By BNE IntelliNews

Christine Lagarde, head of the International Monetary Fund, has for the first time publicly linked IMF funding for Ukraine to an end to conflict in the country’s east.

“In order to reform its economy, Ukraine need stable borders, this is indispensable,” she told Le Monde during an interview at the World Economic Forum in Davos on January 24, but published later. “There is a flagrant link between the economic situation and the military situation,” she added in the interview.

Any new programme offered Ukraine by the IMF “assumes that the situation stabilises – this is a priority”, Lagarde said. “No partner of the IMF can consider participating in a support programme if there is a question mark over 20% of the gross domestic product of Ukraine,” she said.

Lagarde said the original two-year stand-by programme agreed with Ukraine in April 2014 had assumed that the conflict in East Ukraine would be over by the autumn of 2014.

Now the IMF is set to agree with Ukraine a longer-term Extended Fund Facility, Lagarde announced at Davos on January 21. This will support Ukraine over a four-year period during which Kyiv will undertake reforms. Lagarde said in the interview with Le Monde that the funding to be disbursed under the new programme would “doubtless be a little higher than what was [originally] envisaged”.

Media previously reported that the IMF has identified a $15bn gap in Ukraine’s finances for 2015, despite Kyiv having a $17bn IMF stand-by credit, with $10bn promised from other donors. Ukraine is believed to be readying for restructuring talks with bondholders.

Lagarde said the hostilities in East Ukraine’s Donbass region were all the more regrettable because the IMF’s Ukrainian interlocutors “for the first time” are “serious” people, who seem “determined to launch reforms and have the political courage to carry them out”.

“This is a big change compared to the last 20 years,” she said in the interview, nodding to Ukraine’s President Petro Poroshenko, Prime Minister Arseny Yatsenyuk, National Bank of Ukraine head Valery Gontareva and US-born Finance Minister Natalie Jaresko.

Fatal linkage

Western sanctions on Russia – in response to Moscow’s perceived backing for the Donbass rebels – have wreaked havoc on Russia’s economy. But linkage between an end to the conflict and any IMF bailout of Ukraine might encourage Moscow to press harder on Kyiv, betting on Ukraine’s imminent collapse, fear analysts.

“The Russian leader thinks that war is undermining the Ukrainian economy and, by extension, the Ukrainian government much faster than Western sanctions and the economic crisis are weakening Russia’s economy,” Russian analyst Konstantin von Eggert wrote in a column for Carnegie Europe.

“Putin believes that Poroshenko will ask for a deal to end the conflict. According to Putin’s calculation, he will be able to dictate the terms of such an agreement,” von Eggert believes.

“A perfect economic storm has hit Russia,” writes Angela Stent, veteran Russia watcher at Georgetown University. “Surely, now would be the time for the Kremlin and its proxies in Ukraine to agree to serious talks about de-escalating the violence in the Donbass region, (…) But quite the opposite is happening.”

Courtesy of BNE

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