UKRAINE BUSINESS NEWS - TWELVE ARTICLES
INDEX OF ARTICLES ------
Clicking on the title of any article takes you directly to the article.
Return to Index by clicking on Return to Index at the end of each article
1. RIVALRIES THREATEN UKRAINE ECONOMY
IMF Bailout Pulled Country From Brink, but Vote Poses a Risk
By James Marson, The Wall Street Journal, NY, NY, Wed, Sep 9, 2009
2. UKRAINE AIDE SAYS "IMF WILL NOT GIVE US MORE"
By Roman Olearchyk in Kiev, Financial Times, London, UK, Tue, Sep 8 2009
3. UKRAINE MAY NEED MEASURES TO OFFSET FINANCING RISKS, IMF SAYS
Daryna Krasnolutska, Bloomberg, New York, NY, Wed, Sep 9, 2009
4. UKRAINIAN PM, IMF MISSION CHIEF, WORLD BANK DIRECTOR
DISCUSS 2010 BUDGET, PENSION, TAX REFORMS
Interfax Ukraine, Kyiv, Ukraine, September 4, 2009
5. COLLAPSE OF UKRAINE IMF PLAN WOULD HIT RATING
Reuters, Wednesday, September 9, 2009
6. GEOPOLITICS SEEN PROTECTING UKRAINE IMF DEAL
Ukraine given softer ride than other IMF recipients
Strains with Russia seen diminishing after election
Analysis: by Peter Apps, Political Risk Correspondent, Reuters, London, UK, Aug 25, 2009
7. IMF COMPLETES SECOND REVIEW UNDER STAND-BY ARRANGEMENT
WITH UKRAINE AND APPROVES US$3.3 BILLION DISBURSEMENT
IMF Press Release No. 09/271, Washington, D.C. Tue, July 28, 2009 (Released Tues, Sep 8, 2009)
8. UKRAINE: LETTER OF INTENT AND TECHNICAL MEMORANDUM OF
UNDERSTANDING TO THE IMF, ISSUED JULY 23, PUBLISHED SEPT 8
Government of Ukraine, Kyiv, Ukraine, July 23, 2009
International Monetary Fund (IMF), Wash, D.C., Tues, Sept 8, 2009
9. UKRAINE: SECOND REVIEW UNDER THE STAND-BY ARRANGEMENT AND
REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA - STAFF REPORT; PRESS RELEASE ON THE EXECUTIVE BOARD DISCUSSION
IMF Country Report No. 09/270, International Monetary Fund (IMF),
Washington, D.C., Tuesday, September 8, 2009
10. UKRAINIAN OPPOSITION LEADER YANUKOVYCH SAYS IMF
DEMANDS TO CAUSE "FAMINE FOR MILLIONS"
ICTV television, Kiev, in Ukrainian 1545 gmt 7 Sep 09
BBC Monitoring Service, UK, in English, Monday, September 7, 2009
11. IMF ATTEMPTS TO CALM NERVES
bne Ukraine Daily List, Berlin, German, Tues, September 8, 2009
12. NBU DENIES PROBABILITY OF DISCONTINUING COOPERATION WITH
IMF DUE TO RETAINING GAS PRICES FOR POPULATION FROM SEPTEMBER
Ukrainian News-on-line, Ukrainian News Agency, Kyiv, Ukraine, Mon, Sep 7, 2009
================================================
1. RIVALRIES THREATEN UKRAINE ECONOMY
IMF Bailout Pulled Country From Brink, but Vote Poses a Risk
By James Marson, The Wall Street Journal, NY, NY, Wed, Sep 9, 2009
KIEV, Ukraine -- A $10.6 billion bailout from the International Monetary Fund has pulled Ukraine back from what many feared was near-default this spring. But with fiercely contested presidential elections set for January, the next big economic risk looks to be political as potential candidates fight over economic policy.
Parliament is paralyzed as the opposition heaps political pressure on Prime Minister Yulia Tymoshenko by blocking the chamber's work and demanding a rise in social spending. The national currency, the hryvnia, has slid almost 15% in the past two months, with the president and prime minister at loggerheads over key policies.
"Everyone is saying something different -- the government, the president and the opposition. When there's no consensus on the policies that will pull the country out of the crisis, there is limited confidence in the currency," said Ceyla Pazarbasioglu, the IMF's mission chief to Ukraine, in an interview Monday.
January's vote will pitch Ms. Tymoshenko against bitter rival sitting President Viktor Yushchenko, her former ally during Ukraine's pro-Western Orange Revolution in 2004. Also on the ballot is Mr. Yanukovych, leader of the opposition, the largest party in parliament, and the defeated candidate from 2004.
The economy of Ukraine -- a France-sized country to Russia's southwest -- was hit hard last autumn. After demand for major steel and chemicals exports dried up, output contracted 20% in the first three months of 2009, among the harshest European contractions of the global crisis.
With government finances stretched to breaking point, banks wobbling and the hryvnia plunging, Ms. Tymoshenko managed to push through policies required by the IMF despite chronic political infighting. The funds helped stabilize the economy, and Ms. Tymoshenko says improved industrial production figures in July show a recovery is under way.
The crisis has eroded Ms. Tymoshenko's popularity, with Mr. Yanukovych, her main rival for the presidency, now leading the way with 26%, compared with Ms. Tymoshenko's 17%, according to an August poll by Research & Branding Group. Mr. Yushchenko trails with only 2%, behind up-and-coming former parliamentary speaker Arseniy Yatsenyuk with 13%. Surveys show that the economy will be the key battleground in the election.
The early signs for the struggle ahead don't augur well for a firm resolution. The budget is already under severe strain as revenues have dropped. But after a bill proposed by Mr. Yanukovych's party to raise pensions and the minimum wage was voted down last week, the party's lawmakers physically blocked the podium in parliament, effectively shutting it down. The blockage has continued since then, and parliament's speaker has threatened to withhold their salaries in order to get the chamber working.
