Welcome to the U.S.-Ukraine Business Council


Analysis and Commentary: By Timothy Ash, RBS GBM  
Emerging Markets Strategy | EM Alert | CEEMEA   
The Royal Bank of Scotland (RBS), London, UK, Thu, Dec 31, 2009

By Roman Olearchyk in Kiev, Financial Times, London, UK, Dec 31 2009

Agence France Presse (AFP), Wash, D.C., Wed, Dec 30, 2009

Analysis and Commentary: By Timothy Ash, RBS GBM  
Emerging Markets Strategy | EM Alert | CEEMEA   
The Royal Bank of Scotland (RBS), London, UK, Thu, Dec 31, 2009

In a somewhat remarkable move, the IMF released a statement last night which indicated that its board has agreed to adjust down the floor on Net International Reserves under Ukraine's stand-by arrangement by around US$2bn to allow it to cover gas payments to Russia due over the next few months.

This is a significant positive for Ukraine, and should enable it to get through the difficult New Year period without a repeat of the damaging gas supply disruptions which have now almost become an annual event in Ukraine. It should also help the government span the difficult period until the conclusion of presidential elections scheduled for January 17 (with a second round run-off vote likely to be forced on February 7).

To recap, Ukraine's SBA went "off-track" in October after parliament, and the president, approved a 20% hike in pensions and wages which in effect blew a hole in the 2009 budget and indeed budget plans for 2010.

Without IMF financing, and with the NBU reluctant still to print money to cover an enlarged budget deficit, the government has been struggling to find resources to cover the cost of imported gas; the budget in effect has to cover the difference between imported gas and the much lower domestic price of gas, via subsidies paid to the state-owned gas supply utility, Naftogaz.

Under the terms of the revised gas price agreement reached between Russia and Ukraine in January 2009, Ukraine has to pay for gas supplied over the prior month by the 7th day of the following month.

Thus far in 2009 Ukraine, by hook or crook, has managed to stay current on these payments, albeit over the past couple of months only by drawing down Ukraine's additional 2009 SDR allocations; i.e. very much a short run "fix". With these SDR allocations more or less exhausted, the government has been struggling to identify financing sources to meet the December, and likely January gas import bill.

In this regard, Deputy prime minister Nemyrya, led a delegation to Washington earlier this month, pleading for the IMF to disburse emergency funds to Ukraine to avoid a repeat gas crisis with Russia. At that point the Fund made it clear that it would be impossible to disburse new funds under the existing programme, without efforts by the government to resolve outstanding issues, e.g. over the proposed hikes in wages/pensions.

However, with the announcement by the IMF yesterday it would appear that the IMF has opted to cut the government some considerable slack, clearly with an eye to the serious potential regional repercussions should Ukraine fail to meet the monthly gas payment to Russia: the IMF is mindful not to be the cause of Europe freezing again this winter.

As further context note that over the past couple of weeks the governments of Russia and Ukraine have reached notable agreements covering gas and oil supply/transit, which appeared set to alleviate the risks of disruptions to energy supplies to Ukraine and then on to Western Europe this winter. The fact that Moscow agreed to hike gas and oil transit fees charged by Ukraine also suggests that it is adopting a much more conciliatory attitude towards Ukraine as the country heads towards presidential elections.

Our read herein is that with Moscow's two favoured candidates (Tymoshenko and Yanukovych) leading in opinion polls in the run up to the vote, and its arch nemesis incumbent president Yushchenko lagging by some distance, it is eager not to rock the boat in the run up to the polls: its number one policy objective at present is to ensure the smooth transition from power of Yushchenko.

Even with the IMF indicating great flexibility in the use of official reserves, to cover budget financing needs (at least to cover gas import costs), there is still the issue as to whether the NBU will sanction the use of reserves to cover budget financing needs.

President Yushchenko does have a considerable degree of influence over the NBU, and in the past has been critical of IMF and NBU financing of the budget; seeing this as "political" and in effect providing the government with the opportunity to pork barrel in the run up to elections.

However, with the IMF clearly stating that NBU funds can be used to cover gas payments, and in effect to avoid gas supply disruptions, and with Moscow appearing conciliatory, we doubt that even President Yushchenko would feel able to use the gas card this time around, when he would likely now be squarely blamed for any such disruptions.

The IMF announcements, and indeed the gas/oil price agreements reached with Moscow over the past couple of weeks do provide a considerable degree of assurance now that a gas/oil supply crisis over the New Year, with damaging consequences for Europe, can be avoided.

One big take out from the above is that the IMF is adopting a remarkably soft attitude towards Ukraine; I am struggling to remember an occasion when a country has been cut such slack from the Washington-based lender.

