INTERVIEW: Ukraine's new finance minister hits all the right notes at EBRD

INTERVIEW: Ukraine's new finance minister hits all the right notes at EBRD
Ukrainian Finance Minister Oleksandr Danylyuk speaking at the EBRD AGM in London.
By bne IntelliNews May 17, 2016

Ukraine will restart its stalled International Monetary Fund (IMF) assistance programme and could receive the next $1.7bn tranche as soon as the government signs off on a new memorandum on cooperation with the institution, Ukraine’s new finance minister, Oleksandr Danylyuk, told bne IntelliNews in his first interview with the international press on the sidelines of the EBRD’s annual general meeting in London on May 12.

The minister hit all the right notes, highlighting the need for fiscal prudence to keep the economy stable, pushing ahead with crucial privatisation and dealing with the endemic corruption. “Without tackling corruption there will be no Ukraine,” he said during his country presentation at the EBRD.

Danylyuk replaced the highly respected Natalia Jaresko as part of a cabinet reshuffle in April. Although he served as an advisor to the despised ousted president Viktor Yanukovych, Danylyuk is regarded as a progressive technocrat, who can combine good connections in Ukrainian political circles with his international experience working for McKinsey & Company in London. And he was thrown in at the deep end after an IMF assessment team arrived in Kyiv on May 10, within weeks of his appointment. “The aim is to finalise the memo with the IMF and sign off on it. We have completed all the prior actions, but adopting some new laws is critical to the process,” Danylyuk said.

There are 13 laws that need to be passed or changed as part of the agreement that is the last hurdle to restarting the assistance programme. Most of the bills listed were already drafted by the previous government, but will have to be submitted to parliament once again by the new cabinet.

While Danylyuk would not be drawn on how long it will take to sign the memo, he said it would happen “soon” and the IMF tranche would be released “in a matter of weeks” after that. Some $3bn of other lending from the US and Europe is tied to the IMF deal.

Danylyuk pointed to evidence of real progress made by the new administration, as the biggest IMF demand has already been met: the government bit the bullet and hiked domestic energy tariffs by 450% in May – something the fund has been demanding for years. “We are the government that is going to make the tough decisions,” said Danylyuk. “We even raised the energy tariffs above expectations. It was not just a political decision – it was the right thing to do.”

Danylyuk is clear that he is intent on sending a clear ‘open-for-business’ signal to not just the IMF, but international investors as well. “We did this and we can do more,” Danylyuk said, referring to the energy tariff hike.

Land reform is a potential supercharger for Ukraine’s economy. “It has been discussed for decades, but if we open up our agricultural sector ,we can take the country to a new level,” he said. “There is a huge potential in our land.”

“The IMF is imposing reforms on us, but we need our own agenda. We are partners, as our success is their success. It is very important to signal to private investors our commitment, as they need trust in the country. That means what was promised to the international financial institutions [like the IMF] will be delivered,” said Danylyuk, adding that now the economy has stabilized the government is not dependent on the IMF for handouts, although clearly the funding is still very useful.

Speeding up reforms

The country’s macroeconomic situation has stabilised and gross international reserves increased by 4.1%, or $519mn, in April to $13.2bn, the National Bank of Ukraine (NBU) reported on May 6. The NBU was buying not selling dollars in April with net purchases of $676mn, to which it added a local Eurobonds placement worth $651mn. By the end of April, gross international reserves equaled 3.4 months of imports, which is a tad more than economists believe is a minimum to keep the local currency stable. “We can survive quite a long time now without more tranches. What is important now is to speed up reform,” said Danylyuk.

Following the debt restructuring deal struck by his predecessor Jaresko, Ukraine will see its debt repayment obligations start to rise from 2019 and has until then to get its house in order. “We will be able to raise some resources from the market to refinance this debt and these investors are already looking at us. We should be able to return to the international capital market as soon as 2017 after we get the next tranche from the IMF,” said Danylyuk.

In the meantime, his finance ministry will continue to tap the local markets, as much as a trust-building exercise as a means to fund the government spending.

In the same vein, Danylyuk said the privatization programme needs to be fulfilled – another one of the IMF’s key demands – not just to raise money but also to engender more trust among foreign investors. And first up will be the privatization of the Odessa Port Plant, which will be a litmus test of the new government’s commitment to the liberalization agenda.

Despite the optimism and support from Ukraine’s Western allies, the new government still has a hard sell on its hands. The decision of the Dutch to reject Ukraine’s Association Agreement ratification in a non-binding referendum in April is a clear symptom of the growing ‘Ukraine-fatigue’ in Europe. “We can deliver – I’m a reformer myself. There may be some fatigue, but if we do things right, then we will create the opportunity and investors will follow,” he said.

Part of that fatigue is down to Ukrainian President Petro Poroshenko’s failure to seriously tackle corruption by putting a serious man in charge of the Office of the Prosecutor General. “You cannot tackle corruption overnight. This is a systemic problem, so it needs to be also tackle systemically,” Danylyuk said during his country presentation at the EBRD meeting. “This work is underway, it is happening. Institutions are in place and they will start delivering in the next couple of months – you will see some important cases. I am very optimistic about it, as without tackling corruption there will be no Ukraine.”

After much stalling and critcism of his failure to act, President Poroshenko appointed Yuriy Lutsenko in the first week of May, the deputy head of the president’s eponymous parliamentary fraction. “Lutsenko has zero experience as a prosecutor and some think he is a bad appointment. I think he is good. He could and will change the Prosecutor General’s Office as he understands changed is needed there,” said Danylyuk, who is also seen as close to Poroshenko.

Apart from acting as midwife to restarting the IMF programme that has been de facto suspended since August last year, the two other thorniest issues that Danylyuk will have to grapple with are the reform of the corrupt tax administration – another IMF demand started but not finished by Jaresko – and negotiating with Russia over a $3bn Eurobond that was due in December. The Russians have taken the default of the bond to court in a case due to be heard soon in Stockholm. “We will submit our defence later in May and we have a very strong case,” said Danylyuk. “We are always open to restructuring the Russian bond as long as it is on the same terms as the other bond holders, as everyone has to get the same treatment.”

That doesn't sound very optimistic, but Danylyuk pointed out that the Russians have ignored the “etiquette” of international relations and occupied part of Ukraine, which makes relations hard. However, he said eventually the two countries will mend fences, as they have too much in common to ignore each other forever – although a reconciliation is unlikely on President Vladimir Putin’s watch. “There will be a future change in power in Russia and the global market – two neighbours can’t ignore each other,” said Danylyuk.