Increasing social spending has been a major vote-winner in the past but would break the budget and fuel inflation, given the country's precarious finances. Hryhoriy Nemyria, Ukraine's deputy prime minister, vowed to hold the tough fiscal line. "The government has a robust plan and will stick to it," he said in a recent interview.
But concern that politicians can't overcome their rivalries is already weighing on the currency. The hryvnia is approaching this year's low at almost nine hryvnias to the dollar, after what the Ministry of Finance called "panic and speculation" coincided with a high burden of foreign-debt repayments for companies in August.
Mr. Yushchenko has slammed parliament's decision last month to overturn his veto of a bill forcing the central bank to hand over 9.8 billion hryvnias ($1.13 billion) to fund preparations for the Euro-2012 football tournament, which he said would force the hryvnia down further and accelerate inflation. The IMF also expressed concern about the decision, which it advised against.
The deputy head of Mr. Yushchenko's administration said Tuesday that Ukraine is unlikely to receive any more IMF funds this year as it isn't fulfilling its obligations to the fund. The government earlier this week called talk of difficulties with the IMF "hysteria."
Ms. Pazarbasioglu said cooperation with the IMF is "good" despite the government's failure to push through a promised 20% rise in domestic gas prices scheduled for the start of September. An end to subsidies is seen as crucial to shoring up the shaky finances of Naftogaz and bringing transparency to a notoriously opaque sector.
The move was blocked by trade unions in court, but Ms. Pazarbasioglu said she was optimistic that the authorities would push through the rise "in the next two to four weeks."
Ms. Tymoshenko did manage to reach an agreement with her Russian counterpart, Vladimir Putin, last week, that Russia wouldn't impose fines on Ukraine for taking less gas than promised in a deal strike by the pair in January. In a sign of increasingly warm relations with Moscow, Ms. Tymoshenko also announced plans for a meeting with Mr. Putin in Ukraine in October. The agreement on waiving fines hasn't yet been written into the original contracts, and
Mr. Yushchenko said Sunday that this would make Ukraine politically dependent on Russia. Naftogaz pleaded with Ukrainian leaders not to politicize the situation in a statement Monday. [Write to James Marson at j.r.marson@gmail.com]
LINK: http://online.wsj.com/article/SB125244740974493607.html
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
================================================
2. UKRAINE AIDE SAYS "IMF WILL NOT GIVE US MORE"
By Roman Olearchyk in Kiev, Financial Times, London, UK, Tue, Sep 8 2009
KIEV - Ukraine is unlikely to receive more money from the International Monetary Fund this autumn, a senior official said on Wednesday, in comments that painted a grim picture in coming months for a nation struggling to pull out of a deep recession amid political deadlock.
”I think the IMF will not give us any more, until the end of the year,” said Oleksandr Shlapak, deputy head of Victor Yushchenko’s presidential administration. “We are not fulfilling our obligations – practically none of them,” Mr Shlapak said pointing to shortcomings by the government of Yulia Tymoshenko, prime minister and a bitter presidential opponent.
Mr Shlapak’s comments come amid an IMF mission to one of the economies hit hardest by recession to discuss further co-operation. His remarks sparked criticism from some investors who saw them as an attempt to undermine opponents and Ukraine’s economy for personal political gains.
Kiev has received some $11bn from a $16.4bn loan package granted last autumn in the wake of the global financial crisis. The economy appears to be on course for a slow rebound after gross domestic product plunged some 18 per cent in the first half of 2009. But additional support from the IMF is seen as vital to keep Kiev afloat.
The IMF pledged to support Kiev but urges political consensus and unpopular reforms, including an increase in natural gas prices for households to market levels, which was delayed this month.
Tensions have been particularly high in Kiev, as the country’s currency tumbled some 15 per cent approaching a rate of nine to the US dollar. The abrupt slide was the steepest since last autumn when the hryvnia plunged some 40 per cent.
It puts additional stress on an already shaky bank sector in which European financial institutions hold more than a 40 per cent market share. Non-performing loans are at double digit levels.
Citing external debts that mature in coming months and hefty fuel import bills owed to Russia, experts expected depreciation. But they and IMF officials have also blamed the sudden nature of the dip on political bickering and uncertainty before a January presidential election.
With his poll numbers in single digits, observers said Mr Yushchenko was desperate to catch up with frontrunners. He has accused Yulia Tymoshenko, his prime minister, of pursuing populist policies. Viktor Yanukovich leads in the polls and wants parliament to increase social spending in spite of a growing budget gap.
Amid the turmoil, net foreign direct investment inflows fell nearly 66 per cent in the first half of 2009 to $2.4bn. But many investors still talk of strong upside.
Kirill Dmitriev, president of ICON Private Equity, a $1bn fund backed by wealthy Russians and Ukrainians, said his group would this week launch a $100m high-speed telecommunications network.
“We are moving forward with investments because we see a lot of upside despite economic troubles and beyond the concerted effort by the president to weaken the economy and its monetary supply for personal political gains ahead of an election,” Mr Dmitriev said.
LINK: http://www.ft.com/cms/s/0/9fbb3128-9c88-11de-ab58-00144feabdc0.html
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
=================================================
U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
From 22 to over 100 Members in Two Years, Join Today
============================================
3. UKRAINE MAY NEED MEASURES TO OFFSET FINANCING RISKS, IMF SAYS
Daryna Krasnolutska, Bloomberg, New York, NY, Wed, Sep 9, 2009
KIEV - Ukraine, at risk of a delay in getting more bailout help from the International Monetary Fund this year, may need to take further steps to offset a potential increase in its financing needs, the Washington-based lender said.
