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Ukraine and the IMF – Where are we at?

July 15, 2016

Firstly a disclaimer.  Despite suffering several years of economics lectures during one of the degrees held by this blog, and therefore having been exposed to some level of economic theory, it was dull.  It was a labour to gain the credits at a high enough level as not to adversely effect the overall outcome of the Degree grade.  Compared to other subject matter within that degree curriculum economics was the most tedious – albeit not the most intellectually difficult to grasp.

(Surprisingly all the economic attachés since met and spoken with, none have been dull or have resulted in laboured discussion.  Perhaps the lack of intellectual stimulation was therefore due to the (now long-since retired) lecturer in question.  Perhaps not, perhaps it really is dull.)

Whatever the case, the following entry is written with those in mind who find economics less than stimulating.  In fact it relates less to economics and more to politics, policy, and official obligations undertaken – with a little bit of economics.

The (most recent and on-going) IMF programme with Ukraine witnessed a suspension of tranches due to the political turmoil surrounding the lead up to, and subsequent departure of Arseniy Yatseniuk as Prime Minister.  The installation of Prime Minister Groisman and a new Cabinet may or may not have calmed the political seas from an IMF point of view.  We will soon see if the programme restarts very soon.

Much will depend upon how the IMF see the chances of future survival for PM Groisman and Cabinet vis a vis calls from various parts of the political spectrum for early Verkhovna Rada elections – for there are agreement obligations to deliver.  It is no coincidence that PM Groisman has begun a public political offensive against the populists – and in particular against Ms Tymoshenko who repeatedly claims she “knows how to negotiate with the IMF, she’s done it before“.

Indeed she has – below is a document outlining her agreement with the IMF in 2008:

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The document shows that with respect to ending subsidies, depoliticising rates calculations, unifying prices of domestically produced and imported gas (which forces out the nefarious schemes), and protecting the socially vulnerable groups, Ms Tymoshenko agreed to carry out the exact same policy as PM Groisman and current Cabinet are doing now regarding energy and utilities pricing – except Ms Tymoshenko broke the agreement when it came time to implement her promises and after having received some of the IMF funding.

As is always the case with Ms Tymoshenko, be you a Ukrainian politician or an international partner, it is foolish (beyond naive) to expect Ms Tymoshenko to honour her obligations.

A reader may ponder whether the issue of Ms Tymoshenko’s gas deal with Mr Putin, which agreed what was probably the highest ever price for gas in Ukrainian history, will also – chapter and verse – be used against her current populist nonsense in the coming months.  It’s not as though such documented ammunition is unavailable or forgotten about.

Indeed Mr Groisman may yet take a deliberate path of fulfilling many of Ms Tymoshenko’s old political statements/promises that she herself failed to do.  A “she talked it years ago (here’s the proof) – I walked it today because she never did” tactic.

However, recent IMF history aside, whether or not the next, delayed, IMF tranche to Ukraine under the current agreement will appear any time soon remains unknown.

Much legislative time was lost during the eviction of Mr Yatseniuk and installation of Mr Groisman.  Some IMF required legislation has passed per the existing agreement – although not all – and the Verkhovna Rada from 15th July to 6th September is now effectively on legislative holiday.

It is anticipated that on or about 25th July the IMF will make a decision to deliver the next tranche to Ukraine – or not.

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In early April this year, at the Odessa Security Conference, a Deputy Finance Minster was present.  During a chat it became clear that this Deputy Minister did not expect all such IMF required legislation to be passed swiftly – not solely due to the situation then surrounding the position of PM, but also owing to the fact that Ukraine was in a far better position than expected at that time (and still is).  With reserves that could last 3 or 4 months and slowly rising, there would be insufficient desire among the parliamentarians to fulfill their obligations until those reserves started to be burned through absent the IMF funding.

In summary, no rush with IMF required legislation due to the attitudes and culture of Ukrainian parliamentarians – one of manyana/just in time/just enough.  Prophetic this Deputy Minister has proven to be – not all obligations within the agreement have been met yet, and probably in part due to the reasoning of this Deputy Minister.

Has the Ukrainian parliament done enough to continue to enjoy the confidence of the IMF?  Probably, but not definitely.

If it has failed to do enough it is not a catastrophe for Ukraine given its current situation, but it is certainly not good either – and for reasons that have little to do with the national balance sheet.

The current, albeit small economic bounce having hit the bottom of the economic pit is not yet over – although the question of maintaining the upward trajectory throughout 2017 and beyond remains large.  Agricultural and IT sectors seem likely to be the drivers for export growth and also the most attractive sectors for FDI.  Other primarily export sectors are at the whim of the global commodities market, which is not exactly overflowing with demand.

The problem with not achieving a return to IMF lending is one of confidence – both internally of Ukraine and also that of those considering investing in Ukraine.

Internally of Ukraine the IMF tranche immediately reduces “safety net” concerns fiscally – which also has a psychological effect upon the domestic constituency.

Externally regarding FDI, it probably would have little effect upon the major, slowly unrolling, investments by Japan, China, US, UK etc that have already begun.  However the IMF matters when it comes to decisions by other institutions such as the World Bank or the EBRD.  Their actions in turn influence those still considering Ukraine but have not yet made a decision.  No return by the IMF will be interpreted as Ukraine failing (once again) to fulfill its obligations with a major international institution.

Ergo, should the IMF decide Ukraine has done too little, without a dramatic, almost force majeure change in current circumstance, fiscal and economic collapse will not immediately follow, perhaps delayed for as long as 6 months or more – giving the Ukrainian parliamentarians a fairly leisurely timeline to correct their manyana attitude toward their responsibilities that allow Ukraine to meet its national obligations.

The same cannot be said when it comes to the perception of trust and the willingness to meet actively all obligations entered into – for that timeline is a real time timeline for a nation like Ukraine which has “trust/confidence credits” that are only as good as the last commitment and/or obligation it  has met.

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