The International Monetary Fund warned on Tuesday that economically-devastated Ukraine may need an extra $19 billion (14.5 billion euros) in assistance should it fail to quell its brutal pro-Kremlin uprising by the end of next year.
The global lender said it was releasing the second $1.39-billion tranche of its $17.1-billion lifeline despite "major uncertainties" and on the assumption that the ex-Soviet country's Western allies would be ready to pitch in with extra assistance if asked.
"We are assuming that the conflict will begin to subside in the coming months," the Fund's European Department head Poul Thomsen said in his first review of Kiev's compliance with its reform and recovery programme.
"But the balance of risks appear to be tilted to the downside. If this assumption does not hold... the programmes' viability could hinge on larger assistance from Ukraine's international partners."
The IMF added that it has agreed to give Kiev some slack by allowing the government to collect a bigger budget deficit than the one initially approved by its board.
Ukraine won the two-year standby facility after a wave of deadly winter protests toppled the Russian-backed administration and saw Moscow pull the plug on aid it had hoped could keep Kiev permanently out of the European Union's reach.
The rescue formed the heart of a $27-billion package that Ukraine's foreign allies vowed to deliver should the new leaders adopt the deeply unpopular but long-overdue measures to rein in outsized state spending and stamp out communist-era corruption and red tape.
But Ukraine's problems -- big enough to see the economy slip into recession in mid-2012 -- have only mounted from persistent tensions with Moscow that have cut it off from Russian trade and required massive spending on efforts to regain military control of the separatist east.
The fighting has ground vital steel mills and coal mines to a halt that had served as Ukraine's economic engine for more than a century.
The nation of 45 million is now facing the prospect of spending the long winter without crucial Russian gas shipments -- halted during a politically-charged June gas dispute -- and with unemployment running out of control.
The the war-torn country on Tuesday began receiving its first limited quantities of gas from the European Union via Slovakia -- part of a deal brokered by Brussels to reduce Kiev's energy dependence on Russia amid an escalating armed crisis.
But many EU nations have been cautious about irritating the Kremlin by sending the same gas they buy from Russia back to Ukraine.
Russia has issued repeated veiled threats of unspecified measures against countries that send so-called "reverse flows" despite its own decision to cut off its western neighbour's gas.
- Eastern industrial collapse -
The IMF expects the economy to shrink by 6.5 percent and inflation to reach 19 percent this year due to the Ukrainian hryvnia's 40-percent depreciation against the dollar since January.
Analysts attribute the currency collapse to gaping tax revenue shortfalls and the central bank's decision to follow IMF advice and not spend its meagre cash reserves on pricy exchange rate support measures.
Moscow's VTB Capital investment bank said the second tranche's release "is set to calm the local foreign exchange market; however, the external position, including the unresolved gas issues, remains rather fragile."
The hryvnia has clawed back about five percent of its value since hitting an historic low of 13.6 against the dollar ahead of the Fund's second instalment decision on Thursday.
The IMF's Ukrainian economic report card cautioned that this year's growth could decline by a stunning 20 percent in the strife-torn eastern industrial regions of Lugansk and Donetsk.
"The economic situation in the east is very serious," the Fund's Ukrainian mission chief Nikolay Gueorguiev said.
The IMF said it has agreed to give Kiev some slack by allowing the government to collect a bigger budget deficit than the one initially approved by its board.