March 25 (Bloomberg) -- Ukraine is completing bailout talks with the International Monetary Fund to avert a default and curb damage to the economy from a four-month political crisis.
Loan negotiations began three weeks ago. To speed up the process, Ukrainian Premier Arseniy Yatsenyuk canceled a trip to The Hague, where world leaders are discussing the standoff with Russia over his country. The IMF will announce the results of its mission tomorrow, with Ukraine seeking as much as $20 billion, Finance Minister Oleksandr Shlapak said today in Kiev.
The government, which came to power after an uprising ousted President Viktor Yanukovych last month, is grappling with an economy threatening to slide into the third recession since 2008, dwindling reserves and a dropping currency. While Yatsenyuk has pledged to take any steps needed for an IMF lifeline, unpopular measures would risk further destabilizing the country, said Olena Bilan, an economist at Dragon Capital.
“The government is willing to implement reforms and meet the IMF’s requirements,” Bilan said by phone from Kiev. “The government needs to pay special attention to compensation mechanisms. A sharp drop in purchasing power may fuel the ongoing instability in eastern Ukrainian regions.”
The Ukrainian hryvnia has plunged 24.8 percent against the dollar in 2014, the most among more than 170 currencies tracked by Bloomberg. It extended its decline today, weakening 2.8 percent to 10.95 per dollar as of 4:29 p.m. in Kiev.
The government Eurobond due in June traded at 97 cents on the dollar, with the yield more than 6 percentage points lower at 24.4 percent, compared with as high as 55.7 percent on March 12, according to data compiled by Bloomberg. The yield was 5.3 percent on Jan. 16.
Yatsenyuk, approved as premier by lawmakers on Feb. 27, described his task as a “kamikaze” mission, saying the country is in a “great mess,” with an empty treasury, unpaid pensions and foreign-currency reserves having been “robbed.”
Ukraine is seeking its third bailout from the Washington-based lender since 2008. 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. At the same time, in recent statements it said the package should seek to protect the poor and vulnerable.
After failed attempts to revive loan talks last year, directors on the IMF board said Ukraine should be offered smaller amounts and be asked for “strong prior actions,” or measures that need to be implemented before receiving funds.
Ukraine has already made progress by introducing a more flexible exchange-rate policy and can make the gas-price increase more palatable to the public by blaming it on Russia, according to Viktor Szabo, who helps oversee $10 billion in emerging-market debt at Aberdeen Asset Management in London and has sold his Ukrainian holdings.
“I think Washington will pressure the IMF to make a deal as soon as possible, just to hit Russia,” Szabo said. “The cut in the budgetary spending will be more difficult, especially if there was an increase in military spending.”
The IMF mission “has made significant progress in discussing with the Ukrainian authorities the policies,” the lender said March 20, adding that cooperation “has been excellent.”
Ukraine’s government has stressed the urgency of the talks as Russia’s annexation of the Crimea region and troop buildup on the border with its western neighbor are weighing on the country’s economy and financial system.
The cabinet sees the economy contracting 3 percent this year, while reserves have sunk to a nine-year low. Shlapak said the state budget deficit is planned at 4.8 percent of gross domestic product. The central bank imposed limits on foreign-currency purchases last month, before Yanukovych’s ouster, after interventions failed to alleviate pressure on the hryvnia.
Russia in December agreed with Yanukovych on a $15 billion bailout and to cut the price of gas it sells to Ukraine by a third. The Kremlin withdrew that discount, as well as another one it granted in 2010, doubling the price Ukraine may have to pay starting next month, according to Yatsenyuk.
Russia also stopped its bailout after disbursing the first $3 billion tranche last year. The first interest payment on the loan, which was granted in the form of a two-year Eurobond, is due in June. Ukraine owes a total of about $13.6 billion over the next 11 months.
“A default -- maturity extension -- on June bonds is not off the table, so we would be cautious to buy now,” said Szabo, who sold off Ukrainian debt, including corporate bonds, over the last month.
Ukraine, which depends on Russia for more than half of its gas needs, plans to import about 30 billion cubic meters this year, Energy Minister Yuriy Prodan said this month. The price for households may rise by 40 percent, Prodan said last week.
Ukraine may receive the first tranche from the IMF next month, according to Finance Minister Oleksandr Shlapak. Ukraine needs $6.2 billion in the second quarter to service its foreign-currency denominated debt, repay gas arrears and purchase gas, according to Bilan at Dragon Capital.
Investors anticipating a bailout deal helped propel Ukraine’s Eurobonds to their longest winning streak this year. IMF Managing Director Christine Lagarde expects a financing plan for Ukraine within “days,” the Wall Street Journal reported.
“We believe the positive outcome is very likely,” Serhiy Yahnych, an analyst at BNP Paribas SA’s Ukrsibbank unit in Kiev, wrote in a note to clients yesterday. “The delay could be caused by efforts to make the envisaged austerity program as painless as possible, taking into account the ensuing political and social risks.”