COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement on EU macro-financial assistance to Ukraine Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing further macro-financial assistance to Ukraine
Date: 2018-03-09
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: European neighbourhood policy, International Monetary Fund, Ukraine, economic reform, economic stabilisation, macro-financial assistance, structural adjustment

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   EUROPEAN COMMISSION  Brussels, 9.3.2018  SWD(2018) 66 final  COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement on EU macro-financial assistance to Ukraine Accompanying the document Proposal for a  DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing further macro-financial assistance to Ukraine {COM(2018) 127 final}  
 
 
Ex-ante evaluation statement on  
EU macro-financial assistance to Ukraine 

TABLE OF CONTENTS 

1. 

Problem analysis and needs assessment ....................................................................... 3 

1.1. 

1.2. 

1.3. 

1.4. 

1.5. 

Introduction .................................................................................................... 3 

Ukraine’s macro-economic situation ............................................................. 4 

IMF and other donor support ......................................................................... 6 

External financing needs ................................................................................ 7 

Structural reforms .......................................................................................... 9 

2. 

Objectives and related indicators of the macro-financial assistance .......................... 12 

2.1. 

2.2. 

Objectives .................................................................................................... 12 

Monitoring Indicators .................................................................................. 12 

3. 

Delivery mechanisms and risk assessment ................................................................ 13 

4. 

5. 

3.1. 

3.2. 

Delivery mechanisms ................................................................................... 13 

Risk assessment ........................................................................................... 13 

Added value of EU involvement ................................................................................ 14 

Characteristics of macro-financial assistance ............................................................ 15 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

Exceptional Character and Limited Timeframe ........................................... 15 

Political preconditions and EU-Ukraine relations ....................................... 15 

Complementarity.......................................................................................... 16 

Conditionality .............................................................................................. 16 

Financial Discipline ..................................................................................... 17 

6. 

Evaluation and cost-effectiveness .............................................................................. 18 

6.1. 

6.2. 

Evaluation .................................................................................................... 18 

Achieving cost-effectiveness ....................................................................... 18 

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1. 

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1. 

Introduction 

In early 2014, Ukraine embarked on an ambitious macroeconomic adjustment and structural 
reform programme that aimed to overcome an acute balance-of-payments crisis and to lay the 
foundations  of  a  new  economic  model  and  pave  the  way  for  long-term,  sustainable  growth. 
The  reform  programme  was  underpinned  by  a  financial  assistance  programme  by  the 
International Monetary fund (IMF) and other international donors. As part of this assistance 
package, the EU initially committed to implementing two macro-financial assistance (MFA) 
programmes totalling EUR 1.61 billion to alleviate the short-term financing pressures Ukraine 
was facing, while supporting deep and comprehensive reforms.  

In view of the deteriorating economic situation due to the confidence loss associated with the 
conflict in the East provoked by Russia's destabilising actions, the EU approved another MFA 
programme of up to EUR 1.8 billion in April 2015, of which EUR 1.2 billion was disbursed, 
bringing the total EU assistance to Ukraine under this instrument to EUR 2.81 billion. 

The  significant  international  financial  support  and  prudent  macroeconomic  policies  were 
instrumental  in  stabilising  Ukraine's  economy  amid  an  unfavourable  external  environment 
such as a lingering territorial conflict and trade restrictions imposed by one of Ukraine's major 
export  markets  –  Russia.  After  a  cumulated  GDP  contraction  of  about  16%  in  2014-2015, 
Ukraine returned to growth in 2016 as investment activity and household consumption started 
recovering.  Inflation  moderated  significantly,  despite  remaining  elevated.  Prudent  fiscal 
policies  have  significantly  reduced  fiscal  risks.  On  the  external  front,  the  current  account 
deficit was reduced from its pre-crisis levels, while international reserves have been gradually 
replenished after reaching a record low in early 2015.  

Monetary  policy  and  fiscal  consolidation  steps  were  accompanied  by  important  structural 
reforms in energy, banking, public administration, among others. In addition, steps were taken 
to  overhaul  the  public  procurement  system  and  to  launch  a  judiciary  reform.  Progress  with 
anti-corruption reforms has been uneven. While the establishment of institutions in charge of 
preventing,  investigating  and  prosecuting  corruption  offences  represents  progress,  some  of 
these  institutions  have  failed  to  deliver  visible  results  and  efforts  from  vested  interests  to 
delay  or  derail  strong  anti-corruption  action  have  been  apparent.  The 
incomplete 
implementation of two anti-corruption measures, along with two other unmet conditions, was 
behind the cancellation in January 2018 of the third and final tranche from the aforementioned 
third MFA programme. 

Ukraine's economy still faces significant risks. On the balance of payments, these stem from 
the  uncertain  geopolitical  environment  in  the  region  (with  associated  risks  for  Ukraine), 
slower-than-expected  recovery  in  private  capital  flows  and  heavy  external  debt  repayments 
resuming in 2019.  

Seeking  support  for  the  country's  renewed  balance  of  payments  needs,  including  the 
replenishment of international reserves, the Ukrainian authorities requested further MFA 
from the EU in November 2017. Taking into consideration this request and following an in-
depth  assessment  of  the  political  and  economic  situation  in  Ukraine,  the  European 
Commission  is  submitting  to  the  European  Parliament  and  the  Council  a  proposal  to 
provide MFA of EUR 1 billion to Ukraine in the form of loans. In order to fit with the time 
frame of te IMF programme, which expires in March 2019, the operation should be limited to 
two instalments. The proposed MFA will cover part of Ukraine’s residual external financing 
needs  in  2018  and  2019  in  the  context  of  the  on-going  IMF  programme.  These  needs  are 
estimated  at  USD  4.5  billion,  in  addition  to  the  USD  40  billion  of  financing  needs  that  the 

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IMF  estimated  at  the  beginning  of  the  programme  in  2015  and  which  the  EU  helped  cover 
through MFA I-III. The EU’s renewed assistance would be expected to reduce the economy’s 
short-term balance of payments and fiscal vulnerabilities, while supporting the government’s 
adjustment and reform programmes through an appropriate package of accompanying policy 
measures to be agreed with the Ukrainian authorities in a Memorandum of Understanding. 

1.2. 

Ukraine’s macro-economic situation 

Ukraine was affected by a particularly deep recession in 2014 and 2015, when real GDP 
contracted  by  6.6%  and  9.8%,  respectively.  While  reflecting  Ukraine's  long-standing 
macroeconomic  and  structural  weaknesses,  the  economic  crisis  was  largely  driven  by  the 
confidence  loss  and  damage  to  production  capacity  resulting  from  the  conflict  provoked  by 
Russia's destabilising actions in the East of the country. The combination of a strong policy 
response  and  a  large-scale  international  support  package  helped  the  economy  return  to 
growth in 2016 (2.3%). The recovery continued into 2017 despite the negative impact on the 
industrial sector of a cargo blockage introduced in March 2017 vis-à-vis the non-government-
controlled  areas.  GDP  growth  amounted  to  estimated  2.2%  year-on-year  driven  by  robust 
investment  and  household  consumption  on  the  back  of  improving  confidence  and  wage 
growth. On the supply side, double-digit growth in construction output was complemented by 
increasing  retail  and  transport  activity.  At  the  same  time,  agricultural  production  contracted 
due to adverse weather conditions in the first half of the year.  

Strong domestic investment and household demand are expected to remain the main drivers of 
Ukraine's  economic  growth.  Both  the  authorities  and  international  forecasters  project  an 
acceleration to around 3% in 2018 and further to nearly 4% by 2020. The speed of economic 
recovery,  however,  could  be  negatively  affected  by  the  recent  tightening  of  the  monetary 
policy  that  aimed  to  contain  inflation.  At  the  same  time,  the  benign  global  economic 
environment  could  be  conducive  to  growth,  through  growing  demand  from  Ukraine's  key 
export partners. 

The disinflation trend that prevailed from spring 2015 to mid-2016 (consumer price inflation 
peaking at 60.9% year-on-year in April 2015 and reaching a low of 6.9% in June 2016) has 
gradually reversed over the course of 2017. This has been the result of higher food prices, 
partly due to the frost in early 2017 which damaged crops, increasing production costs and a 
pick-up  in  consumer  demand,  both  fuelled  by  the  sizable  wage  growth  partly  offsetting  the 
sharp loss of purchasing power resulting from the 2014-2015 crisis. The depreciation of the 
local currency in the final months of 2017 also supported price growth. As a result, headline 
inflation  reached  13.7%  in  December  2017,  exceeding  the  10%  upper  band  of  the  central 
bank's inflation target.  

In  order  to  tame  price  increases,  the  central  bank  reversed  the  monetary  easing  cycle  in 
place since March 2015. It raised its policy interest rate by a cumulative 4.5 percentage points 
since October 2017 to 17% as of 2 March 2018. 

