Macro-Financial Assistance: Europe’s way to control Ukraine?

Handshake between Petro Poroshenko, new President of Ukraine, on the right, and Catherine Ashton, High Representative of the Union for Foreign Affairs and Security Policy and Vice-President of the EC (EC Audiovisual Services)

The European Commission (EC) paid out €500 million to Ukraine on Tuesday, a financial support to be the first loan tranche of the second Macro-Financial Assistance (MFA) programme of the EU. While the crisis in Ukraine is still raging and the need for economic reforms is more crucial than ever, the EU is adding to International Monetary Fund’s (IMF) and World Bank’s financial aid by the first two MFAs.

MFA at a glance

But what exactly is the MFA programme and how does it work? Why is Ukraine eligible for and what interest rates will the country face in order to take these funds-loans? First of all, MFA is a purely financial support programme to countries that are geographically, politically and economically close to the EU. These countries have to be in a situation of serious balance-of-payments problems and have also previously been funded by the IMF.

Consequently, Ukraine qualifies and justifies its place in this programme.  Furthermore, MFA is provided only in emergent and non-regular circumstances and its main purpose is to better the financial situation of the country by imposing structural reforms. Last but not least, the EU is borrowing the money in capital markets and lends it afterwards to the beneficiary countries under the same financial conditions as obtained by the EU. This sounds very appealing for these countries that are benefited from the exceptional conditions (AAA rating from Moody’s and Fitch) issued to the EU.

Europe supports Ukraine

The EC has come to an agreement to provide financial support to Ukraine of at least €11 billion in total over the coming years from the EU budget and EU-based international financial institutions. MFA is contributing to this subsidy by  €1.61 billion from which  €600 (€500 + €100) million have already been disbursed through the first two MFA programmes (MFA I & II). The EC is now aiming to propose further MFA to cover the rest  €1.01 billion which doesn’t seem far away if we take into account the sayings of EU officials.

Olli Rehn, European Commission Vice President for Economic and Monetary Affairs and the Euro, said on Tuesday: “The European Union is providing essential support for Ukraine’s efforts to address its major economic challenges. Today’s disbursement is a further concrete sign of European solidarity towards the people of Ukraine. It is vital that Ukraine seizes this opportunity to take forward reforms to deliver budgetary stability, sustainable growth and job creation.”

Europe’s true reason for the support

Why does the EU help Ukraine with all the financial means that has in its quiver? Is it because the EU is a good Samaritan? I am afraid this is not the case. There should be always another cause which justifies these loads of money that are granted or loaned to Ukraine.

The Crimean crisis situation has changed dramatically the relationship between Russia and Ukraine, which was its main financial supporter, if not the only one. Particularly, Russia’s help relative to Ukraine’s energy supplies is huge. But because of Ukrainian overwhelming debt, Russia is forcing Europe to provide financial aid to Ukraine in order to receive eventually their money back.

Is this really happening? The result shows that it could be part of the truth behind the financing of Ukraine. Moreover, Europe brings Ukraine closer to the West and by exercising greater influence to the country it can benefit from the increased trade with it. Thus, Ukraine is currently situated somewhere in the middle of a bigger ‘game’ between the Old Continent and Russia.