Archive for April 4th, 2017

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The end of IMF leverage upon Ukraine?

April 4, 2017

In early October 2016, your author again attended an annual closed door event full of experts (less your author who makes no claims to the “expert” label obviously) sponsored by the Polish government.

The rationale behind this annual gathering to discuss Russia, Ukraine, the broader region, and “western” policy toward each individually and where they overlap and related academic publications and/or commentary.

The beauty of such events is that there is no media presence, not only Chatham House Rule applying, but also an understanding that what was said in Gdansk remains in Gdansk as far as public consumption will forever be concerned.

Your author was tasked with following the erudite ruminations of a former Deputy Head of Mission of a 5 eyes nation to Moscow, who has turned accomplished academic and author.   The vast majority of those words were directed at Ukraine, and to be blunt, your author agreed with almost all that was said.

However, a French attendee challenged the former DHM Moscow over the Ukrainian statements, claiming Paris saw matters rather differently.

Perhaps so, but that can only be so if Paris is ignoring the sage communiques of the French Ambassador to Ukraine who in May 2016 had made very similar comment to your author to those now being challenged by the French attendee.

Thus it fell to your author to then speak – and with the benefit of 20/20 hindsight, what was said (and duly scribbled down by numerous attendees) has proven to be rather accurate – so far.

All that was said is not particularly relevant to this entry, however in light of the IMF reaching agreement with Ukraine over another tranche, originally due October/November 2016, some predictions strictly relating to the IMF are worth repeating for a wider audience (most of which supported the former DHM of Moscow and rubbed against the French attendee’s position).

Your author was exceptionally blunt over the following:

Firstly that the imminent IMF tranche would not occur in 2016, nor immediately when entering 2017.  Indeed the October/November 2016 IMF tranche would arrive after a second February 2017 tranche was supposed to arrive, and that the February tranche would never arrive – in short making the 4th April IMF agreement the final IMF tranche to Ukraine.  Despite other tranches being programmed, they would not, and probably would never arrive.

As of 4th April 2017, the tranche due in October/November 2016 has now been agreed.

So far so accurate.

Why was your author so brave/stupid stating in October 2016 that this (finally agreed in April 2017) IMF tranche would be the last?

The reasons orated were thus:

Firstly, any subsequent tranche will require both pension reform and the lifting of the moratorium on agricultural land within Ukraine (among other things).  This against the backdrop of the year passing when Prime Minister Groisman and Cabinet were statutorily ring-fenced from any vote of no confidence.  Within the next fortnight, statute will remove that ring-fencing and the Prime Minister and Cabinet are open to such a no confidence vote.

That vote will no doubt come – even if it fails.

Further it remains to be seen whether the existing slim majority coalition can hold together and whether early elections can be avoided.  Will The Radicals officially, or unofficially, come to the aid of the coalition – if so, will they be reliable, and at what cost if they do?

In short, the Verkhovna Rada will become a very difficult arena when getting much done that has to be done, albeit undoubtedly unpopular.  That said, under the current electoral legislation, early elections are not full of promise when it comes to substantially better outcomes – indeed they may deliver something far worse and even more unworkable.

Regardless, the spectre of early elections on the Ukrainian horizon does not make for successful votes in the Verkhovna Rada when it comes to unpopular pension reform or lifting contentious agricultural land moratorium.

Further, the longer it takes to address these issues, the closer the scheduled elections get too.  Needless to say no such unpopular and/or contentious issues will be addressed then.

There will simply not be the parliamentary votes – and thus no more IMF tranches.

There was also the prophecy that Ms Gontareva would leave office in 2017.

It appears this will be the case with her having (more or less) cleansed the Ukrainian banking system of zombie (dubious) banks (not without questionable delay in some cases), nationalised PrivatBank which has long been a necessity, and free-floated the currency to bring down inflation.

She has made it clear that it is now time for an out and out banker to take over (pushing the names of either Shlapaka, Umanskogo, or Shepka as her replacement – though it remains to be seen whether President Poroshenko will deem any loyal enough to appoint).

(As an aside, apart from replacing Ms Gonareva, in the near future President Poroshenko may also have to replace Prime Minister Groisman, numerous Cabinet members, and Roman Nasirov as SFS chief too – all from a rather empty bucket of Poroshenko loyalists.  The silver lining to such a cloud for the President may be the eventual removal of Arsen Avakov as Interior Minister and the insertion of a Poroshenko loyalist in such a key power ministry during such tumult.)

Nevertheless Ms Gontareva had the confidence of the IMF (even if it doesn’t deal in personalities).

Lastly, your author stated that by year end 2017 Ukraine would have reentered the international commercial money borrowing markets (albeit with 9% yields on 5 year Eurobonds) thus removing the IMF (and other international and/or regional institutional lenders) as the only source of borrowing – and with it the leverage they have over Ukrainian policymakers.

Ergo, in October 2016 your author argued (and very much supporting the broader view of Ukrainian politics and policy presented the former DHM Moscow, turned academic) that there was but one more IMF tranche to come, regardless of any formal IMF -Ukraine programme.

Thus it remains to be seen if these (and other) predictions made by your author behind closed doors in Gdansk last October will actually manifest – whether for the reasons then presented, only some of which are outlined above, or whether they manifest via a different route.

Regardless of route however, when it comes to cooperation with the IMF during the next 2-3 years, would any reader put money on serious pension reform or a lifting of the moratorium on the sale of agricultural land that will undoubtedly be part of any deal for any future IMF tranche post the 4th April agreement?

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