Western Financial Support for Ukraine: The Greek Analogy (continued)

by Elliott Morss, Morss Global Finance


In my last piece, I looked at the IMF/EU bailout efforts for Greece to see what can be expected as the West launches a bailout for Ukraine. And every day, what the West will do becomes clearer. Let’s back up to December of last year. At that time, the Russians agreed to provide ex-President Yanukovych with $15 billion for not entering into an association with the European Union. To date, $3 billion of that amount has been given to Ukraine. Russia has now pulled back and urged Ukraine to ask the IMF for assistance. And IMF staff is now in Ukraine working on a new program.

I say “new” because twice in recent years, the IMF has agreed to a plan to Ukraine only for the IMF to withhold funds when the country failed to meet agreed-upon “performance” targets.

Sidebar on the Role of the IMF in Greece and Ukraine

Whenever Western nations want to offer assistance to other countries, they like to have the IMF as the “front man”. This is because before the Fund ever offers assistance, it works out a reform program with the recipient country. When and if that program is implemented, it is intended to allow the country to move ahead in a sustainable manner. The reform programs have date-specific targets and countries do not get Fund moneys until they achieve the IMF targets. Do the targets always make economic sense? No. For example, in the case of Greece, the initial austerity program adopted by the IMF with support from Germany was too extreme and caused the unemployment rate to skyrocket. To its credit, the Fund saw what was happening and gave up on austerity measures. Its first bailout program was ended early, and its new one emphasizes labor market reforms and other measures to make Greece “competitive”.

The Greek and Ukraine Bailout Programs to Date

Table 1 provides summary information on the EU/IMF bailout program for Greece along with selected economic data. The first point to note is how much the Greek bailout is projected to cost through 2016 – $1.7 trillion! And the Ukraine GDP is one third larger than Greece’s. So far, the US is offering $5 billion in loan guarantees and the EU has pledged $15 billion for Ukraine. The IMF is in Ukraine now, and much larger commitments will be needed if meaningful economic reforms are to take place.

Table 1. – Greece: Bailout Amounts and Economic PerformanceSource: FocusEconomics
Click to enlarge

Econ 101

The last three rows in Table 1 are important. Here is why. In both Greece and Ukraine, everyone agrees the government deficits are too high and not sustainable. There are two ways to reduce deficits: increase taxes and lower government expenditures. Both reduce purchasing power, consequently slowing economic growth and causing unemployment to increase. Look at what has happened in Greece since 2010 when the IMF/EU bailout program started. Unemployment shot up and now stands at about 28%. As I have written, the IMF realized it was pushing austerity too hard and increased the time from for reform. For this to work, the EU will have to forgive more Greek debt that FocusEconomics now estimates stands at a whopping 188% of GDP!

The Ukraine Situation

Table 2 presents economic data on Ukraine.

Table 2. – Ukraine – Key Economic IndicatorsSource: FocusEconomics
Click to enlarge

The IMF program for Ukraine is in the formative stage. But by reviewing past communications between the IMF and Ukraine, the following components are likely to be included:

  • A reduction in the government deficit;
  • A reduction in energy subsidies: the Fund estimates these subsidies are as much as 5% of GDP, and;
  • Government pension reform: the Fund estimates Ukraine has one of the highest pension payout ratios (pensions as a percent of GDP) of any country in the world.

So what do all these “reforms” have in common? All three reduce purchasing power, thereby slowing economic growth and causing unemployment to increase. How reducing government deficits will cause this to happen was covered above. Lower subsidies will mean higher energy prices and consequently consumers will have less money to spend on other goods and services. Lower pensions will also reduce purchasing power.

The key question is: how austere will the IMF program be and what will the Ukrainian political reaction be to it? Keep in mind earlier fund programs were cancelled when Ukraine did not meet targets agreed to for IMF disbursements to continue.

A most pressing economic issue in Ukraine is its international trade deficit. In 2013, it was $19.6 billion or 11.5% of GDP. This is critical inasmuch as the country’s international reserves are only $20.4 billion or about 3 months of imports. About 20% of the country’s imports are energy fuels, and energy subsidies exacerbate the situation.


