Ukraine Premier Promises Economic Overhaul to Win IMF Aid

Ukraine's PM Arseniy Yatsenyuk & U.S. President Barack Obama
U.S. President Barack Obama, right, meets with Arseniy Yatsenyuk, Ukraine's prime minister, in the Oval Office of the White House in Washington, D.C. on March 12, 2014. Photographer: Alex Wong/Getty Images

Ukrainian Prime Minister Arseniy Yatsenyuk sought financial aid from Western donors and promised to adopt measures needed to steady an economy beset by a plunging currency and widening budget deficits.

“The new Ukrainian government is ready to deliver changes,” Yatsenyuk said in Washington yesterday during a visit that included a meeting with President Barack Obama and Christine Lagarde, managing director of the International Monetary Fund.

“We fully realize that the IMF program is not a sweet candy, but on the other hand, my country desperately needs real reforms to stabilize the Ukrainian economy,” he said at a forum at the Atlantic Council, a research institute.

The $15 billion IMF loan Ukraine is seeking is key to unblocking aid pledged by the U.S. and the European Union to help stabilize the former Soviet republic after the ouster of its Russian-backed president. The challenge for Yatsenyuk is to convince the IMF it’s serious about overhauling an economy that barely grew in the past two years and tops global rankings of corruption.

“Intentions are good, but the fund doesn’t run on intentions, the fund runs on actions,” said Martin Edwards, an associate professor at Seton Hall University’s School of Diplomacy and International Relations in South Orange, New Jersey. “There are huge problems with that economy.”

Production Falls

The country’s industrial production has fallen for 20 straight months, and energy minister Yuri Prodan said the government faces a 37 percent increase in its bill for Russian natural gas. The economy may shrink by 3 percent this year after failing to grow last year, according to Capital Economics Ltd. in London.

“Even before this latest crisis, Ukraine was a mess beyond description,” Erik Nielsen, chief global economist at UniCredit SpA in London, wrote in a March 9 note. Under governments since 1991, “incompetence -- if not outright extraction of wealth for the political leadership’s own benefit -- seems to have run through these last two decades, leaving little if any growth for the population.”

Ukraine’s gross domestic product adjusted for inflation today is at the same level as two decades ago, while that of Romania and Russia grew by 60 percent and Poland by 130 percent, Nielsen said.

Corruption Index

The country ranked 144th among 177 nations, tied with Nigeria, in the annual Corruption Perceptions Index compiled by Transparency International, a Berlin-based watchdog.

The IMF made two loans to Ukraine since 2008, each time stopping disbursements after the governments at the time balked at measures they had agreed to carry out. A $15 billion lifeline from Russia gave the country breathing space until the aid was suspended following the toppling of President Viktor Yanukovych, who retained Moscow’s support.

Lagarde, after meeting with Yatsenyuk, said she had “a productive discussion” on the policies needed for Ukraine, adding a fund’s team is assessing the country’s economic needs in Kiev. The fund is “keen to help Ukraine on its path to economic stability and prosperity,” she said.

IMF spokesman Gerry Rice today told reporters the team will probably finish its fact-finding mission tomorrow and will then make recommendations on the size and conditions of a potential loan.

Ongoing Crisis

Speaking at the Atlantic Council, Yatsenyuk, 39, said his country is facing “an ongoing economic crisis. ”

Foreign reserves fell to $15.5 billion in February, the lowest in eight years, according to central bank data. The hryvnia has tumbled more than 12 percent this year, the third-worst performance worldwide after the Argentine peso and the Kazakh tenge.

Ukrainian government debt fell for a sixth day yesterday as the government warned that Russia is massing troops near its border. The 2014 note dropped to 91 cents on the dollar, the lowest close on record, before rebounding to 91.52 today. The yield fell 232 basis points to 51.32 percent by 5:39 p.m. in Kiev today.

Russia’s takeover of Crimea, home to its Black Sea Fleet, has sparked the worst crisis with the West since the Cold War as the European Union and the U.S. try to use sanctions to force President Vladimir Putin to retreat.

The IMF has been urging Ukraine to allow a flexible exchange rate, reduce the budget deficit and raise household gas prices to phase out subsidies accounting for 7.5 percent of the country’s economy.

Cut Subsidies

While Yatsenyuk has heralded decisions to cut subsidies and welfare payments and said he’s ready to be “the most unpopular prime minister in the whole history,” his government has already indicated it’s seeking a more lenient approach from the IMF in exchange for the rescue package.

“I think the IMF’s conditions will be the same but the criteria will be milder,” Economy Minister Pavlo Sheremeta said in a March 3 Bloomberg Television interview. The government wants to discuss raising gas prices by a smaller percentage and setting a timeframe for cutting spending, he said.

The European Union offered an 11 billion-euro ($15.3 billion) package of loans and grants in coming years, and the U.S. Senate Foreign Relations Committee yesterday approved a bill that would give Ukraine a $1 billion debt guarantee.

The guarantee “is the first real and concrete step to stabilize the situation in my country,” Yatsenyuk told reporters after the committee vote.

Rescue Package

A total rescue package led by the IMF between $20 billion and $25 billion will help the country fund its current-account deficit and repay external debt coming due this year, though debt may need to be restructured, according to Capital Economics.

With presidential elections in Ukraine scheduled for May, the fund should make a smaller, emergency loan with lighter conditions now and wait before negotiating an unpopular package, Seton Hall University’s Edwards said.

“All politicians want to survive,” he said. “That would suggest give them the money, give them the wiggle room to get through the elections and then talk about serious conditionality after.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE