How to reform Ukraine's economy

April 2, 2014: 11:57 AM ET

The International Monetary Fund recently agreed to help the debt-stressed country with up to an $18 billion loan, but it can't do it alone.

By Heidi Crebo-Rediker and Douglas Rediker

A market trader counts out hryvnia currency banknotes at a fruit stall in Kiev, Ukraine, on Feb. 3, 2014.

A market trader counts out hryvnia currency banknotes at a fruit stall in Kiev, Ukraine, on Feb. 3, 2014.

FORTUNE -- After weeks of urgent negotiations with Ukraine's interim government, the International Monetary Fund last week agreed to provide up to $18 billion to prevent the country's default. The loan, spread over two years, represents Ukraine's best chance to finally transition its economy and institutions away from its past and open a new chapter in its history.

While the IMF will clearly play the lead role in Ukraine, the country's success or failure will largely depend on its ability to implement reforms to get its economy back on track. To do this, Ukraine will need assistance from the IMF, the European Union, the United States and perhaps -- most of all -- from the European Bank for Reconstruction and Development (EBRD).  With its highly relevant expertise and financial resources, the EBRD should return to its core mandate -- which explicitly includes advancing democratic values -- by shifting its focus away from Russia and toward playing a central role in Ukraine's transition.

MORE: Hold onto your hats: A capital spending boom may be coming

The EBRD is able to bring to bear over two decades of experience in Ukraine, trained professionals who speak the language, and its presence on the ground. The bank has already worked tirelessly for years with Ukrainian companies and banks in attempting to improve standards, fight corruption, and create a more sustainable corporate and investment environment. This has not always been an easy task in Ukraine, and has met with both mixed successes as well as lessons learned.

Corruption plagues Ukraine on many levels. The EBRD knows where many of the bodies are buried (figuratively) in key industries, particularly in the energy sector. Experience has left the EBRD with enough healthy cynicism to make wise choices and realistic recommendations. With new-found political support at the top and a desire by its people to move to a better and more prosperous future, the chances of success on the part of the EBRD in Ukraine are greater now than ever before.

But the EBRD has limited resources -- both financial and professional. To increase its Ukraine effort, it needs to decrease its efforts elsewhere. For many reasons, Russia deserves to pay the price of this increased Ukraine effort. The EBRD spent the past two decades lending significant financial resources to Russia. The bank has directed nearly a quarter of its loans and investments to Russian entities since the EBRD started operations; making Russia the largest single recipient of EBRD financing of any member country. Some of these loans were made to state banks and state-owned enterprises -- including to state-controlled behemoth Gazprom and the Russian state-owned railway, headed by Vladimir Yakunin, who was included last week on the U.S. Treasury's sanctions list. When the EBRD signed the $500 million 10-year loan to Russian Railways in 2009, it was the largest in the EBRD's history.

MORE: What's next for Obamacare?

Lending to and investing in Russia was profitable business for the bank and helped the overall credit quality of its loan portfolio. Unfortunately, it did not do enough to support Article One of its charter, agreed to by all of its shareholders. The EBRD is unique in that -- unlike every other multilateral development bank -- it has the advancement and pursuit of democracy as a core mandate. All member countries, including Russia, committed to the fundamental principles of multiparty democracy, the rule of law, respect for human rights, and market economics when they joined the bank.

Article One of the charter establishes the central purpose of the bank as fostering transition toward open market-oriented economies in countries that are "committed to and applying the principles of multiparty democracy, pluralism, and market economics." Over the years, the EBRD has been able to justify large lending and investment operations in Russia, particularly to state-owned enterprises, as part of the transition mandate. The EBRD argued it was pushing the needle in the right direction on democracy, though the needle was a very heavy one to push.

Given recent events, Russia's commitment to the democracy mandate has clearly been called into question. The EBRD answers to shareholding countries, the largest of those being the United States, followed by Germany, U.K., France, Italy, and Japan. Shareholders should ensure that future lending to Russia clears a very high bar, especially with regard to Article One. Future lending to state-owned or state-controlled companies should cease altogether. It is time for the EBRD to focus more of its resources -- talent, experience, and its balance sheet -- to where they are desperately needed. In supporting Ukraine, there is no question that EBRD will be doing precisely what it was intended to do by the charter that brought the bank into existence just over two short decades ago.

Heidi Crebo-Rediker is the former chief economist at the U.S. State Department and is currently a senior fellow at the Council on Foreign Relations. Douglas Rediker is a former member of the Executive Board of the IMF and is currently a visiting fellow at the Peterson Institute for International Economics.

  • Time to invest in Russia?

