http://russia-insider.com/en/2015/01/22/2612

Ukraine - IMF Admits Failure, Scraps Plan A, Goes for Plan B.....

IMF now admits original aid plan has failed. Has been forced to get behind the more generous Soros Plan. Question is can it work without Russia

Alexander Mercouris

opinion/analysis 13 hours ago

Soros meets the Ukrainians

As the article below from the Financial Times shows, in the face of pending default the West has finally given up on the financial plan for Ukraine it drew up last year.
Briefly, a few weeks ago the Ukrainian government and the IMF admitted that Ukraine needed another $15 billion to get through the next few months.
Attempts to find this money with the western governments have proven unsuccessful.
The US was only prepared to provide a further $1 billion in loan guarantees in addition to the $1 billion in loan guarantees it provided Ukraine last year.
The European Commission has proposed the EU give Ukraine a further 1.8 billion euros.This has not yet been approved by the European Council (the EU’s highest body) where the proposal is likely to meet resistance.
In proposing it the European Commission has said it is as far as the EU can go. A larger amount would drain the EU’s reserves to dangerous levels leaving them short in the event of a crisis.
Lastly, Germany is providing Ukraine with 500 million euros, but this a ring fenced loan for rehabilitation of the eastern Ukrainian regions devastated by the war and cannot be used for the benefit of the Ukrainian economy as a whole.
These sums come nowhere close to the $15 billion the IMF says Ukraine needs.
With default looming the US financier George Soros flew to Kiev and has come up with a plan. This calls for the IMF to drop its existing plan and come up with a new more generous one. At the same time Ukraine’s private western creditors are supposed to voluntarily agree to a cut back or a “haircut” on their loans.
Christine Lagarde, the head of the IMF, says she in principle supports this plan. The details will be worked out over the course of further negotiations that will drag on through January and February.
The first point to make about this plan is that it is an admission that the IMF plan decided on last spring has failed. Many commentators such as Eric Kraus and Elliott Auckland, who both write for RI, always predicted that it would. That is now official.
The second point is that this plan looks like a complicated way to avoid talking to Ukraine’s biggest creditor, which is Russia.
Attempts by the US and the UK governments to find a way for Ukraine to default “legally” on its Russian loans have failed following legal advice that it can’t be done.
Since neither the Ukrainians nor the Western powers want to talk to the Russians about a formal debt restructuring of Ukraine’s debts, they seem to be trying to get around this by adopting Soros’s plan of increasing the amount of IMF lending to Ukraine whilst getting Ukraine’s private western creditors to take a bigger hit than they would otherwise have done.
The third point about this plan is that if the Russians are not party to it then the amount Ukraine owes the Russians is unchanged and the Ukrainians must pay the Russians the same amount they pay now, as the loans say.
It will be interesting to see whether Ukraine’s private creditors agree to the sort of voluntary haircut they are being asked to make. Many of them may not be happy to agree to a haircut so that Ukraine and its Western supporters don’t have to talk to the Russians.
They may very well balk at a plan whose effect would be to privilege loans Ukraine owes Russia over loans Ukraine owes them. No doubt there will be a lot of arms twisting to get them to agree but it is likely the negotiations will be tough.
More to the point is how the Russians will react to all this. Over the last few weeks they have pointedly reminded everyone that the $3 billion loan they extended to Ukraine at the beginning of last year is now due and that Naftogaz, Ukrainian national gas company, owes them $2.4 billion.
They have also said that on 1st April 2015 the discount on the price of gas Ukraine currently gets from Russia will end. Following a cabinet meeting on 21st January 2014 Russia’s Prime Minister Dmitry Medvedev pointedly said Russia is not prepared to go on supporting Ukraine’s economy indefinitely.
In a sense the Russians stand to come out of this well whatever happens.  Since they are not being asked to agree to a haircut, as Ukraine’s biggest creditor if the IMF steps up financial support to Ukraine a lot (perhaps most) of the money will end up in Russia.
There has to be a question however about how realistic this plan is.
Russia is Ukraine’s biggest creditor and key trading partner. It is Russia that currently supplies Ukraine with the gas, electricity and coal Ukraine needs to survive. The previous IMF plan failed precisely because it did not involve Russia.
Refusing to talk to Russia makes no economic sense. As the situation in Ukraine worsens over the coming weeks it may prove impossible to avoid talking to Russia to get Russia's agreement to a debt restructuring if there is to be a realistic chance of Ukraine avoiding default. That is the reality, however disagreeable to some in Ukraine and the West it may be.