In sipte of the economic crisis, Ukraine has made significant progress in the consolidation 
of  its  public  finances  in  the  past  three  years.  The  overall  fiscal  deficit,  including  the 
operating  deficit  of  the  oil  and  gas  company  Naftogaz,  was  reduced  from  10%  of  GDP  in 
2014 to 2.4% in 2016 (compared with the 3.7% deficit target agreed for 2016 under the IMF 
programme).  Budget  execution  continued  to  be  strong  in  2017  due  to  robust  tax  collection, 
rising dividend payments from state-owned enterprises and some one-off factors such as the 
confiscation  of  frozen  assets  of  former  President  Yanukovych  (totalling  1%  of  GDP).  As  a 
result, the consolidated state budget deficit in 2017 amounted to approximately 1.5% of GDP. 
Also  importantly,  quasi-fiscal  deficits  have  been  considerably  reduced  since  2014. 
Notably, the operating deficit  of Naftogaz, previously a key drag on the public budget, was 

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eliminated  in  2016.  Yet,  the  state  has  had  to  recapitalise  banks  in  the  wake  of  stricter 
supervision of their capital buffers. Following the nationalisation of Privatbank, the country’s 
largest bank, in December 2016, the total recapitalisation of banks by the state amounted to 
2.4% of GDP in 2017. Despite this, and thanks to the overall policy of  fiscal consolidation 
has also helped reduce general government debt to an estimated 76% of GDP at the end of 
2017 (down from 81% at end-2016).  

With respect to the external sector, Ukraine’s current account deficit has gradually widened 
(3.5% of GDP in 2017) following the sharp downward adjustment induced by the economic 
crisis (from 9% of GDP in 2013 to 0.3% in 2015). This was mainly the result of the recovery 
in  investment  imports  (reflecting  growing  business  confidence)  and  of  robust  domestic 
consumption. A further widening of the current account deficit was contained by the strong 
rebound in exports (17% year-on-year in 2017) on the back of a growing global economy and 
favourable  terms  of  trade.  Private,  non-FDI  capital  flows  have  also  increased,  notably  as  a 
result  of  a USD  3  billion  Eurobond  placement  by  the  government  in  September  2017.1  The 
support  from  Ukraine's  multilateral  and  bilateral  partners,  coupled  with  a  current  account 
adjustment  and  a  gradual  return  of  private  financial  flows,  helped  Ukraine  replenish  its 
international reserves to USD 18.6 billion at the end of January 2018 despite weakness in 
FDI. 

Despite  the  improvement  of  Ukraine's  economic  situation  since  2015,  a  number  of 
external  vulnerabilities  remain,  such  as  the  overdependence  on  commodity  exports,  high 
external  indebtedness  and  a  level  of  reserves  below  IMF  adequacy  standards.  Additionally, 
the unstable domestic political environment and possible intensification of tensions in the East 
are downside risks that could weigh on the still timid recovery.  

Being  a  commodity  exporter  (agricultural  products  and  metals  accounted  for  approximately 
70%  of  Ukraine's  merchandise  exports  in  2017),  Ukraine  remains  particularly  vulnerable  to 
worsening terms of trade and to the measures introduced by Russia to restrict transit from 
Ukraine. In fact, the global plunge of commodity prices was a key factor for the balance of 
payments crises which Ukraine went through in 2009 and 2014-2015.  

Ukraine's  high  external  indebtedness  constitutes  another  source  of  vulnerability.  Despite 
sharp deleveraging by the corporate and banking sectors since the 2014 crisis, gross external 

1   In September 2017, Ukraine placed USD 3 billion of 15-year Eurobonds with yield of 7.375%. The bulk of 
this  amount,  around  USD  1.6  billion,  was  used  to  refinance  bonds  maturing  in  2019  and  2020  and  thus 
alleviate the country's high debt-servicing needs in that period. 

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201520162017*2018*2019*2020*GDP, real, % change-9.82.32.23.03.64.0GDP per capita, USD2,1352,1992,4592,5972,8183,050Consumer price index, end-period, % change43.312.413.78.95.85.0Unemployment rate (survey-based, %)9.19.39.39.18.98.5Consolidated state government deficit/surplus, % of GDP**-1.6-2.3-1.5-2.4--General government debt, % of GDP79.181.075.682.4--Current account, % of GDP-0.3-3.7-3.5-3.4-3.6-Gross international reserves, end-period, in billion USD***13.315.518.828.630.7-   in months of next year's imports3.13.53.6---Foreign direct investment, net3.33.81.72.53.2-Nominal exchange rate, end-year, USD/UAH24.027.228.1---Table 1. Ukraine - Selected macroeconomic indicators, 2015-2020Source: National authorities; IMF; Commission staff estimates; * - preliminary estimate; ** - deficit ceiling in 2018 in line with the Budget Law; *** - projected/programmed target for 2018 and 2019 
 
                                                            
debt  amounted  to  USD 117.3 billion as  of 1 October  2017 (111% of GDP), including USD 
47.5  billion  of  short-term  maturities  (45%  of  GDP).  While  the  short-term  debt  pertains 
predominantly  to  the  private  sector  and  does  not  represent  as  such  a  direct  liability  for  the 
state, part of it is related to state-owned companies (sometimes guaranteed by the state) and 
thus  amounts  to  a  contingent  liability  for  the  authorities.  The  amount  of  direct  state-owned 
external debt maturing in the following year has significantly declined with the crisis, as the 
authorities  resorted  to  long-term  lending  from  international  financial  institutions  and 
rescheduled some USD 15 billion of bonded debt (both directly owned as well as guaranteed) 
with  a  debt  operation  of  November  2015.2  However,  it  remains  relatively  elevated  and  the 
repayment obligations in 2018-2019 are considerable. 

While Ukraine has managed to replenish its gross international reserves over the last three 
years,  the  process  has  been  slower  than  initially  programmed  by  the  IMF.  With  USD  18.6 
billion  at  end-January  2018,  reserves  remain  below  their  pre-crisis level and  also  below  the 
level foreseen for end-2017 at the launch of the IMF programme in March 2015 (USD 22.3 
billion).  Reserves  could  come  under  renewed  pressure  in  2018-2019,  when  the  country  is 
expected to make more than USD 12 billion of payments (interest and principal) on sovereign 
and  quasi-sovereign  external  debt.3  This  peak  in  debt  repayments  comes  at  the  time  of  the 
presidential and parliamentary elections in 2019. In this context, the further replenishment of 
Ukraine’s  international  reserves  seems  necessary,  and  the  EU’s  additional  MFA  could 
usefully  support  this  effort,  both  directly  (through  its  disbursements)  and  indirectly  (as  a 
catalyst for private capital inflows and instilling confidence in the local currency). 

1.3. 

IMF and other donor support 

In March 2015, the IMF approved a four-year Extended Fund Facility (EFF) programme for 
Ukraine  of  around  USD  17.5  billion,  which  replaced  the  USD  17  billion  Stand-By 
Arrangement that was initiated in April 2014 (under which USD 4.6 billion had already been 
disbursed).  The  necessity  of  this  longer  programme  arose  from  the  deteriorated  balance  of 
payments position and the emergence of new financing needs with the intensification of the 
conflict in  the East in  the course of 2014 and in early 2015. The main elements of the new 
arrangement were: 

  Restoring  confidence  and  economic  and  financial  stability  through  strong  adjustment 
policies. This is to be achieved via (i) a tight monetary policy and a sustainable exchange 
rate policy to allow Ukraine rebuilding its international reserves; (ii) bank recapitalisation 
to strengthen the soundness of the banking sector, including through introducing measures 
to  reduce  related-party lending;  (iii)  fiscal adjustment  to  ensure  a sustainable  public  debt 
trajectory; (iv) measures to reduce the deficit of the oil and gas company Naftogaz. 

  Lifting  medium-term  growth  through  deep  structural  reforms.  These  comprised  (i) 
governance  reforms,  including  anti-corruption  and  judicial  reforms;  (ii)  deregulation  and 
tax administration reforms to improve the business climate; (iii) a comprehensive reform of 
state-owned enterprises. 

2   While Ukraine managed to agree debt restructuring with private bondholders, it failed to reach an agreement 
with Russia over the repayment of a USD 3 billion Eurobond, which has been issued under former President 
Yanukovich. Ukraine defaulted on this liability upon its maturity in December 2015 after the unwillingness 
of  Russia to  negotiate  a  restructuring  of  this  debt.  The  two  sides  are  currently disputing  this debt  in  a  UK 
court.  

3   Payment obligations on the post-restructuring bonds will resume in 2019. Moreover, the first of three USD 1 
billion US-guaranteed bonds will mature in 2019 (the US guaranteed one five-year Ukrainian bond each in 
2014, 2015 and 2016 as a contribution to the IMF-led international financial assistance package). 

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A  total  of  USD  8.5  billion  from  the  IMF  programme  has  been  disbursed,  sometimes  with 
significant delays due to uneven reform implementation.4 Following the disbursement of the 
first  tranche  of  USD  4.9  billion in  March  2015,  the  Fund  provided three  loan instalments  – 
USD 1.7 billion in August 2015, USD 1 billion in September 2016 and USD 1 billion in April 
2017.  

