Ukraine govt resigns ahead of IMF arrival in Kyiv

By bne IntelliNews December 4, 2012

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The Ukrainian government of Prime Minister Mykola Azarov resigned en masse on December 3, in a move regarded as having been orchestrated by Ukrainian President Viktor Yanukovych as a sop to the International Monetary Fund (IMF) ahead of crucial talks to secure a new bailout loan.

The current cabinet will continue to function until a new one is appointed, but speculation on the PM's replacement has already begun. "One name that has been floated around for a replacement is National Bank of Ukraine (NBU) governor Sergiy Arbuzov," says Ivan Tchakarov, chief CIS economist at Renaissance Capital.

On November 30, the government announced that an IMF mission is slated to arrive in Kyiv on December 7 and stay for a week. The invitation was made by the government in order to discuss the possibility of re-establishing the $15.4bn stand-by agreement that was frozen in March 2011 after the government failed to carry out the fund's recommendations - including raising domestic gas tariffs and introducing a looser exchange rate regime. If a new deal can be struck, then that would release billions of dollars of badly needed hard currency to prop up the national currency and stave of a looming devaluation. Residents have already withdrawn $1.9bn in the last month as fears of another devaluation grow.

"The dismissal of the government may have been driven by the need to appoint a new PM that is not burdened (like Azarov) by previous statements that Ukraine will not raise gas tariffs for the population - a key IMF requirement for disbursing money. A new government and a new PM will facilitate the process of negotiations with the IMF and pave the way for speedier re-engagement," Tchakarov said in a note released on December 3.

There are hard economic reasons too. The currency has been sliding and this week the state statistics committee said the current account deficit had widened by $1.6bn in October from $1.5bn a month earlier, ratcheting up the pressure on the hryvna. The NBU has already seen its hard currency reserves tumble this year, falling by over 8% in October alone, to stand at a little more than $26bn at the start of November. At the same time, the economy has slowed sharply from 5.2% growth in 2011; banks like Renaissance see modest growth of only 1% for this year after the economy contracted in the third quarter.

"Still, as we have argued previously, a new IMF programme will probably become reality only in 2013. We think that one possible scenario will involve raising gas tariffs for the population only after the winter season to make this more palatable to the electorate even if the announcement of a favorable conclusion of IMF talks comes before that as an attempt to calm markets. This will benefit UKR assets," says Tchakarov, who argues that Ukraine has been backed into a corner and will have to deal with the IMF if it is to avoid another financial crunch.

"We suspect that positive statements about successful outcome of the negotiations may come sooner than the actual increases of gas tariffs (we expect this to happen only after the winter season is over) as a way to re-ensure markets about Ukraine's external sustainability and internal stability," says Tchakarov.

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