The mission of the International Monetary Fund (IMF) completed its work in Kyiv on February 14, but more difficult talks are ahead. Ukraine still has to prove that it qualifies for the next $1.6 billion IMF loan tranche. The government of President Viktor Yanukovych like its predecessor, whose economic populism prompted the IMF to freeze assistance in late 2009, failed to meet its commitments as many reforms remain unfinished. The IMF approved a $15 billion loan for Ukraine last July and $3.4 billion arrived last year in two tranches. If the tranche expected in March is delayed, the schedule may be changed so fewer than four tranches would be received this year. This may strain public finances ahead of the crucial Euro-2012 soccer championship, a costly event which Ukraine will co-host with Poland.
The IMF mission stated on February 15 that though the economy performed well last year and the economic program supported by IMF loans had been broadly on track, more discussions would be held. In particular, agreement was yet to be reached on household gas price hikes. The mission said a more gradual schedule of hikes was agreed than planned earlier (Interfax-Ukraine, February 15). Last year, the government promised to hike gas prices for households by 50 percent from April 2011, in addition to a 50 percent hike last August. It is not clear how the combined deficit of the government and the debt-ridden national oil and gas company Naftohaz Ukrainy would be narrowed to 3.5 percent this year as promised to the IMF without the April hike.
On February 17, the IMF released on its website documents dated December 10, 2010 containing Ukraine’s obligations under the mutually agreed reform plan. The publication of the documents had been delayed by the IMF apparently at the government’s request in order to avoid negative reactions in Ukraine as many of the reforms agreed with the IMF are likely to prove unpopular. The agreements with the IMF were reached in the wake of the popular protests against a new tax code last fall so the precaution was apparently justified. Now that more than two months have passed, it is clear than many obligations have not been met. The government promised a 5.5 percent state budget deficit in 2010, yet the target was exceeded. It pledged to approve pension reform by January 2011, however parliament plans to pass it only in March. The government admitted that Naftohaz’s deficit would be reduced to 0.4 percent of GDP in 2011 rather than to zero as promised earlier. At the same time, the government pledged to hike household gas prices by 50 percent in April. However, the government made clear to the IMF mission this month that this plan was abandoned (Kommersant-Ukraine, February 21).
Ukraine’s central bank reportedly rejected the IMF’s advice that only one of the three mid-sized banks which were bailed out in 2009, Ukrhazbank, should be rescued. Instead, the government is going to revive at least two of these banks plus the large ailing bank Nadra. In order to rescue Nadra, the central bank plans an increase in the capital of the state-owned Oshchadbank so that Oshchadbank should issue a loan to the equivalent of $440 million to Nadra while the same sum should be contributed by private investors. Another large state-owned bank, Ukreximbank, should lend to Rodovid, which is in the worst condition among the three bailed-out banks. Later, Rodovid should be transformed into a “bad bank” for the toxic assets of Ukrgazbank, the Kyiv bank and possibly Nadra, while Kyiv would be merged with Ukrgazbank, according to the plan. Later on, IPO’s would be conducted for several of those banks. The IMF has yet to approve the plan (Zerkalo Nedeli, February 19).
Central bank governor, Serhy Arbuzov, confirmed most of these developments in a recent interview. Arbuzov also said the IMF was recommending remedies which had been used elsewhere but could not be implemented in Ukraine (Zerkalo Nedeli, February 26). The government has invested over $2 billion in Rodovid, Ukrgazbank and Kyiv since 2009, but an audit conducted in late 2010 showed that more should be invested. Nadra has been in limbo since late 2008 while the central bank’s plan has been to rescue it jointly with the energy and chemical tycoon Dmytro Firtash who co-owns the RosUkrEnergo (RUE) gas intermediary with Gazprom. International and independent domestic experts have been against state participation in Nadra, arguing that either Firtash should rescue the bank on his own or Nadra should be liquidated otherwise it will continue to drain public funds. The government has invested over $2 billion in Rodovid, Ukrgazbank and Kyiv since 2009, but an audit conducted in late 2010 showed that more must be invested. Nadra has been in limbo since late 2008 while the central bank’s plan has been to rescue it jointly with the energy and chemical tycoon Dmytro Firtash who co-owns the RosUkrEnergo (RUE) gas intermediary with Gazprom. International and independent domestic experts have been against state participation in Nadra, arguing that either Firtash should rescue the bank on his own or Nadra should be liquidated otherwise it will continue to drain public funds.
Firtash should have cash to rescue Nadra as RUE will receive 12 billion cubic meters (bcm) of gas from Naftohaz this year as emerged from the December 10 documents released by the IMF. Last year, courts ruled that the former Ukrainian government illegally seized 11 bcm of gas from RUE in early 2009. Naftohaz was ordered to return the gas plus damages. Naftohaz started returning the gas to RUE last December and RUE will sell it in Europe. Meanwhile, former Prime Minister Yulia Tymoshenko, who reportedly thwarted Firtash’s intention to take over Nadra in early 2009, has opposed the new plan for Nadra. Tymoshenko predicted that the plan to help Firtash rescue Nadra with the help of Oshchadbank would spark a corruption scandal (www.liga.net, February 21).