, favoring instead assets in developed
markets.

Italy’s UniCredit bank CEO Federico
Ghizzoni said a solution to the “tense and complicated” crisis in Ukraine is
needed to avoid harming business in Europe. “I hope that at the end of the day
common sense will prevail on both sides, in Ukraine but also in Russia versus
Europe and the U.S.,” he said. “Diplomacy must work hard in order to find a
solution.”

Mario Draghi, head of European Central
Bank, shocked many economists during his May 8 news conference in Brussels
when he said that Russia’s capital outflow reached almost $220 billion this year, though the Russian Central Bank reported only
$50 billion for the first three months.

Harder economic sanctions against
Russia, many fear, could cripple Russia’s economy. A trade embargo would
heavily impact Russia’s export-oriented economy, of which 75 consist of oil and gas
exports, and those revenues supply 50 percent of the national budget.

However, analysts
do not see a potential annexation of Donbas, which includes Donetsk and Luhansk
Oblasts, as very beneficial for Russia.

Donbas is a poor
region – it receives twice more from the state than it puts in to state coffers
– while new sanctions could become a serious threat for Russia’s budget and for
the political regime of President Vladimir Putin, Erik Nayman, managing partner
at Kyiv-based Capital Times investment boutique, wrote in his blog.

Russia does not
need Donbas’s coal and Russian producers are not keen on competing with
Donbas-produced railway carriages, admits Vladislav Inozemtsev, director at
Center for Post-Industrial Society Research in Moscow.

Additional financial help
for Ukraine

“Ukraine
needs much more than 17 billion dollars. For example, bilateral help from
abroad and financial help from other international financial
institutions,” Lagarde commented on the IMF’s package of financial assistance for Ukraine approved on April 31. “We
can’t simply say the situation is too precarious, therefore we’re not giving money
at the moment.”

Ukraine and the European
Union have signed agreements on May 13 which imply $1.9 billion of
financial support for the country currently suffering from a Kremlin-backed
separatist movement.

The IMF expects Ukraine’s
economy to shrink by 5 percent this year, while the global economy will grow by
3.6 percent. However, in the mid-term Ukraine’s economy look betters, it could
rise by 4-4.5 percent.

Kyiv Post associate business editor Ivan
Verstyuk can be reached at [email protected].