The nation’s financing gap is $10 billion and is “fully met by fund resources,” though risks, including a pickup in capital outflows and investment lagging expectations, may “materialize,” the IMF said in a report dated July 23 and published yesterday. Should that happen, the “use of reserves buffers and additional policy adjustment would be needed,” the fund said.
The hryvnia’s slump, a shakeup of the banking system and the economic contraction forced Ukraine to turn to the IMF for a $16.4 billion loan in November 2008.
The country has so far received $10.6 billion and seeks to get $3.8 billion as a next installment at the end of October or beginning of November.
Cooperation with the IMF is at risk as the country fails to meet some requirements, Oleksandr Shlapak, an aide to President Viktor Yushchenko, said yesterday.
The nation needs to adopt a number of laws, including strengthening central bank independence, raising gas prices for households, overhauling the tax and pension systems and avoiding social spending increases to unlock the next tranche, according to the IMF.
So far, the country has delayed a gas price increase until October from Sept. 1, as initially agreed with the IMF, while the parliament was physically blocked by an opposition party that demands increases in salaries and pensions.
OBLIGATIONS
The IMF also requires Ukraine’s government to sort out two lenders, VAT Nadra Bank and TOV Ukrprombank, which ran out of cash. The government and the central bank are clashing over the strategy toward the banks.
“The IMF will not give us anything by year-end as we are not fulfilling our obligations,” Shlapak said. “My talks with the IMF’s head of the mission give me grounds to conclude that they are greatly disappointed with Ukraine’s behavior.”
The government used part of the IMF funds to help narrow the budget deficit, which the lender sees at 8.6 percent of gross domestic product, excluding bank restructuring costs, this year. Without the next tranche, “we will not have funds to finance the state budget deficit,” Shlapak said.
The IMF and Ukraine’s cooperation was stalled earlier this year for three months while the government struggled to reach an agreement to cut the budget deficit.
Inflation will slow to 14 percent this year and 9 percent in 2010, according to the IMF. The inflation rate will be probably between 6 percent to 5 percent from 2011 through 2014, according to the lender.
The recovery will be driven by the weakening hryvnia, which will aid exporters, a rebound of steel prices and investment, it said. The economy, which may expand 2.7 percent next year, can revive even more if political stability returns after presidential elections in January 2010, the IMF said.
To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net
LINK: http://www.bloomberg.com/apps/news?pid=20601102&sid=aF5moldyjlWg
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
========================================================
4. UKRAINIAN PM, IMF MISSION CHIEF, WORLD BANK
DIRECTOR DISCUSS 2010 BUDGET, PENSION, TAX REFORMS
Interfax Ukraine, Kyiv, Ukraine, September 4, 2009
KYIV - Ukrainian Prime Minister Yulia Tymoshenko, International Monetary Fund's Mission Chief for Ukraine Ceyla Pazarbasioglu and World Bank Director for Ukraine, Belarus and Moldova Martin Raiser discussed the preparations of Ukraine's 2010 draft budget, pension and tax reforms at a meeting in Kyiv on Thursday.
The parties also discussed an upcoming visit of the Ukrainian delegation led by Vice-Premier Hryhoriy Nemyria to Istanbul, where they are to attend the annual meeting of the IMF and the World Bank on October 3-8, the governmental press service reported.
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
========================================================
U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.
========================================================
5. COLLAPSE OF UKRAINE IMF PLAN WOULD HIT RATING
Reuters, Wednesday, September 9, 2009
A collapse of Ukraine's loan programme with the International Monetary Fund would hurt the country's rating, which is already low due to concern over Ukraine's finances, an analyst at Fitch Ratings said on Tuesday.
A Ukrainian presidential aide said on Tuesday that Ukraine has not met conditions set by the IMF and is therefore unlikely to receive another tranche of its $16.4 billion loan by the end of the year.
"A collapse of the IMF programme would put downward pressure on the ratings," said Andrew Colquhoun, a director of Fitch's sovereigns group. Ukraine is rated single-B with a negative outlook, a rating which falls into the category of junk status.
Colquhoun said a sharp contraction in Ukraine's gross domestic product, domestic political tensions and its strained relationship with Russia were among factors behind Ukraine's weak rating and negative outlook. "The risks remain quite severe and that is reflected in the low ratings," he said.
Dealers in Kiev said the hryvnia currency did not weaken after the presidential aide's remarks, with the local market dismissing such comments as reflecting a power struggle amongst the political elite rather than IMF views.
The IMF said on Saturday a lack of political unity ahead of a presidential election in January was weighing on the currency but that otherwise it was pleased with the central bank and government actions.
"We cannot prejudge developments, we are still in the region of speculation," Colquhoun said. "I do not know for sure that the IMF programme is collapsing. I am not sure the IMF is prepared to pull the plug on Ukraine." The IMF has disbursed over $10 billion of the loan programme agreed with Kiev last November.
FX AUCTION
Colquhoun said the central bank's decision this week to stop intervening on the interbank foreign exchange market and to move to an auction system was adding to investors' uncertainty. "This seems to be departing from the spirit of the commitments of the IMF programme, which was to move to a managed float," he said.
The hryvnia weakened to a 6-month low near to 9 per dollar last week, after losing 15 percent in the previous two months. The central bank said this week it was switching to an auction system and would spend about $1 billion supporting the currency in September, which is the average amount it has spent every month since January.
Since the start of the year, the central bank has intervened on Mondays, Tuesdays and Thursdays and carried out foreign currency auctions on Wednesdays and Fridays.
Moritz Kraemer, head of EMEA sovereign ratings at Standard & Poor's, said it was unclear if there was a risk to the IMF programme, due to the level of political noise in Ukraine. "There is a history here -- I do not regard what we are hearing as necessarily definitive," he said.