For the conclusion of the ongoing fourth programme review, which would open the way to a 
disbursement of USD 1.9 billion, the adoption of laws on pension reform, on privatisation and 
on  the  establishment  of  an  anti-corruption  court  is  a  prerequisite  for  an  IMF  staff-level 
agreement.  The  first  two  laws  were  adopted  (in  October  2017  and  in  January  2018, 
respectively), while a draft law on the anti-corruption court was introduced to Parliament in 
late  December  2017  after  some  delay.  However,  the  draft  is  not  fully  in  line  with  IMF 
programme  requirements,  which  means  that  it  will  need  to  be  amended  in  the  legislative 
process in order to unblock the review. Moreover, fiscal, energy and financial sector policies 
need  to  remain  consistent  with  Ukraine’s  commitments  under  the  IMF  programme.  The 
pending review is expected to be concluded in the first half of 2018, provided there has been 
sufficient progress on outstanding issues. 

The IMF financial assistance has been complemented by substantial support from a number of 
bilateral  partners  (notably  the  EU  and  some  of  its  Member  States,  the  US,  Japan,  Canada, 
Switzerland and Norway).5 Other international financial institutions such as the World Bank, 
the  European  Bank  for  Reconstruction  and  Development  (EBRD)  and  the  European 
Investment  Bank  (EIB)  have  also  significantly  scaled  up  their  activity  to  support  Ukraine’s 
economic transition. Most of this financing was provided in 2015, when Ukraine's financing 
needs  were the  highest. In  addition  to  the international  financial  support,  the  debt  operation 
that Ukraine agreed with some of its private creditors also contributed to covering Ukraine's 
financing  needs  in  2015-2018,  by  rescheduling  some  USD  15  billion  of  Eurobonds  and 
commercial  loans  to  the  period  of  2019  and  beyond  and  by  decreasing  Ukraine's  nominal 
liabilities by USD 3 billion following a 20% debt reduction.  

1.4. 

External financing needs 

Despite  the  successful  macroeconomic  stabilisation,  Ukraine  continues  to  face  considerable 
external  vulnerabilities.  While  the  country  has  managed  to  replenish  its  gross  international 
reserves since 2015, the process has been slower than initially programmed by the IMF.6 As a 
result, foreign exchange reserves remain below their pre-crisis level and well below the IMF's 
reserve  adequacy  metric.7  They  stood  at  only  54%  of  this  composite indicator  at  the end  of 
2016 and at around 70% at end-2017. Thus, further reserve build-up is needed to reduce 

4   According  to  the  original  schedule  of  the  IMF,  Ukraine  should  have  received  approximately  USD  14.5 

billion from the Fund by the end of 2017. 

5   The  EU  and  the  US  were  the  largest  bilateral  donors.  The  EU  approved  in  April  2015  a  third  MFA 
programme of EUR 1.8 billion (out of which EUR 1.2 billion was eventually disbursed) that added on the 
two previous programmes of EUR 1.6 billion disbursed in May 2014 – April 2015. In addition, considerable 
grant assistance in the form of budget support and thematic programmes was extended to Ukraine. The US 
provided two bond guarantees to Ukraine, which enabled the country to borrow USD 1 billion in both 2015 
and 2016. This came on top of a USD 1 billion guarantee extended in May 2014. 

6   This, however, is partly due to the delay with the implementation of the IMF programme. In March 2015-
December  2017,  Ukraine  received  USD  8.5  billion,  or  some  USD  6  billion  less  than  what  was  initially 
envisaged. 

7   This  metric  is  composed  of  three  indicators  that  measure  reserves  in  relation  to  months  of  future  imports, 
broad money and short-term external debt repayments. As a rule of thumb, reserves within 100-150 percent 
of the metric are considered adequate. 

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external liquidity risks, in particular in light of the repayment obligation of more than USD 
12  billion  of  external  debt  (principal  and  interest)  falling  due  almost  equally  in  2018  and 
2019.8 This peak in debt repayments comes at the time of the presidential and parliamentary 
elections (respectively scheduled in March and October 2019).  

According  to  an  updated  estimate  of  Ukraine's  financing  needs  by  the  IMF  of  December 
2017,  the  country  faces  significant  external  financing  requirements  in  2018-2019.  The 
cumulative financing gap is estimated at USD 16.1 billion,9 with nearly two-thirds of it (USD 
10.5 billion) falling into 2018. The bulk (USD 11.6 billion) of the country's external financing 
needs  relates  to  the  accumulation  of  international  reserves  required  to  reach  100%  of  the 
reserve  adequacy  metric  of  the  IMF.  The  remainder  (USD  4.5  billion)  corresponds  to  the 
balance  of  payments  deficit.  This  deficit  is  mostly  driven  by  the  financial  account,  where 
private capital inflows are recovering at a slower pace than initially expected, including due to 
stalled privatisation, which has impacted on the volume of foreign direct investments. At the 
same time, strong domestic demand is expected to keep the current account deficit relatively 
elevated over the medium term.   

As  far  as  financing  is  concerned,  some  USD  11.7  billion  are  available.  The  majority  of  it 
(USD  8.5  billion)  would  come  from  the  undisbursed  amounts  envisaged  in  the  IMF's  EFF 
arrangement. Another USD 3.1 billion is attributed to the debt operation that Ukraine agreed 
earlier with bondholders and holders of commercial debt.  

Overall,  after  IMF  assistance,  Ukraine  is  estimated  to  face  a  financing  gap  of  USD  4.5 
billion, or EUR 3.8 billion,10 in 2018-2019 (see Table 2). Part of it should be financed by the 
World  Bank,  which  considers  providing  a  policy-based  guarantee  of  USD  800  million  in 
2018. Taking this World Bank into account, Ukraine's residual external financing needs will 
still amount to USD 3.7 billion in 2018-2019, USD 2.5 billion in 2018 and USD 1.2 billion in 
2019. The proposed EUR 1 billion MFA from the EU would thus cover 26.5% of the overall 
financing gap and 32%  of the USD  3.7 billion gap once  the potential  contribution  from the 
World Bank is taken into account.  

8   Ukraine’s debt repayments related to the bonds that were restructured under the debt operation of November 
2015 will start in 2019, when some USD 400 million would have to be redeemed. From 2020 to 2027, the 
country faces annual debt repayments of USD 1.3-1.4 billion under the restructured bonds. In addition, the 
country could have to make disbursements to private creditors on the GDP warrants that were issued as part 
of the 2015 debt restructuring. The warrants, whose notional face value is USD 3.6 billion, are structured to 
pay  out  depending  on  economic  performance  in  2019-2038.  The  first  reference  year  is  2019,  which  could 
potentially trigger a payout in 2021. 

9   This estimate is based on the assumption that Ukraine would have access to the international debt markets in 

2018 and 2019, borrowing USD 2 billion in each year. 

10   All conversions in this document are based on a EUR/USD exchange rate of 1.19. 

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1.5. 

Structural reforms 

Selected reform achievements in 2014-2017, with uneven progress across sectors 

With the political transition in 2014, Ukraine embarked on an ambitious and wide-ranging 
reform  programme.  This  programme  was  supported  by  large-scale  financial  and  technical 
assistance provided by multilateral and bilateral partners. Following the initial strong reform 
impulse,  however,  progress  has  become  uneven,  which  impacted  not  only  on  the  pace  of 
economic  recovery  but  also  on  the  implementation  of  the  financial  support  programmes  for 
the  country.11  The  main  obstacles  to  faster  reform  implementation  became  the  complex 
domestic political environment, the lack of political will among some of the decision-makers 
to implement ambitious reforms in certain sectors such as the fight against corruption, and the 
opposition  by  vested  interests  which  continue  to  exert  influence  on  policy-making  in  the 
country. 

Despite  these  domestic  challenges  and  the  difficult  security  situation  in  the  East,  Ukraine 
managed  to  push  through  reforms  in  a  variety  of  sectors,  many  of  which  were  supported 
through conditionality under MFA I-III.  

In the area of public finance management, the authorities – in line with MFA conditionality 
– strengthened the external audit function and improved transparency in public procurement, 
which  has  also  resulted  in  considerable  fiscal  savings  for  the  state.  Fiscal  governance  was 

11   In the case of the EU's MFA, this effect was evidenced by the considerable delay with the disbursement of 
the second tranche from MFA III and the non-disbursmeent of the final loan instalment from this programme. 

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20152016201720182019TotalFinancing gap*15.66.36.810.55.644.8   Reserve accumulation6.01.92.89.52.122.3   Underlying balance-of-payments gap**9.64.44.11.13.422.5Identified financing15.66.36.97.24.440.3   Bilateral and multilateral9.82.82.45.33.323.6   IMF6.51.01.05.33.317.1   Other bilateral/multilateral3.31.81.4--6.5      World Bank1.00.30.7--1.9      European Union0.90.10.6--1.7      United States1.01.0---2.0      Other bilateral0.40.30.1--0.9   Debt operation5.73.54.42.01.116.7Remaining gap, out of which---3.31.24.5      EU MFA0.60.61.2      World Bank0.8-0.8      Other sources, to be identified1.90.62.5Memorandum itemsCapital market access--1.52.02.05.5Current account (% of GDP)-0.3-3.7-3.5-3.4-3.6-Gross international reserves***13.315.218.828.630.7-Source: IMFTable 2. Ukraine: Financing needs, USD billion* - excludes the effect of spending reflected on the current account by project loans** - excludes project loans and currency swaps*** - gross international reserve target for 2018 and 2019 
 
 
                                                            
strengthened through the introduction of measures to improve tax compliance and through the 
launch of mid-term budgetary planning.  

