Ukraine Vows to Curb Reserves Plunge as IMF Repeats Loan Demands

Ukraine pledged to stem declines in its foreign reserves next year as the International Monetary Fund said it wouldn’t ease conditions for a new loan amid a third recession since 2008.

Borrowing will match or exceed the planned $7.1 billion of foreign-denominated debt repayments, Halyna Pakhachuk, head of the Finance Ministry’s department debt, said today at a Fitch Ratings conference in the capital, Kiev. If markets improve, Ukraine may sell $1 billion to $2 billion of Eurobonds in 2014 and may borrow as much as $1 billion from China, she said.

“It’s difficult for Ukraine to tap international markets now as yields exceed 10 percent, while we can borrow at no more than 9 percent,” Pakhachuk said. “That’s why we’re looking for other sources of financing.”

Ukraine’s economy slipped into recession in the third quarter as industrial production plummeted amid weaker demand for exports such as steel. The government has been discussing a third IMF bailout since 2008 for more than a year, rejecting demands by the lender to cut household heating subsidies as President Viktor Yanukovych prepares for elections in 2015.

Yields on Ukrainian dollar debt due 2017 rose to 10.688 percent, the highest level since Oct. 15, as of 5:08 p.m. in Kiev, according to data compiled by Bloomberg. The hryvnia fell to 8.1900 per dollar from 8.1875 yesterday.

IMF Demands

An IMF mission left Kiev this week, with negotiations over a new $15 billion loan continuing. In a statement today, the Washington-based lender urged “ambitious fiscal consolidation” and reiterated demands on energy tariffs and the hryvnia.

“We advise a significant up-front increase in gas and heating tariffs for households and adoption of a schedule for further increases until cost recovery is reached,” it said. “A more flexible exchange rate would boost Ukraine’s export performance and economic growth.”

Ukraine is seeking to sign an association agreement with the European Union next month, a move that’s angered Russia and triggered threats of trade blockages. The 28-member bloc is in talks with the IMF on providing standby financing to Ukraine should the country come under economic pressure from Russia, Reuters reported today, citing unnamed EU officials.

Ukraine’s gross domestic product fell 0.4 percent from the previous three months in the third quarter after shrinking 0.5 percent between April and June. Central bank reserves were at a seven-year low of $21.6 billion at the end of September, down from $29.3 billion a year earlier, as policy makers intervened to support the hryvnia and repay existing IMF loans.

‘Very Conservative’

The Finance Ministry is working on next year’s draft budget, which “will be very conservative” with a deficit of 2 percent of GDP, Pakhachuk said. The government wants to agree on the 2014 gap with the IMF, which forecasts a shortfall of 5.75 this year, she said.

Ukraine plans to trim losses at state-run energy company NAK Naftogaz Ukrainy by increasing natural gas output, cutting the price of fuel imports from Russia and improving energy efficiency.

Russia said today that it may force Ukraine to prepay for gas starting in December because it owes $882 million for supplies dating back to August. Ukrainian Energy Minister Eduard Stavytskyi said the government would resolve the debt issue by tomorrow.

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