About Ukraine

George Soros
The sanctions imposed against the United States and Europe have worked more quickly and harm the
Russian economy much more than anyone could expect. The sanctions were intended to restrict banks
and companies access to international capital markets. But their influence has increased largely because
of the sharp fall in oil prices, without which the sanctions would have been much less effective. To
balance its own budget, Russia needs oil prices of about $ 100 a barrel. (The price held near $ 55 a
barrel). The combination of low oil prices and sanctions caused the financial crisis in which some
indicators are already comparable to the 1998 crisis.
Then, in 1998, Russia finally exhausted its foreign reserves and defaulted on debt obligations, causing
turmoil in the global financial system. This time, the ruble fell by more than 50 percent, accelerating
inflation and rising interest rates to a level that the Russian economy enters into recession. The big
advantage of comparison with 1998 is that it still has significant reserves in foreign currency. This
enabled the Central Bank to play 30 percent of the value of the ruble on its lowest level, at a cost of
about $ 100 billion and agreed with the PBOC on-line swap (swap-line) of $ 24 billion. But now in the
Central Bank of Russia is only about $ 200 billion or less liquid reserves, and the crisis is gaining
momentum.
In addition to the increase in capital outflows will have to pay in 2015 more than $ 120 billion foreign
debt. Although opposed to the 1998 Russian debt, most concentrated in the private sector should not be
surprised if you end the current crisis of sovereign default. But it could exceed that to which hoped to
American and European policy. When Russia defaulted added to global deflationary processes most
acute in the euro area, as well as the current military conflicts such as conflict around the Islamic State
of Iraq and the Levant (IDIL), it can cause serious upset the global financial system, and especially
vulnerable will be the euro zone .
Hence the need to immediately redirect the current EU policy towards Russia and Ukraine. I used
called for a two-pronged approach that involves balancing sanctions against Russia via Ukraine is
much bigger. For reasons that I will try to explain further rebalancing will need to make in the first
quarter of 2015.
Sanctions are a necessary evil. They are necessary because neither the EU nor the United States
unwilling to risk war with Russia. Therefore, economic sanctions are the only way to support Russian
aggression. They are evil, because not only harm the country against which they are introduced, but the
countries that impose them. This damage was far greater than anyone expected. Russia is covered by
the financial crisis, which promotes the transformation of the threat of deflation in the euro area a
reality.
Instead, all the consequences of aid to Ukraine will be only positive. Helping to defend Ukraine,
Europe indirectly protects himself. Moreover, Ukraine providing financial assistance to facilitate
stabilization of the Ukrainian economy, and indirectly - also give the European economy it is essential
incentive to encourage exports and investment in Ukraine. We can also hope that the problems of
Ukraine's progress and persuade President Vladimir Putin to give up as hopeless his attempt to
destabilize Ukraine.

Unfortunately, neither a European public nor the European leaders do not seem to care about such
considerations. Europe looks dangerously unconscious that is indirectly exposed to Russian military
aggression and trying to do business as usual. It treats Ukraine as just another one of the countries that
need financial help, and, unlike Greece or Ireland, Ukraine is not even a country important to the
stability of the euro.
The prevailing view is that Ukraine suffers from a more or less classic balance of payments crisis that
transformed the banking and debt crisis. There are international financial institutions designed to deal
such a crisis; but they are ill-suited to respond to the political aspects of Ukrainian situation. To help
Ukraine, the European Union in 2007 began preparation of the Association Agreement with Ukraine,
completing this training in 2012, when the EU had to deal with the government of Viktor Yanukovych.
The EU has developed a detailed plan of action to be carried out Ukrainian government to get more
help. Since then, Ukraine held the revolutionary changes taking into account the required correction of
previously developed plan; but this cumbersome bureaucratic procedures hinder the EU.
Accordingly, Ukraine's problems are usually formulated in the following way:
Ukraine needs international assistance for experienced upheaval that caused the financial crisis. But
the shock is transient; Ukraine soon recover from them will repay its creditors. This explains why the
primary institution to provide financial assistance to Ukraine was elected International Monetary Fund.
Since Ukraine is not yet an EU member, the European institutions (such as the European Commission
and the European Central Bank) to help it play only a minor role. IMF gladly took the opportunity to
avoid the complications associated with triple supervised by the EU, the ECB and the IMF itself, as it
did with Greece and other countries. This alignment of roles also explains why the aid offered by the
IMF based on overly optimistic forecasts, and what contribution IRF of about $ 17 billion, much higher
than the aid Ukraine by the different European institutions (general perspective about $ 10 billion) and
more modest aid from the US.
Since Ukraine badly performed its obligations to the IMF earlier, official lenders emphasize that
Ukraine will receive assistance only in response to clear signs of deep structural reforms, not how to
encourage such reforms.
With this handy perspective, successful resistance of the previous government of Yanukovych on
Independence and later Russian annexation of Crimea and separatist arranging beachheads in eastern
Ukraine seem insignificant phenomena. They are regarded as purely temporary external shocks.
This view is certainly to change. Birth of a new Ukraine and Russian aggression is not just a temporary
concussion, and historical events. Rather than deal with the remnants of the doomed death of the Soviet
Union, the EU is now faced with, which is the confrontation becoming strategic partner in the strategic
game. He was replaced by communism, President Putin introduced a nationalist ideology which is
mainly based on ethnic grounds, social conservatism and quasi-religion "brotherhood of Slavic
peoples," homophobia and "Holy". Putin proclaimed "Anglo-Saxon dominance in the world" enemy of
Russia and the rest of the world. Thus Putin has learned a lot from its 2008 war against Georgian
President Saakashvili Miheila. That war Russia won militarily, but was less successful in its outreach
efforts. Later, Putin has developed an entirely new strategy that is widely used and is based on
propaganda and military special forces special purpose.
Putin's desire to restore the Russian empire inadvertently contributed to the formation of the new
Ukraine, which Russia opposes and seeks to be the antithesis of former Ukraine, one of the inherent

