Providing Aid to Ukraine is in the National Interest

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    Mar 12, 2014

    The United States and its Western allies have a major interest in the success of a stable, democratic Ukraine. Not only is the survival of Ukraine’s democracy vital in and of itself, but its regional impact is also of crucial importance, as Ukraine lies poised between Russia and the European Union. True, the Cold War is over, and much of the world has painted an alluring picture of a new international political landscape. However, given Russia’s actions in Ukraine and earlier in Georgia in 2008, it is clear that not all subscribe to this vision of the international system. While the EU might arguably be the most important actor and although, the United States is removed from Ukraine both geographically and economically, it has significant interests through its leadership of the NATO alliance to warrant a significant role. This responsibility has increased given the starkly evident divides within Europe over how far they are willing to go with sanctions and assistance to Ukraine.   

    Though these larger geopolitical issues with Russia are without a doubt a crucial piece to the puzzle, for the time being, it’s important to ensure that assisting Ukraine itself—undeniably the loser in this situation—is not relegated to second place. Any sanctions against Russia must be accompanied by economic support for Ukraine. Indeed, the most urgent objective at this point in time is to provide emergency economic assistance to the government of Ukraine. This has the power to help stabilize the currency, foster links within society, stabilize the banking system, reduce dependency on Russia, and promote beneficial long-term economic reform to guide Ukraine out of its current debt crisis. The House of Representatives recently approved a $1 billion sovereign loan guarantee for Ukraine, which will provide Ukraine with a bond backed by a 100 percent guarantee of repayment of principal and interest by the U.S. Government. This is a crucial and necessary measure to provide needed financing to the Ukrainian government in a key moment, especially as many nations are hesitant to invest in a temporary government with a questionable background. Beyond this, the U.S. government must focus on five key actions in the short and medium term:

    (1)    Supporting IMF quota reform;
    (2)    Reprogram existing USAID funding to support Kiev in the lead-up to the May 2014 election;
    (3)    Putting together an emergency supplemental aid package to support reform efforts; 
    (4)    Direct DFIs such as the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) to expand investments in Ukraine; and
    (5)    Raise World Bank lending limits to provide additional budget support and technical assistance for needed reforms. 

    Legislation that enacts the IMF quota reform that the United States committed to in 2010 should be at the top of the priority list. The IMF is poised to be a deciding factor in aiding Ukraine, with a fact-finding mission gathering information on the ground currently, and the United States should be a leader in these negotiations. The United States cripples its ability to lead in these Ukraine negotiations without IMF quota reform, because it is essentially the only hold out on quota reform; all G20 members aside from the US have approved quota reform.  Quota reform is a marginal adjustment in the shareholdings of the IMF to better reflect the size of economies of the developing world and it makes more money available for crises. The “costs” of quota reform will likely be zero to the US taxpayer because if Congress were to authorize IMF Quota reform it would allow the IMF to shift monies from one IMF account to another. Quota reform would double the IMF’s resources to $725 billion total and give countries like Ukraine and others in desperate straits access to this larger funding pool. Ukraine’s quota specifically would increase from $2.1 billion to $3.1 billion, giving much more room to aid the country. However, as the United States currently holds the controlling share of votes in the IMF, reforms across the board cannot begin without U.S. leadership in implementation. The administration has attempted to put the quota through the House several times, but has failed to unify parties to ensure that the measure passes.

    The Administration should immediately redirect existing USAID and State Department monies to support the technical assistance needs of the new government and the May 2014 elections. USAID and State had a pre-crisis budget of $60 million. However, the United States should strongly consider going beyond loan guarantees and reprogramming existing funds, and put together an emergency supplemental aid package to support structural reform of the Ukrainian economy. This is one of few aspects of the handling of the Georgia crisis in 2008 that was fairly successful and that the United States should turn to now as a precedent. While a sovereign loan guarantee is only useful once someone is willing to buy it—which might not be likely, admittedly, given the general international hesitancy to put full faith in the current interim government—a supplemental grant focusing on economic support would be a vital stabilizing force in Ukraine as it waits for a response from its request to the IMF.

    This supplemental should focus on stabilizing the Ukrainian economy and laying the ground work for what will likely be strong preconditions for any IMF loan. Given Ukraine’s history with failing to implement the required conditionality for IMF loans in 2008 and 2010, the IMF released a statement in December 2013 stating that any further loans would be front-loaded with conditionalities that must be implemented to ensure later disbursements. The conditionalities that have proven most problematic—yet most crucial for economic reform—are energy subsidies (and broader energy sector reform) and currency stabilization. This supplemental package should focus on these key areas, as well as strengthening the Ukrainian banking system and reducing deficits. Not only would a supplemental aid package help Ukraine in the short term, but if implemented well, it could help Ukraine in following through on the reforms needed as part of a significant IMF package.

    Finally, the United States must use its significant influence within multilateral organizations to direct them to support the nascent government in Kiev. It should direct that DFIs such as EBRD and IFC expand their investments in Ukraine with a focus on the financial system, energy sector, and infrastructure. Both institutions have deep networks in Ukraine, but in the case of EBRD operate under maximum level of country investment. This investment level should be raised and the U.S. government should consider identifying risk sharing instruments to support market investments by EBRD and IFC. In addition, the United States should work with the World Bank to raise lending limits to provide direct budget support and technical assistance to Ukraine with a focus on reform of banking regulation, financial management, the energy sector, and the “leaky” and regressive social safety net.

    Although there is a sense that the United States has a limited ability to influence events in Ukraine, we do in fact wield significant economic and development power that can help the transitional government in Kiev to effect the change and reform needed to anchor the country in the West. To do this, though, will require that the Administration work closely with Congress to pass a supplemental spending package and IMF quota reform to ensure continued U.S. leadership in the IFIs. It will require that Congress accept that even in times of American budgetary constraints there are geopolitical moments that require additional U.S. fiscal commitments to support the national interest. And it will require that the United States continue to exercise leadership in the multilateral organizations it created in the wake of the Second World War. Leading the international effort to support the new Ukrainian government is in America’s national interest and if done properly will set the country on a path that is mutually beneficial for the citizens of Ukraine and the region.

    Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Conor M. Savoy is a fellow with the CSIS Project on Prosperity and Development.

    Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

    © 2014 by the Center for Strategic and International Studies. All rights reserved.

     

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