Ukraine appealed for urgent international aid on Monday after the fall of Russian-backed president Viktor Yanukovich cast doubt on a bailout deal with Moscow, saying it needed $35 billion over the next two years.
With acting President Oleksander Turchinov warning that Ukraine was close to default and “heading into the abyss”, the United States and European Union said they were looking at how to help Kyiv.
Both, however, indicated that any comprehensive package was likely to take shape only after elections in May and in coordination with the International Monetary Fund, which is likely to demand painful economic reforms.
Ukraine has been caught in a geopolitical tug-of-war between Russia and the EU. With Yanukovich now a fugitive, its chances of receiving the remaining $12 billion of a $15-billion bailout package agreed with Moscow in December, after Kyiv spurned an EU trade deal, seem to have receded.
Turchinov, appointed after Yanukovich was stripped of his powers by parliament on Saturday, sounded the alarm about the economy in an address to the nation on Sunday evening.
“Against the background of global economic recovery, the Ukrainian economy is heading into the abyss and is in a pre-default state,” he said.
Financial analysts said, however, that the economy was not about to collapse. Prices of its government bonds rallied and the cost of insuring its debt fell, in a sign of investors' confidence that it could avoid default.
The European Commission confirmed a variety of options were being discussed. “The EU has been working on an international economic support package for Ukraine - short, medium and long-term support to address the challenges of the Ukrainian economy,” said Commission spokesman Olivier Bailly.
EU officials said it was highly unlikely Europe, the United States or anyone else would put the kind of sums mentioned by Kyiv on the table right away. However, smaller bilateral loans, possibly coordinated by the EU, could be used to give short-term help, they added.
Discussions have already taken place with Japan, China, Canada, Turkey and the United States on possible help, a senior European Commission official said, and efforts are being made to keep Russia engaged in the process as well.
Elections scheduled for May 25 to elect Yanukovich's successor were crucial.
“Many of the proposals we're working on require an IMF deal to be in place, which means an operational government in Ukraine, so it can't happen until after the elections,” said a separate official involved in efforts to help Ukraine.
The IMF agreed a $15.5 billion loan for Ukraine in 2010, but suspended the deal last year after Kyiv failed to implement the required reforms, which included removing gas price subsidies and freely floating the currency.
Complementing the IMF
Washington offered help on Monday but linked it to reforms and a new IMF deal.
“The United States, working with partners around the world, stands ready to provide support for Ukraine as it takes the reforms it needs to, to get back to economic stability,” said White House spokesman Jay Carney, adding that “this support can complement an IMF program by helping to make reforms easier”.
Separately, Treasury Secretary Jack Lew and IMF Managing Director Christine Lagarde agreed that Ukraine would need both bilateral and multilateral support for any reforms, the U.S. Treasury said.
Three months ago, Brussels was hoping to sign Ukraine up to the far-reaching free trade and association agreement that would have brought the country of 46 million more closely into the EU's political and economic sphere of influence.
Yanukovich rejected that deal at the last minute, deciding instead to accept the aid and cheaper gas from Russia. That led to weeks of popular protests culminating in his fall.
Russian economy minister Alexei Ulyukayev said the next $2 billion installment of its bailout for Ukraine was “ready to go” but repeated Moscow's stand that it first wanted to see who would be running the country.
“Our position is, we are going to continue with that. But we would like to know, who are our partners?” Ulyukayev said during an event at the U.S. Chamber of Commerce in Washington.
Moscow has also said any extension of the deal cutting the price of Russian gas must be negotiated with Ukrainian companies and the government.
EU foreign affairs chief Catherine Ashton was meeting officials in Kyiv to discuss the economy.
Ukraine has around $6.5 billion in foreign debt payments to make before the end of 2014 and needs a further $6.5 billion to cover its current account deficit, while it is also $1 billion in arrears to Russia for gas supplies, according to estimates from Commerzbank.
Estimates vary but Goldman Sachs reckons that the central bank's currency reserves are down to $12-$14 billion, a sum which its obligations could wipe out.
Kiev must repay a $1 billion eurobond in early June and the government has also guaranteed a $1.6 billion eurobond issued by state energy company Naftogaz, which falls due in September.
Ukrainian bondholders remain nervous, despite Monday's market rally.
“As investors we need to see there is a source of funds to repay debt. There was a sure source of funds which was Russia and that's not there any more,” said Angus Halkett, a portfolio manager at Stone Harbor Partners, which owns Ukrainian debt.