Russia-Ukraine conflict overshadows EBRD meeting

By bne IntelliNews May 15, 2015

Ben Aris in Tbilisi -


The conflict between Russia and Ukraine has overshadowed the European Bank for Reconstruction and Development's (EBRD) annual general meeting in Tbilisi this week, with Russian Deputy Finance Minister Sergei Storchak accusing the bank of a "political motivated" decision to suspend lending to Russia.

The development bank's economic forecast released on May 14 was heavily coloured by the conflict. While the start of a quantitative easing programme by the European Central Bank is already giving the countries of Central and Southeast Europe a boost, the conflict in the east is dragging down the rest of its region in the former Soviet Union.

Russia's GDP is seen contracting by 4.5% in 2015, with the recession easing to 1.8% decline in 2016, attributed to oil prices stabilising at $60 per barrel and prudent macroeconomic management. But GDP will remain affected by unsolved deep-rooted structural issues and economic sanctions. This is worse than the 3.5% predicted by most economists.

Russia's slide into recession and the associated collapse of the Ukrainian economy are having a “serious spill-over” effect on the rest of the region, as so many countries in the Commonwealth of Independent States (CIS) are dependent on Russia for both trade and remittances from migrants working there.

The conflict also flared in the country sessions. Russia has been barely present at this year's annual meeting, as the EBRD froze all its programmes in the country and is not making any new loans. Previously, the EBRD was the single largest foreign investor in Russia, disbursing $1bn-2bn a year. Russia is hopping mad at what it sees as an insult by the development bank. “We are surprised and disappointed that the EBRD, being a major and prestigious international financial institution, found itself involved in the sanctions polemics that was used to ramp up political and economic pressure on our country,” Deputy Finance Minister Storchak told the EBRD board of governors in Tbilisi. “It is essential that the EBRD remains a depoliticised transition institution... We hope that the bank will not be guided by temporary political trends.”

Ashes to ashes

Ukraine, on the other hand, has been front and centre at the EBRD, and its "Phoenix arising" session was packed with press and delegates. “The Phoenix has already started to rise,” said US-born Finance Minister Natalie Jaresko. "We have accomplished a lot already.”

Together with Economics Minister Aivaras Abromavicius, who recently gave an interview to bne IntelliNews on his ministry's plans, the two ministers reeled off a long and impressive list of reforms that are in place or in the works. But the government's main achievement so far has been to stem the meltdown and stabilise the economy. Now the real work begins, but with a new anti-corruption agency chief starting this week and a new head of the federal property agency due to be appointed in the next two weeks, most of the team needed to push through the far-ranging and radical reforms is in place and work can start in earnest.

However, Jaresko shied away from the biggest issue hanging over Ukraine now: what to do about its debt. The negotiations over imposing a haircut on the foreign holders of Ukraine's bonds are unravelling, with the two sides trading barbs in the press over the past week. “Despite numerous requests from the [finance] Ministry’s side, the [creditors’] committee refuses to reveal its membership, a highly unusual departure from standard practice in similar situations, and in stark contrast with IIF transparency and disclosure principles,” Ukraine's finance ministry said in a statement posted on its website this week.

According to analysts at the brokerage Investment Capital Ukraine, “this media outburst inflames unnecessary controversy, muddling both sides’ positions. Even more damaging, this news was sparked precisely on the day that the IMF mission convenes in Kyiv to assess the program’s progress." Pressure is growing on the government in Kyiv to restructure its debts before the International Monetary Fund reviews a $17.5bn financial aid deal on June 15.

More difficult still will be that Russia has reiterated that the repayment of a $3bn Eurobond issued by Ukraine and bought by Russia is not up for negotiation and must be repaid when it matures in December. “We are not participating in this debt operation and have no plans to participate," Storchak said at the EBRD meeting about the talks with Ukraine's creditors. This followed remarks from Russian Finance Minister Anton Siluanov earlier in the week that Russia might sue if Ukraine failed to repay the loan on time. Storchak's statement comes a day after Moscow agreed to change the terms on a $1.55bn loan to Belarus.

With two of Ukraine’s main creditors – Russia and private bondholders – not prepared to budge on the debt issue, it seems a nasty clash is in the offing, first ahead of the deadline of mid-June set by the IMF, and then again in December when Russia's debt comes due.

The issue of the Russian debt is especially tricky, because if it’s classified as a sovereign bond and Ukraine defaults on it, then under the IMF's own rules it would not be allowed to make any more loans to Ukraine (it is, however, allowed to lend to countries that have defaulted on commercial debt). The status of the Russian bonds is being hotly disputed, so despite the optimism in Tbilisi the hurdles that Ukraine needs to clear remain formidable.


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