The high risk of default requires the government of Ukraine to take decisive and long-lasting measures to increase the resilience of the economy to either price or trade shocks, and the Association Agreement with the EU can help the government achieve this goal, by serving as a strong external anchor for institutional reforms, according to Roubini Global Economics (RGE).
In her commentary to Interfax-Ukraine, RGE's Senior Economist for Russia and the CIS Evgenia Sleptsova also mentioned that since world commodity prices declined, the Ukrainian economy entered a recession, as its non-resource sectors are unable to generate growth, and only institutional and regulatory reforms can help restart growth in these sectors. Moreover, huge budget and current account deficits need to be addressed urgently. "Ukraine can do this either alone, or with the help of the European Union. However, as experience shows, the implementation of such radical reforms without an external anchor proves to be practically impossible. At the same time, integration with the Customs Union will not help in this regard, as its member states suffer from the same problems as Ukraine - stagnation of growth as a result of lower commodity prices and institutional inability to generate a new growth model," Sleptsova stressed. She admits, however, that there are short-term risks. "The cooling off of relations with Russia can increase the macroeconomic vulnerabilities of the Ukrainian economy through widening the current account deficit." At the same time Sleptsova noted that even without distortions in relations with Russia, in an environment of tighter financial conditions for all emerging markets due to rate normalization in the United States, Ukraine would struggle to get away without an IMF program. "Interest rates on foreign currency borrowing will be so high [they are already 10%], that the debt burden will become unsustainable. The IMF program can help avoid a currency and debt crisis by giving investors a signal that Ukraine is able to take measures which will help narrow the fiscal and current account deficits and increase the medium-term macroeconomic resilience of the economy. And in a more medium-term perspective the Association Agreement with the EU will help diversify the economy and stimulate growth in non-resource sectors. Ukraine needs both a short-term and a long-term solution to its challenges," the expert said. Sleptsova emphasized that the signing of the Association Agreement with the EU still leaves the responsibility for reforms with the Ukrainian government.