Ukraine's new government will face old economic challenges

A woman, wearing a traditional Ukrainian headdress, stands on Kiev's Independence Square on February 24, 2014.

 Some degree of normality has returned to streets of the Ukrainian capital – Kiev- after last week’s bloody turmoil. Businesses have reopened in the city. People have gone back to work. But across the country, there is real anxiety about what happens next – not least on the economic front. 

"The budget coffers are nearly bare, the gas bills are rising quite dramatically, foreign exchange reserves are quite low, the currency is under pressure. The current course is untenable," says Nick Redman of the International Institute for Strategic Studies.

Ukraine needs help. Russia promised the Yanukovich government assistance – in the shape of a $15 billion loan and cheap energy. But Russia denounced the revolution as a coup and, after ponying up $3 billion of the package, it now says it wants to know more about the new Ukrainian government’s economic plans before handing over more.

David Dalton of the Economist Intelligence Unit is doubtful about Russian intentions. 

"It doesn’t look very promising…that they’re going to carry on handing over the money. I think it is very possible that the Russians will cut off the cash and scrap the energy deal,” says Dalton.

International help is at hand. The U.S. said today it’s ready to give financial support. The European Union and the International Monetary Fund have stepped up too. There is talk of a $20 billion bailout -- but with strings attached.

"The main thing isthat Ukraine needs to reform. And that’s what it hasn’t been doing for the last 20 odd years,” says Ian Bond of the Centre for European Reform. Hesays Ukraine mayhave to scrap fuel subsidies, tighten controls over public spending, and shake up its system of governance in return for EU and IMF support. These are the kind of measures that heavily indebted countries in the eurozone were required to undertake.

Ukraine could soon be getting a foretaste of the tough medicine the EU and the IMF prescribe when helping countries stave off default. With that in mind, the White House said today: 

"Our help will make Ukraine’s reforms easier."

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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