I sense on a number of levels we are approaching decision time for Ukraine, at least in terms of the course of reform, the relationship with the IMF and perhaps also the political setting.

An IMF technical mission visited Kyiv last week, but this seems to have been a little more than your plain vanilla technical mission, with the DC based desk head, Ron Van Rooden, also visiting Kyiv, I sense to figure out the lay of the land with respect to some key IMF reform requirements.

I think it is fair to say that there is considerable frustration now with Ukraine with IFIS, reflective of the fact that the current IMF programme has been stalled in effect since the completion of the last review (3rd) back in April 2017 and promises of reform from President Poroshenko appear to be falling on deaf ears – more a case now of “seeing is believing”.

Even back then numerous structural benchmarks were missed, but Ukraine got a pass, as it was recognised that the nationalisation of Privatbank had been a hugely difficult but important reform milestone passed. And there were also promises made then on energy pricing, land reform, and the appointment of a new NBU governor – albeit these have subsequently not been delivered on.

A good review of the state of play with the IMF is detailed in the following Unian report.


I think it is always difficult to set the pitch right as to where Ukraine is on its reform path. But I think it is fair to say that some very substantial, even remarkable, reforms have been undertaken in the period since the Euromaydan revolution – including therein the Privatbank nationalisation and bank reform more generally, NBU reform and the introduction of inflation targeting and a flexible exchange rate, fiscal reform/adjustment and debt restructuring, gas sector reform (reduction of Naftogas deficit), healthcare and education reform, pro-zorro, et al.

But I think it is also fair now to say that reform has slowed over the past year or so, as we approach 2019 elections and the Poroshenko administration looks at its own stalling poll ratings. Indeed, only three reviews of the IMF EFF have been completed, and only 4 credit tranches of a scheduled 12 released, so just USD8.7bn of USD17.5bn from the programme disbursed.

And it is notable that we have seen reform back-tracking, with the failure of the Ukrainian government to deliver on its commitment as per the 3rd review to hike gas prices last summer, alongside almost a year now after the resignation of the former governor of the NBU, Valeria Gontareva, Ukraine still has no permanent central bank governor – instead with the very capable Yakiv Smoliy, only serving in an acting capacity.

Meanwhile, we seem to be seeing rear-guard actions from Ukraine’s vested oligarchic and political elites to stall efforts by the ministry of finance to clean up the state fiscal service (even to remove the reformist finance minister Alex Danyluk), and improve governance around SOEs. And then there is the mega battle being fought over the creation of Anti-Corruption Courts (ACC). What seems to be the case is that for the IMF/IFIs there are now three/four major issues/focal points for reform:

First, the creation of an “independent” ACC. For the uninitiated corruption is the number one issue in Ukraine, as reflected in all the surveys of business and popular opinion. I would go further and argue the reason that real GDP growth performance has been so lacklustre over the past year (still sub-2% despite the low base) is that we have not yet seen a material improvement in the business environment and specifically that related to corruption. Ukraine is still a challenging place to do business.

Various reforms have been undertaken to reduce scope for corruption – pro-Zorro, VAT refund reform, gas price reform (albeit creeping back), cleaning up the banking system (better regulation and supervision), but not all behaviour is changing, or is changing too slowly. Likely therein it is not only about taking away the opportunity to act/benefit from corrupt actions but also including some sanction for wrong-doing.

And while various new institutions have been created to identify graft (e-declarations), NABU, and to begin the process of bringing people to account, the court and judicial system is so corrupt and broken that few, if anyone has been sanctioned for wrong doing.

The international community have concluded that to clear this particular bottleneck special anti-corruption courts (ACC) need to be created which are fully independent, the latter assured by international oversight on hiring/firing of judges. The Poroshenko administration submitted proposals to the Venice Commission, agreeing to abide by its conclusions – therein a condition of the IMF programme. But when the Venice Commission returned its verdict and made recommendations these appeared to be lacking in the draft bill on ACCs tabled by President Poroshenko to the Rada.

The message from Poroshenko is that it is now the responsibility of the Rada to make changes to his bill to make the legislation compliant with the Venice Commission and hence the IMF/IFIs. Unfortunately, the way the Rada operates, with the pro-presidential block only benefitting from situational majorities, unless a bill gets clear support/direction from the presidency/government it is very unlikely to secure Rada support. We already saw that with passage of the pension reform bill last year – which still seems to fall somewhat short of prior IMF requirements.

One is left with a sense that there is a fundamental unwillingness from many within the ruling establishment, and Rada, to deliver on truly independent ACCs, which by definition could well risk hard actions against many in Ukraine’s elites.

The sense is that the presidency and Rada are just going through the motions, trying to buy time, and wear down the IFIs, perhaps just trying to kick the can. The problem with this is that it does not change the core problem which is still high perceived levels of corruption which are weighing on business, investment and growth and development of the Ukrainian economy.

