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IMF warns Ukraine on bailout if it loses east

Ukraine, struggling with a stuttering economy as well as an escalating crisis with neighboring Russia, has had its $17 billion International Monetary Fund bailout signed off.

But international lenders are already warning of threats to its funding.

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Christine Lagarde, IMF managing director, warned "further escalation of tensions with Russia and unrest in the east of the country pose a substantial risk to the economic outlook."

Ukrainian soldiers guard a roadblock along the highway on April 24, 2014 near Slovyansk, Ukraine.
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Ukrainian soldiers guard a roadblock along the highway on April 24, 2014 near Slovyansk, Ukraine.

In a staff report on the aid program, published Thursday, the IMF added that a change to eastern Ukraine's borders could force it to adjust its bailout.

"The unfolding developments in the east and tense relations with Russia could severely disrupt bilateral trade and depress investment confidence for a considerable period of time, thus worsening the economic outlook," it said.

"Should the central government lose effective control over the east, the program will need to be re-designed."

The detention of Russia's military attaché to Kiev by Ukrainian police on Thursday morning highlighted concerns that the tensions gripping the country are unlikely to go away.

The IMF predicts Ukraine's economy to shrink by 5 percent at least this year. The country has been hidebound by corruption in business and politics. New anti-corruption laws are expected, but their effectiveness remains to be seen.

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"This is something of a leap of faith for the IMF and is politically driven by key IMF shareholders to support the (interim prime minister Arseniy) Yatseniuk "kamikaze" administration in its reform efforts," according to Tim Ash, head of emerging markets research at Standard Bank.

Ukraine will get $3.2 billion straight away to help stabilize its economy, which was already in trouble before recent unrest in Crimea and Eastern Ukraine. The ratio of public sector debt to gross domestic product, a key measure of how heavily the government is indebted, will rise from 41 percent at the end of 2013 to 57percent at the end of 2014 following the deal. This may trigger a repayment of debt to Russia, which was incurred as part of an earlier planned bailout, interrupted by the ousting of former Ukrainian president Viktor Yanukovych.

Ironically, Ukraine is still heavily dependent on trade with Russia, which is at risk both from the conflict and any sanctions imposed by the West against Moscow.