Ukraine bailout: 3 things we know, and 2 things we don't

EU leaders are meeting in Brussels today to discuss a proposed $15 billion dollar package of loans and grants for Ukraine, where a shaky new government is staring into an economic abyss even as Russia and pro-Russian Ukrainians steadily prise the Crimea Peninsula away from the country.

But they've been clear that the money will come with serious strings attached – spending and governance changes that could prove very difficult to enact at a time of crisis. And even if the $15 billion comes through, it probably won't be enough.

Ukrainian officials have been pleading with the international community to contribute $35 billion over the next two years to help Ukraine avoid economic collapse. In the next year alone, officials said, Ukraine requires $25 billion in loans to cover its current-account deficit and pay its foreign debts.

Where and how will Ukraine find the assistance to remain afloat? Here are three main things we know about its current talks with the international community – and two key variables we don’t.  

Three things we know so far: 

We know that the EU is ready to disburse assistance – but not all at once and with conditions. An announcement yesterday by European Commission President José Manuel Barroso set likely aid at $15 billion, but it’s subject to EU member states’ approval. And only a fraction of it will be available immediately to cash-stripped Kiev.

The Wall Street Journal’s summary of what’s inside the EU money trunk notes that much of the assistance is slated for long-term investment projects and may not be disbursed until 2016 – or later. This includes $4.1 billion from the European Investment Bank, to be disbursed in 2016, and $6.9 billion from the European Bank for Reconstruction and Development (EBRD).

Only about $1.5 billion of this money, at best, will be accessible to Kiev on an emergency basis; the rest will be subject to Ukraine’s good reform performance and reaching a deal with the IMF.

We know that the US is also pitching in. US Secretary of State John Kerry unveiled an extra $1 billion of US-funded aid in Kiev this week, consisting of a loan guarantee and US technical assistance to the new government. A few hours later, American Treasury officials told Reuters that they were pushing to further increase aid to Ukraine by expanding US funding of the IMF, though the measure would have to pass through Congress first. Plus Ukraine’s access to these new resources would once again hinge on Ukraine implementing IMF conditions. 

And we know what the IMF’s conditions for Ukraine were in 2010, when it last contemplated extending a $15-billion loan to Kiev. The deal was frozen in 2011 after then-President Victor Yanukovych proved reluctant to meet some reform requirements and completely unwilling to undertake others.

The conditions involved cutting immense energy subsidies that see natural gas sold at a quarter of import costs; reducing the fiscal deficit; and cracking down on corruption and tax evasion.

These reforms would have dealt a heavy blow to Ukraine’s voters and consumers even before Ukraine bled out about $28 billion in currency reserves in the subsequent two years of Yanukovych’s presidency – and they will most certainly be even more painful now.  

… And what we don’t know, yet:

We don’t know exactly how harsh the IMF’s terms will be this time around. Financial assistance from the EU and US falls far short of ensuring that Ukraine avoids default. That task will probably fall to the IMF, and much depends on the reform framework it imposes on the country.

The Fund deployed an assessment team to Kiev earlier this week to assess Ukraine’s needs and outline its recommended reform agenda. Ukraine’s new Prime Minister Arseniy Yatseniuk has vowed that his government would "meet all IMF conditions," no matter the consequences to the new team of decision-makers in Kiev – which is why they have taken to terming themselves the “kamikaze” administration.

But we don’t know how much more lenient, if at all, the IMF’s conditions will be than those in 2010. (They might even be harsher.) And we don’t know how much money will be offered. Will it close Ukraine's funding gap of roughly $20 billion?

And we don’t know what Russia will do. Russia has immense power to punish Kiev for its dramatic flight from its embrace – as it’s already demonstrating in Crimea. Russian markets are critical for Ukrainian goods and services, and Russia's gas pipelines are critical to Ukraine’s economy.

Russia is already on the move, pulling these levers. Moscow announced yesterday that it will cancel its life-saving discount on natural gas supplies to Ukraine on April 1. And Ukraine had to pay its outstanding $2.1-billion bill to Gazprom, Moscow said, or face a further price hike.

Whether more blows will follow from the East – and whether the West will be able to counter them – might be the major unknown for Ukraine’s solvency.