And indeed, failure to address this issue is one reason why so many young Ukrainians have opted to leave the country – with 1.2 million Ukrainians working in Poland for example. And remarkably, this is now creating labour shortages in Ukraine – keeping wage price pressure high, forcing the NBU to keep policy rates high, which feeds back into weak growth/development and perhaps back into corruption and a vicious cycle.

Second, following through with gas price liberalisation and the un-bundling of Naftogas – key therein for efficient energy use, and further removing opportunities for graft.

Third, land reform – seemingly more important for other IFIs, namely the World Bank which has been leading the initiative.

[Forth] We could probably add final nomination of a new NBU governor but I don’t particularly see this as a deal breaker from the IMF – especially given that acting governor Smoliy seems to be doing a good job. It could be a problem, if a new, less orthodox/competent name emerges in the running, and pressure to make political appointments to the NBU management and the NBU board mounts. There seems to be politicking in this respect in the background.

In the end though, with the heating season ending, it is possible to see the Poroshenko administration conceding to gas price adjustment, content in the knowledge that this will only hit the consumer from next October – and impact therein still moderated by extension/augmentation of targeted subsidies. And on land reform I think there is enough understanding from the IFIs that this is a tricky issue, and willingness to act from the administration that a compromise solution can be reached around some roadmap for reform. 

As a result all roads lead to the ACC as the most likely key sticking point. And on this I am not hopeful. As for Ukraine’s elites this is an existential threat, and for the IFIS they understand the critical and game changing importance of this issue to the broader development of the economy and the country – simply put it could and should be game changing.

I think the Poroshenko administration assumes that passing somewhat revamped bill, still short of the Venice Commission recommendations, but a first iteration towards that will be enough to buy a bit more time and perhaps push the issue beyond the next elections. I do not though think that is enough for the IMF. So I think this does provide the potential for a break in the relationship – as it is so important to both sides.

But can the Poroshenko administration survive without IMF financing to the next elections?

Well, total debt financing needs to year end are USD7-8bn, of which over USD5bn is in FX, split roughly 50:50 IMF/IFI and market financing. The Unian report suggested that in the absence of IMF financing it would be difficult for Ukraine to return to international capital markets. I am not so sure, as remember that the “highly successful” 2017 Eurobond issue, combined with a liability exercise issue, was placed only “on a promise” of IMF monies in the pipeline – as I remember from the MOF pitch, “in June/July” “or the autumn at the latest”.

market believed that, and I think institutional investors are still inclined to buy on a promise – unless difficulties with the IMF and IFIs are more clearly spelled out. Obviously much ultimately also depends on the global market backdrop and pricing – but given current market pricing a deal priced in the 7-8% range likely would still find plenty of takers, albeit not sure if that is whither the IMF.

Clearly the danger for the IMF/IFIs, is that the government strings the market along, promises reforms, comes to market, fills the coffers and then fails to deliver reform which would be terrible for the long term Ukraine story, and surely another opportunity lost. But at this point in time, and reflective of the 10 month lag now since the last IMF review, this seems the most likely scenario, as mentioned unless the IMF signals that the programme is actually at risk.


I don’t think we are that far away from the latter scenario, given frustrations from the IFIs are building – perhaps therein the deadline could be the Ukraine reform conference planned for Copenhagen on June 27, 2018.


The Danish government are leading the way herein, taking the baton on from the UK which hosted a similar conference in early July 2017. It is possible to imagine by that date, that the IFIs might be seeking to bundle together a number of credits, all linked to key reforms such as the ACCs in order to entice the Poroshenko administration over the line.

A potential complication in all this could potentially be local talk of early elections – with Concorde Capital this week linking a meeting between President Poroshenko and his arch political rival Yulia Tymoshenko earlier in the month to a potential deal to push for early elections. Obviously early elections would put the entire reform agenda on hold, but buy time (kick the can) over the ACC.

Early elections would also stymie calls from some for political reform in Ukraine before parliamentary elections scheduled for November 2019 – moving away from the current split constituency/PR system which tends to benefit business interests and ensure anti-reform vested interests dominate the Rada.

I have to say, given the past bad blood between Poroshenko and Tymoshenko, it is somewhat hard to imagine a deal between the two politicians, albeit Ukraine’s oligarch politicians have all worked with/against each other on numerous times in the past, and opportunities and interests might just be aligning at this point in time – and perhaps noting potential threats from new political forces/characters, including the pop star politician, Svyatoslav Vakarchuk.

Surely early elections would dull his chances in the presidential poll, while also heading off the chances for electoral reform – in essence playing to established political forces and names.

** Please note that any views expressed herein are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at BlueBay, or the views of the firm as a whole. In addition, these conclusions are speculative in nature, may not come to pass and are not intended to predict the future of any specific investment. No representation or warranty can be given with respect to the accuracy or completeness of the information. Charts and graphs provided herein are for illustrative purposes only.”