Governance reforms resulted in the set-up of new anti-corruption institutions, again in line 
with  MFA  conditionality,  with  one  of  them,  the  National  Anti-Corruption  Bureau,  having 
acquired a critical  role in investigating corruption offences. In  addition, in  September  2016, 
the authorities launched an electronic platform for submission of asset declarations by senior 
public  officials.  However,  the  National  Agency  for  the  Prevention  of  Corruption  (NAPC), 
which  is  in  charge  of  verifying  these  declarations  to  identify  possible  cases  of  corruption 
offences,  currently  remains  unable to  conduct  this  function  in  an  efficient  manner,  as  it  has 
not  yet  introduced  an  automatic  verification  mechanism.  This  was  one  of  the  unmet 
conditions from the final tranche of MFA III, which remained undisbursed. An Action Plan 
was  adopted  in  November  2017  outlining  key  steps  to  be  taken  by  the  NAPC  and  other 
responsible  agencies  to  unlock  the  situation.  However,  these  commitments  remain  to  be 
implemented. Taking into account the delays already incurred with the deadlines initially set 
in  the  Action  Plan,  and  assuming  that  implementation  will  swiftly  resume,  the  automatic 
verification of electronic asset declarations could in principle start operating by summer 2018.  

A judicial reform introduced in 2016 saw the election of a new Supreme Court in 2017 and 
the launch of competitive selection procedures for judges at lower-instance courts. As part of 
the 2016 reform, Ukraine committed to establishing a special anti-corruption court. Progress 
to  this  end,  however,  has  been  slow.  The  draft  legislation  on  the  anti-corruption  court  was 
submitted only in December 2017 and is still pending parliamentary approval. The adoption 
of the law is a key requirement for provision of financial assistance by the IMF and the World 
Bank. 

In the area of public administration, as agreed in the policy programme for MFA III, a major 
reform  was  launched  in  mid-2016,  which  is  expected  to  depoliticise  and  professionalise  the 
civil  service  and  to  improve  its  effectiveness.  While  important  measures  were  launched  in 
order to improve corporate governance and transparency of state-owned companies, the 
government's privatisation efforts have not yielded significant results yet.12    

The  energy  sector  also  witnessed  comprehensive  reforms,  many  of  which  featured  in  the 
policy programme of MFA III. The independence of the market regulator was strengthened, a 
new law on electricity was adopted with the objective to increase competition in the sector, 
major steps towards improving energy efficiency were also introduced. Strong progress was 
made  in  reforming  the  gas  sector,  although  the  strategy  approved  for  the  unbundling  of 
Naftogaz has not been fully implemented yet. Household gas tariffs were increased to better 
reflect costs, while utility subsidies were raised to compensate poorer households for the tariff 
hike.  However,  utility  pricing  has  not  been  depoliticised,  as  evidenced  by  a  de  facto 
suspension in 2017 of the supposedly automatic formula for household gas and heating price 
adjustments to import parity as laid down in the legislation and agreed with the IMF (on the 
occasion of what should have been its first application). 

In the banking sector, the focus of recent reforms was on the improvement of regulation and 
supervision.  The  authorities  have  dedicated  significant  efforts  to  cleaning  up  the  segment 
from  unviable  players  and  better  capitalising  the  remaining  banks  in  order  to  stabilise  the 
system and pave the way for recovery in credit activity.13 An important step in this area was 

12   In  January,  the  Ukrainian  Parliament  adopted  a  new  privatisation  law,  which  is  expected  to  simplify  and 
accelerate  the  sale  of  state-owned  companies.  The  adoption  of  the  law  is  one  of  the  requirements  for  the 
release of the next tranche from the IMF programme for the country. However, no SOEs of a significant size 
has as yet been privatised. 

13 The number of banks fell from 180 in 2014 to 82 at the end of 2017. 

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the nationalisation in December 2016 of Privatbank, a major systemic bank (the largest lender 
in  the  country),  which  was  failing  under  the  weight  of  non-performing  related-party  loans. 
The investigation and claw-back of collateral linked to these loans is still ongoing.  

Other important reforms included deregulation, reinforcing the efficiency of the competition 
authority and decentralisation, which has already had positive fiscal implications. In the social 
sphere,  the  authorities  launched  major  pension,  education  and  healthcare  reforms.  The 
conditions attached to MFA III spurred progress in the government's response to the situation 
of internally displaced people in Ukraine, while also highlighting remaining concerns.  

Main government reform priorities 

In April 2017, the Ukrainian government approved a mid-term priority action plan to 2020, 
which outlines the main reform areas the authorities plan to pursue in the next few years. It 
consists  of  five  pillars:  (i)  economic  growth;  (ii)  effective  governance;  (iii)  human  capital 
development; (iv) rule of law and fight against corruption; (v) security and defence. 

In  order  to  promote  economic  growth,  the  authorities  would  seek  to  improve  the  business 
climate  through  deregulation,  tax  and  customs  reforms  and  further  advancing  the  reform  of 
the  public  administration.  Moreover,  privatisation  would  be  stepped  up,  while  public 
procurement would be further improved. An effective system to monitor and control state aid 
to business entities would be created. One of the key measures planned under this pillar is the 
launch  of  the  land  reform,  which  has  been  continuously  delayed  despite  the  significant 
economic benefits it is expected to bring to the country. Finally, the authorities plan to further 
reduce Ukraine's energy independence and improve its energy efficiency. 

In security and defence, the key priorities are further developing the capability of Ukraine's 
armed  forces,  strengthening  border  security  and  guaranteeing  the  country's  information 
sovereignty. In addition, the authorities would seek to restore the main infrastructure and key 
social services in the eastern parts of the country. 

With  regard  to  governance,  the  focus  would  be  on  advancing  reforms  of  public 
administration, including by promoting e-government and decentralisation. These reforms are 
seen  as  critical  for  ensuring  high-quality  and  accessible  services  for  business  and  citizens. 
Furthermore,  in  order  to  ensure  an  efficient  and  transparent  use  of  public  finances,  further 
steps would be taken towards implementing a full-scale medium-term budget planning. 

When  it  comes  to  human  capital,  the  key  priorities  would  be  the  shift  of  the  healthcare 
system to a policy based on health promotion and disease prevention from a treatment-based 
policy  and  modernising  the  educational  system  by  improving  the  quality  of  secondary 
education and promoting vocational training. The reform of the pension system, which aims at 
improving its fairness and effectiveness, is also among the main elements in this pillar. 

The authorities consider the rule of law critical to sustainable, inclusive growth and to social 
development.  They  therefore  commit  to  strive  to  enforce  legislation  and  ensure  effective, 
coordinated  and  transparent  operation  of  anti-corruption  institutions,  including  by  securing 
sufficient  financial  resources  to  this  end.  The  objective  of  the  anti-corruption  activities  by 
2020 would be to strengthen the institutional infrastructure as well as the planning and policy-
making  capacity  of  the  anti-corruption  agencies  responsible  for  corruption  prevention,  in 
particular, to enable corruption prevention bodies to operate effectively. The operation of the 
e-declaration system and system of government control over political parties’ financing would 
be strengthened as a result. In order to assert the rule of law, the government plans to continue 
to  reform  the  system  of  enforcement  of  judicial  rulings,  notably  by  recruiting  private 
enforcement officers in addition to existing public officers.  

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While  the  government  plans  seem  to  go  in  the  right  direction,  the  implementation  of  anti-
corruption reforms in recent years has been weak.14 Essential reforms such as strengthening 
the investigative powers of the National Anti-Corruption Bureau - notably by authorising it to 
wiretap  -,  or  establishing  an  independent  anti-corruption  court,  which  are  two  structural 
benchmarks  under the  IMF  programme,  or  the  effective  verification  of  asset  declarations  of 
public officials, which was among the conditions agreed under MFA III, do not feature among 
the  government's  priority  actions  described  in  the  action  plan.  With  regard  to  the 
establishment  of  an  anti-corruption  court,  there  has  been  progress  since  the  adoption  of  the 
government's  action  plan  in  April  2017.  The  President  submitted  the  relevant  legislation  to 
Parliament  in  December  2017,  but  the  draft  proposed  was  not  in  line  with  some  important 
recommendations from the Venice Commission. Following calls by the IMF, the World Bank 
and  the  EU  to  follow  these  recommendations,  the  draft  law  is  expected  to  be  substantially 
amended in the parliamentary process. 

2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1. 

