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Ukraine: Buy, Rent, or Walk Away?

Ukraine: Buy, Rent, or Walk Away?

For one who has long proclaimed the centrality of economics to foreign policy, the turmoil in Ukraine offers some unexpectedly strong support. A revolution was sparked by the rejection of a trade agreement, after all. Now, in the aftermath, we’ve moved on to the regularly scheduled balance-of-payments crisis. Yet, the problems in Ukraine actually present an extraordinarily difficult mix of economics and politics.

Acting-President Oleksandr Turchynov was reported to have warned this week that the country is close to default and "heading into the abyss" and that it needs $35 billion over the next two years. This is not purely the result of the recent turmoil, though such things do tend to be costly; Ukraine was already in need. The spark to the unrest came when ousted President Viktor Yanukovych opted for $15 billion in Russian money — funds that would come with far fewer strings attached than those offered through a European deal.

The issue is now pressing, since Ukraine is estimated to owe $13 billion in foreign debt service this year; failure to pay would mean default. That could have nasty repercussions not just for Ukrainians but for other indebted and teetering countries. Given those concerns and the geopolitical import of recent developments in the country, why not just pass a hat and give Ukraine the money?

Reason No. 1: $35 billion is a lot of money. To put it in perspective, this is roughly the level of the entire U.S. State Department’s "foreign operations" annual budget, covering the U.S. Agency for International Development, bilateral economic assistance, international security assistance, contributions to international financial institutions, and agencies such as the Peace Corps and Millennium Challenge Corporation. This is not the kind of money you find lying around in a jar.

Reason No. 2: Is this a loan or a gift? A loan would certainly be less costly and more traditional, but the distinction has everything to do with the probability of repayment. The International Monetary Fund has had trouble before with getting Ukraine to pay money back. Usually loans of this magnitude come with conditions that are meant to increase the probability of repayment. Even in normal circumstances, recipient countries can find these conditions unpopular and onerous (e.g., dramatically raising the price of gas for heating and cooking). What are the odds that the present leadership could enforce such a plan?

Reason No. 3: To whom would the money go? Ukraine’s government is provisional and contested. If the money is a loan, who is signing for it? What happens if the country splits, with the Russophile part going its own way? Who would then be responsible for repayment?

Reason No. 4: What does one get for the money? Western powers might find an investment worthwhile if it bought lasting peace and stability and brought Ukraine into Europe’s orbit. But what if it only rented peace and stability? If, in two years, Ukraine does not reform and finds its pockets empty again, it could be just as susceptible to Russian enticements as it was under Yanukovych.

If this all seems a bit too risky for the United States or the European Union to take on, one might think that there is always the IMF. But the IMF is only supposed to do this when it sees a good chance of repayment. It has not been completely pure in following that principle; the IMF’s participation in the Greek bailout was only made possible by implausible assumptions about Greece’s ability to repay. That deviation from standard practice subsequently raised concern among the IMF’s membership: How is it that countries from Asia, Africa, or Latin America must go through excruciating IMF programs to receive funds, but European countries are given a pass? Repeating the same approach with Ukraine would put the IMF’s managing director (Christine Lagarde, a European), in a very awkward position.

When a population on Europe’s periphery has risen up and demanded closer ties and economic linkages, it seems unthinkable that the countries of the West could walk away. Engagement, though, will mean the expensive disentangling of a daunting thicket of economic and political problems. Seeing off the Yanukovych presidency was just the beginning.