Ukraine Rescue

A Bailout at Any Price

Ukraine brken AFP
Destruction is widespread in East Ukraine.
  • Why it matters

    Why it matters

    With its economy severely damaged by the conflict in the east, Ukraine needs more than the aid money currently planned to avoid bankruptcy.

  • Facts


    • The International Monetary Fund can only provide aid to countries which are able to repay it.
    • The IMF announced a preliminary agreement for a new $17.5 billion, four-year loan program for Ukraine last month.
    • The direct and guaranteed debt of Ukraine to Russia and Russian banks amounted to $4.728 billion dollars, or 12.2 percent of Ukraine’s total external debt at the beginning of 2015.
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On Wednesday a meeting of the board of the International Monetary Fund, or IMF, will agree to provide Ukraine with a new $17.5 billion bailout package.

However, IMF head Christiane Lagarde says the country needs a much heftier lifeline of around $40 billion.

This would entail the country’s creditors agreeing to a debt haircut for Ukraine as the aid package alone won’t be enough. Its economy has been severely damaged due to the ongoing war in the east of the country between pro-Russian separatists and Ukrainian soldiers.

The IMF plans to provide $15 billion to the aid fund. According to information obtained by Handelsblatt, the plan also envisages the government in Kiev reaching a deal with its creditors over the coming three months. Through debt restructuring and loans from governments and organizations like the World Bank, this would make up the full $40 billion required.

“It is an ambitious program; it is a tough program; and it is not without risk,” Ms. Lagarde said last month.

While observers expect the crisis in eastern Ukraine to ease, it is unclear whether the ceasefire reached last month will continue between pro-Russian fighters and Ukrainian troops.

The minimum wage in Ukraine has fallen below the equivalent of €50 per month – below the level paid in Ghana or Bangladesh – due to the fall of the currency, the Hrvnia.

It is also not yet known whether and how holders of Ukraine’s debt would participate in the aid program.

The biggest holders of Ukraine’s debt are the Russian government, and Templeton Global Bond Fund, a global investment company.

Templeton holds $14 billion worth of Ukraine’s sovereign bonds, about half of the total.

Before the IMF experts go to Kiev to assess the situation, its program requires that the country’s creditors will have had to either compromise on some of their requirements, lower interest or extend repayment terms.

According to media reports in Kiev, Templeton and other lenders want to form a creditors’ club to represent their interests, headed by the Rothschild financial advisory company.

The IMF has sought to ease creditors’ concerns, assuring them that the restructuring program will reduce the risk of losing the money completely through a state bankruptcy.

Some investors have criticized the IMF’s program.

“They’re assuming that the private sector will take part without even asking,” said Ondrej Schneider, an expert at the Institute of International Finance, a lobby group based in Washington, which represents Templeton, Ukraine’s biggest private creditor.

It will only be possible to rescue Ukraine if investors’ trust can be won back.

Partly to encourage investment and win back this trust, the IMF wants to distribute a sum in the two-digit billions in 2015, according to the information obtained by Handelsblatt.

The majority of the money will be channeled to Ukraine’s central bank; the rest to the national government.

This is a gesture on the part of the IMF and recognizes that Ukraine has carried out some preliminary work in the form of creating an anti-corruption agency. At the same time, the payout is also a recognition of the dire situation in Ukraine.

The government of Ukraine expects economic growth in 2015 to fall by 5.5 percent. The target for inflation has been increased to 26.5 percent and the deficit to 4.1 percent.

The minimum wage in Ukraine has fallen below the equivalent of €50 per month – below the level paid in Ghana or Bangladesh – due to the fall of the currency, the hrvnia.

Given the difficulty of the situation, people in Ukraine are likely to face a significant rise in the price of gas. Observers in Kiev expect social unrest if this occurs.

Within the German government, there are warnings against imposing austerity of “Greek proportions” on Ukraine.

The IMF believes that restructuring Naftogas, the country’s state owned energy company, cannot be avoided. Currently, the company can only meet a small part of its costs.

By the conclusion of the program, Ukraine’s government budget will have to break even if it is to succeed in rescuing the country.

The IMF has acknowledged that this goal will take longer to achieve than originally expected. Last year, the IMF promised Ukraine $17 billion in financial aid, of which $5 billion was paid. This program will now be integrated into the new aid package and the program’s duration will be extended from two years to four.

“This change will enable more money more time, greater flexibility and better loan conditions,” Ms. Lagarde said.

According to a Reuters report earlier this week based on three sources close to the IMF, the organization assumes that it is necessary to ensure Ukraine’s sovereign debt can fall to 70 percent of gross domestic product by 2020, a level the IMF would deem sustainable.

Promises of aid from other countries have been vague so far. The German government had pledged to provide €500 million.

It also remains unclear whether the creditors will relieve Ukraine of part of its debts. Russia has already announced that it will not accept a restructuring of a $3 billion bond. The finance minister of Russia, Anton Siluanov, said, “We expect Ukraine to meet all its obligations.”

The bailout comes amid uncertainty and hostility in Ukraine towards the head of the country’s central bank, Valeria Hontareva. Ms. Hontareva is seen as mismanaging the country’s financial supervision and failing to prevent the rapid fall of the value of Ukraine’s currency.

Ms. Hontareva also this week announced the bankruptcy of Delta Bank, which had been seen as critical to the country’s stability and too big to fail; along with two other banks, Omega Bank and Kreditprombank. The Delta bankruptcy was the 45th bank to collapse since war broke out last year. It proved impossible to stabilize Delta bank despite aid of €200 million, or $212 million.

Some in Kiev speculate that Ms. Hontareva will lose her job in a reshuffle this week; Ukraine’s President Petro Poroshenko may replace or move nine ministers including those managing critical portfolios such as energy and economics.

Ukraine has been in crisis for more than a year, following the ousting of pro-Russian president, Viktor Yanukovych,  followed by the annexation by Moscow of the Crimean peninsula, and the outbreak of a rebellion by pro-Russian separatists in eastern Ukraine. More than 6,000 people are believed to have been killed during the fighting.


Ukraine's Finances-01


Handelsblatt’s Mathias Brüggmann, Moritz Koch and Torsten Riecke cover politics. To contact the authors:,,

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