Smoke from a burning pro-Russian activist blockade rises around a flag of the Donetsk Republic on May 3 in Kramatorsk, Ukraine.(Scott Olson/Getty Images)
Summary
On May 2, Ukrainian forces restarted their military operation in eastern Ukraine. By May 4, Kiev reportedly controlled most of Kramatorsk, and security forces had surrounded Slovyansk, a stronghold for pro-Russian militants. Authorities struggled to maintain order in the southern city of Odessa, where more than 40 people were killed in May 2 clashes and where pro-Russian protesters stormed a police station May 4 and released detainees with little police interference.
On April 30, the International Monetary Fund had approved a $17 billion aid package for Ukraine, with the first tranche scheduled for disbursement in early May. The developments underscore the twofold crisis facing the government in Kiev. Most immediately, authorities are struggling to exert power in the country's eastern regions. Meanwhile, despite financial and political support from the West, the country's substantial economic woes will probably only grow worse.
The crisis threatens to further destabilize Ukraine's interim government, creating gridlock that will prevent the country's leadership from responding effectively to military and economic challenges and could open the door for the Kremlin to push back against Western influence in Kiev.
Analysis
In the same week that the IMF announced its loan, the United States and the European Union imposed new sanctions on Russian officials and entities in an effort to pressure the Kremlin to change its policy toward Ukraine. In a show of support for its allies in the region, NATO has initiated numerous small deployments along its eastern periphery on a semi-permanent rotational basis. However, Western institutions' financial support for Kiev, visa restrictions and asset freezes on high-level Russian officials and companies as well as a largely symbolic military presence in NATO's eastern member states will do little to address Ukraine's current economic and military challenges.
While the first $3 billion tranche of Ukraine's newly approved IMF loan is expected to arrive between May 5 and May 8, the future of Ukraine's financial arrangement with the IMF remains uncertain.
As a condition for granting Ukraine a loan, the IMF asked Ukrainian authorities to introduce and implement a wide array of economic reforms. In response, Ukraine enacted a package of far-reaching austerity measures, including tax hikes. Moreover, on May 1, Ukraine hiked the prices it charges households for natural gas by more than 50 percent. Although subsidies for some segments of the population will remain in effect, and the hikes will have little impact on utility bills until heating costs rise in the fall, changes to Ukraine's long-standing system of energy subsidies remain unpopular.
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Because Ukraine owes large sums to Western creditors and to Russia's Gazprom, a significant portion of the IMF's financial assistance may ultimately be used to pay back debts rather than to stimulate the country's struggling economy. Of the planned $17 billion loan, $5 billion is earmarked for payments of previous IMF loans.
Kiev's efforts to implement austerity and the painful reforms stipulated in its agreement with the IMF do not guarantee the success and continuity of the loan program. According to an April IMF staff report, the institution's loan arrangement with Ukraine would have to be redesigned if Kiev loses control of Ukraine's eastern regions. Eastern Ukraine is the country's industrial heartland -- some of Ukraine's largest factories and mines operate in the region, especially in Donetsk Oblast, which is also the center of separatism in eastern Ukraine. Eastern oblasts also tend to have higher per capita gross domestic product rates than western regions. Continued instability could therefore lower Ukraine's industrial exports, and a loss of control over eastern oblasts could mean a significant loss of tax revenues, which would make it difficult for Kiev to meet the budgetary and macroeconomic targets it has agreed to with the IMF.
Internal Disagreements in Kiev
On April 30, interim Ukrainian President Oleksandr Turchynov admitted that Ukraine's security forces cannot wrest control of the Donetsk and Luhansk regions back from pro-separatist groups, citing the high number of protesters and the unreliability of law enforcement personnel. While Turchynov acknowledged his interim government's vulnerabilities and urged caution, interim Prime Minister Arseniy Yatsenyuk followed up with a warning, saying high-level personnel changes would ensue if government officials fail to meet the country's demand for action and results. The diverging rhetoric between Turchynov and Yatsenyuk, who are close political allies, reveals the deep constraints Ukrainian policymakers currently face and hints at a potential fragmentation of the country's interim government.
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With separatists occupying buildings in more than a dozen cities across the two regions, the Ukrainian public and rival pro-Western political factions are pushing hard for Kiev to reassert control of key areas and administrative buildings, especially in Donetsk Oblast. On May 2, in response to growing public pressure to act in eastern Ukraine, troops moved toward Slovyansk and took over nine separatist checkpoints on the outskirts of the city. On May 4, Ukrainian troops re-established control of Kramatorsk. However, any further military moves in eastern Ukraine face significant constraints, and Kiev will not regain control over Luhansk and Donetsk oblasts without risking more civilian casualties. Russia meanwhile has repeatedly warned Ukrainian leaders that a crackdown in eastern Ukraine would draw a Russian response and that a military intervention would not be out of the question.
The response to the crisis threatens to destabilize the interim government itself. There is pressure from large segments of the public to defend Ukraine's territorial integrity and to ensure that Luhansk and Donetsk oblasts -- which hold about 15 percent of the country's population -- remain a part of Ukraine. If it opts not to fully confront separatists in Luhansk and Donetsk, the interim government would jeopardize its domestic political standing by appearing weak and unwilling to defend Ukrainian territory. Inaction also could leave the space for separatists to consolidate their control over eastern regions.
The economic impact of losing control of parts of eastern Ukraine may ultimately be the cause of a rift within the government. The interim government, which is a coalition of several different parties and factions, risked its popularity by introducing austerity measures, believing that in the long run, the IMF's aid would help revive Ukraine's economy. Without external financial assistance, Ukraine could face a default. However, should parts of the industrial east no longer contribute to Kiev's coffers, the IMF program may be altered or discontinued. Kiev would then have to choose between introducing new, more severe austerity measures -- an unpopular move that risks sparking social unrest -- or turning to Russia for aid. Moscow's assistance would entail significant concessions, including that Kiev cease work on Ukraine's integration with Western institutions. While some members of the interim government and its supporters in parliament may be open to cooperating with Russia should the need arise, many others would oppose such a move.
The two-track crisis facing Ukraine -- a struggling economy in dire need of funding and the loss of government control over two regions -- has put the interim government, already weakened by Russia's annexation of Crimea, in a difficult position. As Ukraine's leadership struggles to meet the demands of the IMF and to hold the line against the spread of separatist unrest, the interim government itself will become increasingly vulnerable.
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