Time running short for Ukraine bailout

February 25, 2014: 11:57 AM ET
Inside Ukraine ex-President's lavish estate
LONDON (CNNMoney)

Time is running short for the United States and Europe to prevent a financial collapse in Ukraine that would further destabilize the divided country.

Some analysts believe Ukraine will run out of funds to pay its bills as early as next week unless the West provides emergency financial aid.

Three months of mass protests in Kiev culminated in the ousting of pro-Russian President Viktor Yanukovych last week. Opposition leaders are now trying to form a temporary government that can steer Ukraine to presidential elections due in late May.

Moscow threw Ukraine a $15 billion lifeline late last year after Yanukovych turned his back on the European Union, triggering the protests. But alarmed by Yanukovych's ouster, Russia looks unlikely to release the remaining $12 billion any time soon.

Related: Lawmakers scramble to unite nation

Acting finance minister Yuriy Kolobov said Monday that Ukraine needs $35 billion over the next two years.

He wants Poland and the United States to come up with loans within a matter of weeks, to be followed by a big conference of international donors.

Western officials said they were working together, and with Ukraine's new leaders, on ways of providing support but emphasized the lead role for the International Monetary Fund in any assistance package.

As part of that, Kiev would have to commit to economic reforms, many of which will be deeply unpopular.

U.S. Treasury Secretary Jack Lew spoke with IMF Managing Director Christine Lagarde Monday while traveling back from the G20 meeting in Australia.

"Secretary Lew and Managing Director Lagarde agreed that Ukraine needs both multilateral and bilateral support for a reform program and that if a fully established government in Ukraine makes a request, then the IMF would provide the best foundation for economic advice and financing," a Treasury official said.

Lew also told opposition leader Arseniy Yatsenyuk that the U.S. was ready to supplement an IMF program to cushion the impact of reforms on low income Ukrainians, the official said.

Related: What next for Ukraine's economy?

Analysts expect the government will have to introduce painful austerity measures, allow a further significant devaluation of the currency -- it has already lost nearly 12% this year -- hike natural gas prices and reform industries such as agriculture.

With its foreign currency reserves shrinking rapidly, Ukraine faces bankruptcy unless it can tap new sources of funding. It has already restricted the flow of money out of the country, and demand for cash in the economy is rising -- although there's no evidence yet of a full scale run on the banks.

"With Russia unlikely to disburse more funds, at least for now, the collapse can come as early as March, unless the recent acceleration of capital flight is not reversed," said the Institute of International Finance in a research note.

The EU was ready to provide assistance alongside an IMF program, once an inclusive government was in place with a convincing economic plan, its top finance official Olli Rehn told reporters Tuesday. The EU was also exploring other ways to mobilize funds, he said.

"As the EU's resources in this field lie predominately with the member states, I would also support idea of a donor conference for Ukraine to put together a substantial aid package."

Join the Conversation
Search for Jobs