corruption and ineffective government. Among the leaders of the new Ukraine are the best
representatives of civil society: young people, many of whom studied abroad, and refused to return
home to work in government or business, for both felt disgusted. Many of them have found a place in
higher education, research centers and non-governmental organizations. Wide volunteer movement that
gained unprecedented strength and scope not seen in other countries helped Ukraine to stand against
Russian aggression. The members of this movement risked their lives on the Square for a better future
and now are determined not to repeat the mistakes of the past, including the political strife that has
undermined the achievements of the Orange Revolution. Politically active civil society is the best
safeguard against a return of the old Ukraine if politicians mired in petty feuds and corruption that
destroyed the old Ukraine, the activists returned to Independence.
Reformers in the new Ukrainian government advocated a program of fast and radical reforms, which
have fundamentally change society. This program provides, inter alia, combating corruption by
reducing bureaucracy while increasing salaries for those who remain in the civil service and the
disbandment of "Naftogaz Ukraine" - gas monopoly, which was the main source of corruption and the
budget deficit in Ukraine.
But the old Ukraine is far from dead. It prevails in the civil service and in the judiciary, and is widely
represented in private (oligarchic and kleptocratic) sectors. Why do civil servants work for meager
wages if they can use their position as a patent for squeezing bribes? As a private business that
zhyvyvsya corruption and "kickbacks" will be able to function without its feeders? These retrograde
elements are now locked in a struggle with reformers.
The new government was faced with a difficult challenge: how to radically reduce the number of civil
servants, while raising their salaries? Supporters of radical reform claim that can and should
significantly reduce the staff of ministries, provided that the general population will not experience a
sharp decline in living standards. This would enable retired government employees find jobs in the
private sector, and those who remain in the public service, receive greater rewards. You can remove a
lot of barriers to business, but it requires substantial financial and technical support from the EU.
Without such support Ukraine needs radical and rapid reform can not succeed. Moreover, given the risk
of failure of the government may even refrain from promoting such reforms.
The volume of European support and reformist zeal of the new Ukraine mutually reinforcing. Yet
Europeans Ukraine kept on a short leash, and the government Arseniy Yatsenyuk dared to undertake
radical structural reforms. Former Economy Minister Pavel Sheremet, a radical reformer, offered to
reduce the size of his ministry from 1200 to 300, but this met with bureaucratic resistance, was forced
to resign. Other attempts to reform the public administration has not yet happened, but noisy society
demands of them.
Here a crucial role can play European policy. By offering financial and technical assistance
commensurate with the scope of reforms they may push the Ukrainian government to radical change
and give a chance for success. Unfortunately, European politicians hinder budgetary constraints at the
level of the EU and its member states. This is why international efforts have focused mainly on
sanctions against Russia, and financial assistance to Ukraine has been reduced to a minimum.
To move the focus to help Ukraine, it is necessary to transfer the bureaucratic negotiations with the
political level. European financial bureaucracy difficult to collect even the $ 15 billion that the IMF
considers an absolute minimum. Currently, the EU can only provide 2 billion euros within its program

