Ukraine Unlocks $27 Billion International Aid Deal

Ukraine reached a preliminary deal with the International Monetary Fund to unlock $27 billion in international aid as U.S. lawmakers passed bills imposing more sanctions on Russians linked to Crimea’s annexation.

The government in Kiev reached a staff-level accord with the IMF for a two-year loan of $14 billion to $18 billion, the lender said today in an e-mailed statement. The IMF’s board must still sign off on the package, Ukraine’s third since 2008, and the cabinet must complete “prior actions” to receive the first installment as early as April.

President Barack Obama said the IMF agreement is “a major step forward” for Ukraine’s bid to stabilize its economy. “It provides the prospect for true growth” and is “a concrete signal of how the world is united with Ukraine,” Obama said at a news conference in Rome today.

Ukraine’s government, which came to power after an uprising ousted President Viktor Yanukovych last month, is grappling with an economy threatening to slide into a third recession in six years, dwindling reserves and a weakening currency. Ukrainian asset prices have also suffered as Russia’s takeover of the Black Sea Crimean peninsula sparked European and U.S. sanctions and rekindled memories of the Cold War.

The U.S. Senate and House in Washington passed bills today imposing further sanctions on Russian and Ukrainian officials connected with Russia’s takeover of Crimea. The Senate bill includes about $1 billion in loan guarantees and $150 million in direct aid for Ukraine. The House passed the loan guarantee earlier this month.

UN Resolution

In New York, the United Nations General Assembly approved a non-binding resolution today declaring Crimea’s March 16 referendum on exiting Ukraine and joining Russia as “having no validity” and calling on all states and agencies to not recognize “any alteration of the status” of Crimea.

The resolution had 100 votes in favor, 11 against and 58 abstentions. It doesn’t mention Russia or directly blame or accuse it of violating Ukraine’s territorial integrity.

“The IMF package should be sufficient to prevent the country falling into a full-blown balance-of-payments crisis,” London-based Capital Economics Ltd. said in an e-mailed note. “But the volatile political situation and Ukraine’s poor track record in implementing reforms demanded by the fund mean that there will still be many doubts about whether politicians will be able to push substantial changes through.”

Yields Plunge

The government Eurobond due in June gained to 97.6 cents on the dollar from 96.5 yesterday, pushing the yield, which reached

55.7 percent on March 12, down 7 percentage points to 21.36 percent, data compiled by Bloomberg showed. The Ukrainian Equities Index fell 0.6 percent, while the hryvnia, the worst performer against the dollar in 2014 with a 26 percent decline, advanced to 10.99 from 11.22 before later sliding to 11.12.

As part of the IMF agreement, Ukraine agreed to narrow the budget deficit to 2.5 percent of gross domestic product by 2016 and to raise retail energy tariffs toward their full cost, according to the Washington-based lender. The central bank will shift to a flexible exchange rate and inflation targeting, while the nation will tackle bad debts at banks, it said.

Lawmakers in Kiev approved budget changes and a tax bill today needed for the IMF loan deal.

‘Very Unpopular’

“The country is on the edge of economic and financial bankruptcy,” Prime Minister Arseniy Yatsenyuk said today in Kiev. “This package of laws is very unpopular, very difficult, very tough. Reforms that should have been done in the past 20 years.”

After being voted in by lawmakers last month, Yatsenyuk described his task as a “kamikaze” mission, saying Ukraine is in a “great mess” with an empty treasury and foreign-currency reserves that have been “robbed.” GDP will shrink 3 percent in 2014 and inflation may be as high as 14 percent, he said today.

Approval for the rescue package is “expected in April, following the authorities’ adoption of a strong and comprehensive package of prior actions aiming to stabilize the economy and create conditions for sustained growth,” IMF mission chief Nikolay Gueorguiev said in the statement. Disbursement may start next month, he told reporters in Kiev.

The IMF agreement 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.

‘Powerful Sign’

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.

Russia agreed with Yanukovych in December on a $15 billion bailout and a one-third reduction in natural gas prices. The Kremlin withdrew that discount, as well as another it granted in 2010, doubling the price Ukraine may have to pay for the fuel starting next month, according to Yatsenyuk. Ukraine depends on Russia for more than half of its gas needs.

Russia also stopped its bailout after disbursing the first $3 billion in 2013. The first interest payment on the loan, which was granted in the form of a two-year Eurobond, is due in June. Ukraine owes $13.6 billion in total in the next 11 months. State debt represents 53 percent of GDP, Yatsenyuk said today.

Curb Exports

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. Ukraine will probably pay $480 per 1,000 cubic meters of Russian gas from April 1, he said.

Russia’s tactics in Ukraine, particularly its annexation of Crimea, have sparked the worst standoff with the U.S. and its allies in more than 20 years. Obama said yesterday that America and Europe must stand united against Russian attempts to redraw Ukraine’s boundaries, warning that indifference would ignore the lessons from two world wars.

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 today 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.”

(For more on the conflict in Ukraine, go to EXT2.)
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