[lbo-talk] Ukranian masses get first taste of freedom

Marv Gandall marvgand2 at gmail.com
Wed Mar 26 13:34:17 PDT 2014

The new Ukrainian government announced today that household gas prices would rise by 50 per cent from May 1, a condition being imposed by the IMF in exchange for a $15bn emergency loan. “At least it will be the end of the heating season, so less politically disruptive – and many Ukrainians would argue that this is a price to pay for freedom”, Tim Ash, emerging markets strategist at Standard Bank, told the Financial Times (below).

Meanwhile, today's Wall Street Journal reports that Western solidarity with the Ukraine only goes so far. One idea which has been recently been circulating in Western policymaking circles is that the Ukrainian government should invoke the doctrine of "odious debt" and default on the recent $3bn loan extended to the previous Yanukovych government by the Russians. The Russians provided the loan to dissuade Yanukovych from signing an EU association agreement, subsequently signed by the Yatsenyuk government. Since the Russian bond was registered in accordance with English law, the UK government could make collection of the debt unenforceable in English courts. However, it's considered highly unlikely that the Cameron government will agree to go down this road. After all, the overriding principle is the sanctity of debt. "It could give the impression that the Brits are fickle about debts", the WSJ reports. “It would be quite a big step for the British government to try and say it becomes unlawful to pay back this bond", a British corporate lawyer told the Journal. Yes, quite.

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IMF rushes through $15bn Ukraine bailout By Peter Spiegel in Brussels and Neil Buckley in Kiev Financial Times March 26 2014

The International Monetary Fund is expected to announce a rescue package for Ukraine of about $15bn as early as Thursday in hopes that the initial aid payments could be made by the end of April, according to officials involved in the negotiations.

The programme, which will come in a traditional IMF bailout known as a “standby arrangement”, is being rushed to the fund’s board because of concerns Kiev is running out of foreign currency reserves.

Securing the IMF deal will be a significant boost for Ukraine’s government as it battles to stabilise the country’s economy, while Russian tanks mass on its borders. Foreign exchange reserves have fallen to barely two months’ import cover, and the finance ministry warned this week it expected the economy to contract by at least 3 per cent this year.

The Fund had been considering a quick infusion of $1bn through its “rapid financing instrument”, but EU and US loans intended to be disbursed alongside the quick IMF aid were not coming quickly enough, officials said.

Instead, the IMF is hoping to agree the entire bailout package with Arseniy Yatseniuk, the Ukrainian prime minister, by the end of Wednesday and announce the deal on Thursday morning.

A package of $10bn-$15bn would be less than the $15bn-$20bn that Ukraine’s finance minister Oleksandr Shlapak said the country was seeking, although other nations are expected to contribute. A Fund rescue package will also unlock significant funding from other sources that has been made conditional on reaching an IMF deal.

Officials said that IMF negotiators were still working with Mr Yatseniuk on a number of fiscal measures, including how to help households who will be hit hard by the end of subsidies to heating fuel. But they believe Kiev will come to an agreement by the end of the day.

“We have been about to finalise [the agreement] for a few days,” said one person involved in the discussions. “They will be sorted out, hopefully today.”

“Ukraine needs the money and the west is eager to demonstrate support,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “All parties have an incentive to finalise and disburse quickly rather than wait until after May’s presidential elections.”

Negotiators are hoping to announce bilateral loans alongside the IMF funding. Japanese Prime Minister Shinzo Abe this week announced his government would pitch in Y150bn, or about $1.5bn, and the EU is attempting to get final agreement for another €1.6bn.

The US assistance, in the form of $1bn in loan guarantees, has been held up in Congress for days as Democrats and Republicans spar over whether the aid bill should include passage of the funding for the IMF.

Speaking before his final meeting with the IMF mission, Mr Yatseniuk said he expected the EU’s €1.6bn in aid to delivered first, within two months of the IMF agreement being signed.

The IMF has long attached two main conditions to any further financial support, which the previous government of president Viktor Yanukovich had not been prepared to accept.

One was greater exchange rate flexibility – code for a devaluation of the national currency, the hryvnia, long pegged at an artificially high rate to the dollar. The other was raising heavily-subsidised natural gas prices to households, which are a significant drain on the state budget.

But with the central bank having allowed the hryvnia to decline by nearly 35 per cent gainst the dollar this year, the first condition has been largely fulfilled. Ukraine also announced on Wednesday that household gas prices would rise by 50 per cent from May 1.

Though raising gas prices is politically unpopular, analysts say some of the extra revenues generated can be used for targeted subsidies to help the poorest consumers – rather than effectively having across-the-board subsidies as previously.

“At least it will be the end of the heating season, so less politically disruptive – and many Ukrainians would argue that this is a price to pay for freedom” from dependence on Russia, said Tim Ash, emerging markets strategist at Standard Bank.

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