of macro-financial assistance, and Member States are hesitant to provide direct assistance from you.
This has forced Ukraine to accept the December 30 interim budget with unrealistic expectations on
revenues and only cautious reforms. This is the starting point for further negotiations. The budget law
envisages amendments to 15 February, but such changes still need to be developed and supported.
European political leaders have to use powerful and infrequent kredytoyemnist of the EU as well as
find other non-traditional sources to offer Ukraine a larger financial package than the one under
consideration today. This would allow the Ukrainian government to conduct sweeping reforms. I define
a number of sources, including:
1.European program to support the balance of payments (applicable for Hungary and Romania) have
not used $ 47.5 billion, while the European mechanism for financial stability (applied to Portugal and
Ireland) has approximately $ 15.8 billion of unused funds. Both mechanisms are currently available
only to Member States but this rule can be changed by a qualified majority on the proposal of the
European Commission. Alternatively, the Commission could use to expand the program and macrofinancial assistance, which has been applied in Ukraine. In fact, there are a number of technical
capabilities, and European Commission President Jean-Claude Juncker would propose concrete steps as
soon as the Ukrainian government will present a convincing list of their priorities.
2. Increased financial assistance from the EU would enable the IMF to increase its loan to Ukraine at $
13 billion and transform the current stand-by agreement for a long-term program of expanded lending.
This led to the total amount of IMF program for Ukraine to a size that is 15 times higher than the
current Ukrainian quota - an unusually high figure, but the precedent has been, particularly in Ireland.
3. Bondi European Investment Bank may offer 10 billion euros or more. The money could be used for
Ukraine's accession to the common European natural gas market, and for a radical reform of
"Naftogaz" - Ukrainian gas monopoly. Such changes would significantly increase the energy efficiency
of Ukraine and brought to extremely high payback. This would help create a single European market
for natural gas and reduce dependence on Russian gas not only Ukraine but the whole of Europe. The
division of the existing "Naftogaz" is the cornerstone of the plan Ukrainian reforms.
4. Long-term financing from the World Bank and the European Bank for Reconstruction and
Development for the restructuring of the banking sector. This can be a source of another $ 5 billion.
The Vienna Initiative for Eastern Europe in 2009, which proved highly successful means of limiting the
outflow of capital and stabilize the banking system, would be extended to Ukraine. The basis of such
an extension has already been laid at the inaugural meeting of Ukrainian Financial Forum in June 2014.
5. Restructuring of sovereign debt Ukraine may release more than $ 4 billion of scarce foreign
exchange reserves. Over the next three years, Ukraine has to pay nearly $ 8 billion in sovereign debt
markets of private securities. Avoiding default, which would have devastating consequences, Ukraine
would have to negotiate with their creditors (it so happened that their relatively small) market for
voluntary exchange of existing commitments for new long-term debt. To this exchange was successful,
part of the new financial aid should be used to improve the credit of these new debt instruments.
Looking for that financial assistance will depend on what lenders require for its participation in the
exchange, but it can make available over the next three years at least twice as many financial resources.
6. Ukraine should also handle debt obligations of $ 3 billion to the Russian government, which must
pay in 2015. Russia may voluntarily agree to delay payments Ukrainian to contribute to future easing
of sanctions against it. Or this debt may be deemed intergovernmental and restructured within the Paris
Club, to separate the rest of the debt of Ukrainian cross-default dependence (where the debtor is
recognized as insolvent with a debt if it is not completed another bond) . Legal and technical details
need to work.
Probably not all of these sources can be applied fully. But if there is the political will is there and the
way. The key role here belongs to Chancellor Angela Merkel, who in relations with Russia and Ukraine

proved to be a real European leader. I named additional funding should be sufficient to provide a new
financial package of $ 50 billion or more. It goes without saying that the real interest should implement
the IMF money is not allocated to uncontrollably. But, instead of with a minimum nashkryabuvaty
official lenders would follow promises maximum. This would radically change the situation. Ukraine
has started to radical reforms and instead to balance on the verge of bankruptcy, would become a
promised land that attracts private investment.
Europe needs to wake up and recognize that it is attacking Russia. Help Ukraine is also regarded as an
expense of the EU in defense. In this context, is discussed amounts are insignificant. If international
players do not offer significant assistance program in response to an aggressive program of Ukrainian
reforms, a new Ukraine is likely fails, Europe will remain one-on-one with Russian aggression, while
leave the values and principles on which founded the European Union. It would be an irreparable loss.
After the April 2015 term will expire sanctions, they should be renewed until President Putin did not
stop to destabilize Ukraine and does not provide conclusive evidence of its willingness to follow the
generally accepted rules of behavior. The financial crisis in Russia and lead, coming from the Ukraine,
President Putin made politically vulnerable. Ukrainian government recently challenged him, refusing to
perform their obligations to the separatist foothold in eastern Ukraine under the Minsk ceasefire on the
grounds that Russia has not fulfilled the agreement from the beginning. After this call Putin
immediately ordered the troops retreated and controlled them directly observe the ceasefire. It is
expected that soon these forces will be withdrawn from the Ukrainian territory and ceasefire will be
introduced to the full. The damage would have to agree to early termination penalties when they are so
close to success.
But significant is the fact that by April 2015, Ukraine has launched a program of radical reform with a
real chance of success. Otherwise, President Putin can convincingly argue that the problems caused by
hostility of the West. Even if Putin loses power, his successor may become even nepostuplyvishyy
leader like Igor Sechin, or a nationalist demagogue.
Conversely, if Europe adequately respond to this challenge and help Ukraine to protect not only
themselves, but also become the promised land, Putin can not blame the problems of Western leaders.
Responsibility obviously fall on him, and he will have to either change course or try to retain power
through brutal repression and intimidation against its own people. If he loses power under such
conditions likely his successor will be a reformer. In any case, Putin will not be a potential threat for
Europe. The fact that alternative will win, will be crucial not only for the future of Russia and its
relations with the European Union, but also for the future of the European Union. Helping Ukraine,
Europe can recover for themselves the values and principles that originally founded the European
Union. That's why I so passionately argue that Europe needs to profoundly rethink the situation. And
we must do it immediately. IMF Board of Directors should take his fateful decision on Ukraine on 18
January.
Translation Alexei Panich