March 26 (Bloomberg) -- Ukraine and the International Monetary Fund will probably make an announcement tomorrow on a bailout, the government said, as the U.S. and Europe warned Russia it faces more sanctions if the Crimea crisis intensifies.
“Most likely it will be tomorrow,” Ukrainian Prime Minister Minister Arseniy Yatsenyuk’s spokeswoman, Olga Lappo, said by phone when asked when the government and the Washington-based lender will unveil an agreement. Talks today in Kiev focused on resolving state natural gas subsidies, according to Deputy Economy Minister Anatoliy Maksyuta.
Battling dwindling reserves and the threat of a third recession since 2008, Ukraine wants a loan of $15 billion to $20 billion, Finance Minister Oleksandr Shlapak said yesterday.
Ukraine’s cabinet, in power since pro-Kremlin President Viktor Yanukovych was ousted last month, wants to stabilize the country after four months of political crisis, while facing the threat of further Russian military incursion. Unpopular measures like those in the IMF-endorsed austerity campaigns that triggered protests and toppled governments from Greece to Spain during the euro debt crisis may foment further unrest.
Greek stabilization may be a model for Ukraine, German Finance Minister Wolfgang Schaeuble said today in remarks in Duisburg, Germany. “If ever we were to reach a situation in which we had to stabilize Ukraine, we would have many experiences from Greece” to draw on, Schaeuble said.
Any agreement with the IMF would be preliminary. Under the lender’s procedures, the negotiators have to return to Washington and write a report for management and for the executive board, which would meet in following weeks to approve the loan package.
After failed attempts to revive loan talks last year, IMF board directors said Ukraine should be offered smaller amounts and be asked for “strong prior actions,” or measures to be implemented before receiving funds.
Yatsenyuk’s government is bracing for an economic contraction that Shlapak forecast at 3 percent this year. The prime minister, who has compared his cabinet to a political “kamikaze,” has heralded decisions to cut subsidies and welfare payments and said he’s ready to be “the most unpopular prime minister” in history.
“A deal with the IMF is crucial to prevent bankruptcy and more political turmoil,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by phone. “But this won’t bring back growth. For this we need to figure out what economic reforms are needed and which of those are politically feasible.”
The Ukrainian hryvnia has plunged 24.8 percent against the dollar in 2014, the most among more than 170 currencies tracked by Bloomberg. The yield on the government 10-year dollar bond fell 13 basis points, or 0.13 percentage point, to 9.44 percent at 9:45 p.m. in Kiev.
In the past, the IMF recommended Ukraine phase out state subsidies that keep household gas prices below market levels and let the hryvnia weaken, which would help make exports more competitive. Ukraine needs the aid to pay back debt, including a $1 billion bond maturing in June, said Alexander Paraschiy, head of research at Concorde Capital investment bank.
“Investors understand that the IMF agreement will come sooner or later, but the key questions is when,” Paraschiy said. “If IMF money doesn’t arrive in the coming month, cooperation with the IMF will not save Ukraine. It will save it only if cooperation starts right now.”
As the government in Kiev pursues aid to avert default, President Barack Obama warned today that “Russian actions in Ukraine aren’t just about one country” and that the Kremlin is challenging the U.S. and allies. The White House and the European Union imposed sanctions on Russian officials and threatened more if Putin fails to ease the crisis.
“If Russia stays on its current course the costs for the Russian economy will continue to grow,” Obama told reporters at press conference in Brussels after meeting EU leaders. There will be “more sanctions” if Russia keeps going, he said.
Russia has consolidated control over the Black Sea peninsula Crimea and is massing forces along the border with Ukraine in the most serious conflict with the U.S. and its allies since the collapse of the Soviet Union in 1991.
Obama said there are “very real contingency plans for all NATO members” and that officials of the 28-member alliance will meet to review military planning next month.
“Neither Ukraine or Georgia are currently on a path to NATO membership,” Obama said. Both countries have had parts of their territory seized by Russia or Russia-backed forces.
While U.S. and European officials say sanctions are beginning to have an effect, Russian assets have rebounded from losses since Crimea’s annexation. Russia’s Micex stock index, down 10 percent this year, rose 1.9 percent to 1,349.39 today in Moscow.
The ruble rose 0.2 percent to 41.5827 against the central bank’s dollar-euro target basket. 24. It’s down 7.5 percent against the dollar in 2014, the second-worst performer among 24 developing-market currencies tracked by Bloomberg.
The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, climbed 3 percent to 23.02 yesterday. Still, investors have pulled $5.5 billion from Russian equities and bonds this year through March 20, already approaching the total outflow of $6.1 billion for all of 2013, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.
In addition to asset freezes and visa bans against Russian, Crimean and Ukrainian officials, Obama and fellow Group of Seven leaders said March 24 they won’t attend a planned Group of Eight summit in the Russian Black Sea resort of Sochi and will instead hold their own meeting in Brussels.
They warned more sanctions may follow and focused on potential military moves by the Kremlin into Russian-speaking areas of eastern and southern Ukraine.
Yet support in Germany, Europe’s biggest economy, for more sanctions, may be waning.
A Stern magazine poll showed 63 percent of Germans oppose further economic sanctions on Russia, with 27 percent backing tougher Russian sanctions.
Some 57 percent of Germans oppose allowing Ukraine to join the EU, with 32 percent calling for the country’s entry, according to the survey by the Forsa polling company. The poll, conducted March 19-20, surveyed 1,002 people and has a margin of error of as many as three percentage points.
To contact the reporters on this story: Daryna Krasnolutska in Kiev at email@example.com; Daria Marchak in Kiev at firstname.lastname@example.org; Sandrine Rastello in Washington at email@example.com