S&P affirmed Ukraine at CCC+ and moved its outlook to positive from negative in July. Moody's rates Ukraine at B2 with a negative outlook. It downgraded five Ukrainian banks on Tuesday.
The cost of protecting Ukraine's debt against default has remained steady, although at high levels, in recent weeks. However, "piecemeal implementation of the IMF programme commitments creates the threat of delays in international financial institutions' lending schedules," said analysts at Troika in a client note.
Distressed debt broker Exotix cut its view on Ukraine to neutral from positive this week, citing caution over a potential debt restructuring for Ukrainian state energy firm Naftogaz.
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
========================================================
6. GEOPOLITICS SEEN PROTECTING UKRAINE IMF DEAL
Ukraine given softer ride than other IMF recipients
Strains with Russia seen diminishing after election
Analysis: by Peter Apps, Political Risk Correspondent, Reuters, London, UK, Aug 25, 2009
LONDON - Increasingly sour rhetoric with Russia is not deterring investors in Ukraine, who are betting that Western powers will guarantee enough financial aid to shield the troubled economy from investment risk.
Western powers are aware of a delicate strategic balance in Ukraine, and although they may not be willing to allow Ukraine into NATO or the European Union any time soon, neither do they want total financial failure or default in a country that lies astride key energy routes and dominates the Black Sea.
They also don't want to see the country financially dependent on Moscow.
So they have watched closely over the last month as Ukraine and Russia blamed each other for irritating ties, with diplomats expelled, confrontations around Russia's Ukraine-based Black Sea Fleet and angry exchanges between political leaders.
Russia said on Monday Ukrainian troops and volunteers had fought for Georgia in last summer's war, something Ukraine has always denied.
But where worsening relations between the two countries in the aftermath of the Georgia war unnerved markets and hit Ukrainian assets, this year investors say the situation is entirely different.
"The worse relations get, the more likely the West is to make sure they get the aid they need," said emerging markets strategist Nigel Rendell at Royal Bank of Canada. "Ukraine is definitely a very different case compared to other countries in the region when it comes to their IMF deals."
Ukraine's economy and currency slumped drastically late last year, reeling from the impact of the global financial crisis and leaving the country dependent on a $16.4 billion rescue package from the IMF (International Monetary Fund).
That has left the confidence of the handful of foreign investors remaining in Ukraine almost entirely dependent on the progress of that deal, with the IMF holding up delivery of a tranche earlier this year blaming political failure to pass essential reforms.
IMF SHOWING UNUSUAL FLEXIBILITY
Investors had worried political turmoil ahead of presidential elections in January and a power struggle between Ukrainian President Viktor Yushchenko and one-time ally Prime Minister Yulia Tymoshenko might further delay and imperil the programme.
But the cost of insuring Ukraine's sovereign debt in the credit default swaps market, which soared earlier in the year as fear of sovereign default made it virtually uninsurable, has fallen back in recent months -- although it remains amongst the highest in emerging markets.
The price move is almost entirely down to the growing market assumption that the IMF would back Ukraine regardless -- unlike other countries such as Latvia or Hungary that are also dependent on international financial aid to survive financially but on whom the lender is seen as being less lenient.
Indeed, the IMF has shown an unusual degree of flexibility, for example by allowing a budget deficit of 6 percent of gross domestic product after initially demanding a balanced budget.
The agreement of another $3.3 billion tranche last month was seen by many as a sign that the IMF would not walk away from Ukraine. The European Union has provided additional support to help Ukraine purchase Russian gas.
"The IMF is taking a softer line on Ukraine the other countries and the reason is simply down to geopolitics," said Commerzbank head of emerging market research Michael Ganske.
Investors are also hoping tensions with Russia will diminish after elections in January, with both front-runners in the polls seen more friendly towards Russia than current President Viktor Yushchenko, who stands little chance of being reelected.
Moscow is seen reluctant to take serious action against Ukraine -- such as closing gas taps as it did earlier this year in a row over payment -- for fear of undermining support for the candidates seen as more Russia-friendly. (Editing by Sonya Hepinstall)
LINK: http://www.reuters.com/article/asiaCrisis/idUSLP311768
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
========================================================
7. IMF COMPLETES SECOND REVIEW UNDER STAND-BY ARRANGEMENT
WITH UKRAINE AND APPROVES US$3.3 BILLION DISBURSEMENT
IMF Press Release No. 09/271, Washington, D.C. Tue, July 28, 2009 (Released Tues, Sep 8, 2009)
WASHINGTON, D.C. - The Executive Board of the International Monetary Fund (IMF) completed today the second review of Ukraine’s economic performance under the two-year Stand-By Arrangement (SBA), and approved the immediate release of the third tranche under the arrangement equivalent to SDR 2.12 billion (about US$3.3 billion). This will bring total disbursements under the SBA to SDR 7 billion (about US$10.9 billion).
With the completion of this review, the Executive Board also approved the modification of a performance criterion on the fiscal deficit in response to a broadening of the fiscal deficit target to include the deficit of Naftogaz.
The SBA with Ukraine was approved on November 5, 2008 in an amount equivalent to SDR 11 billion (about US$16.4 billion; see Press Release No. 08/271).
Following the Executive Board discussion, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, said: “Financial stress has eased in recent months and Ukraine’s current account is adjusting rapidly. At the same time, the fall in output is more pronounced than expected, which has necessitated further significant policy adjustments. The revised economic program continues to seek to mitigate the effects of the global crisis, restore confidence in the banking system, and preserve fiscal sustainability, while protecting the most vulnerable segments of the population.
“To cushion the impact of the sharper economic contraction and to reflect the imbalances of the state gas company Naftogaz, the revised economic program targets a broadened fiscal deficit. Corrective fiscal measures and structural reforms are a priority to ensure fiscal sustainability and to avoid crowding out of private sector borrowing. The authorities have reduced nonpriority expenditures as well as taken a number of steps to restore viability in the natural gas sector.
