IMF arrive in Ukraine on the heels of a $7 Billion bill from Russia

Well this should be an interesting week.

Russia slaps Ukraine with a well timed $7 Billion bill for unused and unwanted gas within the contractual parameters of the awful deal crafted by Ms Tymoshenko, rumours are rife of a Ukrainian default on foreign debt this year (and let’s be honest, any debt payment rolled over or delayed is indeed a default on the original agreement), and the IMF has rolled into town with the same demands including the of raising gas tariffs to an impoverished population and sluggish less than competitive industry by 50%.  (That would be another 50% after the last 50%.)

Naturally Ukraine is not keen on paying Russia the $7 Billion it contractually owes.  Neither is it keen on raising the gas prices for its population or export producing industries to please the IMF.  Rumours of Ukrainian default to foreign debt holders will simply drive the cost of external borrowing through the roof via traditional sources.

Very difficult for any of those involved in any of the negotiations with any external party – not that any of those that make the press statements are likely to have been directly involved in such difficult discussions.

Very grim – but there is always the calculating Chinese to sell or rent what is left of the family silver to……which I touched upon yesterday.

Naturally the EU is publicly mute thus far.

 

Update!:  Rumour has it that on 30 January, Naftagaz has borrowed $5.9 billion from Delta Bank to deal with the Russian gas bill, with the bank profit being $240 million.  Who owns Delta Bank these days?

National Bank of Ukraine statement on monetary policy for 2013

The National Bank of Ukraine makes a statement on monetary policy in 2013.

In short, we can expect a far more elastic Hrynia/US$ exchange rate than has previously been the case.

A far looser peg to the US$ will indeed please the IMF who have been consistently stating Ukraine must allow the Hryvnia to float freely – however, if the Hryvnia is to remain at an average of UAH 8.5 to US$ 1 as is the foundation of the Ukrainian 2013 budget, then the NBU will have no choice but to intervene lest its true value of between UAH 9 and UAH 10 per US$ 1 become the reality.

Even so, the average of UAH 8.5 to US$1 as declared as a foundation block of the 2013 budget places the Hryvnia at a level to which it has never depreciated to before.

Can the NBU keep the Hyrvnia at the level forecast in the Ukrainian budget?  That cannot be answered until this time next year.  Personally I have very serious doubts that it can – or will.

With billions in foreign loans in US$ and Euro to repay in 2013, it seems to me to be more of a question of whether the NBU can keep the exchange rate stable long enough for the majority of those loans to be repaid – before the idiom of the straw and the camels back meet – concluding in the well known metaphorical result.

A best guess or pie in the sky? Ukrainian budget 2013

Although I studied economics as part of a degree in Business Management and Finance many moons ago, I can say without a shadow of a doubt that it was not exactly the most interesting of subjects, and one in which I had to motivate myself to maintain a respectable overall end grade.

The fact it is not an exact science, or indeed given recent events with a vast and very varied set of opinions from both well known and hitherto unknown “economists” and little else other than opinions since 2008, would suggest that to many it is not even a science but simply partially educated guesswork.  I make no comment!

Anyway, as is required by law, the Ukrainian budget for 2013 has to be agreed by the RADA before 2013 – which makes sense – other than due to the parliamentary elections and associated shenanigans which dragged the process on and on, the legally required resignations of the current Cabinet of Ministers due to said parliamentary elections and the soon to be appointed new Cabinet of Ministers,  on-going IMF negotiations by Cabinet Ministers who have now resigned and may have little authority by next week despite negotiating now, the gas price from Russia etc., etc., the 2013 budget will be something of a rush job with little time for debate in the RADA and quite possibly little or no responsibility for those who table it should they be dropped from the next Cabinet of Ministers.

Something of a mess procedurally when it comes to time-lines and that is without going into the proposed 2013 budget which is some 461 pages long, all of which are splattered with columns and columns of numbers, issued to a RADA membership some of which will not be RADA members next week and unseen by some successful candidates that will be RADA members next week.

Those personnel changes could even affect the composition of the Budget Committee that has submitted the budget proposal for 2013.

From what I have gleaned from those who have seen the draft budget, the government intends to continue to subsidise gas prices to consumers in 2013.  A stance that will make the on-going IMF negotiations very difficult, particularly as I understand that the gas price foreseen in the budget works on today’s pricing of $417 per 1000 cubic meters of gas.  That will mean the government will have to find UAH 21.5 billion ($2.7 billion) to cover the difference between purchase price from Russia and sale price to the Ukrainian consumer.  Ouch!