Objectives 

The objectives of the proposed MFA operation are to:  

(i)  contribute  to  covering  the  external  financing  needs  of  Ukraine  in  the  context  of  a 
sizeable external financing  gap brought  about by lower-than-expected private capital 
flows, significant external debt amortisation and the need to build up foreign exchange 
reserves; 

(ii)  alleviating Ukraine’s budgetary financing need; 

(iii) support the fiscal consolidation effort and external stabilisation efforts in the context 

of the IMF programme; 

(iv)  support  structural  reform  efforts  aimed  at  improving  the  overall  macroeconomic 
management,  strengthening  economic  governance  and  transparency,  and  improving 
conditions for sustainable growth, including the fight against corruption; 

(v)  facilitate  and  encourage  efforts  of  the  authorities  of  Ukraine  to  implement  measures 
identified  under  the  EU-Ukraine  Association  Agreement  and  in  the  context  of  the 
bilateral  cooperation  programmes,  support  regulatory  convergence  and  economic 
integration  with  the  EU  and  strengthen  the  EU’s  economic  policy  dialogue  with  the 
authorities. 

2.2.  Monitoring Indicators 

The  fulfilment  of  the  objectives  of  the  assistance  will  be  assessed  by  the  Commission, 
including in the context of the ex-post evaluation (see below), on the basis of the following 
indicators:  

  Progress with macroeconomic and financial stabilisation, notably by assessing the degree 

of adherence to the IMF-supported programme.  

  Progress with the implementation of structural reforms, notably the specific policy actions 
identified  as  conditions  for  disbursement  of  the  assistance,  which  will  be  included  in  a 

14   While  the  confiscation  of  assets  of  nearly  USD  1  billion  believed  to  be  related  to  former  President 
Yanukovych  can  be  considered  an  important  step,  it  does  not  indicate  that  the  anti-corruption  set-up  in 
Ukraine is generally working well. 

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Memorandum  of  Understanding  to  be  negotiated  between  the  Commission  and  the 
Ukrainian authorities.  

3. 

DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1. 

Delivery mechanisms 

The  proposed  new  MFA  would  amount  to  EUR  1  billion.  Regarding  the  form  of  the 
assistance, the Commission proposes to disburse the full amount in the form of medium- to 
long-term  loans.  As  usual,  these  loans  will  have  favourable  conditions  in  terms  of  long 
maturities (of up to 15 years) and a low interest rate (the rate at which the EU, benefiting from 
its AAA rating, borrows the funds in the international capital markets). This form of financial 
support is similar to the one provided under the previous three MFA programmes that were 
implemented in 2014-2017. It is consistent with the treatment granted by the World Bank and 
the IMF to Ukraine.  

MFA provides untied and undesignated macroeconomic support, which helps the beneficiary 
country  to  meet  its  external  financing  needs,  and  may  contribute  to  alleviating  budgetary 
financing  needs.  The  funds  would  be  paid  to  the  National  Bank  of  Ukraine.  Subject  to 
provisions  to  be  agreed  in  the  Memorandum  of  Understanding,  including  a  confirmation  of 
residual budgetary financing needs, the funds may be transferred to the Ministry of Finance of 
Ukraine as the final beneficiary.  

3.2. 

Risk assessment  

There are fiduciary, policy and political risks related to the proposed MFA operation.  

There is a risk that the MFA could be used in a fraudulent way. As MFA is not designated to 
specific expenses by Ukraine (contrary to project financing, for example), this risk is related 
to factors such as the general quality of management systems in the National Bank of Ukraine 
and  the  Ministry  of  Finance,  administrative  procedures,  control  and  oversight  functions,  the 
security of IT systems and the appropriateness of internal and external audit capabilities. 

To  mitigate  the  risks  of  fraudulent  use  several  measures  will  be  taken.  First,  the  Loan 
Agreement  will  comprise  a  set  of  provisions  on  inspection,  fraud  prevention,  audits,  and 
recovery  of  funds  in  case  of  fraud  or  corruption.  It  is  further  envisaged  that  a  number  of 
specific  policy  conditions  will  be  attached  to  the  assistance,  including  in  the  area  of  public 
transparency  and 
finance  management,  with  a  view 
accountability. Also, the assistance will be paid to a specific account of the National Bank of 
Ukraine.  

to  strengthening  efficiency, 

Moreover, in line with the requirements of the Financial Regulation, the Commission services 
will  carry  out  an  Operational  Assessment  of  the  financial  and  administrative  circuits  of 
Ukraine  to  ascertain  that  the  procedures  in  place  for  the  management  of  programme 
assistance,  including  MFA,  provide  adequate  guarantees.  The  assessment  will  cover  areas 
such  as  budget  preparation  and  execution,  public  internal  financial  control,  internal  and 
external  audit,  public  procurement,  cash  and  public  debt  management,  as  well  as  the 
independence  of  the  central  bank.  The  preliminary  findings  of  the  consultancy  company 
engaged with this Operational Assessment are to be received in the second quarter of 2018. 
Developments  in  that  area  will  be  further  closely  monitored  by  the  EU Delegation  in  Kyiv. 
The  Commission  is  also  using  budget  support  assistance  to  help  the  Ukrainian  authorities 
improve their PFM systems, and these efforts are strongly supported by other donors. 

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Finally, the assistance will be liable to verification, control and auditing procedures under the 
responsibility of the Commission, including the European Antifraud Office (OLAF), and the 
European Court of Auditors. 

A  second  risk  stems  from  the  possibility  that  Ukraine  will  fail  to  service  the  financial 
liabilities  towards  the  EU  stemming  from  the  proposed  MFA  loans  (default  or  credit  risk), 
which could be caused for example by a significant additional deterioration of the balance of 
payments and fiscal position of the country. This risk is mitigated, however, by the fact that 
the EU’s MFA is part of an international package of official assistance led by the IMF that is 
supporting  an  adjustment  and  reform  programme  aimed  at  restoring  fiscal  and  balance  of 
payments sustainability through the implementation of a series of policy measures, included 
those to be agreed in the Memorandum of Understanding between the EU and the Ukrainian 
authorities. Moreover, the risks for the EU budget are cushioned by the EU’s Guarantee Fund 
for external actions. 

Another key risk to the operation stems from the regional geopolitical situation, in particular 
the lingering conflict in the eastern part of the country, which acts as an important deterrent to 
private  capital  inflows.  A  worsening  of  the  regional  geopolitical  situation  could  have  a 
negative impact on Ukraine’s macroeconomic stability, affecting the performance of the IMF 
programme  and  the  disbursement  and/or  repayment  of  the  proposed  MFA.  Ukraine’s  still 
difficult relations with Russia, one of its key export markets, is also negatively impacting on 
the  economic  recovery  of  the  country.  Diplomatic  efforts  for  conflict  management  and 
resolution continue, including with the support of the EU. 

On  the  domestic  front,  the  main  risks  stem  from  the  complex  political  environment  and the 
existence  of  strong  vested  interests  against  reforms.  This  could  result  in  insufficient  reform 
implementation,  in  particular  ahead  of  national  elections  in  2019,  and  therefore  hamper  the 
implementation of the proposed MFA, including through impacting on progress with the IMF 
programme. However, despite the difficult political environment, Ukrainian authorities have 
requested  further  MFA,  knowing 
the 
implementation of reforms to be agreed. This conditionality provides a tool to support reform-
oriented  forces  in  the  country  and  in  particular  within  the  authorities  (government  and 
Parliament).  Moreover,  politically  Ukraine  remains  highly  committed  to  its  comprehensive 
commitments  under  the  Association  Agreement  with  the  EU,  including  in  the  part  on  the 
establishment of a Deep and Comprehensive Free Trade Area, which is also reflected in the 
government’s action plan of April 2017.  

that  disbursements  will  be  conditional  on 

Having made a thorough assessment of the risks, the Commission services consider that there 
are  sufficient  grounds  and  guarantees  to  proceed  with  the  proposed  MFA  to  Ukraine.  The 
Commission  services  will  maintain  close  contacts  with  the  Ukrainian  authorities  during  the 
implementation of the MFA in order to address quickly any concerns that may arise. 

4. 

ADDED VALUE OF EU INVOLVEMENT 

The Union’s financial support to Ukraine reflects the country’s strategic importance to the EU 
in  the  context  of  the  European  Neighbourhood  Policy  (ENP).  The  MFA  instrument  is  a 
policy-based  instrument  that  aims  to  alleviate  short-  and  medium-term  external  financial 
needs. As a part of the overall EU package of assistance, it would contribute to supporting the 
Union’s  objectives  of  economic  stability,  economic  development  and  resilience  in  Ukraine 
and, more broadly, in the eastern European neighbourhood. 

The  EU’s  MFA  would  also  complement  the  standard  EU  aid  packages  mobilised  under  the 
European Neighbourhood Instrument (ENI). By supporting the authorities’ efforts to establish 

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a  stable  macroeconomic  framework,  the  EU’s  MFA  would  enhance  the  added  value  and 
effectiveness of the EU’s involvement through other financial instruments. 

In addition to the financial impact of the MFA, the proposed programme will strengthen the 
government’s  reform  commitment  and  further  foster  its  aspiration  towards  closer  relations 
with the EU, as reflected by the Association Agreement that entered into force in September 
2017.  This  result  will  be  achieved,  inter  alia,  through  appropriate  conditionality  for  the 
disbursement  of  the  assistance.  In  a  larger  context,  the  programme  will  signal  to  the  other 
countries  in  the  region  that  the  EU  is  ready  to  support  countries  implementing  ambitious 
economic and structural reforms. 

