There are painful decisions to be taken, which are essential for the overall health of Ukrainian economy. Key among these is abandoning very generous domestic gas subsidies that will help to rein in the budget deficit and stabilize the state-run energy monopoly Naftogaz Ukraine. Meanwhile weakening an artificially strong exchange rate could make Ukrainian exports more attractive and in turn helping the country to start generating the much needed foreign currency reserves and controlling that widening trade deficit.
But after securing a lifeline from Russia, Yanukovych’s priority now is to regain control over the economic situation, defuse the opposition movement and prepare for this second –term presidential bid. He does not have enough political capital or indeed willingness to introduce those necessary but painful macroeconomic measures. And while the Russian aid helps in the short-term to stabilize the economy but it will also push the reforms into the backburner.
Russian aid will have a positive short- term impact, dissipating market concerns over Ukraine’s creditworthiness and in time bringing down Kyiv’s borrowing costs on capital markets. Also, unlike IMF or EU loans, the new Russian credit line comes with no macroeconomic policy pre-conditions. This would give the Ukrainian government some freedom of maneuvering without taking unpopular austerity measures which can further undermine president Yanukovych’s already declining popularity. More specifically, this means that the president can avoid significant devaluation of the currency and sharp increase in domestic gas prices. Both measures, if implemented can take a toll on Ukrainian households’ pockets, and damage the president’s faltering ratings.