Ukraine and the IMF: a sense of deja vu

April 1, 2014

The West has just agreed to stump up a load of cash for Ukraine but there is a distinct sense of deja vu around it all.

Let’s face it – Ukraine’s track record on how it manages ts economy and foreign affairs isn’t great. This is the third aid programme Kiev has signed with the International Monetary Fund in a decade and two of them have failed. The IMF has its fingers crossed that this one will not go the way of the past two. Reza Moghadam, the IMF’s top European official, tells Reuters in an interview:

They seem to be committed, they seem to own this reform programme and in that sense I am optimistic

Indeed, Ukraine’s new government has taken some brave and politically unpopular  steps, allowing the currency to depreciate and announcing plans to cut gas subsidies that amount to almost a tenth of its annual GDP, according to IMF data. (Here’s a piece from Breaking Views on the shocking energy waste in Ukraine).

But there’s a long road ahead, says Luis Costa, head of CEEMEA strategy at Citi.  According to Costa:

It’s a question of seeing whether the student continues to behave. (Former President Viktor) Yanukovich also had started the IMF programme on a good footing but when the market opened he went to the Eurobond market for cash instead of sticking with the IMF and that’s when things started to go wrong.

He notes that with the IMF now playing ball, foreign investors are likely to venture back in force into the hryvnia T-bill market, with an eye on the double-digit yields there, especially as the hryvnia has already depreciated 25 percent this year to the dollar. At present, 5.5 percent of the T-bill buyers are foreigners. Secondly, elections loom in May which always makes it difficult to take politically unpopular decisions.

Ukraine in fact is almost at the point where it could  tap global bond markets again – its 2023 bond is trading with a 8.6 percent yield (off highs above 11 percent) which means it could issue five-year debt for less than that. There are a couple of caveats to that, however. First, bond yields have fallen only because the IMF has Ukraine’s back. Second, if Ukraine walks away from this IMF programme, there is unlikely to be another. With debts equating to half its annual GDP, even Kiev will be aware of the risks. Gabriel Sterne at Exotix says:

 When a country has failed that many times, one has to be cautious about the possibility of success. But the last programme failed because Yanukovich did not want to raise gas prices and the current government has expressed willingness to do so.

Sterne rates the chances of success as higher this time because the current government, unlike Yanukovich, will not get any support from Russia.  Moscow had offered a $15 billion loan in December as a price for rejecting a trade deal with Europe.

Stakes for failure for this government are a lot higher than in the past. It can’t afford to lose the goodwill of the West because the alternative backstop that Yanukovich had in the form of Russia is not there any more.

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