    If you thought Vladimir Putin's annexation of Crimea was quick, just look at how fast investors have changed their tune on Russia.

    By Jen Wieczner, writer-reporter

    FORTUNE -- It wasn't too long ago that Russia was considered one of the BRIC powerhouses among emerging markets, along with Brazil, India, and China. Toward the end of 2013, many respected money managers were excited about Russia -- if not bullish. David Darst, then the MORE

    Mar 31, 2014 5:00 AM ET
  • El-Erian: With Russia booted out, G-7 needs to deliver more than ever

    Monday's decision to cancel June's G-8 meeting in Russia and replace it with a G-7 in Belgium will be a real test for the G-7.

    By Mohamed A. El-Erian

    FORTUNE -- Escalating their response to Russia's annexation of Crimea, Western leaders on Monday decided to move the June Group of 8 (G-8) Summit from Russia to Belgium and to dis-invite Russia. In the process, they have set up a test MORE

    Mar 25, 2014 10:17 AM ET
  • What U.S. sanctions against Russia will (really) do

    They won't get Russia to return Crimea to Ukraine, but sanctions could discourage further Russian moves into Ukraine if President Obama executes them right.

    By James M. Lindsay

    FORTUNE -- In a move to punish Russia's hostile takeover of Crimea, the White House on Thursday announced a second round of sanctions against 20 Russians and a St. Petersburg bank. This builds on asset freezes and visa bans President Obama ordered Monday MORE

    Mar 21, 2014 10:32 AM ET
  • Why the West won't hit Russia with more sanctions

    Western politicians may talk tough, but they have nothing to gain from escalating tensions over Crimea.

    FORTUNE -- Vladimir Putin's approval ratings may be soaring, but you can't say the same thing for the Russian stock market or the ruble.

    Investors have been pulling their money out of Russian investments, fearing that the country's annexation of Crimea could lead to harsh economic sanctions from western nations. Not only that, it's increasingly clear MORE

    - Mar 20, 2014 2:12 PM ET
  • Putin's folly: Crimea is a money pit

    While the way in which Crimea was ripped away from Ukraine was understandably traumatic, the country will be far better off without it in the long run.

    By Cyrus Sanati

    FORTUNE -- Ukraine is better off without Crimea. Indeed, if Ukraine really wants to stick it to Russian President Vladimir Putin, it should hand over a few more of its southern and eastern provinces to Moscow, in addition to the backwater MORE

    Mar 19, 2014 2:54 PM ET
  • U.S.-Russian trade relationship? There really isn't one

    Russia and the U.S. are free to antagonize each other because they have very little to lose economically from deteriorated relations.

    FORTUNE -- It's the economies, stupid.

    Russian President Vladimir Putin signed legislation officially annexing Crimea on Tuesday, in blatant disregard of threats of economic sanctions that President Barack Obama announced over the weekend. And while some have considered the events in Ukraine the result of geopolitical posturing (Arizona Senator John McCain, MORE

    - Mar 18, 2014 11:28 AM ET
  • How Ukraine could overcome its crisis

    Russia's intervention threatens Ukraine's already fragile economy.

    By Robert Kahn

    FORTUNE -- As Russian officials on Thursday announced new military operations in several regions near the Ukrainian border, it becomes clear that the country isn't just dealing with a political crisis. Its economy is also in jeopardy. The political turmoil we've seen over the past two months has exposed Ukraine's vulnerable economy -- a product of years of unsustainable economic polices MORE

    Mar 14, 2014 10:57 AM ET
  • Russian debt deal could haunt Ukraine's economy

    A "clever" bond deal will add even more tension to the neighboring nations' negotiations.

    FORTUNE -- Just months before the toppling of its government, Russia cut a loan deal with Ukraine that would make even an ace structured finance dealmaker envious. One expert on sovereign debt has called the transaction "clever." And the deal could come back to haunt Ukraine's economy.

    Back in December, Russia lent Ukraine $3 billion as part of MORE

    - Mar 12, 2014 5:00 AM ET
  • Kiev residents fear higher prices from bailouts

    On the ground in Kiev, Ukrainians wait in uneasy limbo as European leaders discuss rescue packages.

    By Vivienne Walt

    FORTUNE -- As Western officials try to salvage Ukraine's near-bankrupt economy they might want to visit the country's Ministry of Agrarian and Food Policy to take stock of how difficult their task might be.

    Inside the Soviet-era building off Kiev's Independence Square on Wednesday night, the lobby was piled high with grimy mattresses, MORE

    Mar 6, 2014 9:38 AM ET
    Posted in: , , ,
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by VIP.