The EuroMaidan victory in February has renewed hope for
democracy and economic prosperity in Ukraine, only to be put in jeopardy by
Russian threats. While these may be “only” saber-rattling for internal
consumption, the situation is serious and tense. It does not take a
crystal-ball to assume the U.S. and EU are highly unlikely to counter this by
rattling their own sabers, hence the question arises what can they do to help
Ukraine ensure its sovereignty and territorial integrity? I propose they can
instead of sabers put on the field a financial equivalent of plowshares. That
is, they can move very rapidly to provide the new Ukrainian Government with
short-term bridge financing to meet any external repayments in the next two-three
months, before a solid International Monetary Fund agreement and conventional
donor financing is put in place for the medium and long term. Two questions
arise. First, given Ukraine’s past record is this not incautious or even
foolhardy? Second, what are the
instruments available for such amounts in such a short time?
There can be no doubt about the past record of Ukrainian
governments, even those considered more democratic. Reformist and monitoring
procedures are needed for a big medium-term package. But the most recent signs
from Ukraine strongly suggest the possibility of a true change in direction. After the fall of ex-President Viktor Yanukovych’s
regime, a new coalition government has been put in place in an incredibly short
period of time with apparently little of the acrimony and conflicts within the
“opposition” that was the hallmark of previous efforts. Further, the government put forth a
multi-point program of quite concrete measures including new presidential
elections, an immediate invitation to the IMF for a fact-finding mission, a
commitment to sign the EU Association Agreement and the Deep and Comprehensive Free
Trade Agreement at the earliest possible moment , a commitment to meet its
external debt-servicing obligations and several internal regularizing decisions.
The National Bank of Ukraine has immediately brought an end to the folly of
wasting limited reserves to halt the inevitable slide of the hryvnia and allow
its devaluation that experts have been urging to stimulate sorely lacking
growth. There is now a prospect of the “external anchor” of EU integration and
even eventual membership. But perhaps even more important in the short-run is
the internal anchor of a resolute Maidan, clearly intent on keeping its eyes on
government behavior and continuing the use of “the power of the people” that
led to this victory. For the long-term,
“agora democracy” (perhaps the best translation of Maidan is in fact agora!)
may not be ideal, but in the very short-run it can be a force for transparency
and substantive action.
But is there not a problem with lending to a care-taker
government before Presidential and later parliamentary elections? At such a
time, international finance institutions and bilateral donors have usually
waited for new governments. Usually, but not always : Bulgaria in 1997, Brazil
a few years later provided precedents of negotiating an IMF program before
elections and asking the major contenders in the election to commit publicly to
a program agreed in advance. It does not stretch the imagination to expect that
presidential candidates such as Vitaliy Klitschko and Yulia Tymoshenko, with
their parties, would be prepared to do this.
Thus, there is a new day dawning and cause for optimism,
albeit cautious. There is a worthy recipient of short-term emergency financing.
The question remains, where is such financing and what are the available instruments
that could provide several billions of dollars quickly? Numbers bandied about
are typically $4-5 billion, but in the spirit of the suggestion by IMF Managing
Director Christine Lagarde, let’s let the fact-finders find those facts in the coming
days or weeks. We can however speak of three potential sources that could provide sufficient funds; none of
them are subject to straightforward green lights, but all three can with enough
political resolve offset any saber-rattling.
First is the EU’s Macro Financial Assistance (MFA) facility
used since 1990 precisely applied to transition economies and explicitly
including non-member European neighborhood countries. In the past decade disbursements
have been tiny, less than 100 million euros, but in the first years they have
exceeded 1 billion euros. There are other EU sources such as European
Investment Bank loans, but the MFA may be the most important in this case. The U.S. Treasury has a special fund of far
larger magnitudes to be used for various international support emergencies —
and was so used to catalyze one of the largest short-term support packages in history
for Mexico in the early 1990s. At the time, this could have done by
administrative order. Since then an informal commitment of all presidents made
approval by the U.S. Congress a requirement, thus making it less automatic.
Would Congress approve? One need not elaborate that the continuity of
circumstances makes both the Presidential Administration and the Congress
desirous of countering the saber-rattling without escalating it. Possible, but
less certain, are some IMF emergency facilities for “post-conflict or other
fragile situations” like the Rapid Credit Facility, though in principle they
are intended for low-income countries.
Is this urgent bridge-financing needed? Could the IMF not
move quickly enough to cover the short-term gaps? Perhaps, but the upcoming
visit is clearly labelled as fact-finding not negotiating. More importantly, it
would be best for Ukraine and all external donors concerned to allow the IMF
and Ukrainian experts some breathing room to develop a solid, sustainable
medium-term program before a conventional donor conference. A bridge loan based
on the aforementioned logic would send out immediate positive signals to
markets and above all provide a dampening effect on the rattling of sabers.
Oleh Havrylyshyn is a visiting scholar at the Munk School of Global
Affairs/CERES at the University of Toronto.
