Grading assistance to Ukraine

Larry Summers, not my favorite public persona but a savvy economist to be sure, offers sage advice on aid for Ukraine.  But he fails to consider how we are likely to measure up to his “lessons for the design of support programs,” so here are my guesstimates (the proposals in bold are his, the rest is mine):

1.  Immediate impact is essential.  While Congress has acted quickly to approve $1 billion in loan guarantees and the European Union has in principle approved $15 billion, the International Monetary Fund has not yet acted.  Odds are it will take time, not only for the IMF to extract reform promises from Ukraine but also for the bureaucratic arrangements to be made by the EU and US.  And the total amount is likely to fall far short of the $35 billion Ukraine says it needs.

2.  Avoid “Potemkin money.”  I wonder if loan guarantees fall in the category of Potemkin money, as I imagine it is difficult to know how much new money they make available.  Perhaps a reader or two who are expert can enlighten me.  EU money is rarely quick in my experience.  IMF money is real but takes time to get approved.  Months rather than weeks before they write a check.  Potemkin-like in the meanwhile.

3.  Be realistic about debts.  Summers wants us to consider rescheduling or restructuring, which is something often done after a revolution (but never quick–it often takes years).  Relief from official and private sector debt is often in the 35-60% range.  Uniquely Iraq got 80% off its official debt at the Paris Club.  Post-Communist Poland got 40% off.  But of course much of Ukraine’s debt is owed to Russia, which is unlikely to be cooperative in any effort to reduce, reschedule or restructure.  The usual consensus is not likely to be available, unless we strike a deal with Moscow that is likely to be inimical to Ukraine’s interest in Crimea.

4.  Honest management is as important as prudent policy.  We don’t want the Ukrainians stealing the money we send them, and we should want to recover as much as possible from past abuse.  Lots of luck on the latter.  Yanukovich and his cronies will have squirreled away a lot of money in difficult to trace places.  Some of Ukraine’s wealthy tycoons are prominent supporters of the post-Yanukovich regime.  It will not be easy to prevent problems in the future either, as Ukraine clearly lacks the mechanisms required for serious transparency and accountability.  Sure we should insist, but it will take legislation and courage to put them in place.  Recovery of ill-gotten gains takes years, as does establishment of institutions designed to prevent theft.

5.  Countries need to pursue broad polices in a way that benefits Ukraine.  There is a pretty good chance the Obama administration will do the right things on the IMF and on energy policy by building the Keystone pipeline and approving natural gas exports.  Europe is also likely to do at least some of the right things:  continue to pay for the gas it receives through Ukraine, so long as the Russians continue to send it, and help Ukraine develop alternative energy sources for its own use, reducing its dependency on Russia.

The big problems are with immediacy and impact.  Ukraine needs a lot of money quickly, much faster than it will get honest management or debt reduction.  Washington and Brussels look likely to have won the tug of war for Kiev and any other parts of Ukraine that remain attached to it.  They need to do everything they can to avoid financial implosion of their prize.

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3 thoughts on “Grading assistance to Ukraine”

  1. Amer writes, but is having trouble posting:

    While we wait for an expert to show up, I’ll pass along what I’ve seen in the on-line press recently:

    1. Immediate impact – an IMF team is already in Kiev; its report expected next week. IMF money – a bridge loan – may come as early as April (http://www.reuters.com/article/2014/03/10/ukraine-crisis-imf-idUSL6N0M71Z520140310).

    The EU will be eliminating tariffs on goods from Ukraine – the proposal has been approved by the EU Commission and awaits approval by EU Council and European Parliament. Russia not only cuts off gas when it’s unhappy with Ukraine, but halts imports. Gordon says this will save UKR €487 million a year – but the agreement only runs to 1 Nov. At this point, you have to assume, every hundred million helps.

