“Bootstrapping” democracy - Ukraine

The IMF Mission has once again left Ukraine having completed its first review under The Extended Fund Facility Agreement.  Its statement on the IMF website can be found here, but reads in its entirety as follows:

“IMF Statement on Discussions with Ukraine on First Review under the Extended Fund Facility Arrangement
Press Release No. 15/243
May 31, 2015
End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

An International Monetary Fund (IMF) mission visited Kyiv during May 12-29 to hold discussions on the first review under the Extended Fund Facility Arrangement (EFF) in support of the authorities’ economic reform program (see Press Release No. 15/107).

At the conclusion of the visit, Mr. Nikolay Gueorguiev, mission chief for Ukraine, made the following statement today in Kyiv:

“The mission held constructive discussions with the authorities on policies needed to complete the first review under the EFF arrangement. Understandings were reached on most issues and discussions will continue in the comings days to finalize a staff-level agreement than can be taken for approval to the IMF management and the Executive Board.

“The authorities’ commitment to the reform program remains strong. All performance criteria for end-March were met and all structural benchmarks due in the Spring are on course to be met, albeit some with a delay. This good program implementation has been achieved notwithstanding an exceptionally difficult environment, in part related to the unresolved conflict in the East, which took a heavier than expected toll on the economy in the first quarter of 2015. Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent. Inflation was mostly driven by one-off pass-through effects of the large exchange rate depreciation in February as well as the needed energy price increases.

“In recent months, signs that economic stability is gradually taking hold are steadily emerging. The foreign exchange market has remained broadly stable. Gross international reserves, although still very low, have increased to US$9.6 billion at end-April. Banks’ deposits in domestic currency have been recovering. The budget outturn in the first months of 2015 was stronger than expected, partly due to temporary factors.

“The authorities recognize that decisive implementation of economic reforms is indispensable for entrenching financial stability and restoring robust and sustainable growth. They are committed to advancing fiscal consolidation and energy sector reforms, including further energy tariff adjustments to eliminate the large losses of Naftogaz, reduce energy consumption, and foster energy independence. They are also moving ahead with the rehabilitation of the banking system, and the improvement of the business environment to enhance the productive potential of the economy.

“The authorities are also determined to complete the ongoing debt operation in line with program objectives. This will ensure that public debt is sustainable with high probability and the program remains fully financed, which are requirements for the completion of the review. More broadly, continued financial support for Ukraine’s reform efforts from official and private creditors is vital for the success of the program.”

The message it sends between the lines is really quite clear - numbers aside (and they are simply numbers, that whilst seemingly large and temporarily depressed, they are indeed small on the global scale - The AIG bailout of $85 billion in 2008 exceeds the requirements of Ukraine for example).

The IMF message strongly inferes that for the very first time, Ukraine has a competent Finance Minister and NBU Chief that not only say what they will do, but that actually do it - backed up by a supportive Cabinet of Ministers, and this despite the populist screeching of the usual Rada MPs with a history of reneging on IMF agreements and neither having the sense to gradually raise the gas prices when they had the power to do so, thus avoiding the dramatic rises that have now occurred.

Thus, the message is Ukraine has a competent team the IMF can work with and trust to carry out even the most unpopular of immediate term tasks for the longer term good.  Yet it also clearly infers, that whilst the IMF and other creditors now have a team that can be trusted and that will do as it says it will do when agreements are reached, there is insufficient funding from international and private lenders for them to be able to do what needs to be done.

A good and trusted team attempting economic reform, democracy promotion and consolidation - currently bootstrapped - is the takeaway message.

Regardless of the war on the ground in eastern Ukraine, Ukraine has to win the war of governance, and governance style, with The Kremlin.  It is perhaps a battle far more important than that in the eastern regions (without wishing to belittle those serving in the east of the nation).

It is a war of governance style that the “West” has every interest in seeing Ukraine victorious, unless it is prepared to see democracy retreat upon the European continent the moment it is robustly confronted by a governance system that is irreconcilable with every pillar of democracy.

It has been a long time since democracy was victorious on the continent in the face of externally driven confrontation.  Investing seriously and responsibly in the long term future of such a large EU (and NATO) neighbour when few further democratic continental gains present themselves, is perhaps prudent beyond the bootstrapping currently provided.

Simply throwing money at Ukraine is not the most sensible way to go.  Democracy has to arrive and consolidate in all its individual pillars - by which time it will not require anything like the assistance it requires now.  Thus controlled front-loading is the most obvious path to follow.

By not throwing a sensible and goal-achieving sum at a level that conserves some internal political energy for overcoming unexpected hurdles, it will go a long way to undermining any democratic pillars before they consolidate.   Whilst prudence is wise, enforced bootstrapping is probably not, for when that internal political energy expires prematurely, so will the trusted team with which the IMF (and others) currently deal.

Who are the “West” going to bet “long” and robustly upon?  Democracy, the status quo, or the authoritarians and dictators?

“Shorting” democracy and all its pillars would seem the antithesis of all it proclaims to be - particularly in your own backyard.  To go “long” and move from “bootstrapping” to “adequate” would be enough with regard to Ukraine.  Clearly the days of “ample” or overwhelming “all-in” punts have long since left the democracy promotion/support strategy - but “adequate” too?