Ukraine raised $1bn from a Eurobond issue on February 4 and bought itself some breathing space in negotiations with the International Monetary Fund (IMF), a team from which arrived in Kyiv last week to negotiate a new $15bn stand-by agreement.
The government has been backed into a corner by slow economic growth and rapidly dwindling hard currency reserves that have threatened to destabilise the local currency, the hryvna.
Kyiv is stuck between a rock and hard place. On the one side, the IMF is insisting that the government increase domestic gas tariffs by at least half - a deeply unpopular move the government has been resisting. First Deputy Prime Minister Arbuzov said on Sunday, February 3, that the "work with the IMF is very important... and we will do our best... for Ukraine to receive IMF support". But he dodged questions of whether the government would increase domestic gas/utility tariffs to secure cooperation with the IMF. The most the government has said on the issue so far is it may hike tariffs on some people with "European salaries".
On the other side, Russia has said it would slash the cost of gas imports that are eating up Ukraine's reserves if Kyiv agrees to join its Customs Union - a trade club set up between Russia, Kazakhstan and Belarus in 2010. Kyiv doesn't want to do this either, as it would effectively end any chance of Ukraine entering into a free trade agreement with the EU, the first step to becoming a member of the western trade club.
However, with hard currency reserves dwindling, Kyiv is running out of time. The government already knew when the IMF team arrived that there would be little chance of signing off on a new deal quickly, let alone getting another tranche of cash. Then Russia upped the ante again last week by slapping Kyiv with a $7bn bill for unpaid gas deliveries that Kyiv cannot afford.
The Eurobond will stave off disaster - for a while. The yield of 7.625% on the bonds that will mature in 2022 was slightly cheaper than its last issue of $1.25bn in November (technically this issue is an extension of November's), but is still expensive. However, with a debt/GDP ratio of under 35%, Kyiv still has some space to borrow. This issue still only accounts for a fifth of the total borrowing permissible by this year's budget.
Timothy Ash, head of emerging market research at Standard Bank, said in a note on Tuesday, February 5 that by issuing the Eurobond, Kyiv has "sent a crystal clear message that they are in no rush to do a deal with the IMF or the Russians."
Circumstances have worked in Kyiv's favour, as emerging market debt right now is easy to sell as last year's bond rally spills over in 2013 - but it can't last forever. Moreover, Ukraine has a heavy repayment schedule this year, with more than $3bn to repay to the IMF alone from the last stand-by deal. Kyiv will struggle to meet this debt without cutting a new deal, and will still have to find another $6bn to meet its other obligations - domestic and external - through to the end of the year. Ukraine will have to one way or another find more external funding if it is to make it through the year in one piece.
Standard Bank's Ash suggests Kyiv is simply playing a game of chicken, to spin things out until the heating season is over after which it can hike rates without inflicting pain on the population. 'This is all about trying to lock in cheap funding while they can, and to boost their position in negotiations both with the IMF and the Russians," says Ash. "This hardly sends a message that the Ukrainian authorities are willing to do whatever it takes to cut a deal with the IMF, more like lets see what is the minimum we can get away on the reform front, and lets play for time... hope we can survive thru the winter, and beyond the winter heating season before having to hike gas prices to secure an IMF agreement."
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