Mark Adomanis in Philadelphia -
In the pages of the New York Review of Books in January, George Soros issued a plaintive call for Western assistance to Ukraine. As you might expect for an essay published in what is fundamentally a literary magazine, Soros' plan is a little light on details. The number that jumps out of the article, the take-away that has gone out across the newswires, is $50bn, the cumulative value of all the aid that Soros thinks Ukraine should receive.
However, it is a little bit of a cheap shot, and I am as guilty of this as anyone else, to say that Soros wants to "cut Ukraine a $50bn cheque." Soros' actual proposal is a bit more subtle than that, and includes a combination of loan guarantees, direct financial transfers, and, perhaps most controversially of all, debt relief.
In particular, Soros wants to draw the bulk of his proposed aid money from the EU’s "Balance of Payments Assistance facility" – a lending operating that has been previously used by Hungary, Latvia, and Romania.
It's instructive, however, to look at what actually happened in Romania, the most significant target of the facility's assistance. In May 2009, an agreement was reached between the International Monetary Fund (IMF), the World Bank, the European Community, and the European Bank of Reconstruction and Development, to provide €20bn worth of assistance.
How much of that aid was actually disbursed? About €5bn, or 25% of the overall amount on offer. To get to his $50bn figure of aid to Ukraine, it appears that Soros uses an identical ratio. A quick back-of-the-envelope calculation using 25%, when combined with the other financing streams that Soros proposes to mobilize, yields total of $49.5bn in aid.
However, there are good reasons to expect that Ukraine, which is not even a candidate member of the EU, would have a much more difficult time working with the Brussels bureaucracy than Romania (a full-fledged member) did. By the time it needed to leverage the assistance facility, Romania had a full mission in Brussels, and standing representatives within the EU’s voluminous and baroque bureaucracy. Ukraine will have no such advantages, and would be relying on people who have little or no practical experience actually navigating the Brussels maze.
There is also the small matter that any extension of the lending facility would require approval from the European Commission itself. Soros skips past this as some sort of minimalist procedural hurdle (“Both mechanisms are currently limited to EU member states but could be used to support Ukraine by modifying their respective regulations by a qualified majority”), something that could happen almost by a sleight of hand.
But in Europe’s current political environment, putting up tens of billions of dollars of EU funds as collateral would actually be a political knife-fight of the highest order. Can you imagine how the Italian, Greek, Portuguese or Spanish delegations, people who have been told time and time again that “there is no money” to address their own ruinous economic crises, would react when the EU, at the stroke of a pen, managed to find billions upon billions of dollars for a country that isn’t even a candidate member? Given the massive rise in Eurosceptic sentiment, Soros’ “plan” seems almost guaranteed to engineer a systemic crisis.
Wheels turn slowly
The EU was deliberately designed so that it can only work effectively when it governs by consensus. This means that its actions can be very strong when they occur, but that they can take quite a lot of time to get the bureaucratic machinery moving. To say that there is no “consensus” regarding Ukraine is quite an understatement. In reality there are fundamental and irreconcilable differences between the various member states in how the Russian threat is perceived (or even if it is perceived as a threat!), and what stake, if any, Europe has in Ukraine’s future. Soros’ article gives little indication that he is even aware of this skepticism, or that it can simply be wished away by repeatedly saying “Russia is bad.”
Despite all of the high-flown rhetoric coming out of Brussels, the actual policy steps have been underwhelming. The most recent EU assistance to Ukraine was a paltry €1.8bn, not enough to play any meaningful role in staunching the bleeding of a country whose economy and currency are now both in free-fall. The IMF hasn't even acted to increase the size of its original bailout, which proved to be based on wildly optimistic targets about Ukraine's economic performance and which all sides agree is totally insufficient to the problems at hand.
The simple reality is this: Ukraine needs a lot of assistance and quickly, but Europe and the IMF have, to this point, been amazingly slow at matching their rhetorical commitments with actions. At this rate, Ukraine’s economy will implode while the EU and IMF debate about who has to pick up the tab.
Mark Adomanis is an MBA/MA student at the Wharton School of Business and the Lauder Institute. Follow him on Twitter @MarkAdomanis
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