"A key step is a schedule of natural gas price increases to bring domestic prices in line with international prices. Vulnerable households will be protected by a better targeting of the social safety net programs. The authorities are also moving ahead with a strategy to strengthen the financial situation and transparency of Naftogaz. Plans for pension and tax reforms in the context of the 2010 budget will also help entrench fiscal sustainability and reduce fiscal financing needs.
“The monetary policy stance is adequate. The National Bank of Ukraine (NBU) will closely monitor developments in monetary aggregates and stands ready to tighten its policies if inflation or exchange rate pressures were to reemerge. The NBU has also taken measures to increase currency flexibility in both directions, including by amending regulation to allow foreign exchange forward transactions. Further progress in this area will help Ukraine to adjust better to external shocks, discourage dollarization and excessive risk taking by unhedged borrowers, and allow monetary policy to focus on inflation objectives.
“Restoring confidence in the banking system, which is essential to facilitate the economic recovery, remains a key priority. Recent important steps include the recapitalization of the systemic banks, the decisions taken with regard to two other banks, and the adoption of legal amendments to enable the resolution of nonsystemic banks. “The authorities plan to phase out remaining import restrictions in line with their commitments under the program."
“Going forward, close adherence to the program will be key to create the conditions that facilitate an expeditious economic recovery,” Mr. Lipsky stated.
LINK: http://www.imf.org/external/pubs/ft/scr/2009/cr09270.pdf
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
=========================================================
8. UKRAINE: LETTER OF INTENT AND TECHNICAL MEMORANDUM OF
UNDERSTANDING TO THE IMF, ISSUED JULY 23, PUBLISHED SEPT 8
Government of Ukraine, Kyiv, Ukraine, July 23, 2009
International Monetary Fund (IMF), Wash, D.C., Tues, Sept 8, 2009
WASHINGTON, D.C., - The following item is a Letter of Intent of the government of Ukraine, which describes the policies that Ukraine intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Ukraine, is being made available on the IMF website by agreement with the member as a service to users of the IMF website (www.imf.org).
UKRAINE: LETTER OF INTENT
Kyiv, July 23, 2009
Mr. Dominique Strauss-Kahn
Managing Director,
International Monetary Fund
Washington DC, 20431, U.S.A.
Dear Mr. Strauss-Kahn:
1. Like most European economies, the economy of Ukraine has been affected by the negative effects of the global financial and economic crisis. Weak external demand, the low level of international steel prices, the sharp increase of our energy import prices, and tight global financing conditions as well as a reduction of credit provided by the banking system have taken a severe toll on economic activity.
However, in the last few months, financial strains in Ukraine have moderated significantly and there are some signs that the economy is stabilizing. Our efforts remain geared towards supporting macroeconomic stability and generating a rapid yet sustainable rebound of our economy.
2. Despite the difficult environment, policy implementation since the first review has been in line with our commitments. The end-May 2009 quantitative performance criteria on base money, net international reserves, and the cash deficit of the general government have been met. We have made progress with the resolution of the systemic problem banks and in preparing legislation to improve the bank resolution framework. We have also strengthened our efforts to raise financing for the budget from domestic sources, including by offering market rates in our treasury bills auctions.
3. In light of this performance and our continued commitment to the program, we request completion of the Second Review under the Stand By Arrangement. Given the sharp reduction in economic activity and its impact on public finances as well as the deterioration in the financial situation of Naftogaz, we request a broadening of the fiscal deficit target to include the deficit of Naftogaz and a modification of the performance criterion on the fiscal deficit. We have maintained import restrictions for two product groups, but these restrictions will expire on September 7, 2009.
Finally, we would like to request that the full amount of the next tranche be disbursed directly to the budget to finance the fiscal deficit, including the repayment of the external obligations by the Government. We commit to full accountability and to provide information on a regular basis as to how the resources are being used.
4. We believe that the policies set forth in the letters of October 31 2008; April 30 2009; and this letter are adequate to achieve the objectives of our economic program, but we stand ready to take additional measures as appropriate. As is standard under all IMF arrangements, we will consult with the IMF before modifying measures contained in this letter or adopting new measures that would deviate from the goals of the program, and provide the IMF with
the necessary information for program monitoring.
Yours sincerely,
/s/ /s/
Yulia Timoshenko Prime Minister of Ukraine
Victor Yushchenko President of Ukraine
Ihor Umanskiy Acting Minister of Finance
Volodymyr Stelmakh Governor of the National Bank of Ukraine
UKRAINE—MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES
A. MACROECONOMIC FRAMEWORK
1. Due to the deepening of the global recession in the first quarter of 2009, weakening terms of trade, and the deterioration of financial conditions, the utflow of deposits and the contraction of credit to economy turned out worse than expected. As a result, the decline in real GDP in 2009 is expected to be more pronounced than the 8 percent that was projected at the time of the first program review, possibly reaching approximately -14 percent.
However, going forward, we believe that the improvement of global economic conditions and the implementation of the policies of our economic program will facilitate the strengthening of our banking sector and general confidence, allowing for a resumption of the flow of credit to enterprises and households and a rebound of our export sector and economy. We expect our economy to grow by around 3 percent in 2010.
2. Developments in inflation and our balance of payments have been better than expected. Continued effective implementation of anti-inflation policies, the strengthening of our anti-crisis efforts, the coordination of monetary and exchange rate policies of the NBU with the fiscal policy of the Government, and the commitments under the joint economic program supported by the IMF have allowed us to bring inflation down. We now expect inflation at around 13 percent by the end of the year compared to 16 percent at the time of the first program review.