There are a number of uncertainties for Ukraine going forward. A major issue will be what sort of bailout program the IMF will prepare at the behest of Western nations. It will be designed to put Ukraine on an economically sustainable path. It will not be popular in Ukraine and will cause even more political unrest.

Investment Implications

As indicated in my earlier piece, this is not a good time to invest in ETF’s with any Ukrainian exposure such as: Junior Miners ETF (JUNR), iShares MSCI Poland Capped ETF (EPOL), Frontier Markets ETF (FRN), MSCI BRIC Index Fund (BKF), or iShares MSCI Emerging Markets Eastern Europe ETF (ESR).

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5 replies on “Western Financial Support for Ukraine: The Greek Analogy (continued)”

  1. Seems to me that the biggest economic engine and employer in Ukraine would be the import/export trade at the port on the Crimean Peninsula, and Russia has had a lock on that by treaty since Ukraine gained their independence.

  2. jeffmiller47
    Elliott may also want to respond. 
    I have not reviewed the economy of Ukraine in detail but have done some general reading.  The ports in Crimea may well be important but I believe more shipping from Ukraine goes through Odessa and ports in the Dnieper delta as well as on the Danube by far than through Crimea.  I believe the GDP of Ukraine shows more output from manufacturing, services and agriculture than from transportation, which would include shipping.  There is also a significant mineral and coal mining industry (uranium is big, I believe). 
    I would guess that all transportation activities in Ukraine would comprise less than 10% of the economy and less than 10% of employment.  If my guess is at all accurate then the loss of the Crimean ports would cost Ukraine less than 1% of its GDP and effectively no employment because the Crimean people employed would no longer be in the Ukraine work force.
    My understanding is that the industrial output (steel is one of the big items) is sold mainly into the Russian Federation and former Soviet Republics so those exports would not involve a lot of Black Sea/Mediterranean traffic.
    The ports of Crimea are not that important economically for Ukraine but are much more important for Russia which does not have other deep water ports that are comparable.

  3. @jeffmiller47 
    Following comment delivered by e-mail:
    “The reason for the aggressive acts of Russia comes from the Economic Union foolishly invading Russia’ sphere of influence by asking the Ukraine to join the Union.
    This was an extremely provocative act – the analogy for the US would be Russia going to Cuba or Hong Kong wanting to beak away from China.
    The Russian grab of Crimea is its reaction the the EU action. They knew they could get away with it….It is a done deal”

    Elliott Morss

  4. JohnLounsbury  
    To Elliott Morss:  I’m inclined to disagree, Elliott.  First of all, Russia going to Cuba (with nukes) was an extremely provacative act, to which JFK responded appropriately with an expressed willingness to risk WW III, because our national security was at stake.  I don’t think any American President could take a similar stand over Ukraine.
    You are aware that since Ukraine gained its independence from the Soviet Union, it has had a treaty with Russia that grants Russia the right to keep a base in the Crimean Penninsula, warships there, and up to 36,000 troops with guns and equipment there.  And up to 25,000 Russian troops have been there for many years!  I’m wondering if this was really an invasion, or a provacative drive around town to get a rise out of the media.
    I don’t like Putin personally, I don’t like his ideology, and I certainly don’t like his oppressive style, but I do believe he had his nation’s vital interests at heart, and had legitimate concerns about the new Ukraine government continuing to honor the contract/treaty Ukraine has with Russia, which was just extended for 25 years in 2010.
    The analogy that came to my mind was this.  What if the United States had only one ice free port, thru which a significant percentage of our imports and exports passed — let’s say it was New Orleans.  And let’s same some fringe group of seccessionists over-threw the government of Louisianna in a democratic election, then seceded from the Union.  Would the United States idly stand by and applaud this new democracy’s boldness?  Or would we send in troops to protect our national interests?  I suspect the latter.
    Jeff Miller

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