Further, an envisaged inflation rate of just over 6% and a US$ to UAH exchange rate of no more than 8.5 are foundations for the entirety of the 2013 budget.  Wishful thinking in both cases!

Possibly even worse, is that this budget is to go to the RADA tomorrow, and that means the almost disbanded current parliamentary assembly may well just vote it through as their very last act before the new parliament sits for the first time.  That, when amongst the current RADA members very few have seen it, and I strongly suspect given the average IQ amongst RADA deputies, hardly any will understand it, thus it seems fraught with danger or nefarious intentions – not that the new parliament will radically raise the IQ level of the parliamentarians or their understanding of budgetary matters.

The question therefore must be, given that the 2013 budget is supposed to be the economic blueprint for Ukraine next year – why the rush to get it finalised at the start of December and with an old parliament when there is the entire month to debate and tinker with it with the new parliament?

Hryvnia devaluation coming soon?

Here is a bit of crystal ball gazing, or maybe navel gazing, and quite possibly a completely misguided forecast for the period November 2012 and following months relating to the Ukrainian currency, the Hryvina.

Whilst no doubt the Hrynia will remain relatively stable against other currencies over the summer, primarily due to the parliamentary elections in October, although there are other factors as well, there are a number of indicators that would suggest the Hryvnia will devalue quite dramatically thereafter.

It is already noticeable that the National Bank of Ukraine is acting far more slowly when intervening in the monetary markets to support the unofficial Hryvnia/US$ peg.  It has, in the space of a few weeks, dropped from UAH 8 to $1 and now exchanges on the streets at UAH 8.1 to the $1.  A slide that seems likely to continue.

The question is how far?

Aside from the National Bank of Ukraine’s deliberate slow interventions, there is the matter of the IMF.  Not the suspended tranches that could possibly be used to artificially peg the Hryvnia to the US$ at 8/1 as the National Bank of Ukraine still has the capability to do that.  As I say it is a deliberately slow intervention by the NBU and a sign of what is to come.

I am not referring to the on-going stand-off between the current government of Ukraine, who having raised the prices of electricity and gas 50% at IMF insistence already, refusing to do so again – at IMF insistence – again.

The IMF is currently zeroed in on Article IV of the IMF Articles of Agreement to which Ukraine is subject.

In short, the IMF is pushing Ukraine to allow the Hryvnia to free float on the currency exchanges and if the NBU is not going to unofficially and artificially prop up the Hryvnia through intervention on the currency markets then devaluation is going to be the obvious result. (Not that the NBU is in a position to intervene ad infinitum anyway.)

The question is probably one of how far and how fast this devaluation will occur once the October parliamentary elections are over, rather than whether devaluation will be avoided.

If I had to put a provisional figure on it, I would estimate UAH 9 – 9.5 to the US$ – but it may be more, possibly even UAH 10.

And yes, I have put my money where my mouth is and sacrificed the extremely good interest rates on Hryvnia this week, changing all into Sterling, US$ and Swiss Franc, a policy I will continue until all becomes clear when a new parliament and new budget for 2013 become apparent, the dust settles, and a governmental policy becomes clearer.

As much as I do enjoy the very good interests on the Hryvnia and it pains me to act before the masses and any restrictions that may yet come in doing so, my good lady is rather pleased.  She thinks Sterling and the Swiss Franc are very pretty!

US pressure on Ukraine via IMF – Probably won’t work!

It’s been a long time since I mentioned the IMF and Ukraine.  Basically because it is has been a long time since the IMF lent any money to Ukraine.  More than 12 months in fact.

The reason being Ukraine’s reluctance to put up gas prices again for domestic and commercial users.  Now, you can understand Ukraine’s reluctance if there is still the very unlikely chance it can reduce the ridiculously high gas prices from Russia.

In an election year, those in power do not particularly want to raise gas prices yet again, having already done so to appease the IMF after coming to office (as well as other unpopular things like raising the pension age on IMF insistence), if such IMF demanded rises can be negated by a sensible gas price from Russia.

To be fair to the IMF both reforms are definitely needed and to be fair to the current government it has made steps in the right direction as far as is politically possible with elections on the horizon.

