KYIV BLOG: Interim Ukraine govt in the same hole as Yanukovych

By bne IntelliNews March 24, 2014

Ben Aris in Moscow -

The interim Ukrainian government signed off on the long-mooted Association Agreement with the EU at the weekend, setting the impasse with Russia in stone. However, the "Maidan" government baulked at signing the economic part of the deal. Is the new administration about to find itself in exactly the same place as ousted president Viktor Yanukovych did: refusing to sign the full agreement with the EU unless it gives Ukraine more money? That would be ironic.

Ukraine is bankrupt and needs billions of dollars fast to prevent a full-blown meltdown. The problem is the EU is not in good financial shape either and cannot afford to bail out yet another country.

The EU is already on the hook for the economies of Greece and Cyprus, with the southern states like Portugal, Spain and Italy also in deep trouble. How can the EU justify shelling out the $35bn (just for this year) that the Ukraine government is asking for but at the same time continue to drag its heels over bailouts for the other states already in the EU? Moreover, this would be an extremely hard sell politically, both regionally (as Germany would have to foot the bill) and domestically as populations are tired of being asked to pay for other countries (and banks) while their own living standards are falling.

Yet this is where we are heading. So far the EU's game to take Ukraine from Russia has been all tactics and no strategy. The money on the table is simply not enough to even get Ukraine through this year, let alone pay for the deep structural reforms and recovery.

The EU added another $1.4bn to its bailout package over the weekend, bringing the total on offer to around $15bn "over several years."

"The EU decided to increase financial aid to Ukraine from €610m to €1.61bn," Ukraine's UNIAN agency quoted PM Arseniy Yatsenyuk as saying.

"Over $2bn will be transferred to accounts of the Ukrainian government to stabilize economic situation in Ukraine. The deadline for the transfer is late April or early May," the premier continued, reports RIA Novosti.

At the same time, the US has almost voted through $1bn in credit guarantees to help Ukraine get through this rough patch.

This money is laughably insufficient.

Run through the numbers. Ukraine has between $12bn and $15bn (depending on who you ask) in hard currency reserves, or less than two months' import cover, which is not enough to maintain the stability of the currency. Moreover, the economic damage done by the three months of protests almost certainly guarantees that the economy will contract this year.

In terms of outgoings this year, the state has some $7bn worth of debt redemptions, including payments due to the International Monetary Fund (IMF). Russia is almost certain to increase the price it charges Ukraine for gas from the "special price" of about $260 per thousand cubic metres to around the $400 it was charging under the terms of the deal cut by former PM Yulia Tymoshenko in 2009, and even suggested last week that the price may be increased to $500. This price hike will cost Ukraine an extra $7bn a year in fuel bills. That's $14bn right there, all of Ukraine's reserves, and that is before you spend a penny on pensions, teachers or new power stations.

Add to this is that Ukraine owes Russia's Gazprom another $2bn for gas deliveries this year and the Kremlin has reintroduced the unpaid bill of $7bn from last year. If you include the $3bn of Ukrainian bonds that Russia bought in December, Russian Prime minister Dmitry Medvedev said over the weekend that Ukraine's total debt to Russia is about $16bn - more than the country's entire hard currency reserves.

EU foreign policy chief Catherine Ashton voiced deep concern on March 22 over the fragility of Ukraine's economy and said a short-term budget deficit problem had to be resolved "relatively quickly". But while there is a lot of talk about rallying the global community to bail out Urkaine, there's so far very little in the way of actual commitments.

"We have to make sure that Ukraine, economically, does not fall over... My biggest fear right now is the state of economy and the need for us all to offer the support that they need," Ashton told an event organized by the German Marshall Fund think-tank. "How do we make sure this economy holds together?"

An IMF team was in Kyiv all of last week to assess the situation and work out the details of a new stand-by loan programme. It was supposed to announce the details on March 21, but delayed the announcement to sometime this week. The Fund earlier said that no IMF money could be released until April, though last week admitted that even this date would probably be missed.

PM Yatsenyuk travelled to Brussels on March 21 to sign the political provisions of its association agreement with the EU, and on March 24 will be at the IMF office. Clearly he is lobbying for more money and must have asked for more from the EU over the weekend.

For its part, the EU also said that it would accelerate dropping some of its trade tariffs immediately. Under the terms the Deep and Comprehensive Free Trade Agreement (DCFTA), Ukraine was due to drop its barriers immediately, while the EU would drop its own barriers "eventually" depending on Ukraine's progress with deep and painful structural reforms. The concession made last week to drop more barriers early sounds good, but economists say it is actually worth about $200m over five months.

Yatsenyuk said the economic part of the agreement, rejected by the previous government over fears of significant economic losses, will be signed only after the presidential election due on May 25.

Arguably, it should have been the other way round: the economic part of the deal - the whole point of signing up to the EU in the first place - should have been signed now and the political part, that sets Ukraine in permanent conflict with Russia and ignores the interests of the population in the east of the country, should have been signed after the presidential elections when those people actually have some representation in the government.

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