Ukraine Awaits IMF on Bailout as U.S., Allies Warn Russia

The International Monetary Fund and Ukraine are poised to announce a bailout agreement as the U.S. and European allies continue warning Russia against further threats to Ukrainian sovereignty.

A preliminary accord will probably be unveiled today, Olga Lappo, a spokeswoman for Ukrainian Prime Minister Arseniy Yatsenyuk, said by phone. Battling dwindling reserves and the threat of its third recession since 2008, Ukraine wants a loan of $15 billion to $20 billion from the Washington-based lender, Finance Minister Oleksandr Shlapak said this week.

“Investors understand that the IMF agreement will come sooner or later, but the key questions is when,” said Alexander Paraschiy, head of research at Concorde Capital investment bank. “If IMF money doesn’t arrive in the coming month, cooperation with the IMF will not save Ukraine.”

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 risk of further Russian military incursion. Unpopular measures like those in the IMF-endorsed austerity campaigns that triggered protests and toppled some governments, including those in Greece and Spain, during the euro debt crisis may foment further unrest.

Greek stabilization may be a model for Ukraine, German Finance Minister Wolfgang Schaeuble said yesterday 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.

Economic Contraction

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.

The Ukrainian hryvnia has plunged 26 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 last night in Kiev.

“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.”

‘Tough Response’

As the government in Kiev pursued IMF support, European leaders joined U.S. President Barack Obama in warning Russia it would face further penalties if it failed to de-escalate the crisis sparked by its annexation of Crimea from Ukraine.

German Chancellor Angela Merkel said yesterday that European allies would move forward with a “tough response” if Russia escalates tensions, though they still hope to avoid imposing broader economic sanctions.

“Russia must know that if certain international treaties are violated further, then we will be ready,” Merkel said after meeting in Berlin with South Korean President Park Geun Hye.

Obama said yesterday the U.S. and Europe are at “a moment of testing” as Russia challenges the ideals of democracy, free markets and international law.

“Once again, we are confronted with the belief that bigger nations can bully smaller ones to get their way, that recycled maxim that might makes right,” he said in a speech in Brussels. “We must never take for granted the progress that has been won here in Europe.”

Rallying Opposition

Obama’s speech capped three days of rallying opposition to Russia’s takeover of Crimea in The Hague and in Brussels, shuttling from the Nuclear Security Summit, an emergency meeting with Group of Seven leaders, a sit-down with the presidents of the European Commission and European Union as well as NATO’s secretary general.

Russian President Vladimir Putin has consolidated control over the Black Sea peninsula 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.

The situation in Ukraine has neither an easy answer nor a military solution, Obama said. Even so, he said, every member of the North Atlantic Treaty Organization “must step up and carry its share of the burden” for the alliance’s collective defense and its role in maintaining international security.

U.S. Stocks

In addition to asset freezes and visa bans imposed on Russian, Crimean and Ukrainian officials last week, 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.

As Obama spoke yesterday, U.S. stocks fell, erasing earlier gains, on investor concern that the conflict may escalate. The Standard & Poor’s 500 Index lost 0.7 percent to 1,852.56 in New York, after earlier climbing to within three points of its record closing level reached March 7.

In trading today, the MSCI Asia Pacific Index dropped 0.6 percent to 134.86 as of 11:47 a.m. in Tokyo after rising 1 percent yesterday.

Before Obama’s speech, Russian markets had rebounded to levels seen before Putin moved to annex Crimea. The benchmark Russian Micex Index climbed 1.9 percent to 1,349.39, the highest since March 5 by the close, though it’s down 10 percent this year.

Gas Subsidies

The ruble rose 0.2 percent yesterday to 41.5827 against the central bank’s dollar-euro target basket. It’s down 7.5 percent against the dollar in 2014, the second-worst performer among 24 developing-market currencies tracked by Bloomberg.

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 Kiev yesterday, negotiations with an IMF team focused on resolving state natural gas subsidies, according to Ukraine’s Deputy Economy Minister Anatoliy Maksyuta. In the past, the IMF has 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.

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.

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