The WSJ reports,"Russian President Vladimir Putin may be toning down his rhetoric toward Ukraine, but he still holds potent financial levers to keep Kiev from turning westward.
First, Moscow can use the price it charges for natural gas supplies Ukraine relies on to fuel its economy, a power that gives it unprecedented to make or break the country’s finances. Ukraine’s turn to the West coincides with an escalation in the price dispute. The more Kiev looks to Europe as its future trade partner, the higher the natural gas bills seem to head.
Second, Moscow may be able to use a special clause in the $3 billion in Ukrainian bonds Russia bought in December to trigger a system-wide debt meltdown, says aGeorgetown University law professor and debt expert Anna Gelpern. That financial nuclear option could pressure Ukraine’s new pro-West government from embracing a full-fledged European integration and a turn away from its former Soviet masters".
Ukraine’s newly-elected President Petro Poroshenko has already asked his European counterparts for more time to commit to a major economic and deal with the European Union.
Financial levers are part of the broader battle being waged over Ukraine, says Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. Mr. Putin not only wants the country’s strategic assets such as the Black Sea naval port in Crimea, but he also wants Ukraine to be part of a Eurasian trade bloc and to prevent the country from becoming another member of the North Atlantic Treaty Organization, analysts say.
The country is in a particularly precarious economic position, even with an International Monetary Fund bailout.
The financial lifeline is already one of the IMF’s riskiest emergency loans. Just a day after the fund approved a $17 billion bailout for Ukraine in late April, IMF brass warned a bigger bailout than currently planned might be necessary, given the political turmoil the new leadership faces. Those risks are underscored as government forcescontinue to clash with militant separatists.
Some economists warn that a restructuring shouldn’t be ruled out and wonder if Ukraine is the new Greece, which received a record-sized bailout that eventually led to the biggest private debt restructuring in modern history.
“We see the IMF’s growth forecasts for Ukraine and Greece not as forecasts at all, but rather as assumptions necessary to justify the IMF’s interventions,” say Benn Steil andDinah Walker in a Council on Foreign Relations blog post.