Our balance of payment has adjusted significantly. During the first 5
months of 2009, merchandise imports and exports contracted by 52 percent and 44 percent, respectively, compared to the same period in 2008. Until May, rollover rates for private external debt held up relatively well. Our current account is expected to record a surplus of about 0.5 percent of GDP in 2009.
B. FISCAL POLICY
3. At end-May, the cash deficit of the general government was 1.8 percent of GDP, below the program ceiling of 2.4 percent of GDP. However, the outlook for public finances has worsened significantly since the first program review and without offsetting measures, the general government deficit according to the projections may increase from 4 percent to 6.5 percent of GDP in 2009 (excluding bank recapitalization costs). We believe that it is appropriate to broaden the fiscal aggregates monitored under the program to explicitly cover the deficit of Naftogaz, estimated at 2.7 percent of GDP (Hrv 25 billion).
4. To keep our public finances in a structurally sound position, we have announced corrective measures amounting to 0.6 percent of GDP to contain the general government deficit to 6 percent of GDP in 2009, excluding banks’ recapitalization costs and the Naftogaz deficit to 2.6 percent of GDP.
5. These measures, together with the structural measures and reforms we plan to implement in 2010, will help us contain the general government deficit in 2010, based on realistic macroeconomic assumptions and revenue projections. This will start the process of fiscal consolidation and ensure medium term debt sustainability. We have publicly committed to a 4 percent deficit target for 2010 and have taken the following measures:
To improve the financial position of Naftogaz, we have capitalized Naftogaz by UAH 18.6 billion. We have also announced increases of gas tariffs paid by households (effective September 1, 2009) and utility companies (effective October 1, 2009) by 20 percent (prior action). This will bring these tariffs to the levels of 31 and 43 percent of import prices, respectively. We have also announced a schedule of 20 percent quarterly price increases for households and utility companies starting in January 2010 (prior action). We have formed a taskforce to enforce the existing social safety net to effectively protect poor households. Our objective is to achieve convergence of all tariffs with import prices, while maintaining effective safety nets to protect vulnerable groups.
We have adjusted electricity tariffs (for consumption of electricity over 600 kw), taken measures to strengthen tax administration in line with IMF advice, and plan to reduce our expenditure by curtailing the expenditures for goods and services in nonpriority areas. Social transfers will be better targeted as well.
We have adopted and announced a time-bound road map describing the schedule and main steps in the design of pension and tax reform. We will issue, by end-September, a comprehensive analysis of the situation of the pension system and the tax system, on which basis we will recommend concrete policy actions by end-October 2009.
We will contain local government expenditures, including payments to contractual workers, in line with the budgeted amounts and will not introduce
any tax amnesty nor implement a moratorium on tax audits.
6. While we will continue to protect the most vulnerable groups of the population from the effects of the crisis, we are also aware that a quick adjustment of our economy to the large external shocks it is facing requires a temporary tightening of our incomes policies. Our strategy will thus be to continue to limit the increase in both minimum and average public wages and pensions, and other social transfers, in line with projected inflation in 2009 (average and end-period basis). We do not support the approval by the Parliament of the draft bills, which would envisage an increase in minimum wages and pensions to unsustainable levels for public finances, and any such bill will be vetoed.
7. We are fully committed to take structural measures to strengthen the financial situation, transparency, and governance of Naftogaz. By end-September, we will pass the legislative amendments in order to introduce the distribution accounts for the heating utilities by the independent regulator (NERC), and eliminate the ban on penalties for households who do not pay their gas and communal utility bills.
We have adopted a revised 2009 financial plan and developed a 2010 projected financial plan (prior action) for the company which, in addition to the gas price increases mentioned above, envisages measures to increase payment discipline by households and utility companies, and a strengthened heating tariff setting mechanism. We have commissioned a special audit of Naftogaz by an international audit firm, to put in place a monitoring framework for the cash result of the company and to establish a regular (monthly) and timely public reporting of key financial data (prior action).
8. Efforts made in recent months to develop domestic financing sources for the government have started to bear fruit. We have been able to place increasing amounts of domestic debt in recent weeks as the bonds carried interest rates more closely aligned with market rates. We are continuing to actively work on procedures and instruments to develop a domestic debt market. In parallel, we are strengthening our efforts to secure additional funding from multilateral and bilateral creditors.
9. Within one year, the Government and the State Property Fund will privatize a number of substantial enterprises, in particular oblast energy distribution companies. In addition, the privatization of the “Odessa sea-port plant” will be completed in September on a competitive basis with a broadest possible involvement of international investors.
C. MONETARY, EXCHANGE RATE AND FINANCIAL SECTOR POLICIES
10. We are making efforts to improve the functioning of the foreign exchange market. The official exchange rate is aligned with the average rate on the interbank market on the previous day with a deviation not exceeding 2 percent of the market rate. We have been able to seize on the recent positive developments in the foreign exchange market to buy a small amount of reserves.
We have stepped up our efforts to lift administrative controls on the foreign exchange market, including by amending NBU regulation 108 to lift the ban on foreign exchange forward and spot transactions (prior action), and by bringing regulations 107 and 109 in line with international good practices.
11. While inflation continues to fall and pressures on the hryvnia have recently eased, which allowed us to reduce policy rates, we stand ready to tighten policies if pressures on the exchange rate or inflation were to reemerge. The outflow of deposits from the banking system has come to a halt, which has allowed us to revoke the requirement which limited the possibility of withdrawal of deposits prior to maturity. Going forward, we will closely monitor developments in monetary aggregates and bank liquidity and avoid a build up of a large monetary overhang.
12. We have tightened the criteria for access to central bank liquidity, both for the regular refinancing operations and for the liquidity support to problem banks. The agreed- uponprocedures arrangement by Ernst and Young on the provision of refinance credit and foreign currency to banks in the fourth quarter of 2008 was concluded. The preliminary results suggest that the NBU followed approved procedures and authorization policies in conducting these operations. We have shared the results with the IMF, and will publish the main findings in accordance with the terms of reference for this arrangement that was agreed with the IMF.
