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The recent deterioration of the economic situation in Ukraine has given rise to numerous calls for immediate large-scale financial assistance to the country. In which way could, in your opinion, such assistance be provided, and would it be helpful in solving the country's problems?

Amat Adarov: The financial needs of Ukraine have increased remarkably, and the spectrum of areas in need for massive external financing is wide: macroeconomic stabilisation and public finance adjustments, anti-corruption and other institutional reforms, financial sector stability, energy and infrastructure issues, as well as medium-term challenges related to the EU Association Agreement and Deep and Comprehensive Free Trade Area. However, above all, the paramount necessity now is to end the military conflict. Unless that is resolved, or at least transformed to a less destructive ‘frozen conflict’ form, financial assistance will be ineffective and any reform efforts undermined. Then, another urgent matter is attaining macroeconomic stability. The economic problems Ukraine faces are deep: GDP declined by an estimated 7% last year, inflation reached double-digit highs, up to 24.9% in 2014, the hryvnia has been tumbling sharply, and international reserves have been depleted to critically low levels, prompting the National Bank of Ukraine to introduce currency controls and raise its key interest rate to a stunning 30%. The intensifying economic crisis requires firm and prompt policy reaction, and international institutions specifically focusing on these issues will be instrumental in providing both technical and financial assistance. Much headway has already been made, with the IMF, naturally, taking the lead. It has recently approved a new bail-out package worth USD 17.5 billion under a four-year Extended Fund Facility arrangement that replaces the Stand-By Arrangement endorsed earlier, in spring 2014, and offers a longer engagement and repayment period, importantly also unlocking further bilateral and multilateral aid. The EU complements the IMF efforts, and so far two macro-financial assistance loans have already been disbursed, and a third package of up to EUR 1.8 billion in medium-term loans was proposed by the European Commission in January this year. Altogether, it is declared that a total of approximately USD 40 billion of financial support from the international community will help implement the stabilisation programme, which will hopefully yield way to additional credits and debt restructuring. The programme targets critically important reforms focusing on fiscal consolidation, strengthening the financial system and monetary policy framework, structural adjustment, and the energy sector. However, the overall funding is still rather modest and may not be sufficient, especially taking into account Ukraine’s debt problem. The success of the new package is heavily contingent on broad debt restructuring, involving principal and coupon reductions, and maturity extensions. While debt talks with the creditors will be tough, even in the case of success, the debt risks will persist in the future, and what Ukraine really needs is sizeable long-term financing. However, the IMF’s mandate allows for only short- and medium-term loans, and other donors are not willing to take the risks.

Aside from immediate economic stabilisation needs, Ukraine is facing medium-term challenges associated with the implementation of the EU Association Agreement. The experience of the transition economies that have joined the EU in the past suggests that the costs of aligning with the EU norms and regulations, new investment and industrial transformation in light of a more competitive environment, will be rather high for Ukraine which is characterised by weak institutions and infrastructure, low competitiveness of producers, as well as major industries in the east historically oriented towards Russian markets. Financial assistance from the EU institutions, as well as the World Bank, the IMF and the EBRD will help alleviate the sizeable medium-term costs associated with EU integration either by co-financing the investment expenditures or facilitating macroeconomic stability.

Another important dimension of financial aid should focus on the humanitarian issues Ukraine is facing now along with social costs that will likely arise as a result of fiscal consolidation and structural adjustments. As a part of the IMF deal, Ukraine has committed to austerity and amended its budget, which will lead to pension cuts, energy bills spiking, and other unpopular consequences that will hit particularly hard the poorest households already hurt by high inflation. In the longer run, industrial transformation resulting from deeper EU integration will inevitably lead to some businesses going bankrupt and worker layoffs. While Ukraine is facing a humanitarian disaster already, its central government is financially constrained to fully address social expenditures, and the loans and grants by the World Bank along the lines of its initiatives aimed at supporting conflict-affected and impoverished communities, as well as assistance from other organisations and countries, are much needed.

All in all, the mechanisms to extend financial aid are in place and already functioning, although the funding provided so far is modest and more is demanded; but yet another challenge is to ensure that the disbursed funds are utilised effectively by the Ukrainian officials. Let’s face it: Ukraine has been suffering from severe corruption and poor governance issues throughout its post-Soviet history under different leadership, and it still ranks strikingly low, e.g. 142nd place out of 175 countries in the Transparency International Corruption Perception Index in 2014. Hence, it is important to ensure that the use of financial aid is transparent and strictly administered, and its effectiveness closely monitored at all stages with performance benchmarking and independent observers from the donor organisations and countries involved. In the world still recovering from the economic crisis there is no spare money, but, in the case of Ukraine, there is almost universal support from the global community for its reform ambitions. Therefore, whereas given the highly fragile situation and poor track record of previous assistance to Ukraine it is certainly a risk to provide financial aid, under the condition that the military conflict is resolved and the new government shows consistency in undertaking structural reforms, the already committed aid may be effective and additional financial assistance on multilateral and bilateral basis can be further negotiated.

Vasily Astrov: Given Ukraine’s dire economic situation, its huge financial needs are fairly obvious and range across a wide spectrum of areas: from replenishing foreign exchange reserves, which are badly needed to support the currency, to restoring war-related infrastructure damages in Donbas. It is somewhat ironic that the West is ready to provide large-scale financial assistance to Ukraine now, but was not willing to provide even a fraction of these funds to former President Yanukovych when he was hesitating whether to sign the Association Agreement with the EU in autumn 2013.

In answering the above question, one cannot but have a certain feeling of déjà-vu when drawing parallels between the Ukraine of today and Russia in the mid-1990s, which was also a large recipient of (IMF-led) Western financial assistance at the time. The list of common features is extensive and includes: fragile macroeconomic situation; high and unsustainable budget deficits; a ‘pro-Western’ but weak government influenced above all by domestic oligarchs and with poor bargaining position in negotiations with Western creditors; and, last but not least, low transparency in the use of disbursed funds.

The ensuing developments in Russia are well-known: a large chunk of obtained funds were misappropriated, while others were used to sustain the overvalued exchange rate and enable, for a while, solid returns on government bonds to foreign lenders. This all culminated in sovereign default of 1998, severe economic recession and a radical political backlash, with the liberal government giving way to a much more pro-active one. If Russia’s experience is of any guidance to what one might expect in Ukraine, the latter’s prospects do not look particularly encouraging, particularly taking into consideration that some of the features which were present in Russia at the time – first of all with respect to the level of corruption – are even more pronounced in present-day Ukraine. On top of that, unlike Russia in the mid-1990s, Ukraine is de facto in a state of war, and part of the budgetary support provided by the West will inevitably end up being spent on the military. At the same time, broad segments of the Ukrainian population will be hit by austerity measures required by the IMF, which are arguably harsher than those implemented in Russia at the time, and which will almost certainly undermine the badly needed political support for reforms.