Ukrainian President, Viktor Yanukovych, launched his long-awaited reform program with great fanfare, addressing the nation and parliamentarians from the lavish Soviet-style Ukraina palace in central Kyiv on June 3. The document, which details reform plans in the economic sector for 2010-2014, prepared with the help of the international consulting company McKinsey, is designed primarily to impress the International Monetary Fund (IMF), which the Yanukovych team asked for multi-billion dollar loans. However, the IMF doubts that it is ambitious enough. Kyiv signaled that if it failed to convince the IMF, it would rely on financial support from Moscow.
The plan provides for lowering the state budget deficit from 5.3 percent in 2010 to 2 percent by 2014, while public debt should be stabilized at 45 percent and inflation is expected to decline from 16 percent in 2009 to 5-6 percent by 2014. In line with IMF requirements, the plan includes increasing the pension age. It is scheduled to start repaying, from August 2010, the multi-billion dollar value-added tax debt to exporters accumulated in 2008-2010, which is one of the main hurdles to foreign investment. A new tax code, to be passed this year, aims to simplify taxation and bring it closer into line with European standards. The share of the public sector in the economy will diminish from 37 percent to 20-25 percent. Talks on a free trade zone with the European Union are scheduled to be completed in 2012 (www.zn.ua/2000/2020/69596). The plan can be summed up in three key words: liberalization, deregulation and Europeanization.
Even Yanukovych’s critics agree that the plan is good, but there are doubts about the seriousness of the government’s intentions. Former Finance Minister, Viktor Pynzenyk, a liberal economist and fierce critic of both Prime Minister, Mykola Azarov’s, cabinet and their predecessors, suggested that the plan was drafted only to coax the IMF into issuing more loans. He pointed to discrepancies between the plan and the state budget for 2010, whose real deficit may amount to as much as 16 percent (UNIAN, June 3). IMF representative in Ukraine, Max Alier, told Yanukovych that the reform plan was not ambitious enough, particularly in regard to the budget deficit and inflation, and that it lacked specific deadlines. Yanukovych promised to coordinate the plan’s implementation with the IMF (www.liga.net, June 2).
Ukraine wants the IMF to issue a new 2.5 year loan, whose size is yet to be determined. It is expected to range from $12 billion to $20 billion, replacing the $16.4-billion stand-by loan from which almost $11 billion was received in 2008-2009. Ukraine would have defaulted without IMF financing during the difficult 2009, when state coffers were almost empty and Russian gas prices grew. IMF money is no less needed because Azarov’s cabinet fell into the same trap as its predecessors: it refused to cut spending in 2010 for fear of losing popularity, while revenues for the budget are still hard to collect in an economy which is only slowly emerging from the financial crisis. The 15 percent decline in GDP in 2009 will not be addressed soon as GDP is expected to grow by no more than 4 percent this year.
Deputy Prime Minister, Serhy Tyhypko, responsible for IMF loans in the Azarov cabinet, admitted in an interview with ICTV on June 7 that Ukraine might fail to qualify for IMF loans. However, he said that “nothing dramatic will happen” in that case, other than the finance ministry issuing more Treasury bills and additional loans would need to be taken from Russia.
Russia has come to the rescue long before the completion of talks with the IMF, whose mission is scheduled to arrive in Kyiv on June 21, consequently a final decision on loans will not be taken earlier than the middle of summer. Ukraine has already received a $2 billion loan from the Russian state-controlled VTB bank. The deal was shrouded in Byzantine secrecy. On June 10, several Russian and Ukrainian media outlets reported, citing anonymous sources, that VTB issued the loan for six months at the under-market rate of 6.7 percent. VTB and the Ukrainian government neither confirmed nor denied the reports. On June 11, Russian Ambassador, Mikhail Zurabov, “conceded” that the loan “may have been issued” by VTB but he refused to provide any details (UNIAN, June 11). The loan is evidently aimed at temporarily filling gaps in the budget in the absence of IMF loans.
The failure to secure IMF financing would be a red flag for Western creditors and investors alike. The niche will be filled by Russia which is not afraid of the difficult economic situation in Ukraine as it is guided by geopolitical and long-term economic considerations, while for Yanukovych, immediate business and electoral considerations dominate. This was demonstrated by the April “fleet-for-gas” deal in which Ukraine received a 30 percent gas price discount in exchange for extending the Black Sea Fleet basing agreement in Sevastopol by 25 years (EDM, April 28). Moscow has already suggested merging several industries in both countries, including nuclear energy, oil and gas, aerospace and ship-building industries. Given the differences in size between the two economies, such mergers would be tantamount to takeovers by Russia.