Ukraine's Economy Caught Between West and Russia

NEW YORK (TheStreet) -- Ukraine has received a $27 billion financial lifeline from the International Monetary Fund.

Two other factors, however, could offset the effectiveness of this aid from the West: the economic reforms mandated by the IMF and Russia's control over everyday expenses in Ukraine.

The country is a pawn in Russia's new cold war with the West, and Russia's recent annexation of Crimea has heightened geopolitical tensions.

The agreement announced Thursday expedites transfers of funds, giving Ukraine a buffer to help pay for military costs should Russia push further into Ukrainian territory.

The agreement announced Thursday includes $14 billion to $18 billion in loans for two years, contingent on the country's ability to enact tough economic reforms.

The IMF estimates those reforms, in combination with the aid, will prevent economic contraction of up to 10% this year. Ukraine  remains on the edge of bankruptcy, however, something new Prime Minister Arseny Yatsenyuk has reiterated to parliament the past few weeks.

The terms of the deal have also led the country to adopt a flexible exchange rate, something the IMF estimates could fuel inflation of 12% to 14% this year.

This move was made in an effort to stop Ukraine from depleting its foreign exchange reserves by propping up its currency, the hryvnia, and attempting to stave off public discontent over a declining currency.

Meanwhile, the cost of Russian natural gas could add significantly to Ukraine's inflation problem.

Russian leaders have backed an end to Ukraine's discount from Gazprom, Russia's largest natural gas company.

If you liked this article you might like

The Weight of the World Is Bringing Down U.S. Equities: Here's How to Play It

Want to Know Why Japan Stocks Are Lagging? These Charts Tell the Story

Emerging Markets, Long Beaten Down, Are Poised to Explode Higher -- Here's Why

The Fed Is Looking at the Wrong Jobs Numbers; Here's What Yellen Should Watch

European Banks Bottom On Renewed Optimism