On Jan. 24 rockets fell on the Ukrainian-held city of Mariupol, killing 31 and injuring 108. As separatists make a new push, fighting has heated up, but behind the scenes another battle — a financial one — is also intensifying.
Ukraine has at least a $15 billion shortfall in its budget for this year, including all expected loans. It is in desperate need of cash as prices march relentlessly upward. In addition to the legacy of former President Viktor Yanukovych’s regime, which tried to steal as much money from the state as possible and then borrowed more, the war in eastern Ukraine is, according to Finance Minister Natalie Jaresko, costing the country $7 million to $10 million daily. That is money Ukraine does not have, which means that it is embroiled in a conflict that it cannot afford and cannot escape.
As a result, Ukraine is in desperate need of financial backers. To that end, Jaresko and Ukrainian President Petro Poroshenko went to January's World Economic Forum in Davos, Switzerland, to make the hard sell and turn statements of concern from Western foreign ministers and diplomats into hard cash support. Jaresko sold Ukraine as a good investment while expressing frustration on the sidelines that Russia was doing everything it could to block new loans. Poroshenko made a more emotional appeal, giving a speech while holding a fragment of a civilian bus shelled in Volnovakha, leading to the death of 13 people. Appealing for funds, he said, “We need a financial pillow [that] can support us during the reforms.” He is right. To make good on promises to reform, Ukraine needs cash.
For Ukrainians the revolution that started on Kiev’s Maidan Square a year ago and focused on creating a more accountable and transparent society has not paid dividends. Since then the Ukrainian currency has lost more than half its value against the dollar, destroying savings, and foreign reserves have shrunk to almost zero. Inflation has climbed to 25 percent, and 20 percent of the economy is simply gone because of lost territory, with the remaining economy shrinking by 7.5 percent in 2014 and expected to continue shrinking this year. Meanwhile, the government has failed to deliver any big reforms that could be held up as proof that those sacrifices were worthwhile. For now, there is just enough revolutionary optimism mixed with wartime patriotism to keep Ukraine going. But without real change, its government cannot keep popular support, and the country risks falling back into the nihilistic cynicism regarding change that defines so much of the post-Soviet space. In this equation, funds buy more time to deliver change.
To that end, billionaire George Soros has written two impassioned appeals for the West to increase its funding to Ukraine. The first was in The New York Review of Books and the second in The New York Times with French philosopher Bernard-Henri Lévy. Soros, a longtime supporter of civil society in Eastern Europe, has called for the European Union to take the lead and provide an unprecedented $50 billion loan, identifying unused funds from which it could be drawn. Soros’ argument is two-pronged: Europe is under attack from Russia, and the survival of a reformed Ukraine depends on Western funding.
Despite the sticker shock, Soros’ plan makes some sense. For one, financial support is the kind of aid the West, especially Europe, is most able to give Ukraine. Though outrage over the Ukrainian crisis is growing after the attack on Mariupol, the anti-militarism deeply rooted in postwar Europe’s culture makes sending arms and soldiers next to impossible. The U.S. has gone a bit farther, passing a law that would allow President Barack Obama to send weapons to Ukraine, though thus far, despite growing pressure, he has not done so. On Feb. 6, U.S. Secretary of State John Kerry said Obama would make a decision soon.
The standard response to escalation by Russia and its proxies in eastern Ukraine has been to sanction Russia. Because the U.S. is not a major trade partner for Russia, those sanctions usually hurt only when they come from the EU. The sanctions don’t directly help Ukrainians, though many find them cathartic, and after the recent Greek elections, it is hard for the EU to muster the unity it needs to expand them. That leaves financial support the only real option, but here ideological support runs into a cold fiscal block: In the postcrisis world, countries do not want to part with their limited financial resources.
That isn’t to say that Ukraine hasn’t received financial support in recent weeks; it just isn’t enough. Canada has provided $200 million, and the EU has agreed to $2 billion, respectively, in loans, and the U.S. has provided $2 billion in loan guarantees. But Ukraine needs $15 billion — in cash. It’s the only way that Ukraine can impress and stabilize financial markets. On Feb. 5, Ukraine did the opposite, sending its currency tumbling by 32 percent against the dollar in one day after Central Bank governor Valeriya Gontareva said Ukraine would no longer use foreign reserves to defend the established exchange rate.
Unsurprisingly, the process of getting funds has been complicated by Ukraine’s poor financial track record. Leonid Bershidsky, writing for Bloomberg View, called Soros’ idea a terrible plan and emphasized Ukraine’s shady finances, which have continued post-Maidan. He points out that members of Ukraine’s parliament passed the 2015 budget without knowing what was in it — at which point the budget mysteriously increased by $62 million, with allocations also changing — and that the Ukrainian government has failed to deliver on a single major reform. On that front he is correct, but in Ukraine there is a firm sense that only the International Monetary Fund and Western creditors, through terms for new loans, will be able to hold the Ukrainian government to a higher standard.
For now, the government that immediately jumped from revolution to war is focusing on buying itself time to deliver on promises. Jaresko is working tirelessly to bring in the cash to make that possible, meeting with U.S. Treasury Secretary Jacob J. Lew and bringing on investment bank Lazard to help restructure Ukraine’s debt where possible.
As the clock ticks, the danger is not that Ukraine will run out of money and not have sufficient funds to fight the war. Even if that happens, the war will not end; it just means Ukraine’s increasingly limited resources will go to the front, leaving little left to support reforms. Western leaders have praised the principles of the Maidan revolution and now have the opportunity to put their money where their mouth is by giving Ukraine the chance the war took away. Funding Ukraine and holding it to the highest of standards is the best way to see the Maidan project through to fruition. To date, it has been painfully clear for Ukrainians what Western support does not mean. Now would be an excellent time to show what it does.