Cut the budget deficit and raise energy prices, Biden tells Ukraine

Graham Stack in Kyiv

In a speech in Kiev yesterday July 23, on the last of his Ukraine visit, US vice president Joe Biden told Ukraine to do exactly what the IMF says, and on two specific points: “The Fund requires that your government, and your government agreed to critical reforms to cut the budget deficit, revive a striving [sic*] banking system, and phase out energy subsidies, which I know from experience is a very difficult thing to do. Carrying out this agreement requires very hard choices and tough action, but it will help put you on the road to growth and competitiveness.”

Biden told Ukraine that, “moving toward market pricing for energy is brave, but also absolutely necessary pre-condition.”

Biden argued that shifting to market prices would strengthen Ukraine’s energy security. However, it also the Russian position that Ukraine must shift to market prices for gas.

If the US is resetting its relationship with Russia, it appears the US is also rethinking its relationship with Ukraine.

Biden as expected committed to Ukraine’s independence and sovereignty, and praised Ukraine’s democracy as the ‘the freest country in the region.” He emphasized however NATO or EU membership would be entirely Ukraine’s choice, and that the US would not push Ukraine to join. “The USA supports Ukraine’s deepening ties to NATO and to the European Union. But again, we recognize they are your decisions, your choices, not ours whether you choose the EU or seek to, or NATO. We recognize that how far and how fast to proceed on your choices is, again, a uniquely Ukrainian choice — it is not ours.”

Yesterday, Biden warned that the sustainability of Ukraine’s democracy was threatened by economic collapse and pervasive corruption.

“Mature democracies survive because they develop institutions such as a free press, a truly independent court system, an effective legislature – all of which serve as a check on the corruption that fuels the cynicism and limits growth in any country, including yours,” Biden said. Referring to Ukraine’s economic problems, Mr Biden asked: “Can you name me a place where democracy has flourished where the economic system has failed?”

He also harangued ruling politicians for their failure to work together. “Communications among leaders has broken down to such an extent that political posturing appears to prevent progress.”

Committing the US to respect for national sovereignty is a retreat from the neocon supremacist position, and, although delivered with an anti-Russian twist in the Georgian context, in facts coincides with longheld Russian and Chinese demands for the US to abide by international law.

Underlining the shift, Biden said the US was committed to a “multi-polar world” – an expression straight out of the Putin / Primakov phrasebook.

Ukraine moves towards IMF agreement

After signing a joint declaration to the Fund together with the president and central bank governor last week, Ukraine’s government yesterday March 12 made further steps towards renewing the IMF’s $16.5bn lending Program, according to Interfax. Deputy PM Hryhoriy Nemyrya said it was very likely the IMF would approve disbursement of the second loan tranche to Ukraine by the end of March.

Nemyrya said yesterday following a meeting between President Viktor Yushchenko, Prime Minister Yulia Tymoshenko, National Bank of Ukraine (NBU) head Volodymyr Stelmakh, and Verkhovna Rada Speaker Volodymyr Lyvtyn that the government made several decisions to ensure the independence of the NBU, make changes to the state’s bank recapitalization program and cancel contentious articles in the state budget law for 2009. He said the measures made disbursement of the second tranche of the IMF stand-by credit attainable by the end of March.

Regarding central bank independence, NBU Deputy Head Anatoliy Shapovalov said amendments to a government decree introduced yesterday meant that the Bank was no longer required to coordinate disbursement of refinancing loans with the government, though it would continue to report on its refinancing decisions.

Regarding the deficit, IMF Resident Representative in Ukraine Max Alier said the Fund and Ukrainian authorities reached an “understanding” with respect to the budget deficit. He did not provide any numbers, but mentioned ageement on an “acceptable and adequate level.” Alier alluded to decreased government spending, and sources report the government and IMF agreed to a 3% deficit, according to Galt & Taggart.

Dragon Capital’s Olena Bilan likewise expects the IMF to agree to a deficit of 1-2% of GDP net of bank rehabilitation costs, “or even higher if Ukraine makes the revenue target more realistic in view of the ongoing economic decline and succeeds in securing non-inflationary financing on top of IMF aid.”

