The discussion of Ukraine’s external financing needs on the occasion of Ukrainian President Petro Petroshenko’s visit to the United States had the air of the surreal. For at a time when the International Monetary Fund (IMF) is estimating that Ukraine might need at least an additional $19 billion of external official support to see it through 2015, the White House has agreed to provide Ukraine around an additional $50 million in assistance. This leaves unanswered the basic question as to from where the remaining $18.95 billion is to be obtained. One would have thought that this question would have been the main topic under discussion during Poroshenko’s U.S. visit. This is particularly so considering the very magnitude of the official external support that Ukraine might require to keep its economy afloat and considering that one way or another, the U.S. taxpayer is going to be on the hook for at least a part of this assistance.
{mosads}The question of Ukraine’s external financing needs is all the more important given that it is all too likely that the IMF is lowballing Ukraine’s needs in much the same way as it did in its Greek bailout program. Last May, at the time it launched its Ukraine lending program, the IMF estimated that Ukraine might need around $35 billion in official external support. Today, some six months later, it is estimating that Ukraine might need around $55 billion in official external financing. If the repeated upscaling of the financing needs of the IMF-EU Greek bailout program is any precedent, one should not be surprised if the total official bailout cost for Ukraine came closer to $100 billion rather than the $55 billion that the IMF is now estimating.
Sadly, there are all too many reasons to think that the external official cost of keeping the Ukraine economy afloat will indeed turn out to be very much higher than the IMF is estimating. As eastern Ukraine is still troubled and as Russia shows no sign of backing down in its efforts to destabilize Ukraine’s economy, can we have any confidence that the Ukrainian economy will only decline by 6.5 percent in 2014 and then actually start recovering in 2015 as the IMF is currently predicting? Is it not conceivable that Russia will use its natural gas weapon to truly sink the Ukraine economy and to increase its borrowing needs this winter by cutting off natural gas flows to Ukraine? Might the cost of defending Ukraine against Russian incursions not increase Ukraine’s defense expenditures well beyond what the IMF is currently estimating? And might not further currency weakness raise the cost of bailing out the Ukrainian banking system, which has a large currency mismatch on its books?
This is not to argue that Ukraine’s economy is not worth supporting, especially considering the country’s geopolitical importance to the West. Rather, it is to argue that the U.S. taxpayer deserves a transparent and realistic discussion of how much money supporting Ukraine will in the end cost the official international community. In that respect, one has to hope that policymakers do not resort to backdoor financing of Ukraine through the IMF without appropriate legislative approval. This is all the more so the case considering that any further substantial IMF lending to this war-torn country runs the risk of significantly compromising the IMF’s balance sheet and undermining its credibility as a condition-based lender.
Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.