5. 

CHARACTERISTICS OF MACRO-FINANCIAL ASSISTANCE 

5.1. 

Exceptional Character and Limited Timeframe  

The  proposed  MFA  operation  would  be  exceptional,  aiming  to  support  the  restoration  of  a 
sustainable external finance situation of Ukraine.  It would have an availability period of 2.5 
years from the entry into force of a Memorandum of Understanding, as part of conditionality 
requirements  described  below.  However,  the  operation  is  expected  to  run  along  with  the 
current IMF EFF arrangement for Ukraine that is set to expire in the spring of 2019. Against 
this  background  and  given  the  time  required  for  the  legislative  process  in  the  European 
Parliament and the Council, the EU's assistance is  expected to  be implemented in  2018 and 
the first half of 2019. Subject to the implementation of the policy measures to be agreed, the 
disbursement of the first tranche could take place in the second half of 2018, while the second 
instalment could be made available in the spring of 2019.  

5.2. 

Political preconditions and EU-Ukraine relations  

MFA is available to third countries that are politically, economically and geographically close 
to the EU. Countries that are covered by the ENP, like Ukraine, are in principle eligible for 
MFA. In order to receive MFA, the beneficiary country needs to respect effective democratic 
mechanisms (including a multi-party parliamentary system) and the rule of law and guarantee 
the respect for human rights.  

Political preconditions: The political preconditions for receiving MFA may be considered to 
be  fulfilled  in  the  case  of  Ukraine.  Ukraine's  constitution  and  legislation  enshrine  the 
principles  of  democratic  pluralism  and  multi-party  political  system,  the  rule  of  law  and 
respect of fundamental rights and freedoms. Ukraine is an open society, where elections are 
held  freely  and  largely  in  line  with  international  standards,  although  Ukrainian  authorities 
should proceed with the reform of the electoral legislation. Media freedom has improved, but 
further  work  is  needed  to  strengthen  the  pluralistic  media  environment.  The  most  severe 
human  rights  violations  take  place  in  the  areas  not  under  the  control  of  the  government, 
following  the  illegal  annexation  of  the  Crimean  peninsula  and  the  conflict  in  the  east 
provoked  by  Russia's  destabilising  actions.  Ukraine  has  made  considerable  reforms  in  the 
justice  and  anti-corruption  sectors,  but  immediate  actions  are  needed  to  ensure  their 
completion, full implementation and irreversability.15  

EU-Ukraine  relations:  The  EU  and  Ukraine  have  developed  close  political  and  economic 
relations  over  the  years,  leading  to  the  signature  of  an  Association  Agreement,  including  a 
Deep and Comprehensive Free Trade Area (DCFTA), on 21 March and on 27 June 2014. The 
Association  Agreement  which  is  the  main  tool  for  bringing  Ukraine  and  the  EU  closer 

15   A more detailed assessment of the compliance with this criterion, provided by the European External Action 

Service (EEAS), is reproduced in the Annex of this Staff Working Document. 

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together,  replaces  earlier  frameworks  for  cooperation.  It  promotes  deeper  political  ties, 
stronger economic links and the respect for common values. 

Parts of the Association Agreement have been provisionally applied since 1 November 2014. 
This has enhanced EU-Ukraine cooperation on human rights, fundamental freedoms and the 
rule  of  law,  political  dialogue  and  reforms,  movement  of  persons.  It  has  also  strengthened 
cooperation in a number of sectors such as energy, environment and climate action, transport, 
financial  services,  public  finances,  agriculture,  consumer  protection  and  civil  society.  The 
provisions concerning the DCFTA had been provisionally applied since 1 January 2016, when 
the  EU  and  Ukraine  started  to  mutually  open  their  markets  for  goods  and  services.  The 
Association  Agreement,  including  its  trade  part,  entered  into  force  on  1  September  2017, 
following the conclusion of the ratification process. 

The EU is Ukraine's first trading partner, accounting for 40.6% (in value terms) of Ukraine's 
total trade in 2016. Bilateral trade increased further in 2017. Ukrainian exports to the EU grew 
by 27.3% year-on-year, while imports from the EU rose by 22.1% (in value terms).  

The EU is also an important source of assistance to the reform process in Ukraine. In March 
2014, the Commission adopted an unprecedented financial support package to Ukraine worth 
over  EUR  11  billion  for  the  next  few  years.  This  was  augmented  in  early  2015  by  another 
EUR 1.8 billion through the approval of a third MFA programme for the country. Out of the 
total pledge of nearly EUR 13 billion, the EU has so far mobilised more than EUR 10 billion 
to stabilise Ukraine's economy and support structural reforms. This includes EUR 3.4 billion 
in  macro-financial  assistance  (out  of  which  EUR  2.8  billion  has  been  disbursed)  as  well  as 
nearly EUR 1 billion in grants. In addition, the EIB and the EBRD have each signed project 
investment contracts for more than EUR 3 billion to support infrastructure development and 
private sector activity, among others.  

5.3. 

Complementarity 

The proposed MFA would complement assistance provided by other multilateral donors in the 
context of the IMF-led economic programme. The EU’s MFA would also complement other 
EU  aid  packages  mobilised  under  the  ENI.  By  supporting  the  adoption  by  the  Ukrainian 
authorities of an appropriate framework for macroeconomic policy and structural reforms, the 
EU’s  MFA  would  enhance  the  added  value  of  the  overall  EU  involvement,  increasing  the 
effectiveness  of  the  EU’s  intervention  including  through  other  financial  instruments.  The 
proposed MFA would also  contribute to  the EU’s leverage on policy making in  Ukraine by 
helping the country reduce economic vulnerabilities and promote higher and more inclusive 
economic growth. 

5.4. 

Conditionality 

Disbursements  under  the  proposed  MFA  operation  would  be  conditional  on  successful 
reviews under the IMF programme and on the effective drawing by Ukraine on IMF funds, 
as well as on the fulfilment of the political pre-conditions. In addition, the Commission – on 
behalf of the EU – and the Ukrainian authorities would agree on a specific set of structural 
reform  measures,  to  be  defined  in  a  Memorandum  of  Understanding.  These  reform 
measures  would  support  the  authorities’  reform  agenda  and  complement  the  programmes 
agreed  with  the  IMF,  the  World  Bank  and  other  donors,  as  well  as  the  policy  programmes 
associated with the EU’s budget support operations. They would be consistent with the main 
economic  reform  priorities  agreed  between  the  EU  and  Ukraine  in  the  context  of  the 
Association Agreement, including the DCFTA and the Association Agenda. 

The Commission would seek a broad consensus with the Ukrainian authorities, so as to ensure 
ownership  and  hence  increase  the  likelihood  of  smooth  implementation  of  the  agreed 

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conditionality.  The  policy  conditions  should  address  key  weaknesses  of  the  Ukrainian 
economy  and  economic  governance  system.  In  particular,  delivering  on  key  anti-corruption 
and  governance  reforms  will  be  indispensable  if  the  MFA  operation  is  to  be  successfully 
completed. 

In  light  of  the  incomplete  implementation  by  Ukraine  of  the  policy  programme  linked  to 
MFA III,  which  led  to  the  cancellation  of  the  final  tranche  by  the  Commission  in  January 
2018,  it  is  appropriate  to  include  specific  conditions  for  each  of  the  two  tranches  of  this 
assistance.  More  specifically,  it  is  planned  to  reflect  the  four  measures  that  were  not 
implemented under the previous programme in the following way: 

  On the verification of asset declarations of public officials, the Commission would 
insist  on  the  establishment  of  an  effective  verification  system,  including  through 
automatic verification software with direct and automatic access to state databases and 
registers.  In  the  Memorandum  to  be  agreed  with  Ukraine  under  the  proposed  new 
MFA  operation,  the  Commission  would  therefore  require  the  aforementioned 
automated verification system to be in place and operating, with a significant number 
of  declarations  verified  through  the  automated  system,  giving  priority  to  high-level 
officials.   

  On the verification of data to be provided by companies on their beneficial owners 
and  the  enforcement  of  companies’  reporting  obligation,  it  has  to  be  recognised 
that  this  is  still  in  its  infancy  internationally,  including  in  the  EU.  Expert  exchanges 
between Ukraine and the EU will be organised, on a Ukrainian request, with a view to 
defining feasible steps for Ukraine to operationalise a verification mechanism. On this 
basis,  the  Memorandum  could  specify  tangible  benchmarks  for  a  verification 
mechanism as a condition under the MFA programme.  

  The wood export ban, which is not compatible with refraining from trade-restricting 
measures,  remains  in  place,  and  a  law  repealing  it  is  yet  to  be  considered  by  the 
responsible  parliamentary  committee  in  Ukraine.  The  Commission  will  engage  with 
the Ukrainian authorities with a view to finding a solution to this irritant through the 
use of dedicated trade instruments, possibly including the bilateral dispute settlement.  
  As  to  the  law  establishing  a  central  credit  registry,  it  was  adopted  on  6  February 
2018  by  the  Ukrainian  parliament  and  entered  into  force  on  4  March  2018.  This 
measure can thus be assessed as implemented and does not need to be reflected in the 
new Memorandum. 