The Cabinet meeting was held with the presence of IMF and World Bank representatives, who confirmed that the decisions made at the meeting complied with the IMF agreement.

The Cabinet also approved the budget of Naftogaz Ukraine with a surplus, which may signal that the Cabinet has also approved increased tariffs for natural gas supplies to households, according to Alfa’s Denis Shauruk.

“Nemyrya’s involvement and cooperative rhetoric, as well as wide agreement among key domestic figures, point to an improvement in Ukraine-IMF collaboration in the near future” says Galt & Taggart analyst Danylo Spolsky.

Further negotiations will probably center on budget parameters and ways to reduce budget expenditures without hurting the most vulnerable social groups, according to Dragon’s Bilan.

Graham Stack for business new europe (www.businessneweurope.eu)

Ukraine’s government starts to implement IMF conditions

Deputy Prime Minister Hryhoriy Nemyria  announced that Ukraine’s government has approved all decisions required by the International Monetary Fund (IMF) prior to disbursement of the second tranche of a $16.5bn stand-by credit. Russian Finance Minister Alexei Kudrin is also considering Ukraine’s request for a $5bn loan.

“I would like to note that due to constructive cooperation between all of the components of the process today at a meeting of the government, we took an agreed decision, which we think will allow us in the near future to achieve practical results regarding the return of the IMF mission, and after some time, [allow the IMF] to make a decision to provide the second tranche of the loan,” Nemyria said at a briefing in Kyiv on Wednesday, March 11, according to Interfax Ukraine.

Nemyria also said that “a number of important decisions” were made at the meeting of the government to ensure the independence of the National Bank of Ukraine (NBU).

Nemyria said a number of other issues had been resolved in a way acceptable to the IMF: amending a resolution of the Cabinet of Ministers and the NBU on bankrefinancing; amending a government resolution on the issue of the state participation in bank capitalization; canceling Articles 84 and 86 of the Law of Ukraine on the 2009 national budget.

The Association of Ukrainian Banks today cited Steen Edzerskov, the advisor for the NBU from the IMF, as saying the IMF wanted Ukraine “to simplify the procedure of receiving of refinancing by banks and removal of subjective factors in decision making on refinancing of banks.” This refers to abolishing the present requirement for case-by-case government consent for NBU refinancing of banks.

Resident IMF representative Max Alier, yesterday told Troika Dialog analysts that the IMF had agreed to soften the budget deficit target criteria from its previous zero deficit less bank recapitalization costs, according to Troika. However, no specific number was mentioned.

The IMF had previously said it would soften its stance on the deficit if Ukraine could find non-inflationary ways of financing it, such as loans from foreign countries. This week Russian finance officials confirmed that Ukraine had officially requested a $5bn loan. Russian finance minister Alexei Kudrin said yesterday March 10 that he was considering the request.

Such a loan is however likely to be politically very divisive. President Viktor Yuschenko has compared Prime Minister Yulia Tymoshenko’s negotiations with Russia for a $5 billion loan with the Molotov-Ribbentrop Pact between Nazi Germany and the Soviet Union in 1939.

Leading political forces – the Prime Minister, the President, the speaker, the governor of the NBU and the opposition leader – are set to meet today as part of the necessary process in acquiring the second tranche of the IMF loan. The previous letter – drafted after similar meetings – was considered by IMF officials and returned to the authors with relevant remarks.

“One of the IMF’s main concerns is the restored independence of the central bank as well as a realistic forecast for the state budget deficit and sources of its financing,” says Alfa Bank’s Denis Shauruk, adding, “we expect all disputed issues to be addressed by the end of March.”

Belarus turns to IMF for loan, as current account deficit grows

Graham Stack for business new europe (www.businessneweurope.eu)

For all its image as ’safe haven’ and its low level of international integration, Belarus became the latest East European country to turn to the International Monetary Fund (IMF) for a loan last week, as its current account deficit widens. But deputy chairman of the National Bank of Belarus Yury Alymov told bne that the banking sector is still stable.

Belarus appealed on Thursday October 24 to the IMF for a $2bn loan to stabilise the country’s economy in the face of the global financial crisis. This makes Belarus the third East European country following Ukraine and Hungary to turn to the IMF in October. Belarus is also negotiating a $2bn loan from Russia.

