Stalemate in IMF talks, early resolution unlikely

With the extreme cold this month claiming more than 130 dead on the streets in Ukraine, it would not seem to be the right time to put up gas prices, despite calls by the World Bank to speed up reforms, and further International Monetary Fund (IMF) loans contingent upon action in this direction.

President Viktor Yanukovych is reportedly avoiding any such move ahead of temperatures improving in April, (with an eye on parliamentary elections scheduled for October) thereby making it unlikely that there will be any early resolution in talks with the IMF, which requires Kyiv to increase gas prices before it allocates a new US $1.5 bn quarterly tranche of the US $15.5 bn stand-by arrangement agreed in July 2010. Only US $3.4 bn has been released, and none for the past year.

An alternative means of cutting costs sought by Yanukovych was persuading Russia to cut gas costs to US $250 per 1,000 cu m from US $400 to avoid implementing the 35% increase in household gas tariffs sought by the IMF. This is increasingly unlikely as Russia is now playing hard-ball, actually putting up prices and reducing energy exports to Ukraine – while offering a potential price reduction as a reward if Ukraine were to join its customs union.

David Hawley, Deputy Director of the External Relations Department at the IMF, confirmed that IMF Managing Director Christine Lagarde met in Zurich with Prime Minister Azarov this month, subsequent to the 24 January Kyiv/IMF meeting in Washington, to discuss “key policies and reforms needed to ensure the country's sustainable economic growth. They agreed to pursue an active dialogue through technical teams in the period ahead.” No time line was given for any follow up, though in response to questioning about room for Ukraine to ease its policies, Hawley responded, “A key policy issue from our perspective, is strengthening public finances in Ukraine and that is an aspect that can be covered in the technical discussions.”

The head of the Penta Center for Applied Political Studies centre, Volodymyr Fesenko, commented, "We should not currently expect a breakthrough in the talks with the IMF. I think that neither Ukraine nor the IMF is ready to take steps to reach a compromise. Ukraine cannot allow itself to agree to increase utility rates - it would be too risky in the year before elections. And the IMF is currently not ready to abandon its stringent demands," adding (with reference to the Euro crisis), “Ukraine is not the first in line for IMF loans."

An alternative for Kyiv has come from Sberbank which reportedly could consider lending to Ukraine if the IMF loans are not forthcoming, CEO German Gref told reporters. No application for such financing has been made, but Gref has said that Sberbank is working with the Ukrainian government on raising new debt (possibly as underwriter). Financing from the bank could form part of a larger syndicated loan or Eurobond. The Ukrainian government reportedly intends to raise US $2.7 bn in external funding this year (in addition to rolling a US $2.0 bn loan from VTB).

On 18 January this year, Yanukovych replaced finance minister Fedir Yaroshenko, with former economy minister and security service chief Valery Khoroshkovsky. Yanukovych was apparently unhappy about the austere budget Yaroshenko had presented and the country's bleak economic outlook. The World Bank has lowered its forecast for Ukraine's economic growth in 2012 from 5.0% to 2.5%.

Khoroshkovsky said he would try to find a "compromise" with the IMF and would offer "strong commitment and political will to make reforms," but he avoided promising that Ukraine would raise domestic gas prices.