IMF announces $18B bailout for Ukraine

Kiev has agreed to tough economic reforms that may be unpopular domestically

March 27, 2014 8:00AM ET Updated 2:15PM ET

The International Monetary Fund announced a bailout of up to $18 billion for cash-strapped Ukraine on Thursday, as part of a $27 billion agreement rushed through in the wake of Russia’s annexation of Crimea to keep Kiev from sliding into economic collapse. In return for the financial lifeline, Kiev has agreed to stringent economic reforms that will unlock further aid from the European Union, the United States and other lenders over two years.

The deal, to be approved by the global agency's board next month, was a political boost for the pro-Western government that replaced ousted Russian-backed President Viktor Yanukovich last month, prompting Moscow to seize the Black Sea peninsula.

Click here for live coverage of the crisis in Ukraine

The Ukraine crisis has triggered the most serious East-West confrontation since the end of the Cold War a quarter century ago, but it has also deepened the slump in Ukraine's battered economy, centered on coal and steel production, gas transit and grain exports. Russia is Ukraine's single most important trading partner, and a major supplier of natural gas at a discounted rate.

Without IMF-mandated austerity measures, the economy could contract by up to 10 percent this year, Prime Minister Arseniy Yatsenyuk told parliament, explaining why his government had bowed to the fund's conditions. "Ukraine is on the edge of economic and financial bankruptcy," he said.

Heeding that warning on Thursday, Ukraine's parliament voted in favor of an anti-crisis bill that was required for the IMF bailout to be implemented.

Kiev had previously opened the way for the IMF deal by announcing on Wednesday a radical 50 percent hike in the price of domestic gas starting May 1 and promising to phase out remaining energy subsidies by 2016, an unpopular step Yanukovich had refused to take. It also accepted a flexible exchange rate that is fueling inflation, set to hit 12 to 14 percent this year, according to Yatsenyuk.

The prime minister, who took on the job a month ago saying his government was on a "kamikaze" mission to make painful decisions, said the price of Russian gas on which the nation depends may rise 79 percent — a recipe for popular discontent.

In a statement after Ukraine's IMF deal, the White House said: "This represents a powerful sign of support from the international community for the Ukrainian government.

"The IMF program will be a central component of a package of assistance to support Ukraine as it implements reforms and conducts free and fair elections that will allow all the Ukrainian people to determine the future of their country."

The IMF statement said a key element of the program would focus on cleaning up Ukraine's opaque energy giant Naftogaz, which imports gas from Russia's Gazprom. Naftogaz's chief executive was arrested last week in a corruption probe.

"The program will focus on improving the transparency of Naftogaz's accounts and restructuring of the company to reduce its costs and raise efficiency," it said.

In another show of support for Kiev on Thursday, The U.N. General Assembly passed a non-binding resolution declaring invalid Crimea's referendum in favor of succession earlier this month.

There were 100 votes in favor, 11 against and 58 abstentions in the 193-nation assembly.

Western diplomats said the number of yes votes was higher than expected despite what they described as Moscow's aggressive lobbying efforts against the resolution.

The international rescue for Ukraine has been coupled with Western measures to isolate Russia diplomatically and impose economic costs for what many countries have called an illegal annexation of Crimea, home to Moscow's Black Sea Fleet and a majority of ethnic Russians.

Targeted U.S. and EU visa bans and asset freezes against senior Russian and Crimean officials, with the threat of tougher economic sanctions to come if President Vladimir Putin goes any further, have accelerated capital flight.

Russian Economy Minister Alexei Ulyukayev said on Thursday that capital outflow could be around $100 billion this year, and would slow economic growth to about 0.6 percent. The Economy Ministry predicted in January that GDP growth this year would be about 2.5 percent.

The World Bank gave an even gloomier forecast for the Russian economy, saying that in a high-risk scenario of persistent tension over Ukraine, Moscow's economy could shrink by up to 1.8 percent, even without Western trade sanctions.

Ukraine's dollar bonds jumped on news of the IMF bailout, while Russian stocks were down about 1.5 percent on economic pessimism there.

U.S. President Barack Obama, in the main policy speech of his European tour, warned Russia on Wednesday that it faced growing isolation, incremental sanctions and more severe economic consequences unless it changed course.

Russian leaders have already said that Ukraine's discount from Gazprom will come to an end next week. Yatsenyuk said he expected Moscow to charge Kiev as much as $480 per 1,000 cubic meters of gas starting April 1 instead of the current $268.50.

That could exacerbate the country's economic woes and cause political instability in the run-up to a May 25 presidential election.

The European Union signed a political association agreement with Ukraine last week but is holding off from signing a far-reaching trade and economic cooperation pact until a new elected government is in place.

Wire services