«It is small wonder that Belarus has asked for an IMF loan. The global financial turmoil has caused cash deficiency, and our trade partners have delayed payments for our services and products” NBB Spokesman Anatoly Drozdov told Prime-Tass October 24.

But most analysts agree the problem goes a lot deeper than merely delays in payment. Instead, Belarus is facing a widening trade deficit. Hard currency revenues are plummeting along with global commodity prices, while domestic demand for imports is still driven by the peak in commodity prices earlier in the year.

Add to this the fact that Belarus was already struggling to deal with successive price hikes for Russian gas in 2007 and 2008.

Commenting to bne before last week’s application for an IMF loan, the deputy chairman of the National Bank of Belarus, Alymov explained that the 2007 hike in the gas price caused the current account deficit to reach -6.6%, but that the economy had quickly adjusted to the new price. In the first half 2008, despite a second 20% gas price hike at the start of the year, the current account deficit in fact dropped to -5.5%.

But already in the third quarter of 2008, as the value of commodity exports dropped precipitously, the deficit doubled again to reach $1bn. Foreign currency reserves fell by $459.7m in September alone, to reach $4.12bn as of October 1.

With NBB reserves falling, and FDI likely to slow rather than accelerate as washoped, the situation is becoming critical. And adding insult to injury, Belarus does not stand to benefit from falling oil prices, since it already receives subsidised oil and gas from Russia. Instead it is faced with another substantial gas price hike come the new year.

Peaking commodity prices skewer capital accounts

Belarus has been caught out by the same double whammy as Russia and Ukraine.

With the start of the financial crisis in 2007, money moved out of securities into commodities, causing prices for everything from wheat to oil and gold to soar all round the world. According to the Minsk Institute of Privatisation and Management, in 2007, the value of Belarus exports increased by 20%, almost entirely due to rising commodity prices. Belarus is a major exporter of fertilisers, especially potash, and of refined oil products.

But as the global financial crisis developed, the record-breaking commodity prices proved shortlived. As speculators started to get nervous about a looming global slowdown, they moved out of commodities – into dollars. And commodity prices dropped like a stone- exemplified by the world oil price halving over five months.

This lurch is now putting pressure on the currencies of commodity exporters, as their trade deficits widen.

Crucially, as Renasisance Capital analyst Elena Shapirova has argued for commodity exporting countries, there is a time lag between the impact of a price drop on export revenues, and its impact on domestic demand for imports. While hard currency receipts drop with commodity prices, domestic demand for imported consumer goods is staying high, as last year’s windfall still works its way through the economy.

And now this time lag is causing the trade balance of commodity exporter countries like Belarus, Ukraine and Russia to do the splits, causing exchange rates to wobble, – and the IMF to arrive in town.

Banks still standing

However, while the growing trade deficit is looking ominous, Belarus’ banks are still holding up better than in Russia and Ukraine. But NBB’s Alymov does not deny that the global crisis could still hurt the domestic banking sector.

«Over the last few years, Belarus banks have constantly increased their level of borrowing from non-residents,» explains Alymov. «At the same time, their level of lending in foreign currency has accelerated, mostly using funds borrowed from non-residents. Funds borrowed from non-residents, are, however, to a very large extent short-term.»

This means, according to Alymov, that «a potential threat … posed by the global financial crisis could be difficulties for Belarus banks in borrowing on international financial markets and problems connected with foreign currency liquidity.»

Alymov, however, also points out that increased international borrowing by Belarus banks has been accompanied by increased involvement of foreign banks in the sector.

«The arrival of new foreign investors can compensate decreased borrowing opportunities on foreign markets through growth in equity and capital and also make it easier to attract foreign loans.»

«In addition,» says Alymov, «it’s important to note that in the case of difficulties, banks belonging to large western financial concerns can count on effective support from their foreign shareholders.»

However, the theory that banks with strong foreign parents are safer than local banks is increasingly being questioned. This week throughout Eastern Europe there were reports that foreign banks, facing problems at home, are restricting lending to their local subsidaries – thus exporting the financial crisis by the back door.