Nevertheless,  there has been no further IMF lending to Ukraine for more than a year now.  This week, Ukraine has made the first repayment to the IMF relating to loans made before the lines of credit were suspended.  A “tick in the box” you would think as far as IMF/Ukraine relations go.

Not necessarily so however.  This week on of Mrs Rodham-Clinton’s minions was in Kyiv telling Ukraine that aside from raising the gas prices to end users in Ukraine, this would still probably not be enough to allow for further IMF lending.

In short, the USA would not support further IMF lending to Ukraine whilst Ms Tymoshenko remains in jail.  Whether the USA has missed the red line over Ms Tymoshenko that has become apparent to the EU as far as dealings with Ukraine goes, or whether the minion thought the USA and IMF had more clout with Ukraine than the EU, I am not sure.

It should be understood that as far as Ukraine goes, there are no real US interests that complicate the US value system.  It is often the “interests” verses the “values/morality” that give nations that perception of duplicity when it comes to foreign policy.

A contemporary example is the US continuing to arm the Bahrain regime whilst condemning the Syrian regime despite both failing in their responsibility to protect their own citizens.  The US is not alone in this, every nation’s foreign policy works on an “interests” verses “values” based model and sometimes national interests trump morality/values or vice versa.

In the case of the IMF, which is going cap in  hand to its members asking for more money, in particular China, such duplicity again presents itself.

How can the IMF go begging at the Chinese door, when China has more political prisoners and human rights issues than Ukraine and then refuse to give what is in effect Chinese money to Ukraine because Ms Tymoshenko is in jail?  What ever happened to targeted sanctions so the general population doesn’t suffer?  Who suffers the most from the absence of IMF lending, the oligarchy or the average man, woman and child?

Should it be influenced by the US in dealing with Ukraine anyway?  The US is no stranger to human rights issues at the moment.  As far as I am aware, it is still running Gitmo and is still under EU investigation for “Black Sites” across the EU relating to renditioned and subsequently tortured prisoners who are still to see anything remotely resembling a trial.

Can or should the IMF, an international funding organisation, be involved in internal processes of a Sovereign nation outside of all things monetary, fiscal and budgetary?

What would be the US position if Italy ask for an IMF loan?  There isn’t one single democratically elected official in the Italian government and neither is there a date set to replace the technocrats running Italy.  Could every citizen of Italy be classed as a political prisoner as they have no idea when democracy will be returned?

So, what has been the Ukrainian reaction to such overt fiscal threats of blackmail by the US via the IMF over its internal judicial processes?  If it has not crumbled to EU pressure, will it crumble to US/IMF pressure?

Well, read into this what you will – Andrei Klyuev, Ukraine’s lead negotiator with the IMF over the past few years has been moved from that position in the past few days to head up the PoR parliamentary reelection campaign.  Nobody as been appointed as his replacement.

One of the IMF”s biggest complaints when dealing with the Tymoshenko government was that officials changed regularly and were therefore always playing catch-up.  That was until Ms Tymoshenko pulled the plug on IMF negotiations as they  were insisting on pension reform and gas price increases just prior to her failed Presidential bid.

As Ukraine seems quite happy to put the DCFTA and AA with the EU on the shelf after it is initialed shortly, rather than cede internal sovereignty over Ms Tymoshenko, is that likely to be the same with the IMF and US regardless of the consequences?

Prima facie, it is starting to look that way and personally I really don’t see Ukraine bothering with the IMF again this year either now the US has threatened to use it as a political and policy lever against Kyiv.

It is starting to look as though the only wriggle room, should the current opposition fail to win the next election and free Tymoshenko, is that Tymoshenko is found guilty of the UESU/Somolli financial shenanigans, using in part no doubt the very same evidence used in the US courts that jailed her business partner for 9 years, and then the subsequent quashing of her current conviction which is deemed “political”.

This way, she is not imprisoned for “political crimes” such as misuse of office but genuinely criminal crimes such as money laundering, tax evasion, theft and fraud as her business partner was in the US.

As much of the US evidence to convict Lazarenko and provide his 9 year jail sentence names Tymoshenko and her UESU and Somolli companies.  Will the US condemn any verdict using much of the same evidence?  Will it then be much more amenable to IMF involvement with Ukraine (assuming Ukraine raises the gas prices to customers or Russia reduces gas prices to a sustainable level without the need for price hikes)?

