Ukrainian Bailout to Test Cabinet’s Mettle Amid Threats
An hour after Ukraine’s lawmakers
yesterday passed the laws needed to unlock a $27 billion
international lifeline, protesters chanting “Revolution!”
gathered by parliament, forcing deputies to evacuate.
The demonstration, sparked by one of the nationalist Pravyi
Sektor group’s leaders being killed in a firefight with police
this week, shows the extent of the challenges Ukraine new
leaders must overcome to keep the bailout money flowing.
Weeks after an uprising ousted Ukraine’s previous leader,
the government is grappling with President Vladimir Putin’s
takeover of Crimea and a Russian troop buildup on its eastern
border. The heightened tensions, which sparked European and U.S.
sanctions and rekindled memories of the Cold War, risk curbing
Prime Minister Arseniy Yatsenyuk’s ability to fulfill his
promises to IMF, which halted two loans to Ukraine since 2008
for failure to meet terms.
“Political risks are likely to remain elevated and could
flare up, particularly in eastern Ukraine,” Barclays Capital
said yesterday in an e-mailed note. “Implementation risks to
the reform program, possibly exacerbated by retaliatory measures
from Russia, are also meaningful.”
Ukraine’s Eurobond due in June gained to 97.8 cents on the
dollar yesterday, pushing the yield, which reached 55.7 percent
on March 12, down 7 percentage points to 20.71 percent, data
compiled by Bloomberg showed. The hryvnia, the worst performer
against the dollar in 2014 with a 26 percent decline,
strengthened 0.3 percent to 11.12.
IMF Agreement
Yatsenyuk’s cabinet yesterday agreed on a preliminary deal
with the International Monetary Fund, which will supply as much
as $18 billion. In return, Ukraine must slash spending and raise
household heating tariffs in the wake of the worst political
crisis since independence in 1991.
Already dealing with a third recession in six years and
dwindling reserves, Ukraine’s acting President Oleksandr Turchynov says the Kremlin is fomenting unrest in the ex-Soviet
republic’s eastern provinces, where Russian is widely spoken.
Putin massed thousands of troops on Ukraine’s eastern border and
warned he may intervene to defend Russian speakers’ rights.
Russia signed a $15 billion bailout for Ukraine in December
with now-deposed President Viktor Yanukovych, before halting the
rescue after the first $3 billion disbursement. The Kremlin also
withdrew a one-third discount on natural gas prices, as well as
another granted in 2010, doubling the price Ukraine may have to
pay for the fuel starting in April, according to Yatsenyuk.
Ukraine depends on Russia for more than half of its gas needs.
Russia Catalyst
Russia, which doesn’t recognize the new government in Kyiv,
will curb Ukrainian exports through trade restrictions that
could lower economic growth by 1 percentage point, according to
Yatsenyuk. The economy will shrink 3 percent in 2014 and
inflation may be as high as 14 percent, he said yesterday.
Russia’s stance on its neighbor, as well as the austerity
plan, “serve as a catalyst for further social dissatisfaction
in the near future,” Nomura Holdings Inc. analysts Dmitri Petrov and Peter Attard Montalto wrote in a research note.
Putin’s tactics in Ukraine, particularly the annexation of
Crime, have sparked the worst standoff with the U.S. and its
allies in more than 20 years. President Barack Obama said
yesterday that Russia’s energy and finance industries are
possible targets if it moves deeper into Ukraine.
Under the IMF deal, Ukraine will narrow the budget gap to
2.5 percent of gross domestic product by 2016 and raise retail
energy tariffs toward their full cost. The central bank plans to
shift to a flexible exchange rate and inflation targeting.
‘Very Unpopular’
“This package of laws is very unpopular, very difficult,
very tough — reforms that should have been done in the past 20
years,” said Yatsenyuk, who last month called his task as
premier a “kamikaze” mission because of an empty treasury and
foreign-currency reserves that have been “robbed.”
In a sign of opposition to some of the IMF’s demands,
lawmakers yesterday rejected a tax-overhaul bill before
eventually passing it in a second vote.
That reluctance echoes Ukraine’s history of derailing
rescue packages. The IMF froze loans to the nation of more than
40 million on two occasions since 2008 after governments balked
at measures they’d agreed to carry out, such as cutting
utilities subsidies to ease the pressure on the budget.
The government in Kyiv reached a staff-level agreement with
the Washington-based lender for a two-year loan of $14 billion
to $18 billion. The cabinet must complete “prior actions” to
receive the first installment as early as April.
The accord will clear the way for a planned 1.6 billion
euros ($2.2 billion) in emergency aid from the European Union,
European Commission President Jose Barroso said March 5.
EU Package
The EU has also pledged project loans and grants that could
reach 11 billion euros over seven years. The European Bank for
Reconstruction and Development said today that it would increase
investments in Ukraine to 1 billion euros a year and would
resume lending for state-run projects.
The U.S. has also pledged to provide Ukraine with $1
billion in loan guarantees and $150 million in direct
assistance.
While investors in Ukraine are pleased that the IMF pact
doesn’t impose losses on bondholders, their enthusiasm may give
way as May 25 presidential elections approach, according to Arko Sen, a London-based analyst at Bank of America Corp.
“There was substantial market concern about an imminent
restructuring, which is why we’re seeing the ongoing relief
rally in Ukraine assets,” he said yesterday by e-mail. “That
can run a bit further in the near term, before giving way to the
risks of program execution and upcoming elections against the
backdrop of rising domestic tariffs and a weak economy.”
To contact the reporters on this story:
Daryna Krasnolutska in Kyiv at
dkrasnolutsk@bloomberg.net;
Daria Marchak in Kyiv at
dmarchak@bloomberg.net
To contact the editors responsible for this story:
Balazs Penz at
bpenz@bloomberg.net
Andrew Langley