It seems the International Monetary Fund is running out of patience with the Ukraine government, which has become too weak and divided to fulfil the pledges it has made to the fund to receive aid.
Kyiv announced it would not pay the $3bn it owes Russia in the form of a Eurobond that matures on December 20. Within hours the IMF issued a statement that threatened to cut Ukraine off from its $17.5bn aid package if it didn't pass a sensible tax reform plan as part of next year's budget.
Ukraine's cabinet has imposed a moratorium on payment of the Russian debt, Prime Minister Arseniy Yatsenyuk said at a cabinet meeting on December 18. "Considering that Russia has refused, despite our efforts, to sign an agreement on the restructuring and to accept our proposals, the cabinet is imposing a moratorium on payment of the Russian debt worth $3bn," he said.
Furthermore, "The government is imposing a moratorium on the payment of $507mn by two Ukrainian companies - Yuzhnoye and Ukravtodor - to Russian banks. From today, all payments shall be suspended until the adoption of our proposals or a court decision," Yatsenyuk said.
The IMF had officially recognised the Russian bond as official debt earlier this week. Defaulting on the Russian bondwould have prevented the fund from providing any more aid to Ukraine if it had not previously defused the issue by changing its own rules to allow "lending into arrears".
However, the IMF also issued a mild rebuke to Ukraine, saying that it had to negotiate with Russia "in good faith", which was taken to mean that it needed to try one more time to sit down with the Russians and settle its differences. "The IMF does not lend to countries that are not making good-faith attempts to repay their debt," the IMF said in a statement.
That meeting never happened as the two sides are not even talking to each other. All communications between Kyiv and Moscow have been running for the past week through Berlin, which belatedly has been trying to avert this particular train wreck.
Kyiv passed laws this month that allow it to slap a moratorium on "foreign debt", but given it has come to terms on a restructuring deal with its other creditors, the only debt left to apply this law to is the Russian one.
The Kremlin has made it clear that it expects to be paid on December 20 and will almost certainly take Kyiv to court over its decision of renege on the payment. That is likely to be an extremely complicated case, especially after President Vladimir Putin admitted in public during his annual press conference that Russia has military personal operating in the Donbas region of Ukraine. Ukrainian financial losses incurred through Russia's seizure of Crimea through a disputed referendum in March 2014 can also be cited as a reason for non-payment.
Moreover, if Ukraine's debt is official then legally it cannot be included in the restructuring of private debt done earlier this year, according to reported expert legal opinion. Ukraine has been insisting the debt is private from the start and Yansenyuk has cited this as justification for imposing the payment moratorium. The validity of this claim, together with the issue of whether Russia has forfeited its rights to be reimbursed because of its military action against Ukraine, is what will be tested in court.
The IMF is in an awkward position and has been trying to take a middle path between the two belligerents. The admission that Ukraine's debt is official was seen as a victory for the Kremlin. However, the fund's decision to allow lending into arrears was seen as a political-motivated move to enable to allow it to continue supporting Ukraine.
However, the IMF is also clearly irked by Kyiv's failure to rise to the challenge. In a statement issued on December 18, it explicitly threatened to cut the government off from more funds if Kyiv didn't put a tax plan into place that would leave the government with an IMF-approved 3.7% federal budget deficit in 2016.
Some in the government are pushing a business-friendly version that would slash taxes and maintain social payments but results in at least a 10% budget deficit, which the IMF refuses to finance. The Rada rejected the IMF-compliant version of the budget in a vote this week, saying the issue would be put off until the New Year.
"It is with concern that we have observed the discussions yesterday [December 17] in parliament that effectively rejected the government's proposals for a new tax code and the government budget for 2016," David Lipton, the first deputy managing director of the IMF, said in a terse statement release on December 18. "Approval of a budget that deviates from programme objectives for 2016 and the medium-term will interrupt the programme and inevitably disrupt the associated international financing.”
The IMF was already unhappy with Kyiv. It has refused to release the last two tranches of money until it sees a finalised budget. Ukraine was due to receive a total of $10bn this year from the IMF, but the fund has withheld the last payments worth just over $3bn because of concerns that Kyiv was not making progress on implementing the associated reforms.