    2. Potemkin money – large, loudly proclaimed sums that never seem to accomplish anything: suggestion – none of it should go to pay private consultants from the West. Ask the Kosovars about this. On the other hand, they learned a lot about producing PowerPoint presentations.)

    3. Be realistic about debts – Another suggestion: make sure the people of the country know exactly how much is being forgiven. The Serbian government not only failed to make clear at home what the London Club and the Paris Club had done to reduced Serbia’s debt load after Milosevic was handed over, but prevented the newspapers from mentioning it until sometime last year. Posters who tried to sneak in a mention of the arrangements to tamp down the usual paranoia about the West deliberately trying to ruin the country routinely had their comments on the topic censored. (One of a number of forbidden topics, BTW. Politely expressed comments, nothing really except figures.)

    Yanukovych’s old party is already talking about the West wanting to make Ukraine its “colony” – talk about increased prices and the strain of debt payments may show up regularly from now on at election time if the facts aren’t made public from the start. (The Communists used the fiction that grain had to be exported during the famines of the 1930s to pay greedy international lenders, while these same lenders were telling them to feed the people first.)

    4. Honest management – well, the UKR government has asked for help from the FBI and the relevant UK agencies here, especially in tracking down stolen cash. Restitution may take a while, but the effort could start paying off immediately if it scares potential fraudsters straight.

    5. Policies – alternative energy is a good idea (there’s probably a lot of potential for windfarms, with all that open land). US companies are have been in talks to explore the fracking potential; ExxonMobil has a deal to drill for oil in the Black Sea. I assume will surely try to prevent this, and once the Party of Regions gets back on its feet, they’ll talk about the theft of Ukrainian natural resources, at least sotto voce. The government has already cut spending, ministries are auctioning off their vehicles to raise cash (Kiev has a subway, they won’t all be walking). Germany is announcing plans to deliver large volumes of gas (via CR and Slovakia), which should reassure the people and the government that they won’t be left to freeze while the petroleum engineers do their thing: http://www.spiegel.de/international/germany/german-companies-prepare-plans-to-supply-ukraine-with-gas-a-957988.html

    Putin is promising to double or triple wages in Crimea once the referendum passes, so leaving Ukrainians financially desperate is not the way to go at this point.

    I say “once” rather than “if” after reading of an extra 400,000 ballots being printed for the referendum next week http://gordonua.com/news/crimea/CHubarov-Dlya-referenduma-v-Krymu-napechatali-na-400-tys-bolshe-byulleteney–13594.html To make assurance doubly sure, “passports” (official id) for some citizens have been destroyed. It looks like you needn’t bother to volunteer to poll-watch there, Dan.

  2. Technical note: there’s a documented, if sporadic, problem with WordPress blogs not always recognizing the first message in a thread sent from Firefox. I remembered only after emailing about the problem with the above that IE worked in the past for this. So, if you don’t get an immediate confirmation message from a blog (when using FF), IE may work.

  3. Free and Democratic elections are still the best way to go. No matter who wins or loses the elections the interested parties will still have the influence via democratic means. Considering the sad state of Ukraine’s economy and the fact that IMF had several arrangements with Ukraine’s governments that were not fulfilled, having financial interests of all the parties channeled through the institutions of a democratic state and abiding the rule of law is the road Ukraine ought to take on. Having a new constitution in place, if that is what is Russia looking for, one that will not take on the short term goals as in Crimea could vote independence (for that matter Kosovo did vote independence but did not joined Albania) for the Russia, Ukraine and Europe to achieve a state of equilibrium through democratic means would prove to be the wisest thing to do vis-a-vis financial interests of all the parties involved. Would also help Russia (and some reactionary parties from the west) to learn that the interests, or what the interests had become in the globalised world, are best served via democratic institutions of a state that abides the rule of law. No need for Ukraine to join one or the other union, but to act, via political parties, in their best interest. This would render the new government and the secession of the Crimea unlawful and open (or reopen) a way for regular cooperation between the EU and Russia.

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