A big picture view seems to have been taken to cut Ukraine sufficient slack to get it through presidential elections, and the New Year energy supply hiatus, presumably with the assumption that the IMF will be better able to crack the whip with programme conditionality in March/April next year, with a new face in the presidential palace and hopefully then also a new government with stronger coalition backing in parliament, i.e. a greater ability to effect IMF-compliant policy.

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By Roman Olearchyk in Kiev, Financial Times, London, UK, Dec 31 2009

KIEV - The International Monetary Fund gave the green light to Ukraine to lower its minimum international reserve requirement, freeing up $2bn from central bank coffers to pay Russian natural gas bills and keep the cash-crunched country financially-afloat ahead of a hotly contested presidential election.

The announcement late on Wednesday helped further to defuse fears in Europe that gas supplies could be cut off again as they were during last January’s Moscow-Kiev spat, should recession-ravaged Ukraine fail to cover multi-billion-dollar import bills in coming months.

“The IMF Executive Board agreed to the government’s request to modify the performance criterion on Net International Reserves, as specified in the current Stand-By Arrangement, to lower the end-December NIR floor by about $2bn,” said Max Alier, the IMF’s resident representative to Kiev. “This important step will enable the Ukrainian authorities to use existing resources to make external payments due – including gas payments – within the framework of Ukraine’s programme with the Fund.”

The IMF has helped keep Kiev afloat since the global financial crisis, providing $11bn in support as Ukraine’s gross domestic shrank by 15 per cent. But the fund froze assistance in November due to lacklustre reforms and political infighting in Kiev. Mr Alier said that fresh aid hangs on the ability of Ukraine’s leadership to demonstrate consensus and adopt a fiscally prudent 2010 budget.

Ukraine’s request in December for a fresh $2bn emergency loan was turned down, and the IMF has sought to keep its distance from the country’s messy pre-election politics. Kiev’s political leaders are bitterly divided, with president Viktor Yushchenko, prime minister Yulia Tymoshenko and ex-premier Viktor Yanukovich all campaigning in a January 17 presidential election campaign.

Ms Tymoshenko’s opponents have accused the IMF of being too soft on her government. Ms Tymoshenko accuses opponents of trying to cash-starve her government and undercut her presidential bid by sabotaging cooperation with the IMF. The political temperature is not expected to cool down until after a second round run-off is held in February.

Wednesday’s decision marks continued flexibility by the IMF in dealing with Kiev. It should help keep Ms Tymoshenko’s government afloat with just enough cash from central bank reserves that were built up with IMF funds after the global financial crisis struck.

LINK: http://www.ft.com/cms/s/0/2843f1ac-f606-11de-bf49-00144feab49a.html?nclick_check=1

Agence France Presse (AFP), Wash, D.C., Wed, Dec 30, 2009

WASHINGTON — The International Monetary Fund said Wednesday it had eased loan criteria for Ukraine to allow the government to use international reserves to meet its debts, including gas payments.

Ukraine, which has been hammered by the global financial and economic crises, was granted its request for a modification of its 16.4-billion-dollar standby arrangement, the IMF said in a statement. The IMF said it had agreed to lower the end-December floor of Ukraine's net international reserves by approximately 2.0 billion dollars.

"This important step will enable the Ukrainian authorities to use existing resources to make external payments due -- including gas payments -- within the framework of Ukraine?s program with the fund," the Washington-based institution said. "It does not involve any new disbursement by the IMF," the fund noted.

The head of Russian gas giant Gazprom said Friday that Ukraine had cut back on purchases of Russian gas since mid-December and appeared to be facing serious cash problems. "Ukraine is experiencing serious problems with payment," Alexei Miller said on Russia's Vesti channel in comments carried by the Ria-Novosti news agency.

Ukraine has until January 11 to pay for gas, according to Gazprom, which has cut off supplies to the country over unpaid bills repeatedly in the past.

Ukraine has been seeking the next installment of 3.8 billion dollars from its IMF standby loan. So far the government has received a total of 10.6 billion dollars of the 16.4-billion-dollar credit extended in November 2008 to help Ukraine cope with the global economic crisis.

Acting Finance Minister Igor Umansky a week ago was quoted by Interfax news agency as saying that the IMF had turned down the request for the new installment to be disbursed this year due to concerns over the intense campaigning for a presidential election on January 17.

Umansky led a delegation to appeal for the release of at least half the new credit installment -- or about 2.0 billion dollars -- in talks at the IMF's Washington headquarters this month.  He said negotiations with the fund would continue in January.

Cash-strapped Kiev this month called its financial situation without the IMF loan money "extremely difficult." Ukraine has been hard hit by the economic crisis after the global slowdown triggered a massive slump in its export-dependent heavy industrial sector.

The IMF loan -- by far Ukraine's biggest source of foreign income in 2009 -- is crucial to help the country overcome the crisis, but the IMF has been exasperated by political infighting and new laws on wages and pensions.