"I guess it was always going to be ambitious to imagine the current IMF-compliant version of the tax code and budget were going to be passed in a couple of days through the [Verkhovna Rada legislature]," Tim Ash, a strategist with Nomura, said in an emailed note. "More likely we assumed things would drag on to the edge/last minute, and knife edge. This is Ukraine, after all where its political elites seem to exist on a different planet/even constellation to other mere mortals.
"The IMF have made it pretty clear that they are not going to be soft - they did their bit by changing policy over lending into official arrears, now it is the turn of the Rada to do its share of the heavy lifting and pass a reasonably coherent and consistent budget and tax code, reining the deficit in to 3.7% of GDP."
Indeed, the government's own advisors have become increasingly scathing of the government failure to make progress. "All the progress made this year has been imposed externally," Ivan Miklos, an advisor to Finance Minister Natalie Jaresko, said in a recent article titled "How to (not) reform Ukraine".
That same message was brought home clearly by US Vice President Joe Biden, who travelled to Kyiv and spoke to the Rada at the start of December. "You know in your hearts what to do. So do it," Biden told the assembled deputies.
However, instead of buckling down to the task, the Rada session turned into farce in the following days. Yatsenyuk was defending his government's record in parliament on December 12 when legislator Oleh Barna, a member of the presidential faction, approached him with a bunch of flowers and proceeded to physically lift him from the lectern. The situation quickly descended into a slapstick bar room brawl.
If that wasn't bad enough, only three days later chaos broke out at a Ukrainian government meeting after Interior Minister Arsen Avakov lost his temper and threw a glass of water at Mikheil Saakashvili, formerly president of Georgia and now governor of Ukraine's Odessa region. The two men exchanged slurs and accusations and close to blows as the meeting quickly broke up.
"It's a long time since I've seen such a bonkers populist," Avakov said of Saakashvili afterwards, but neither man emerged from the exchange with much grace.
Overall, it seems Ukraine's western partners are rapidly running out of patience with Ukraine - except the EU. Also on December 18, the European Commission (EC) gave a "positive conclusion" to deliberations on lifting the visa requirement for Ukrainians wanting to travel to the rest of Europe.
The EU-Ukraine Visa Liberalisation Dialogue was launched in October 2008. In November 2010, the European Commission presented the Ukrainian government with an action plan on visa liberalisation (VLAP). The VLAP sets a series of precise benchmarks for four 'blocks' of technically relevant issues, with a view to adopting a legislative, policy and institutional framework (phase 1) and ensuring its effective and sustainable implementation (phase 2). The benchmarks need to be met before Ukrainian nationals holding biometric passports can enter the Schengen zone for short stays without the need for a visa, the EC says in its report.
In its baroque way, the EC has just completed the next step in this long process: "the sixth report is the second progress report on Ukraine's implementation of the second phase of the VLAP."
But the commission concluded that "Ukraine meets all the benchmarks set in respect of the four blocks of the second phase of the VLAP".
That doesn't mean the EU will drop visa requirements tomorrow but is a definite step closer to it. The decision will also be a desperately needed bone for the liberal administration that is clearly starting to fray at the edges. Visa-free travel to Europe is one of the most desired changes the "pivot to Europe" demanded by the Euromaidan protestors, and the decision gives the embattled President Petro Poroshenko some fresh ammunition to use against his political opponents.
However, the EC is almost certain to hold the government to making more progress against corruption before moving to the next level, something Poroshenko has pointedly failed to make any progress with.
Ukraine is reaching a tipping point. There have been mounting calls for the resignation of Yatsenyuk, whose party's approval ratings are so low it didn't even bother to stand in recent regional elections. At the same time the recent fisticuffs in the Rada was between allied fractions within the ruling coalition.
The population has become weary of the circus which presents an opportunity for resurgent former prime minister Yulia Tymoshenko, who is expected to table a "no confidence" motion in the government soon. The worst case scenario is that the chaos could play into the hands to the extreme rightwing nationalist parties or a pro-Russian party and that could result in a new round of violence or a third Maidan.