In addition, the Memorandum for the new programme will also include other measures 
to  be  implemented  by  Ukraine  in  order  to  receive  the  first  and  second  disbursement. 
These  will  comprise  actions  in  the  area  of  public  finance  management,  which  is  part  of  all 
MFA-related  policy  programmes.  More  generally,  the  conditionality  will  focus  on  a  select 
number of key sectors that are relevant to Ukraine's macroeconomic stabilisation.  

5.5. 

Financial Discipline 

The  planned  assistance  would  be  provided  in  the  form  of  a  loan  and  should  be  financed 
through  a  borrowing  operation  that  the  Commission  will  conduct  on  behalf  of  the  EU.  The 
budgetary costs of the assistance will correspond to the provisioning, at a rate of 9%, of the 
amounts  disbursed  in  the  guarantee  fund  for  external  lending  of  the  EU,  from  budget  line 
01 03 06 (“Provisioning of the Guarantee Fund”). Assuming that the first loan disbursements 
will  be  made  in  2018  and  the  second  one  in  2019  for  a  total  amount  of  EUR 1  billion,  and 
according  to the rules  governing the guarantee fund  mechanism, the  provisioning will  take 
place in the budgets for 2020 (for EUR 45 million) and 2021 (EUR 45 million).  

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Based on current projections on the utilisation of the budget line 01 03 06, the Commission 
assesses  that  the  budgetary  impact  of  the  proposed  MFA  operation  for  Ukraine  can  be 
accommodated. 
In line with the requirements of the Financial Regulation, the European Commission services 
would  carry  out  in  the  second  quarter  of  2018,  as  noted,  an  Operational  Assessment  of  the 
financial and administrative circuits of Ukraine. Developments in this area will continue to be 
closely monitored also through the regular assessment of PFM reforms by the EU Delegation 
in Kyiv. 

6. 

EVALUATION AND COST-EFFECTIVENESS 

This  assistance  is  of  exceptional  and  macroeconomic  nature  and  its  evaluation  will  be 
undertaken in line with the standard Commission procedures.  

6.1. 

Evaluation 

Ex-post  evaluations  of  MFA  operations  are  foreseen  in  the  Multi-Annual  Evaluation 
Programme of the Commission’s Directorate-General for Economic and Financial Affairs. An 
ex-post evaluation of the proposed MFA to Ukraine will be launched within a period of two 
years after the completion of the operation. A provision for the ex-post evaluation is included 
in the proposed Decision for the assistance, and will also be included in the Memorandum of 
Understanding.  Budget  appropriations  from  the  MFA  budget  line  will  be  used  for  this 
evaluation.  

6.2. 

Achieving cost-effectiveness 

The proposed assistance would entail a high degree of cost-effectiveness for several reasons:  

(i)  First,  since  the  assistance  would  be  leveraged  by  that  provided  by  the  international 
financial  institutions,  with  which,  as  noted,  it  would  be  closely  coordinated,  its 
ultimate  impact  could  be  very  significant  compared  to  its  cost.  Moreover,  in 
negotiating  specific  policy  conditions,  the  Commission  will  be  able  to  draw  on  the 
expertise of those institutions, including the IMF and the World Bank, and to influence 
their conditionality as well in ways that will take into account the EU's views.  

(ii)  Second, providing a coordinated macroeconomic support to Ukraine on behalf of the 
EU  countries,  the  MFA would  be  more  cost  efficient  than the  provision  of  a  similar 
total amount of financial support by EU Member States individually.  

(iii) Third,  all  of  the  assistance  would  be  provided  in  the  form  of  loans,  through  which 
scarce budgetary funds are effectively leveraged, thus enhancing the impact of the EU 
budget. 

(iv)  In addition, the Commission will aim to achieve synergies with other EU policies and 
instruments  used  to  support  the  implementation  by  the  beneficiary  of  the  relevant 
measures (notably in the area of public finance management).  

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ANNEX 

EUROPEAN EXTERNAL ACTION SERVICE 

Head of Division 

Eastern Partnership Bilateral  

Brussels, 9 March 2018 

EURCA EAST 2 (2018)  

ASSESSMENT OF DEMOCRACY, HUMAN RIGHTS, RULE OF LAW AND REFORMS IN UKRAINE 

Political  preconditions:  Countries  which  are  covered  by  the  ENP  are  eligible  for  MFA.  A 
pre-condition  for  granting  MFA  should  be  that  the  eligible  country  respects  effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system  and  the  rule  of  law 
and guarantees respect for human rights.  

Ukraine's  Constitution  envisages  a  parliamentary-presidential  democracy  which  is  based  on 
the  rule  of  law,  division  of  powers,  and  guarantees  for  local  self-government.  The 
Constitution protects human dignity, equality, rights and freedoms such as freedom of media, 
speech, religion, association and assembly as well as broad social and economic rights. It also 
guarantees the free functioning of political parties. Cabinet of Ministers is accountable both to 
the  Parliament  and  the  President  who  holds  important  powers  and  who  has  also  legislative 
initiative and veto rights.  

Following  a  major  political  crisis  in  2013-2014,  Ukraine  has  embarked  on  an  ambitious 
reform path, supported by its international partners. The reform agenda is rooted in the EU-
Ukraine  Association  Agreement,  including  its  Deep  and  Comprehensive  Free  Trade  Area 
(AA/DCFTA), the Association Agenda and various Government strategies and action plans.  

The AA/DCFTA was signed in 2014, has been partly provisionally applied since November 
2014  (the  DCFTA  since  January  2016),  and  entered  into  force  on  1  September  2017.  The 
Association  Agenda,  facilitating  its  implementation,  was  most  recently  updated  in  March 
2015.  The  constitutional,  electoral  and  judicial  reforms  and  preventing  and  combatting 
corruption are among its priorities for action.  

Ukraine  has  pursued  the  implementation  of  structural  reforms,  generating  positive  trends  in 
the  governance,  economic  and  social  spheres  despite  the  internal  and  external  challenges, 
including  the  illegal  annexation  of  the  Crimean  peninsula  by  Russia  and  the  conflict  in  the 
east  of  the  country  provoked  by  Russia's  destabilising  actions.  Ukraine  has  continued  to 
advance measures to tackle corruption, but the sustainability of reforms remains a challenge 
and  immediate  actions  need  to  be  taken  in  order  to  to  ensure  the  full  implementation  and 
sustainability of these reforms.  

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Recent developments  

The  last  presidential,  parliamentary  and  (nation-wide)  local  elections  took  place  in  spring 
2014,  autumn  2014  and  autumn  2015  respectively  and  were  assessed  by  the  Office  for 
Democratic Institutions and Human Rights of the Organization for Security and Co-operation 
in  Europe  (OSCE/ODIHR)  as  "competitive,  well  organized  overall  and  the  campaign 
generally showed respect for the democratic process". Nonetheless, criticism was expressed in 
relation  to  the  over-complicated  legal  framework,  the  dominance  of  powerful  economic 
groups,  and  the  influence  of  political  and  business  interests  of  media  owners  on  media 
reporting.  

Since 2015, local elections have been held in over 400 newly amalgamated communities as 
part of the ongoing decentralisation. Ukrainian independent civil society election observation 
organisations have characterised the electoral process as competitive, with a broad choice of 
candidates. They have assessed the conduct of elections positively, noting some irregularities 
which, however, did not have a significant impact on the overall outcome.  

Ukrainian  electoral  legislation  for  all  types  of  elections  remains  to  be  harmonised  and 
consolidated.  Currently  it  is  dispersed  in  multiple  legislative  acts,  does  not  address 
sufficiently  a  number  of  important  issues  and  contains  contradictory  or  unclear  provisions. 
The  OSCE/ODIHR,  the  Venice  Commission  and  the  Ukrainian  civil  society  have  been 
advocating for the adoption of a single Electoral Code, which the EU has also supported. A 
draft electoral code passed the first reading in the Parliament on 7 November 2017, but with 
minimum required votes; substantive efforts are required from the Government to ensure its 
final adoption.  

In  addition,  the  appointment  of  13  new  members  of  the  Central  Election  Commission,  to 
replace those whose mandate has expired, is still pending. Positive steps have been taken in 
the field of party financing, where tightened transparency rules entered into force in 2016. 

Next  presidential  and  parliamentary  elections  are  scheduled  in  spring  and  autumn  2019 
respectively. The discussions about the local elections in the territories not under the control 
of  government  in  eastern  Ukraine  are  ongoing  within  the  Trilateral  Contact  Group.  Gender 
quota has been introduced to the local elections; at national level only 12 % of Members of 
Parliament are women.  

The  current  government  coalition  is  formally  composed  of  two  party  factions  (Bloc  Petro 
Poroshenko and Popular Front). It falls short of a proper majority in the parliament and must 
systematically resort to situational alliances with other parties. Strong vested interests are still 
represented in the Parliament, as well as among institutions and authorities.  

