IMF controlling Ukraine through $18 billion in loans

After three weeks of urgent negotiations with the interim government in Kiev and in an atmosphere of great power competition, the International Monetary Fund announced on Thursday an agreement to provide Ukraine up to $18 billion in loans over two years to prevent the country’s default. http://www.nytimes.com/2014/03/28/world/europe/ukraine-bailout.html?hp
The agreement, announced in Kiev, the Ukrainian capital, will hinge on the country taking steps to let the value of its currency float downward, to cut corruption and red tape, and, crucially, to reduce huge state subsidies for the consumption of natural gas. The energy subsidies alone represent roughly 8 percent of Ukraine’s gross domestic product, and Russia has said that it intends to raise on April 1 the price of natural gas to Ukraine, which is largely dependent on Russian supplies and which already owes Gazprom well over $1 billion.
The deal, which is subject to the approval of the fund’s board next month, is intended to get the new government over a big hurdle of coming debt obligations when its hard-currency accounts have been sharply diminished by months of unrest that led to the overthrow of former President Viktor F. Yanukovych.
The two-year loan package, the I.M.F. said in a statement, is expected to unlock more loans, including from the United States and the European Union, that should bring the total over two years to $27 billion. The loans will be more spread out and less onerous than the $15 billion Russia had promised Mr. Yanukovych before he fled the country.
The fund’s mission chief, Nikolay Gueorguiev, declined to say how big the initial tranche of aid would be. He said he expected the board to approve the deal by the end of April.
Arseniy P. Yatsenyuk, the interim prime minister, told Ukraine’s Parliament that the country was “on the brink of economic and financial bankruptcy” and that gross domestic product could drop 10 percent this year unless urgent steps are taken in conjunction with the fund.
The measures could damage the new government’s popularity at a time when it is struggling to establish itself after losing territory to Russian forces and before emergency presidential elections scheduled for May 25.
Appearing in Parliament on Thursday, Mr. Yatsenyuk announced new legislation to prevent “financial disaster” in Ukraine, including provisions that would freeze the minimum wage and raise taxes on the country’s largest businesses, which in many cases have effective monopolies.
Posting later on Twitter, Mr. Yatsenyuk wrote: “The government will not allow the bankruptcy of Ukraine. The package is very unpopular, complex, hard reforms that have long needed to be done, submitted to Parliament.”
Senior Western officials said on Wednesday that the loans from the United States and from the I.M.F. would be structured to get the government through its first few months without undue political upheaval, putting off some of the more difficult changes until after the May election.
The West has also chosen not to press for early parliamentary elections, one senior official said, because “the priority now is stabilization in Kiev and de-escalation with Moscow.”
The fund said in a statement that “the financial support from the broader international community that the program will unlock amounts to $27 billion over the next two years. Of this, assistance from the IMF will range between $14-18 billion, with the precise amount to be determined once all bilateral and multilateral support is accounted for.”
The new government’s initial estimates of its needs was roughly $35 billion over two years.
“Following the intense economic and political turbulence of recent months, Ukraine has achieved some stability, but faces difficult challenges,” the I.M.F. said, adding that foreign currency reserves were at a “critically low level.”
The fund has made demands of Ukraine in the past, and pulled the plug on a loan arrangement with the previous government. But Mr. Yatsenyuk, an economist himself, has vowed to work with the fund to make any necessary changes.
The I.M.F. statement Thursday was careful in speaking about energy prices, saying that it needed “the commitment to step-by-step energy reform to move retail gas and heating tariffs to full cost recovery, along with early action towards that goal,” but it did not specify its terms.
On Wednesday, Ukraine’s state energy company, Naftogaz, said it would increase domestic heating gas prices by 50 percent on May 1, in part in response to Russian price increases. But Ukraine has sizable gas stores and the arrival of spring will sharply reduce consumption.
The United States and the European Union have made a big show of promised aid and loans guarantees, but the American offer of about $1 billion has been held up in Congress in a dispute over funding for the I.M.F. The Europeans are seeking final approval for $1.6 billion and Japan has announced that it will contribute roughly $1.5 billion.
In a statement by the White House press secretary, Jay Carney, the Obama administration praised the I.M.F. announcement. “This represents a powerful sign of support from the international community for the Ukrainian government,” Mr. Carney said, adding that Washington was standing firmly behind the provisional government in Kiev. “Together with our allies and partners, President Obama will continue to build international support for the Ukrainian people at this critical time.”
Mr. Carney also said that the White House was working to win congressional approval for an additional loan guarantee of $1 billion.
In December, Russia had agreed to provide Ukraine with a $15 billion economic bailout package and, publicly at least, had not imposed any of the conditions that had long been demanded by the fund in exchange for assistance.
After purchasing an initial $3 billion in Ukrainian bonds, the Kremlin effectively canceled the aid package in response to the ouster of Mr. Yanukovych, the country’s pro-Russia president.
While Western leaders had been eager to provide financial assistance to Ukraine’s new government, especially in light of Russia’s invasion and annexation of Crimea, the Kremlin still has enormous leverage over the Ukrainian economy and, consequently, over Kiev’s ability to repay its loans.
Last summer, Russia abruptly began blocking Ukrainian goods at its border by demanding tougher customs inspections, and then threatened even more severe and destabilizing trade sanctions if Ukraine signed sweeping political and trade agreements with the European Union. Mr. Yanukovych, citing those threats, refused to sign the accords, setting off the months of civil unrest that ultimately led to his ouster.
In recent days, the United States and its Western allies have shown concern that Russia might undertake further military action by invading eastern Ukraine, which is the base for much of the country’s manufacturing and industrial activity.
Russia, however, could easily wreak economic havoc on the region without any military action, simply by imposing the sanctions threatened in the fall.
In December, the I.M.F. issued a scathing report on the results of a financial aid package to Ukraine that was approved in 2010. In the report, the fund accused Mr. Yanukovych’s government of abandoning promised economic measures and suggested that it would be hesitant to lend money to Ukraine in the future.
While it is unlikely to dissuade the fund’s board from approving the new assistance package, the previous difficulties in Ukraine nonetheless amount to a reality check. Stabilizing Ukraine’s deeply troubled economy will not be easy, even if Russia does not intervene.

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