An inside look at the IMF's push to secure a wartime deal with Ukraine

Air raid sirens went off and the power was out. Ukrainian officials in Kyiv suddenly cut short their calls with International Monetary Fund officials as they fled to underground hideouts to survive Russia’s endless rockets and bombs.

It was against that backdrop that the IMF and Ukraine started to negotiate a deal this fall that could eventually bring up to $20 billion to the country — a nearly unprecedented financial lifeline for a country still under an existential attack.

As the world's lender of last resort, the IMF is used to working through crises, though conjuring a deal with a client country under such a relentless military offensive was another story. Adding to the complexity, the negotiations were being done remotely, with Ukraine’s negotiators in a war zone and their IMF counterparts witnessing the horror over screens from Washington, D.C.

“We're on a Zoom call, [and] our counterparts disappear for a couple of minutes. And then they reappear five minutes later in the bunker. And our conversation continues,” Gavin Gray, the IMF mission chief for Ukraine, told Devex in an interview from his office in Washington.

“There was another conversation, I recall, where one of our counterparts was taking the call at home, on his phone, with candles in the background. He had no electricity, but he had enough cellular on his phone,” Gray said.

The point of the stories, Gray said, is a word that keeps coming up with regard to the Ukrainians: “resilience.”

Gray’s team estimates that Ukraine will need $40 billion to $57 billion annually in external financing in the coming years. The wide range is uncommon, but it reflects the “enormous uncertainty” of the ongoing war, he said.

The IMF and Ukraine were able to reach the first stages of an agreement that just got underway this week, the first tangible results of the ongoing negotiations. Officials hope the four-month arrangement, called “program monitoring with board involvement,” or PMB, will both provide technical assistance to stabilize Ukraine’s finances and catalyze further support from donors.

Though the deal does not provide cash to Ukraine, follow-through on the PMB — which includes measures such as improving the country’s tax collection and jump-starting the local bond market — could lead to actual IMF cash flows next year.

“Strong implementation of the PMB should help pave the way toward a possible full-fledged IMF-supported program,” Gita Gopinath, the IMF first deputy managing director, said in a statement Monday.

The agreement was “tailored to Ukraine’s exceptional circumstances,” Gopinath said.

The announcement came just days before Ukrainian President Volodymyr Zelenskyy arrived in Washington on Wednesday in a surprise visit to help secure funding and weapons from the United States. He flew almost directly from another unannounced visit to the frontlines of Bakhmut, an eastern Ukrainian city devastated by a months-long battle with Russian forces.

Ukraine, via its embassy in Washington, declined to comment for this story.

The U.S. has already sent Ukraine $48 billion in aid, about half of which was military support, making it the largest bilateral donor. The U.S. announced another $1.85 billion in defense assistance Wednesday as Zelenskyy arrived for his first trip abroad since the Russian invasion began on Feb. 24. 

The U.S. Congress, meanwhile, is proposing more than $44 billion in emergency aid for Ukraine for the upcoming fiscal year, split between defense, humanitarian, and other assistance. It is part of an omnibus spending bill that is expected to be approved later this week.

“Ukraine didn’t fall. Ukraine is alive and kicking,” Zelenskyy told a packed joint session of the U.S. Congress on Wednesday night, to applause and standing ovations. His speech and visit made clear he does not expect the war to end anytime soon, as he sought to rally long-term assistance.

“Your support is crucial,” the visiting president added, making clear why he came to the U.S. capital. He said aid was not charity, but a long-term investment and that all funds would be used responsibly, a nod to concerns about mismanagement.

“Ukraine will continue to need large resources to keep the state functional,” Gray told Devex in the interview, which took place prior to Zelenskyy’s visit. “Above all, they need predictable sources of financing. They need certainty about the amounts and about the timing.”

And what if things get worse? “If things get much worse … in reality, it’s the international partners who need to be ready to provide the support,” he added.

On top of the tremendous loss of life and the millions displaced, including nearly 8 million refugees who fled to neighboring nations, Ukraine’s economy has shrunk by a third, according to its central bank. The World Bank has warned the Russian invasion could knock 45% off Ukraine’s gross domestic product. More than 18 million people need humanitarian assistance, according to United Nations.

Ukrainian officials have indicated they are ultimately aiming for a program worth $20 billion from the IMF, to supplement direct fiscal support from friendly countries, especially the United States and European Union members. The hope is it can be reached in the first half of 2023.

None of this includes rebuilding costs, which will run into the hundreds of billions of dollars, according to the World Bank. One World Bank official estimated half a trillion dollars would be needed. So far, the Washington-based lender has mobilized and disbursed $15 billion, and regional banks have also lent several billion.

A major obstacle to getting an IMF deal moving is ensuring that the loan can be repaid, as the Russian invasion is relentless and targets critical aspects of Ukraine’s economy. Martin Mühleisen, a nonresident senior fellow at the Atlantic Council and a former senior IMF official, said that normally the fund would put in place macroeconomic safeguards, known as conditionalities. But neither Ukraine nor the IMF can control the Russian war machine.

“If there is another wave of attack over the next year that essentially kills off the Ukraine electricity grid or the railway system, then there is no IMF conditionality that can ensure that eventually they're going to be able to repay,” Mühleisen explained.

One way to speed up the process of getting IMF funds to Ukraine is for the Western shareholders that are Ukrainian allies to provide financial guarantees to the fund in the event Kyiv is unable to pay back the loans.

While paying the loan back is not the only concern — monitoring the use of funds and corruption could be another — Mühleisen believes the guarantees would remove a major obstacle and keep the IMF whole.

“Support Ukraine as much as you can,” Mühleisen urged IMF shareholders. “Just don’t break the institution.”

Nothing is especially easy in Ukraine right now, but Gray noted a few silver linings. The country has worked with the IMF before on loan programs, which means there is institutional knowledge on how to engage with the fund. This makes the process a lot quicker and smoother. And, perhaps most importantly, the officials in Kyiv are working tirelessly to secure the deal.

“When we started this discussion the Ukrainians had already been at war for more than six months. They came to these discussions with a problem-solving approach,” says Gray, a veteran of the IMF who previously worked in Iraq.

For the donor countries, he says, it should be about “the recognition that Ukraine is doing its part — and if Ukraine is doing its part, then so should they.”