Sunday, March 22, 2009

A Troubled Ukraine Seeks Loan from Russia

Sources: The Guardian, Business Feed Article; International Herald Tribune, Ukraine PM Slashes Her Salary by Half; International Herald Tribune, Ukraine PM Seeking $5 billion loan from Russia

Despite small improvements in production, figures released by Ukraine's central bank indicate the country's continuing economic problems. Though the Ukrainian government has stopped releasing monthly GDP figures, the central bank's indicators show GDP continuing to fall in 2009. Experts expect a contraction of at least five percent this year after a 2.1% growth in GDP for 2008. Falling steel and chemical prices are a major source of Ukraine's problems, along with a falling currency and falling consumer demand.

On Wednesday, Prime Minister Yulia Tymoshenko announced that she and her Cabinet would be cutting their salaries in half in response to Ukraine's economic troubles. The Cabinet also asked parliamentarians to join them in the salary reductions, which will be effective until January 2010.

Compounding Ukraine's problems is the suspension of its IMF loan in February. The IMF refused to release a tranche of the loan when Tymoshenko refused to comply with required social spending cuts, and so Ukraine is in desperate need of a new funding source. Next month, Tymoshenko will ask Russia for a $5 billion loan despite warnings from the Ukranian president that such a dependency on Ukraine's giant neighbor would be disastrous for the country. Russia and Ukraine have been on shaky terms since a gas dispute that cut off supplies to Europe last year, and many Ukranians are concerned that indebtedness to Russia could lead to Russian control of the gas line and less bargaining power in the future.


1) Do you think Tymoshenko should avoid asking Russia for help at all costs to maintain Ukrainian political independence, or is seeking a loan from Russia a good way to get around the IMF and avoid unpopular spending cuts?
2) Is it dangerous for Ukraine to be continuing social spending when its economy is performing so poorly?

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