13. With a view to strengthening the independence of the NBU we will, by end-September 2009, enact legislation to strengthen the overall governance structure of the NBU in line with our commitments under the program. We will also refrain from enacting legislation that impinges on NBU independence and will veto any initiatives to this effect.
14. To restore financial stability and the conditions for a resumption of bank lending, we intend to make rapid progress with our bank recapitalization and restructuring program. Shareholders of most systemic private banks have already brought in the capital and we will follow up closely with the shareholders of noncomplying banks to ensure that the remaining capital pledges materialize. To improve communications with the home supervisors of parent
banks, we will aim to complete all pending MoUs by end-2009.
15. We will swiftly resolve the systemic problem banks. For the five systemic problem banks where shareholders are unable to bring in the necessary
capital, we have finalized the resolution strategy and started implementation. Three of these banks have already been recapitalized and we expect to make a decision by end-July regarding the expediency of the state involvement in replenishing the capital of the other two banks. (prior action).
This strategy includes identifying a fair value of shares, recapitalization by the government and appointment of a professional management. The banks will undergo a thorough due diligence that includes an assessment of restructuring options post-recapitalization. To ensure rapid progress, we have completed the setup and staffing of the relevant units at the MoF and in the NBU. In the implementation of the recapitalization program, we will avoid undue monetary
expansion and safeguard the financial position of the NBU.
16. We have recapitalized the two state banks in line with the diagnostic results. By September 2009, we will develop a set of measures to strengthen their financial sustainability.
17. Preparations for the workouts of the non-systemic insolvent banks have been progressing apace. The diagnostic studies for the Group 3 and 4 banks have been completed, and banks have been informed about the needed capital increase by end-2009.
18. Legal amendments to identify ultimate controllers of banks and to strengthen the bank resolution process, which will form the basis for the workouts of the non-systemic insolvent banks, have been adopted (prior action). For these banks we will finalize the resolution strategy and start its implementation by end-September, 2009.
19. More broadly, to strengthen our supervision framework, we are preparing amendments to legislation with a view to implementing consolidated supervision and provide for supplementary supervision of financial conglomerates. We plan to have these amendments enacted by May 2010. Since April 2009, we have also required banks to disclose detailed financial information.
==================================================
Appendix I. Table 1. Ukraine: Access and Phasing Under a Proposed Stand-By Arrangement 1/
| Date Available | Millions of SDRs | % of Quota | Conditions Include |
| November 2008 | 3,000 | 218.7 | Board approval of arrangement |
| 1 May 2009 | 1,875 | 136.7 | Observance of end-March 2009 performance criteria, prior actions and completion of the first review |
| 15 June 2009 | 2,125 | 154.9 | Observance of end-May 2009 performance criteria, prior actions and completion of the second review |
| 15 November 2009 | 2,500 | 182.3 | Observance of end-September 2009 performance criteria and completion of the third review |
| 15 February 2010 | 375 | 27.3 | Observance of end-December 2009 performance criteria and completion of the fourth review |
| 15 May 2010 | 375 | 27.3 | Observance of end-March 2010 performance criteria and completion of the fifth review |
| 15 August 2010 | 375 | 27.3 | Observance of end-June 2010 performance criteria and completion of the sixth review |
| 15 October 2010 | 375 | 27.3 | Observance of end-September 2010 performance criteria and completion of the seventh review |
| Total | 11,000 | 802 |
Source: IMF staff estimates.
1/ Reflects the rephasing of the second and third purchases requested in the LOI.
=================================================
APPENDIX I: TABLE 2 QUANTITATIVE AND CONTINUOUS PERFORMANCE CRITERIA
To see this table go to the following link: http://www.imf.org/external/np/loi/2009/ukr/072309.pdf
=================================================
APPENDIX I: TABLE 3 UKRAINE:PRIOR ACTIONS FOR THE COMPLETION OF THE SECOND REVIEW
Prior Actions for the Second Review
A1. Amend legislation to enable effective bank resolution. The amendments should include revaluation of shareholder capital, transfer of assets and liabilities without prior approval of creditors, simplifying and accelerating the process for bank mergers and acquisitions, enabling the government to provide funds for banks under resolution by the NBU, and definition and disclosure of ultimate controllers of banks.
A2. Finalize the resolution strategy for each of the systemic problem banks and start implementation. In particular, implement the recapitalization for the three banks for which the decision thereto has already been taken, and decide on the expediency of the state involvement in replenishing the capital of the other two banks.
A3. Announce an increase in the price of natural gas paid by households (effective September 1) and utility companies (effective October 1) by 20 percent to bring these tariffs at 31 and 43 percent of import prices, respectively, and announce a schedule of 20 percent quarterly price increases for households and utility companies starting in January 2010. Introduce mechanisms to enforce payment discipline of utility companies and households.
A4. To improve transparency of Naftogaz: approve a revised 2009 financial plan and develop a 2010 projected financial plan for Naftogaz, based on credible financing assumptions, and commission an independent review, by an international audit firm, to put in place a monitoring framework for the cash result of the company and to establish regular (monthly) and timely public reporting of key financial data.
A5. Improve the functioning of the foreign exchange market, including by amending NBU regulation 108 to lift the ban on foreign exchange forward and spot transactions.
LINK: http://www.imf.org/external/np/loi/2009/ukr/072309.pdf
---------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
================================================
9. UKRAINE: SECOND REVIEW UNDER THE STAND-BY ARRANGEMENT
AND REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA -
STAFF REPORT; PRESS RELEASE ON THE EXECUTIVE BOARD DISCUSSION
IMF Country Report No. 09/270, International Monetary Fund (IMF),
Washington, D.C., Tuesday, September 8, 2009
WASHINGTON, D.C. - In the context of Second Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria, the following documents have been released and are included in this package:
(1) The staff report for Second Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria, prepared by a staff team of the IMF, following discussions that ended on July 3, 2009, with the officials of Ukraine on economic developments and policies.
