Mar 27, 2014 7 min read

KIEV, Ukraine – The world rushed to help Ukraine Thursday, with the International Monetary Fund pledging up to $18 billion in loans, the United Nations condemning the vote that drove Crimea into Russian hands and the U.S. Congress approving even harsher sanctions against Russia.

Yet even with such intensive help to prop up Ukraine’s teetering economy, the prime minister warned of painful times ahead from the necessary economic reforms – and home energy prices were certain to rise quickly.

Former Ukrainian Prime Minister Yulia Tymoshenko, one of the country’s most polarizing figures, announced she would run for president in the May 25 vote – a move sure to usher in strong emotions in Ukraine’s turbulent politics.

President Barack Obama called the swell of international support a “concrete signal of how the world is united with Ukraine.”

“The decision to go forward with an IMF program is going to require a lot of courage,” Obama said, speaking in Rome. “It will require some tough decisions.”

Russia shrugged off the torrent of criticism directed at its annexation of Crimea. President Vladimir Putin’s government announced it would set up its own payment system to rival Visa and MasterCard after the two companies pulled their services from some Russian banks in the wake of international sanctions.

In a passionate address to parliament in Kiev, Prime Minister Arseniy Yatsenyuk warned Ukraine was “on the brink of economic and financial bankruptcy” and laid out the fixes needed to put the country back on track.

“The time has come to tell the truth, to do difficult and unpopular things,” Yatsenyuk said, adding Ukraine was short $25.8 billion – “equivalent to the entire state budget for this year.”

The IMF loan, which is expected to range between $14 billion and $18 billion, hinges on structural reforms Ukraine has pledged to undertake.

Ukraine’s new government finds itself caught between the demands of international creditors and a restive population that has endured decades of economic stagnation, corruption and mismanagement. The reforms demanded by the IMF, which include raising taxes, freezing the minimum wage and hiking energy prices, will hit households hard and are likely to strain the interim government’s tenuous hold on power.

Ukraine, a nation of 46 million people, is battling to install a semblance of normalcy since President Viktor Yanukovych was ousted in February after months of protests ignited by his decision to back away from closer relations with the EU and turn toward Russia. Over the last few weeks, an interim government formed, Ukraine lost Crimea to Russia and further possible military incursions by Russia are feared.

“This is a kamikaze government that perfectly well understands that there is no other way to stabilize Ukraine,” said Viktor Zamyatin, analyst with the Kiev-based Razumkov Center think tank. “The catastrophic state of Ukraine’s economy has forced the government’s hand.”

But he said it could pay a steep price.

“It is hard to explain to the voter that the worsening of the economy has happened not because of the revolution, but because of Viktor Yanukovych’s policies,” he said.

In Washington, Congress spoke with one voice against Russia’s annexation of Crimea, passing legislation in the House and Senate giving help to cash-strapped Ukraine and imposing sanctions against Russia.

The Senate approved the legislation by voice vote at the same time the House was passing a different version on a 399-19 vote. Lawmakers intended to get a final measure to the White House by day’s end.

Sen. Bob Menendez, D-N.J., chairman of the Senate Foreign Relations Committee, said the votes were “critical for President Putin to hear.”

Menendez said the Senate bill would provide $1 billion in loan guarantees to help stabilize Ukraine’s economy and would authorize assistance for democracy, governance and civil society programs and enhanced security cooperation. It also would provide support for the Ukrainian government to help recover assets linked to corruption by former Ukraine government officials.

Targeting Russia, the bill would freeze assets and revoke visas of Russian officials and their associates who are complict in or responsible for significant corruption in Ukraine.

The measure also would sanction those who are responsible for human rights abuses against anti-government protesters and those responsible for undermining the peace and sovereignty of the Ukraine.

Meanwhile, the U.N. General Assembly overwhelmingly approved a resolution condemning the referendum that led to the annexation of the Crimean Peninsula as illegal. The vote was 100 in favor, 11 opposed and 58 abstentions.

Tymoshenko, who was released from jail last month following the overthrow of her fierce rival Yanukovych, is variously admired as an icon of democracy or detested as a self-promoting manipulator with a shady past.

This will be the 53-year-old Tymoshenko’s second attempt to win the presidency. She narrowly lost to Yanukovych in 2010 and spent two years in jail on charges many in the West considered politically tainted.

On Thursday, alluding to her time in jail, she declared she earned the right to promise she will combat corruption.

“I will be the candidate of Ukrainian unity,” Tymoshenko said. “The west and center of Ukraine has always voted for me, but I was born in the east.”

Ukraine is politically divided, with western regions favoring closer ties to Europe and the east looking toward Russia. But the dire state of its economy is an unavoidable issue: Ukraine’s Finance Ministry said it needs $35 billion over the next two years to avoid default.

The IMF said recent economic policies drastically slowed Ukraine’s growth and brought foreign currency reserves to a “critically low level.”

“Ukraine’s macroeconomic imbalances became unsustainable over the past year,” the IMF said.

One immediate reform will be to let gas prices for households float up to become more in line with market prices. Ukraine for years relied on discounted gas from Russia and then subsidized that further, so residents are used to extremely low energy prices. Russia has abandoned the discounts and Ukraine’s government cannot afford the extra subsidy anymore.

State energy company Naftogaz announced this week that household gas prices would rise 50 percent beginning May 1 to make utility costs economically viable for the state by 2018. Yatsenyuk said the number of households getting state energy subsidies would rise from 1.4 million to four million.

He also announced layoffs for 10 percent of Ukraine’s civil servants, or 24,000 workers.

Other donors, including the European Union and Japan, have already pledged further aid to Ukraine, conditional on the IMF bailout and reform package. The total amount of international assistance will be about $27 billion over the next two years.

Separately, the 28-nation EU has prepared a wider aid package including loans and grants for Ukraine expected to total more than $10 billion over the coming years.

Ukraine historically had a fraught relationship with the IMF and failed to keep to the terms of earlier bailouts in 2008 and 2010. Such recalcitrance is seen as less probable this time around, although doubts persist.

“Given the volatile political situation, the prospect of a change in president following elections on May 25, and Ukraine’s track record with the IMF, there will still be many doubts about whether politicians will be able or willing to push through more substantial changes,” wrote William Jackson, an analyst at Capital Economics research company.