IMF deal on cards as Ukraine said to cave in to demands on gas tariffs

By bne IntelliNews November 4, 2013

bne -

Facing down Russian bullying on one side and an economic collapse that could only be months away, Ukrainian President Viktor Yanukovych has reportedly caved into long-standing pressure from the International Monetary Fund (IMF) on November 4 by saying his government would hike domestic gas tariffs.

Ukraine's hard currency reserves have been dwindling fast over the last few months and Standard & Poor's downgraded Ukraine's sovereign rating to 'B-' from 'B' on November 1, sparking speculation that a steep devaluation of the currency was imminent. Moreover, the state is facing some $3bn of debt redemptions this autumn and another $7bn next year, but doesn't have enough on hand to meet those obligations.

Kyiv is badly in need of a new IMF stand-by loan deal to get through the next year, after which Yanukovych will face re-election as president in 2015. He has calculated that by throwing his lot in with Europe and signing off on a free trade and association pact with the EU at a summit at the end of November, his new friends will come up with cash to bail out the economy. However, the IMF threw a spanner in the works by releasing a tough statement November 1 saying it will stick to its demands, among which hiking the domestic price for gas is a key condition.

The government in Kyiv has been shilly-shallying on the issue for several years now. But reports say Yanukovych has now agreed to raise domestic tariffs for households by a whopping 60%, which consume 3,500 cubic metres of gas a year. Yanukovych has also signed off on an order to widen the trading band for the hryvna, which will lead to a controlled devaluation of the Ukrainian currency. The new upper limit will be set at a hryvna/dollar rate of UAH8.5, significantly higher than the approximately UAH8.1 it has been trading at, the weekly reports. Relaxing the forex regime is another key IMF demand.

Back against the wall

None of these measures will be popular with the electorate and for Yanukovych to agree to them means he has been backed into a corner.

Perhaps significantly, Yanukovych has made the concessions in the wake of meetings with his Russian counterpart President Vladimir Putin. Moscow is livid at the idea of Kyiv rejecting the Russian-led trading bloc called the Customs Union in favour of the EU and has promised retribution: Russian state-owned gas giant Gazprom has already hit Ukraine with a $882m bill for unpaid gas deliveries.

Minister of Energy and Mines Eduard Stavytskyy told Ukrainian broadcaster Channel 5 at the weekend that a resolution to the issue would be hammered out November 4. He said the talks between Naftogaz and Gazprom are in the final stages, but wouldn't reveal the nature of any of the negotiations, or if the government will step in to provide financial help for the Ukrainian company. "I want to emphasize that the issue is actually solved and on Monday [November 4] you will learn the details," Stavytskyy said, reported UPI.

Analysts welcomed the apparent moves by Yanukovych, which should clear the way for a new IMF deal and get Ukraine back on its feet. On October 31, Reuters reported senior EU officials as saying that the EU is in advanced discussions with the IMF on providing stand-by financing to Ukraine should the country come under economic pressure from Russia later this year.

However, others caution that this is not the first time Kyiv has made these sorts of promises and then no delivered. "On numerous occasions in the past various members of the government have indicated a willingness to raise gas prices, but little has yet been delivered on this front," Tim Ash of Standard bank said in emailed comments to clients. "So the question is should we really believe the latest set of reports? I guess with Russia really turning the screw, the question now is how desperate is the Yanukovych administration for a new IMF programme."

On the face of it, the Ukrainian government looks more determined to keep its word. At the meeting where the measures were decided, the Ukrainian weekly Zerkalo Nedeli said Yanukovych was flanked by Prime Minister Mykola Azarov, First Deputy Prime Minister Sergei Arbuzov and Finance Minister Yuriy Kolobov.

Other less headline-grabbing details to stabilise the budget were also agreed at the meeting, including conducting audits at the biggest firms and closing loopholes that allow companies to transfer funds offshore reports Zerkalo Nedeli. Savings from revising social benefits, such as cutting pensions, could also be on the cards.

Even if Yanukovych is serious, it is very unlikely all this can be implemented overnight. Ash speculates that nothing will be done until next April and then the increases in gas tariffs and reductions in social benefits will be phased in gradually - probably just fast enough to convince the IMF to open up its purse again.

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