The  constitutional  system  in  Ukraine  has  been  subject  to  several  changes  during  the  past 
years,  often  through  controversial  procedures.  The  current  reform  process  which  was 
launched  in  2015  is  generally  perceived  as  more  transparent,  participatory  and  in  line  with 
international  standards.  Constitutional  amendments  on  the  judiciary  entered  into  force  in 
September  2016,  strengthening  judicial  independence  and  reorganising  the  court  system.  
Constitutional amendments related to decentralisation have been adopted by the parliament in 
the  first  reading,  with  the  second  reading  still  pending.  Draft  amendments  aiming  to 
modernise the chapter on human rights were discussed in 2015, but so far no draft has been 
submitted to the parliament. 

Since  2014  Ukraine  has  been  implementing  a  decentralisation  reform  at  the  basic 
(community) level. Overall, it has led to significant increases in tax revenues, notably in the 
voluntary amalgamated communities, increased trust among the population towards the local 

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authorities  and  new  opportunities 
administration reform is being implemented steadily, albeit in some areas at a slow pace.  

for  socio-economic  development.  The  public 

In terms of media freedom, Freedom House ranked Ukraine as "partly free country" in 2017. 
Its report highlights that Ukraine’s media environment has significantly improved since 2014, 
as  ongoing  reforms  continue  to  strengthen  the  legislative  environment  for  journalists  and 
outlets, although several challenges remain. Although declining overall, instances of physical 
attacks against journalists have persisted, along with impunity for those who committed such 
crimes.  

Ukraine has adopted one of the most progressive and far-reaching legal frameworks in Europe 
on the transparency of media ownership, although the influence of private interest on editorial 
lines remains an  issue. A law on public broadcasting was adopted  in  April  2015, creating a 
single  public  company  providing  public  service  broadcasting  on  both  TV  and  radio,  and 
enshrining the editorial independence of the new broadcaster. An urgent and key challenge is 
the persisting and significant shortfall in funding to the broadcaster out of the state budget, as 
stipulated in the law. 

A number of ambitious reforms have been initiated in Ukraine's  justice sector, in particular 
the creation of a new Supreme  Court  which started operating in  December 2017. There has 
also been progress in the implementation of anti-corruption reforms, but immediate actions 
are  needed  to  ensure  completions,  full  implementation  and  sustainability  of  these  reforms. 
The  independence  and  capacity  of  National  Anti-Corruption  Bureau,  the  Specialised  Anti-
Corruption  Prosecution  and  the  National  Agency  for  the  Prevention  of  Corruption  (NAPC) 
must  be  ensured  and  reinforced,  reversing  the  current  trends  undermining  their  work. 
Effective  verification  of  e-declarations  was  one  of  the  unmet  policy  conditions  of  the  third 
macro-financial assistance programme, due to which it was not possible to disburse its third 
tranche. It remains a key issue for the credibility of anti-corruption reforms.  

The  continued  lack  of  convictions  in  high-level  anti-corruption  cases  is  of  serious  concern. 
These  shortcomings  are  expected  to  be  remedied  by  the  envisaged  establishment  of  a 
specialised High Anti-Corruption Court as recommended by the Council of Europe's Venice 
Commission. Ukrainian authorities have to reinforce their efforts to ensure the independence, 
operation capacity and full effectiveness of the anti-corruption institutions. Full investigation 
of  the  large-scale  fraud  at  Privatbank  prior  to  its  nationalisation,  eventual  prosecution  and 
conviction of those responsible, along with the recovery of misappropriated funds, are still to 
be conducted. 

Ukraine has a vibrant civil society that plays an active role in promoting, design and oversight 
of reforms, especially in the area of anti-corruption, judiciary, decentralisation, human rights, 
media, health and energy. However, some civil society actors have also denounced increased 
pressure on their activity, undermining their work and credibility. 

In  the  territory  under  the  control  of  Ukrainian  authorities,  human  rights  are  generally 
respected  and  fundamental  freedoms  upheld.  Still,  a  number  of  concerns  persist,  relating  to 
discrimination  on  various  grounds,  cases  of  torture  and  ill-treatment,  and  the  lack  of 
protection of vulnerable groups.  

The  ongoing  conflict  in  the  east  of  the  country  and  the  illegal  annexation  of  the  Crimean 
peninsula by Russia continue to take a heavy toll on the human rights situation, resulting in 
grave violations of human rights and international humanitarian law. Referring to the impact 
of  the  ongoing  conflict,  Ukraine  has  notified  of  derogations  from  some  of  its  obligations 
under the International Covenant on Civil and Political Rights and the European Convention 

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of Human Rights. A mechanism of periodic independent review of these derogations has been 
established, but no review has been conducted. 

As  a  result  of  the  conflict,  there  are  approximately  1.6  million  internally  displaced  persons 
(IDPs), who continue to suffer from socio-economic difficulties and lack of access to certain 
political and social rights. The EU has called on the Ukrainian government to resume social 
assistance  and  pension  payments.  In  2017,  the  authorities  adopted  a  long-term  integration 
strategy for IDPs. 

The  Government  has  adopted  an  ambitious  and  comprehensive  National  Human  Rights 
Strategy and Action Plan in 2015. It has clear timelines and definition of responsibilities, but 
its  implementation  continues  to  proceed  slowly,  with  only  a  quarter  of  the  actions 
implemented within the envisaged timeline. Adequate resources and political will are needed 
to ensure its implementation.  

The investigations into the killings at Maidan and the violent events in Odesa on 2 May 2014 
have proceeded very slowly and culprits have still not been brought to justice. The Council of 
Europe's  International  Advisory  Panel  has  identified  a  number  of  shortcomings  in  these 
investigations, which need to be addressed. 

Minority  rights  remain  overall  protected.  The  adoption  in  September  2017  of  a  framework 
law on education has sparked concerns by some minorities and their kin-states. These remain 
to  be  addressed  by  taking  into  account  fully  the  Venice  Commission  recommendations,  in 
dialogue with representatives of the minorities.  

Legislative changes  still  to  be  made  include  a  ban  on  all  forms  of  discrimination,  including 
discrimination based on the grounds of sexual orientation and gender identity, as well as the 
development  of  the  new  Labour  Code,  keeping  the  anti-discrimination  provisions  of  the 
current Labour Code in the new one when adopted, and the new anti-discrimination law.  

Gender-based  discrimination  and  domestic  violence  remain  a  challenge.  The  ratification  of 
the  Istanbul  Convention  remains  pending.  In  March  2017,  the  Vice  Prime  Minister  for 
European  and  Euro-Atlantic  Integration  has  been  appointed  to  coordinate  the  Government's 
gender equality policies and a post of gender policy commissioner has been created.  

EU-Ukraine relations 

After  almost  three  years  of  provisional  application  of  different  parts  of  the  AA/DCFTA,  it 
entered  into  force  on  1  September  2017.  Effective  and  swift  implementation  of  the 
AA/DCFTA provides a clear path for Ukraine's political association and economic integration 
with the EU.  

On  11  June  2017,  a  visa  free  regime  for  short  term  stays  in  Europe  for  Ukrainian  citizens 
holding  biometric  passports  came  into  force.  The  First  Report  under  the  Visa  Suspension 
Mechanism concluded on Ukraine that overall, the visa liberalisation benchmarks continue to 
be  fulfilled.  However,  immediate  actions  need  to  be  taken  in  order  to  ensure  full 
implementation and sustainability of past reforms, in particular as regards the anti-corruption 
benchmark. 

Conclusions 

Ukraine's  constitution  and  legislation  enshrine  the  principles  of  democratic  pluralism  and 
multi-party political system, the rule of law and respect of fundamental rights and freedoms. 
Ukraine  is  an  open  society,  where  elections  are  held  freely  and  largely  in  line  with 
international standards, although Ukrainian authorities should proceed with the reform of the 
electoral legislation. Media freedom has improved, but further work is needed to strengthen 
the pluralistic media environment. The most severe human rights violations take place in the 

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areas  not  under  the  control  of  the  Government,  following  the  illegal  annexation  of  the 
Crimean  peninsula  and  the  conflict  in  the  east  provoked  by  Russia's  destabilising  actions. 
Ukraine has made considerable reforms of the judiciary and the fight against corruption, but 
immediate actions are needed to ensure completion, full implementation and irreversability of 
these reforms.  

The  EU  remains  fully  committed  to  supporting  Ukraine  in  its  reform  efforts  together  with 
other international  donors.  The  envisaged  financial  assistance  should help  keep  the  current 
reform  momentum  to  the  extent  that  its  effective  disbursement  will  be  conditional  on 
continued  progress  with  key  reforms.  In  this  context,  the  European  External  Action  Service 
and the Commission stand ready to provide a further detailed assessment of the situation of 
democracy, human rights, rule of law and reform in Ukraine throughout the lifecycle of the 
proposed  Macro-Financial  Assistance  operation,  whose  political  preconditions  may  be 
considered as being fulfilled. Delivering on key anti-corruption and governance reforms will 
be indispensable if the Macro-Financial Assistance operation is to be successfully completed. 

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