The Ukraine government has been watching its country go down in flames these last few months and has finally decided to do something about it. The central bank tried to call a halt to the free fall of the hryvnia on Wednesday by banning banks from buying foreign currency on behalf of their clients for the rest of this week.
This allowed the central bank to artificially dictate the interbank rate, which it reduced from 32 to 24 hryvnias. However, the artificial rate only affects exporters, who are obligated to sell 75 percent of their foreign currency revenue at that rate to the National Bank.
These moves have not yet had any effect and in the meantime, the Ukraine needs money—and quickly-- to counter the rampant hyperinflation that is now plaguing the country. The currency is sliding, raising concerns that companies that owe money in foreign currency could go bust. Banks are weak and a rescue from outside lenders will not happen until there's a stable government. The situation could get even worse of gas supplies are cut off as threatened.
Yes, bailing out the country of 46 million people will not be as easy as simply writing a hefty check. Analysts estimate the country will need between $25 billion and $35 billion for 2014 and 2015, perhaps $15 billion this year and $10 billion the next. The money would help pay salaries and pensions and maturing bonds. Indeed, according to sources in the know, the treasury account normally used to pay these bills is bare.
IMF to the Rescue
Ukraine government officials say that the country is relying on International Monetary Fund (IMF) aid to come to its rescue.
According to Natalie Jaresko, finance minister of Ukraine, “This is a very serious financial crisis there's no question, and we're looking forward to the IMF board meeting and the IMF first tranche (of aid) because it's a critical time.”
But it could take time for the IMF to agree on the bail-out conditions. Until then, the Ukraine will have to get temporary support from individual countries in Europe or the U.S.
Even with a rescue program, the country will face trying times and would likely have to make painful reforms, including a potential doubling in the price of gas. In addition, the IMF would probably insist on letting the currency fall by as much as 30 per cent and some banks may need bailouts as their foreign debts balloon. Quality of life would drop as imports soar in price.
Another stumbling block could be the IMF which might agree on a much lower loan than anticipated, something to the tune of $3 billion to $5 billion at different intervals.
Neighboring Russia
Russia, Ukraine’s largest neighbor, had promised to help with a loan of $15 billion but only $3 billion was dispensed and the rest put on hold after parliament voted on Saturday to remove pro-Russian President Viktor Yanukovych.
Russia could make even more trouble for the Ukraine by tightening the screws on its supplies of natural gas. They already halved the price of its gas supplies to Ukraine in December in an effort to put some distance between it and the EU. That price cut is up for review every three months.
As far as the IMF is concerned, U.S.-born Jaresko said she was confident that the Ukraine government was doing all it could to ensure the money, at least $17 billion, was released swiftly.
"We've worked very quickly over the last two months to come to a program of Ukrainian reforms so I believe we will be doing everything we need to do to ensure that money does come, and comes as soon as possible."