Since the conflict in eastern Ukraine began last year, the European Union has recognized that Russia and the rebels it supports never embraced the cease-fire agreement, and over the summer it renewed its sanctions against Russia. The EU has also given the government in Kyiv just EUR 2.21 billion ($2.47 billion) of new, direct financial aid -- a tiny sum when compared with the hundreds of billions Europe has spent bailing out Greece, according to Bloomberg.
Much of the rest of the EUR 11 billion package that the EU announced during Crimea's annexation amounts to vague promises and accounting tricks. It includes, for example, $3 billion in potential loans from the European Investment Bank, but the contracts signed in Ukraine since the annexation of Crimea are no larger than they were before the conflict with Russia began, reads the report.
The International Monetary Fund, for its part, is orchestrating a $40 billion bailout designed to keep Ukraine solvent. The Fund's own $17.5 billion program accounts for less than half of that sum, and Ukraine is pursuing another $15 billion in savings through debt restructuring negotiations with its creditors. The rest is supposed to come from bilateral donors, but this is falling short. In addition to the EU money, the U.S. is providing $3 billion in loan guarantees.
Ukraine needs much more help. Its economy shrank by more than 14% in the second quarter; its currency, the hryvnia, has collapsed, together with investment and consumption; and inflation has soared to 55%. Under these circumstances, Ukraine cannot save its way to recovery. It needs large-scale foreign aid and more creative thinking.
Read alsoEconomist: Ukraine's debt sagaOne idea is for Europe's central banks to jointly put together a currency swap facility that Ukraine's National Bank could use to defend the hryvnia if needed. A verbal commitment to such a strategy alone might help stabilize the currency and make it easier for the government to follow through on its promise to lift capital controls.
It's also in the EU's interest to find hard cash for Ukraine and technical support to plug the holes in its finances -- holes that get bigger the more Russian-backed rebels attack. Most pressing is Ukraine's need to cover the $3 billion it owes Russia. The government is also looking to borrow $1 billion to pay for natural gas for the winter, to undercut the Kremlin's ability to use gas supplies as a weapon. The European Bank for Reconstruction and Development is considering a loan of $300 million. Other lenders are needed to step in.