Will Ukraine simply stick determinedly to the red line it has drawn around Tymoshenko regardless, EU, DCFTA, AA, USA and IMF be damned?

The answers, one suspects, relate to Tymoshenko’s trial relating the UESU and the international reaction to any result as well as how honest the October elections will prove to be in October.

As it stands today, it appears Ukraine is prepared to withstand all pressure over the Tymoshenko issue from what ever direction it comes, including those threats by the US to influence the IMF and take whatever hardships come with that stance.

Time will tell – 24 hours is a long time in politics they say but that red line drawn by the Ukrainian authorities over the issue looks to be getting firmer rather than softer the more external public pressure is applied.

Ukraine: Delete IMF. Insert China

Well here is an interesting article in Kommersant.  China will replace the IMF in Ukraine.

So why has Kyiv fallen out with the IMF?  Officially no doubt over the refusal of the current government to raise the prices to consumers of utilities even more than it already has done.  It should be noted that utility prices have indeed been raised twice already at IMF insistence for previous loans in the past 18 months.

The IMF are dismayed at the lack of political will to do so again.  Then again the IMF are not facing elections in 10 months time, have not been directly responsible for raising utility prices twice, raising the pension age, reforming the tax code despite mass demonstrations, even if the IMF were the drivers of those policies in return for aid.

When Ms Tymoshenko was Prime Minister, she also broke off dealing with the IMF over raising utility prices before an election.  Surely the IMF must realise that yet another 50% hike in utility prices 10 months before an election is not politically palatable.  One month after elections is a completely different matter.

One wonders if the IMF have read the recent OECD report entitled “Perspectives on Global Development: Social Cohesion in a Shifting World”.  One wonders what the IMF believe are the root causes behind the Arab Spring, Occupy movements and various other violent and non-violent protests around the globe in the past year or so.  Could it be that those at the bottom and the rapidly disappearing middle classes across entire continents are at the point they cannot or will not be squeezed any further without protest (or worse)?

How far does the IMF think the current Ukrainian leadership can push the Ukrainian people in a 2 year period that would include 3 massive price hikes for utilities plus the other IMF driven unpopular reforms and retain any form of social cohesion, particularly when Ukraine is paying twice the price for gas to Russia than Germany is?  (Little wonder there is not much sympathy for Ms Tymoshenko from the public.)

It maybe that a new deal is struck between Ukraine and Russia that will bring the Ukrainian price in line with the EU average, in which case that saving may well offset the need for further price rises.  Enough for reengage with the IMF?.  It maybe however, Russia will make Ukraine stick to Ms Tymoshenko’s deal.

You will recall a few days ago, I posted about the National Banks of Ukraine and China agreeing bilateral trade in their own currencies and that Ukraine had become the 12th country that China will allow the Yuan to be held as a reserve currency.

It would seem that Ukraine, and possibly China, foresaw the issues with the IMF and the need for Ukraine to suspend talks with the IMF rather than enter a politically disastrous raising of utility prices now.  One suspects that Ukraine and China made provisional arrangements for China to replace the IMF during the negotiations over each nation holding the others currency via bilateral trade and removing the US$.

This is not particularly good news for the EU who may well have been hoping Ukraine’s need for IMF assistance would have indirectly and unofficially and behind closed doors led to Ms Tymoshenko’s release when threats to shelve the DCFTA and AA have failed.  By that I mean, an indirect but potent negotiating lever has been taken away to be replaced by China who will not bow to the IMF or the EU but are instead wanting far more clout within the IMF (and other institutions).

So why is China taking such interest in Ukraine?  Natural resources will play a minor part of course but neither the EU or Russia have a great interest in Ukraine for economic reasons and neither will China.  There is really no strong and convincing arguement for any major/regional power to be interested in Ukraine for economics reasons.  The only strong and convincing arguement is geopolitics and who holds sway over a nation slightly larger than France sitting between the EU and Russia.

China may well see Ukraine as a future geopolitical satellite province sitting between the EU and Russia.  It already holds the majority of those let Black Sea and Sea of Azov oil and gas exploration plots.  It has began a number of joint R&D projects with Ukraine, FDI in infrastructure, Chinese Consulates popping up all over the place, allows Ukraine to hold the Yuan and is now apparently prepared to be the Ukrainian lender of last resort.

Having managed to grasp the Russian language reasonably well over my many years here, maybe I should bypass learning Ukrainian and go directly to Mandarin?

