March 28 (Bloomberg) -- An hour after Ukraine’s lawmakers yesterday passed the laws needed to unlock a $27 billion international lifeline, protesters chanting “Revolution!” gathered by parliament, forcing deputies to evacuate.
The demonstration, sparked by one of the nationalist Pravyi Sektor group’s leaders being killed in a firefight with police this week, shows the extent of the challenges Ukraine’s new leaders must overcome to keep the bailout money flowing. While last night’s protest dispersed without incident, activists gathered at the parliament building today again.
Weeks after an uprising ousted Ukraine’s previous leader, the government is grappling with President Vladimir Putin’s takeover of Crimea and a Russian troop buildup on its eastern border. The heightened tensions, which sparked European and U.S. sanctions and rekindled memories of the Cold War, risk curbing Prime Minister Arseniy Yatsenyuk’s ability to fulfill his promises to IMF, which halted two loans to Ukraine since 2008 for failure to meet terms.
“Political risks are likely to remain elevated and could flare up, particularly in eastern Ukraine,” Barclays Capital said yesterday in an e-mailed note. “Implementation risks to the reform program, possibly exacerbated by retaliatory measures from Russia, are also meaningful.”
Ukraine’s Eurobond due in June gained to 98.13 cents on the dollar as of 11:19 a.m. in Kiev, pushing the yield, which reached 55.7 percent on March 12, down 8 basis points, or 0.08 percentage point, to 18.7 percent, the lowest since Feb. 10, data compiled by Bloomberg showed. The hryvnia, the worst performer against the dollar in 2014 with a 26 percent decline, weakened 0.8 percent to 11.2 per dollar.
Yatsenyuk’s cabinet yesterday agreed on a preliminary deal with the International Monetary Fund, which will supply as much as $18 billion. In return, Ukraine must slash spending and raise household heating tariffs in the wake of the worst political crisis since independence in 1991.
Already dealing with a third recession in six years and dwindling reserves, Ukraine’s acting President Oleksandr Turchynov says the Kremlin is fomenting unrest in the ex-Soviet republic’s eastern provinces, where Russian is widely spoken. Putin massed thousands of troops on Ukraine’s eastern border and warned he may intervene to defend Russian speakers’ rights.
Ukraine’s parliament today set up a special commission to investigate the death of Oleksandr Muzychko, the killed Pravyi Sektor leader, which will include non-government organizations.
“Yesterday, there was an attempt to destabilize the situation in Kiev,” Turchynov told lawmakers. “People, on purpose or not, supported an aggressor that’s increasing its forces on our borders. In order to avoid provocations, the parliament should ensure clear and transparent investigation.”
Russia signed a $15 billion bailout for Ukraine in December with now-deposed President Viktor Yanukovych, before halting the rescue after the first $3 billion disbursement. The Kremlin also withdrew a one-third discount on natural gas prices, as well as another granted in 2010, doubling the price Ukraine may have to pay for the fuel starting in April, according to Yatsenyuk. Ukraine depends on Russia for more than half of its gas needs.
Russia, which doesn’t recognize the new government in Kiev, will curb Ukrainian exports through trade restrictions that could lower economic growth by 1 percentage point, according to Yatsenyuk. The economy will shrink 3 percent in 2014 and inflation may be as high as 14 percent, he said yesterday.
Russia’s stance on its neighbor, as well as the austerity plan, “serve as a catalyst for further social dissatisfaction in the near future,” Nomura Holdings Inc. analysts Dmitri Petrov and Peter Attard Montalto wrote in a research note.
Putin’s tactics in Ukraine, particularly the annexation of Crime, have sparked the worst standoff with the U.S. and its allies in more than 20 years. President Barack Obama said yesterday that Russia’s energy and finance industries are possible targets if it moves deeper into Ukraine.
Under the IMF deal, Ukraine will narrow the budget gap to 2.5 percent of gross domestic product by 2016 and raise retail energy tariffs toward their full cost. The central bank plans to shift to a flexible exchange rate and inflation targeting.
“This package of laws is very unpopular, very difficult, very tough -- reforms that should have been done in the past 20 years,” said Yatsenyuk, who last month called his task as premier a “kamikaze” mission because of an empty treasury and foreign-currency reserves that have been “robbed.”
In a sign of opposition to some of the IMF’s demands, lawmakers yesterday rejected a tax-overhaul bill before eventually passing it in a second vote.
That reluctance echoes Ukraine’s history of derailing rescue packages. The IMF froze loans to the nation of more than 40 million on two occasions since 2008 after governments balked at measures they’d agreed to carry out, such as cutting utilities subsidies to ease the pressure on the budget.
The government in Kiev reached a staff-level agreement with the Washington-based lender for a two-year loan of $14 billion to $18 billion. The cabinet must complete “prior actions” to receive the first installment as early as April.
The accord will clear the way for a planned 1.6 billion euros ($2.2 billion) in emergency aid from the European Union, European Commission President Jose Barroso said March 5.
The EU has also pledged project loans and grants that could reach 11 billion euros over seven years. The European Bank for Reconstruction and Development said today that it would increase investments in Ukraine to 1 billion euros a year and would resume lending for state-run projects.
The U.S. has also pledged to provide Ukraine with $1 billion in loan guarantees and $150 million in direct assistance.
While investors in Ukraine are pleased that the IMF pact doesn’t impose losses on bondholders, their enthusiasm may give way as May 25 presidential elections approach, according to Arko Sen, a London-based analyst at Bank of America Corp.
“There was substantial market concern about an imminent restructuring, which is why we’re seeing the ongoing relief rally in Ukraine assets,” he said yesterday by e-mail. “That can run a bit further in the near term, before giving way to the risks of program execution and upcoming elections against the backdrop of rising domestic tariffs and a weak economy.”
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