Based on information available at the time of these discussions, the staff report was completed on July 23, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
(2) A Press Release summarizing the views of the Executive Board as expressed during its July 28, 2009 discussion of the staff report that completed the review.
NOTE: To view the two documents listed above go to: http://www.imf.org/external/pubs/cat/longres.cfm?sk=23258.0
---------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
================================================
10. UKRAINIAN OPPOSITION LEADER YANUKOVYCH SAYS
IMF DEMANDS TO CAUSE "FAMINE FOR MILLIONS"
ICTV television, Kiev, in Ukrainian 1545 gmt 7 Sep 09
BBC Monitoring Service, UK, in English, Monday, September 7, 2009
KIEV - Ukrainian opposition leader says IMF demands to cause "famine for millions" The International Monetary Fund's demand that the Ukrainian cabinet must increase the price of gas for domestic consumers will lead to millions of people having no money to buy food, opposition Party of Regions leader
Viktor Yanukovych has said.
"The cabinet must say straightforwardly and honestly that the IMF wants gas prices for the population to increase by 20 per cent and also all social payments to be frozen. Given today's growth of prices of everything one needs for living and the fall of the hryvnya, such conditions from the IMF are famine for millions of Ukrainians in the direct meaning of this word," the Ukrainian television channel ICTV showed him saying on 7 September. The cabinet is expected to raise gas prices from 1 October, ICTV recalled.
----------------------------------------------------------------------------------------
[return to index] [[U.S.-Ukraine Business Council (USUBC), www.usubc.org]
=================================================
U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.
============================================
11. IMF ATTEMPTS TO CALM NERVES
bne Ukraine Daily List, Berlin, German, Tues, September 8, 2009
BERLIN - After stirring up a storm by warning that the IMF might cut Ukraine off if the government didn't get its act together, the team currently in Kyiv tried to calm things down again on Monday.
IMF mission head in Ukraine Ceyla Pazarbasioglu told Reuters in an interview she did not see fundamental economic reasons (as trade balance is ok) for significant UAH devaluation. "Uncertainty about future policies", making people to hedge themselves was named the main trigger for national currency weakening.
During IMF mission visit details of budget 2010 were defined: 4% state budget deficit, which includes contributions to Naftogaz, and GDP forecast of 3%. C. Pazarbasioglu also said Naftogaz, which "is a huge strain on government finances", needs to manage its debts well and collaboratively. Thus, there were no direct objections against NAFTO restructuring.
Our view: the recent interview should calm down talks arisen last week that IMF would ultimately halt cooperation with Ukraine until elections period is over. The Fund seems to be ready for dialogue, but Ukraine should fulfill obligations it has taken, including adjustment of internal energy prices.
The necessity of this step was underlined by C. Pazarbasioglu and today local mass-media report that the ban on raising gas tariffs is a breach in conventions with EU on $1.7bn loan for Ukrainian gas sector.
----------------------------------------------------------------------------------------
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
=================================================
12. NBU DENIES PROBABILITY OF DISCONTINUING COOPERATION WITH
IMF DUE TO RETAINING GAS PRICES FOR POPULATION FROM SEPTEMBER
Ukrainian News-on-line, Ukrainian News Agency, Kyiv, Ukraine, Mon, Sep 7, 2009
KYIV - The National Bank of Ukraine denies the probability of discontinuing cooperation with the International Monetary Fund due to retaining prices of natural gas for population from September, Serhii Kruhlik, director of the NBU department for external economic relations, has said in course of an online conference.
"It is not real to denounce the programme, as long as the International Monetary Fund Mission has arranged raising gas prices from October 1, 2009," he has announced. Previous agreements with the Fund were to raise gas prices for the population from October 1 by 20%.
Kruhlik also commented on the situation at the Ukrainian forex market. "As experts put it - Ukrainian, international and specifically head of the International Monetary Fund Mission Ceyla Pazarbasioglu - the hryvnia is weakening on the reason of political instability and the government's vague economy policies," he noted.
As to the NBU official, only joint actions by all government establishments and institutes with a clearly outlined economic strategy and corresponding investing policy can prevent further devaluation of the national currency.
The National Bank alone has no powers to stop the hryvnia plunge, Kruhlik stressed hereto. The banker says that the level of Ukrainians' trust to the hryvnia at the moment is the same as their trust to the governing authorities.
"This means that political instability and disorienting of the population provoke, among others, the sinking hryvnia. That is why only the government's setting readable targets for attractiveness of the projects in which the population can invest would somehow rectify the situation," he said.
Kruhlik has stressed, the National Bank is developing more new instruments to ease dependence of the economy and of the population on the exchange rate fluctuations. They plan to forbid provision of forex loans to individual persons and private entrepreneurs who have no earnings in foreign currency.
As Ukrainian News earlier reported, the resolution of the National Electricity Regulatory Commission on the increase of prices for the natural gas for population of 20% from September 1 did not take effect as not approved by trade unions.
On July 24, the Electricity Commission raised natural gas retail prices for households by 20% from September 1, 2009, and the ceiling prices of natural gas for the municipal heating companies by 20% from October 1, 2009.
Higher natural gas rates for households and municipal heating companies is one of the conditions for Ukraine's receiving a loan from the International Monetary Fund and loans for buying natural gas into the underground repositories of Ukraine.
Moreover, the Ukrainian government and the International Monetary Fund signed a memorandum binding the government to introduce from 2010 quarterly indexation of natural gas prices for the said categories of consumers.