Aid-Dependent Kiev Faces 'Serious Problems' Pending Shift in Russia-US Relations

Raiffeisen Research, the research arm of Raiffeisen Banking Group, one of the largest banking networks in Central and Eastern Europe, has come out with a gloomy report on Ukraine's prospects. Any significant shift in relations between Russia and the US could mean in serious consequences for Ukraine's economy and foreign policy, researchers say.

According to a copy of the Austrian banking group's report on Ukraine, excerpts of which were obtained by the Russian news agency RIA Novosti, "any significant changes in relations between Russia and the US will have serious and difficult consequences for Ukraine's foreign and domestic policy, as well as the country's economy."

This, the report stresses, is due to Ukraine's heavy "dependence on international and bilateral financial assistance from Western countries, and to the key role played by Western institutions in reforming the country's government institutions."

In true analytical form, Raiffeisen Research stresses that for now, analysts can only make qualified guesses about what may happen after January 20. Still, any possible agreement between the new US administration and Moscow is expected to be accompanied by uncertainty and reduced support from Washington to Eastern Europe. For Kiev, that is particularly troubling.

Also worrying to Kiev, according to the report, is the kind of commentary Trump made on the campaign trail, and after being elected, vis-à-vis Ukraine, and the US's relationship with Russia, and the background of some of his appointments.

Economically speaking, the report says, the worst case scenario for Kiev would be a rupture in the current IMF lending program to Ukraine, which is presently expected to last until 2018. Pointing out that the international financial institution has already had problems with Kiev in the past, with the latter failing to fulfill some of its basic obligations as a condition for further borrowing, Raiffeisen Research noted that a "(geo) political component" had been involved in the IMF Board of Governors' agreement to continue programs to support Ukraine.

Under Trump, researchers suggest, the IMF's lending policy to Ukraine may change, given the US's important role in the institution. "Ukrainian authorities may find it more difficult to ensure the continuation of the IMF program, if key conditions, such as the fight against corruption, and progress in structural reforms, are not met." In that case, all that would be left for Kiev to do would be "to intensify their efforts" to meet at least the minimum conditions for the continuation of the existing aid program.

Unfortunately, in addition to things like anti-corruption reforms, the IMF's conditions have included forced austerity reforms. These have harmed Ukraine's impoverished population via things like cuts in social benefits and hikes in utilities prices. Currently, the average pension payment for Ukrainian retirees amounts to about $74 per month, according to the Fund. Meanwhile, the average bill for utilities in summer for a one room apartment has risen to about $40 in summer, and $110 in winter.

In addition to IMF assistance, the US also provides aid via guaranteed US government bonds. The Trump administration, Raiffeisen Research says, may be more reluctant to provide this form of bilateral assistance to Kiev than the outgoing administration.

This, researchers say, would not result an immediate crisis as far as Ukraine's financial stability is concerned, although a reduction in US assistance would play an important 'psychological impact' on the country's politicians. Thereafter, Ukraine would be left in the hands of the European Union, where a certain level of "Ukraine fatigue" has also set in. The report does not see "a strong desire at the EU level to provide bold amounts of additional support for Ukraine," either.

Ultimately, Raiffeisen Research doesn't expect IMF assistance to dry up anytime soon; in fact, the report suggests that the chances that Kiev will receive another tranche of its IMF loan in late January or early February have grown.

"Nevertheless, a fierce debate on foreign policy has already started in Ukraine due to Trump's election, and may lead to an adjustment in Ukraine's political positions in 2017," the report concludes.