At the end of the Sochi Olympics we saw an incredible, inspirational development when the Ukrainian people prevailed against former President Viktor Yanukovich. This week, the geopolitical posturing continued with tension running high between Russia and the West.
My focus is on the economic and financial situation. Under Mr. Yanukovich, the economy was distorted with policies that favored certain industries and the typical cronyism that comes with many developing countries. That system was maintained by lifelines of monetary infusions from Russia.
Now that the political upheaval has broken old alliances, Ukraine has been set adrift at a really, really inconvenient time. The economic stats read like a litany of the worst of emerging markets -- the country was in recession last year and expectations for this year are low. The country’s current account deficit was 7.9% of GDP last year which is significant for a country that needs a cash infusion.
New Prime Minister Arseniy Yatseniuk has stated that the country was “robbed and empty” and that he could not “promise better living today or tomorrow.” The Financial Times reported that he said: “Some $20 billion from the central bank reserves was stolen and $37 billion in loans were received which disappeared nobody knows where.”
I am sure that prior to taking the job as head of the International Monetary Fund, Christine Lagarde had no illusions that this would be an easy job. Now all eyes have fallen on her and the IMF and other western financial sources to come through for Ukraine at this crucial time. Ms. Lagarde has to look beyond the fact that Kiev has never stayed with any IMF program for more than one year and figure out how to structure the conditions surrounding such aid.
For its part though, Ukraine needs to radically shake up its economic structure to reform in a manner that promotes a sustainable growth rate. The country did catch a nice windfall in seeing its currency fall 20% over the last week, which will help narrow that mammoth trade deficit, although it is cold comfort in the middle of the chaos.
My View: All roads to growth and stability for Ukraine are really, really hard. Wise judgment is critical among policymakers.
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