The International Monetary Fund, European Union and Western lenders have been playing their cards well lately in dealings with cash-poor Ukraine. They are rightly forcing the country’s pandering politicians to adopt unpopular, yet essential steps, to reduce the need for future bailouts. This is great news for Ukrainians, as it will eventually lead to improvements in their living standards despite short-term higher costs. It is wise to keep Ukraine’s leaders on a tight leash, giving loans and aid only in exchange for ending such things as gas-price subsidies and introducing market prices to more segments of the economy. Ukrainian politicians wouldn’t have the courage to take these steps on their own ahead of the Jan. 17 presidential election. Ukraine needs to become a more reliable partner for both Russia and Europe, which got a big wake-up call in January when its gas supplies were cut off for two weeks during the Kyiv-Moscow energy spat.
Late in July, the IMF agreed to lend another $3.3 billion to Ukraine, meaning that the nation has now received more than $10 billion of the $16.4 billion in IMF loans. In return, Prime Minister Yulia Tymoshenko agreed to start removing unsustainable subsidies on natural gas prices for households. A 20 percent price increase is expected in coming months, just ahead of the presidential election Tymoshenko hopes to win. Ukraine should also lift price caps on domestically-produced gas, which has helped keep tariffs low for voters. Such measures will help attract more investment into domestic production, thereby cutting dependence on imports from Russia. They will also give greater incentives to energy conservation.
The Ukrainian government’s pledge to move towards market gas prices also opened the door to $1.7 billion in loans from Western lenders to help further reforms of the country’s gas sector. The loans were brokered by the European Union and will come from the European Bank for Reconstruction and Development, the World Bank and European Investment Bank. It’s a good deal and perhaps Ukraine’s only way to stave off default these days.
The West should keep cramming healthy changes down the throats of Ukraine’s elite, whose members have shown they can only act in the national interest when they are forced to do so. We also encourage Ukraine’s international lenders to step up oversight, as Ukraine’s political leaders are incapable and uninterested in stopping the nation’s rampaging corruption at the top.
