Will loans save the Ukrainian economy?

By Vestnik Kavkaza

The visit by President of Ukraine Petro Poroshenko to Canada resulted in signing an agreement, according to which the Canadian government granted loan guarantees to Ukraine amounting to С$200 million. Receiving the loan from Ottawa, Poroshenko addressed the U.S. Congress to establish a special fund for supporting reforms of the economic and justice systems of Ukraine. In the context of the Ukrainian President’s attempts to get as many Western loans as possible, experts’ fears about the economic collapse of Ukraine are growing.

Vladimir Bruter, the expert of the International Institute for Humanitarian and Political Studies, says there are four factors which mainly influence negative tendencies in the country’s economy. “First of all, there is the destruction of some economic potential of the country as a result of the hostilities. Secondly, there is a radical reduction of trade turnover between Russia and Ukraine, which will continue to go down. Thirdly, there is the unprecedented drop in GDP. Officially, the IMF predicts that it assumes 7%, but I think 7% is without comparing the exchange level in 2013 and 2014; in reality it is much worse. And finally, Ukraine is being issued IMF aid in conflict with all the principles of the IMF, it is a purely political decision. And the IMF is ready to do it, even though in all other situations it wouldn’t do it,” the expert thinks.

On the other hand, Bruter is sure that international, Western sponsors of Ukraine will do their best to prevent the economy of the country from collapse, which could happen in the very near future: “And we could see it in the last two weeks evidence from the hryvnia exchange rate. When it was announced that the IMF issued aid immediately and it wouldn’t depend on certain indices, as at the moment Ukraine was unable to guarantee it, the National Bank of Ukraine managed to decrease the rate. It continued for a week, but then the dollar began to grow again.”

Even though many experts believe that major Western loans will cause disastrous consequences, Bruters believes that non-receipt of aid from the IMF means imminent collapse for Ukraine. “If turnover with Russia continues to decrease, and of course Russia should insist on fulfillment of obligations which were made after Ukraine’s signing of the association with the EU, it means exports to Russia will fall further. In the next 2-3 months, which will coincide with the election campaign, forecasts of a GDP drop at the end of 2014 will grow. So at the moment the dependence of the Ukrainian authorities on foreign aid is almost absolute. If the international sponsor makes a decision on taking new emergency measures on the issue, the Ukrainian economy will face serious problems, if not shocks, in winter,” Vladimir Bruter states.

The economist is sure that without additional aid from the IMF, the hryvnia will drop again: “Today the National Bank of Ukraine has no opportunities for supporting the hryvnia daily, and when serious pressure by foreign currency buyers starts, it will be impossible to support the hryvnia exchange rate at the current level.”

As for forecasts for the future, according to him, further economic developments will depend on results of the parliamentary elections on October 26th: “If Poroshenko manages to maintain his power in the Ukrainian policy and enhance it due to certain efforts, the economic situation will be oriented toward him. If the radicals win a serious number of seats, a permanent radicalization of public opinion will take place, and Turchinov’s doctrine could come true. It was voiced ahead of the Minsk talks, and it said that if no immediate ceasefire was reached in Minsk, martial law should be imposed. Apparently, if the ceasefire doesn’t last for a long time, the “war party” will continue its attacks, and it will lead to changes in Poroshenko’s position.”