Alymov refused to comment on rumours that Germany’s Commerzbank, which in the summer seemed on the verge of acquiring 100% in Belinvestbank, Belarus’ fourth largest, is backing out of the deal.

He did say unsurprisingly that the planned London IPO for the country’s largest bank, state-owned Belarusbank, had now been postponed due to the «unpleasant market situation.»

But as a silver lining, Alymov sees opportunities beckoning for Belarusbank to develop as a ‘national champion’ by expanding internationally through acquisitions. «We believe that such a large banking institution as Belarusbank, uniting 38.8% of the country’s banking assets and 28.8% of capital, is perfectly capable of expanding onto global financial markets through acquiring subsidiaries in countries to which we are closely linked by trade and economic ties.»

Conditions unclear as IMF grants Ukraine $16.5bn stand-by loan

Graham Stack for business new europe (www.businessneweurope.eu)
The IMF announced on Sunday October 26 it would grant Ukraine a SDR 11bn ($16.5bn) stand-by loan, conditional on Ukraine passing a raft of stabilisation measures the details of which are not known. The move follows last week’s massive intervention by the National Bank of Ukraine (NBU) to support the hryvnia.

The Bank had to intervene with a massive sale of its international reserves in October as devaluation pressure mounted on the hryvnia. Plummeting steel prices, external debt repayments and a sharp rise in retail demand for cash foreign currency, caused NBU reserves to drop by $3.2bn over the first 20 days of October (down 8.6%), to $34.3bn.

The intervention could not prevent the hryvnia weakening by 19% since the beginning of the month, to UAH 6.03:USD on October 24, according to Bloomberg.

The loan amounts to about just under 50% of NBU international reserves as of Oct. 21, and is larger than envisaged by Ukraine authorities, who spoke of $10-15bn as likely amount.

There are still no detail of the legislative measures Ukraine has agreed to, and which Ukraine’s fractured parliament will be confronted with tomorrow. The IMF said in a press release the program would address “financial sector liquidity and solvency problems by smoothing the adjustment to large external shocks and by reducing inflation. At the same time, it will guard against a deep output decline by insulating household and corporations to the extent possible.”

According to Galt & Taggart’s Danylo Spolsky, Ukraine’s central bank governor Volodymyr Stelmakh noted that besides changes to banking legislations, the package will focus on measures to rein in the current account deficit. The deficit is expected to widen as metallurgy, the leading exporting sector, contracts.

Troika’s Iryna_Piontkivska also expects the IMF to make conventional requirements such as tightening of fiscal policy and privatisation.

Most analysts believe the loan – given approval by the IMF board and Ukraine’s fulfilling all conditions – should suffice to prop up the hryvnia

According to Alfa’s Andriy Gubachov, “should Ukraine obtain the loan, it would completely remove all current pressure on the currency and ease speculative demand for foreign currency.”

Dragon’s Olena Bilan is less optimistic, expecting the hryvnia “to remain under strong devaluation pressure until end-2008 and for most of 2009. Although Ukraine’s C/A deficit, expected at $15bn this year, 8% of estimated 2008 GDP, may narrow in 2009 due to contracting domestic demand, an estimated $30bn of external debt, which we think is unlikely to be rolled over and will have to be repaid next year, is set to weigh on the hryvnia,” says Bilan.

However, she adds that she expects “thanks to the IMF backing, the NBU will have enough resources to help private companies and commercial banks meet their foreign obligations falling due in the next 12 months.”

An additional unknown is the coming price hike for natural gas imported from Russia. Ukraine has been delaying settling the price until the end of the year, as world oil prices are falling.

According to Troika analysts, “the recent sharp correction in oil prices, to which gas prices are expected to react with a typical lag of six to nine months, may enable Ukraine to negotiate a gas price below $300/tcm, i.e. our current base-case estimate.” Ukraine currently pays $175 / tcm, so this would have a major negative impact on Ukraine’s current account deficit.

Today, the dollar and euro exchange rate continued to grow relative to the hryvnia, reaching UAH6.00-6.23 at some currency exchange booths, according to Korrespondent.net.

This is the lowest level since Ukraine adopted the hryvnia in 1996.