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Grading assistance to Ukraine

Larry Summers, not my favorite public persona but a savvy economist to be sure, offers sage advice on aid for Ukraine.  But he fails to consider how we are likely to measure up to his “lessons for the design of support programs,” so here are my guesstimates (the proposals in bold are his, the rest is mine):

1.  Immediate impact is essential.  While Congress has acted quickly to approve $1 billion in loan guarantees and the European Union has in principle approved $15 billion, the International Monetary Fund has not yet acted.  Odds are it will take time, not only for the IMF to extract reform promises from Ukraine but also for the bureaucratic arrangements to be made by the EU and US.  And the total amount is likely to fall far short of the $35 billion Ukraine says it needs.

2.  Avoid “Potemkin money.”  I wonder if loan guarantees fall in the category of Potemkin money, as I imagine it is difficult to know how much new money they make available.  Perhaps a reader or two who are expert can enlighten me.  EU money is rarely quick in my experience.  IMF money is real but takes time to get approved.  Months rather than weeks before they write a check.  Potemkin-like in the meanwhile.

3.  Be realistic about debts.  Summers wants us to consider rescheduling or restructuring, which is something often done after a revolution (but never quick–it often takes years).  Relief from official and private sector debt is often in the 35-60% range.  Uniquely Iraq got 80% off its official debt at the Paris Club.  Post-Communist Poland got 40% off.  But of course much of Ukraine’s debt is owed to Russia, which is unlikely to be cooperative in any effort to reduce, reschedule or restructure.  The usual consensus is not likely to be available, unless we strike a deal with Moscow that is likely to be inimical to Ukraine’s interest in Crimea.

4.  Honest management is as important as prudent policy.  We don’t want the Ukrainians stealing the money we send them, and we should want to recover as much as possible from past abuse.  Lots of luck on the latter.  Yanukovich and his cronies will have squirreled away a lot of money in difficult to trace places.  Some of Ukraine’s wealthy tycoons are prominent supporters of the post-Yanukovich regime.  It will not be easy to prevent problems in the future either, as Ukraine clearly lacks the mechanisms required for serious transparency and accountability.  Sure we should insist, but it will take legislation and courage to put them in place.  Recovery of ill-gotten gains takes years, as does establishment of institutions designed to prevent theft.

5.  Countries need to pursue broad polices in a way that benefits Ukraine.  There is a pretty good chance the Obama administration will do the right things on the IMF and on energy policy by building the Keystone pipeline and approving natural gas exports.  Europe is also likely to do at least some of the right things:  continue to pay for the gas it receives through Ukraine, so long as the Russians continue to send it, and help Ukraine develop alternative energy sources for its own use, reducing its dependency on Russia.

The big problems are with immediacy and impact.  Ukraine needs a lot of money quickly, much faster than it will get honest management or debt reduction.  Washington and Brussels look likely to have won the tug of war for Kiev and any other parts of Ukraine that remain attached to it.  They need to do everything they can to avoid financial implosion of their prize.

Observers, aid, energy and elections

Much as I am entertained by explanations of Russian behavior based on Western decline and claims that Vladimir Putin is delusional, responding to the seizure of Crimea and threats against the rest of southern and eastern Ukraine requires a finer brush.  How can Russia be prevented from occupying other Russian-speaking areas and how might the occupation of Crimea be reversed?  Those are the objectives Kiev, Washington and Brussels should be setting.

Kiev is one key to preventing Russia from taking over other Russian-speaking areas of southern and eastern Ukraine.  It has already done well to block (with a veto by the speaker of parliament) a law that would have denied Russian the status of an official language in those areas.  It has also appointed new governors, including at least two wealthy oligarchs.  How well they manage to respond to pro-Russian protests, avoiding violence while reasserting a modicum of Kiev’s authority, will be the primary determinant of whether things get out of hand or continue to calm.  Putting in international observers to report on the situation and highlight any abuses is a good idea.  Putin already has his hands full in Crimea.  He doesn’t really need to take on additional burdens elsewhere in Ukraine, provided Russian speakers aren’t clamoring for intervention to protect them from the depredations of Kiev. Read more