A Roadmap for Ukraine

U.S. and European efforts to resolve the Ukraine crisis seem to be finding their stride in recent days. U.S. Secretary of Defense Ash Carter ended months of “will they won’t they?” by announcing earlier this week that the U.S. would be sending heavy weaponry into Eastern Europe, and late last week EU leaders declared that EU sanctions against Russia would remain in place through the end of 2016, quelling months of anxiety around whether EU resolve on sanctions would hold.

But surely if, as Carter put it, the real test is whether the U.S. and its NATO partners deliver on commitments to “stand up to Russia’s actions and their attempts to reestablish a Soviet-era sphere of influence,” then among the strongest measures of success regarding Ukraine will be whether the country remains capable of steering its own fate economically.

As we have written elsewhere, transatlantic diplomacy suffers from a muscle imbalance when it comes to Ukraine. Far too much of the focus of U.S.-European attention has been on punishing Russia and deterring future aggression; the U.S., Europe, and allies need to do much more to support Ukraine’s economy, and they need to do so soon.

Further, of what little international attention has remained focused on the economic dimensions of this crisis, the overwhelming share has fixated narrowly on the negotiations now underway between the Ukrainian government and its private creditors, which remain deadlocked. This is understandable—it’s a high-profile negotiation, significant amounts are involved, and the outcome is central to the country’s fate. But without a larger U.S.-EU economic vision for Ukraine to anchor it, even the most successful outcome to the current debt negotiations will likely be forgotten to history, swallowed by an ending in which no one—neither Washington, Brussels, Kiev, nor Moscow— comes off well.

What, then, to do?

Clearing the fastest possible path for Ukraine to return to market access requires five basic ingredients: a credible reform plan; secure medium-term financing; a reduction of government debt to viable levels; leaders capable of delivering those reforms; and a public which is willing to go along. In the view of some analysts, the pricetag for all of this is in the range of $40–50 billion over the next three to four years—not a small sum, but hardly imposing when compared to the hundreds of billions expended on lesser strategic priorities (e.g. keeping Greece in the eurozone).

If Greece and other eurozone crises teach us anything, though, it is this: finding the right ratios of these five ingredients proves to be as or more important as securing a certain topline amount of short-term external financing. To their credit, Western leaders recognized almost immediately that, as willing partners in Kiev go, it won’t get better than the team currently in place. But what they fail to appreciate is that this is not a static point: it is true that Ukraine has its most serious reform-minded economic team since it gained independence twenty-four years ago. The current government has made meaningful downpayments on its reform commitments, passing anti-corruption legislation last October, standing up a new anti-corruption agency this past spring, and curbing jaw-dropping energy subsidies—one of the greatest sources of the country’s corruption— over recent months.

Yet, it’s not enough. Support at home is eroding. Local opinion polls point to sharp declines in support for the Kiev government over the past year. Whereas nearly half of Ukrainian respondents viewed the Kiev government as having a positive influence a year ago, that figure is now down to one-third. More striking, this shift is particularly strong in western Ukraine, where those who view the government as a bad influence has jumped from 28 to 54 percent.

This suggests that, in calibrating the right ratios—in determining how and how aggressively to push on the debt negotiations and on the broader reform agenda—Western policymakers would do well to see their task as defined, above all, by doing what is necessary to help the current Ukrainian government shore up support.

So far, the IMF appears to understand this. The Fund is hosting a rare trilateral meeting of Ukraine and private creditors’ representatives in Washington this week in a hands-on bid to bridge the gaps between the two sides. The Fund also helpfully bolstered Kiev’s negotiating position by signaling last week that it was prepared to release the next tranche of its bailout even if Kiev suspended debt servicing. And it reacted warmly to Ukraine’s offer to issue securities linked to future growth in return for private creditors accepting a writedown in debt, what IMF head Christine Lagarde softly applauded as Ukraine’s “continued efforts to reach a collaborative agreement with all creditors.” The next step is for the government itself to meet with creditors, without conditions, to move the negotiations forward.

Just as the Fund is doing its part to see that Ukraine emerges from the current creditor negotiations with a sustainable debt load, so too must the United States, EU, and other Western leaders do theirs: coming together around a common, detailed roadmap that does everything possible to support and hold the Ukrainian government to its own stated priorities. These include shrinking the bureaucracy, eliminating dozens of inspection agencies, improving the caliber of civil servants, and unifying all energy prices at the market level, which would eliminate the greatest cause of top-level corruption.

There is no single correct answer as to what such a roadmap must entail. We’ve compiled a few suggestions and ideas all sides might do well to consider (many of which build on recommendations contained in an excellent report by the Vienna Institute for International Economic Studies):

Jennifer M. Harris is a senior fellow at the Council on Foreign Relations.