Ukraine must stop foreign borrowing – Azarov‏

Well you did wonder when Ukraine was going to mirror the political divides of the US, the UK and many other EU nations over the issue of debts and deficits.

It seems Ukrainian Prime Minister Azarov would take an extremely cautious and conservative view. “We have to restrict, or maybe even completely suspend foreign borrowing, and have to be extremely careful while issuing state guarantees” (on commercial loans).

He is of course quite right to have concern over the effect the current US failure to reach agreement over its debt ceiling will have on a global scale. That will pale into insignificance come October when the US delivers (if it does) a budget for the next year that will not address debt or deficit to market satisfaction.

He is right to concern himself over the Eurozone issues as the latest agreement seemingly sets the stage for the creation of a EMF (European Monetary Fund) quite similar to the IMF. That though will mean major national and EU structural legal changes which may or may not get passed relevant nations parliament or referendums if necessary/held.

Now is probably not the right time to go rushing into the international market borrowing money with such immediate uncertainty ahead. Much more will be apparent by the end of the year with regards to the likelihood of the legal creation of something like the EMF and also the reaction globally to the US budget in October.

With record reserves of about $37 billion, even if it cost $15 billion in government spending before the end of the year, quite possibly that is a wise course than to borrow from the markets at the moment.

The Prime Minister’s position does seem to put him at odds with Deputy Prime Minister Tigipko who is insistent that continued and speedy IMF borrowing should occur.

To be fair to Tigipko, whether Ukraine needs the money or not, it does need to shed the huge subsidies it gives the public when it comes to utilities and which is a key condition of further IMF lending. Irrespective of the money, sticking to the IMF agreement provides the discipline to achieve what otherwise will not get sufficient political backing to get through the RADA. Public ire can always be partially deflected towards the IMF when all is said and done whilst it remains a key condition of the future loan installments.

There are pros and cons to both arguments of course. There are always pros and cons with any decision. Still, at least the issue has appeared as a blip on the Ukrainian radar.

No more IMF money until after 2012 elections….but it’s not urgent‏

Well now, Ukraine and the IMF are at a stand-off once again, although this time it would seem to suit Ukraine, at least politically, and possibly spell the end of IMF assistance to Ukraine.

A few months ago The Democratist and I sat in Odessa discussing Ukrainian issues and the IMF came up. He seemed somewhat surprised when I said that Ukraine no longer needed IMF money urgently but that the government was keeping to the IMF conditions as a foundation and straight-jacket to push through unpopular reforms. It is always helpful to have somebody else to blame for unpopular changes after all.

Confirmation of what I told him months ago, now appears to have become public knowledge due to the Ukrainian government failing to push through additional charges for utilities despite the IMF insistence. The most difficult political issue of pension reform having now made it through the RADA under the guise of economic necessity and IMF insistence. It is yet to get the Presidential signature and become law it must be said.

Now however, what I suspected/knew to be the case, has become public knowledge either deliberately or accidentally. Ukraine is not reliant upon IMF funding and does not expect to get any more money until the utilities pricing issues are addressed.

There is no rush as the above link shows. Ukrainian reserves are at a record high.

The real issue is whether this is the end of IMF involvement in Ukraine. As it seems the current government will not address yet another unpopular issue until after the October 2012 elections and the previous and now unseated government broke the terms of the initial IMF agreement in 2009, there may still be no political will after the elections to reengage with the IMF.

That said, should the current government retain a majority after October 2012, it may well then address the issue rather swiftly, confident of another 5 years in power and the knowledge any utility price rises pushed through at the end of 2012 will be forgotten by 2017 when the following elections come around.

Should it lose having passed the unpopular utility price rises before 2012, you can guarantee the populist left of centre politicians such as Ms Tymoshenko would reintroduce the utilities subsidies and campaign on a platform that would include exactly that (regardless of the long-term outlook). It would seem politically inept to knowingly provide such a platform with an election only 14 months away and a winter heating season looming.

Another large financial shock to the global system resulting from the EU or the undoubtedly weak US budget deal that will emerge from negotiations in October within the bowels of Capital Hill, may well force changes in the current Ukrainian position should the US$ devalue rapidly.

Anyway, baring economic shocks, it would appear further IMF funding will not come until after the 2012 elections. Thereafter, it will depend upon who wins a majority in the RADA.