The Ukrainian government is showing signs of hesitating in its commitment to economic reform and the IMF is watching keenly to see how a planned pension overhaul progresses before it releases $1.6 billion of fresh credit.
A slowdown in commitments under the $15 billion IMF programme, with only modest economic growth in sight, coincides with renewed political tension following moves to prosecute former prime minister Yulia Tymoshenko.
She is charged with misusing public funds while in office, which she denies.
Spooked by huge demonstrations late last year against proposed tax reform, Prime Minister Mykola Azarov is suggesting that an IMF-backed plan to raise the retirement age for women to 60 from 55 might be scrapped if the public comes out against it.
The International Monetary Fund’s stand-by programme is a big factor in allowing Ukraine to borrow on the international debt markets at a relatively low price.
The Fund has said that Ukraine is broadly meeting targets, but it does not want any backsliding over raising the pension age.
Under the deal with the Fund, Ukraine is to receive $15 billion credit over two and a half years, which could be a valuable spur for renewed investor interest.
The programme is key to the government’s efforts to revive its economy, which is dominated by steel exports, after a 15 percent contraction in 2009.
Reforming the ex-Soviet republic’s inefficient tax system is another part of the program agreed with the IMF — but here too progress has been mixed.
At the initiative of President Viktor Yanukovich, parliament watered down a proposed tax code after up to 10,000 small entrepreneurs vented their anger in the biggest protests against him since he came to power a year ago.
Despite popular anger now, Yanukovich has tightened his grip on power through local elections that have left his Regions Party in powerful positions across the country.
Though popular opinion has moved against him over tax reform and also over a 50 percent rise in domestic gas prices, he appears to have bought time by avoiding an early parliamentary election.
What to watch:
– A parliamentary vote on pension reform expected in March. Yanukovich has said a rise in the retirement age is inevitable in the long run but how quickly will the government move?
– Will the IMF mission approve release of the third $1.6 billion tranche of credit if pension reform is slowed?
GAS AND RUSSIA
In January 2009 a gas pricing row between Moscow and Kiev resulted in a stoppage of Russian gas flows to European households for about two weeks, tarnishing Russia’s image.
Ties with Ukraine’s powerful neighbour have greatly improved with Yanukovich’s arrival in power. But the high cost of imports of natural gas from Russia remains a drag on the economy.
Prime Minister Azarov says the base price for Russian gas is still way too high, despite an April agreement under which it was granted a 30 percent discount.
At the same time, Kiev is resisting a counter-proposal from Moscow for a merger between Russia’s gas giant Gazprom and Ukraine’s state energy firm Naftogaz.
What to watch:
– Any signs of strain in Ukraine meeting its gas payments
– Renewed pressure by Moscow for a gas merger
FOREIGN INVESTMENT
Though Ukraine needs foreign investment, the strange case of steelmaker ArcelorMittal and its Kryvy Rih mill in central Ukraine raised eyebrows among potential investors.
The state prosecutor launched a court action against the company, which bought the mill for $4.8 billion in 2005, raising fears this could herald a roll-back of privatisations carried out under Yanukovich’s predecessor, Viktor Yushchenko.
The prosecutor abruptly dropped the case after pressure from French President Nicolas Sarkozy.
Another sign of investor indifference came with the failure of an auction to sell off the fixed-line telecommunications monopoly Ukrtelecom.
The privatisation auction had been set for Dec. 28, but the planned $1.3 billion sale was put off and Ukrtelecom seems likely now to be sold to the only bidder Austria’s EPIC.
What to watch:
– Any new privatisation auctions
– Any real signs of external investor interest
TYMOSHENKO PROSECUTION
Another destabilising factor could be Yanukovich’s handling of his old adversary, former prime minister Tymoshenko, who is now in opposition.
Tymoshenko, whom Yanukovich beat for the presidency last February, is the subject of criminal probes after already being charged with abuse of office during her time as prime minister.
A populist whose impassioned rhetoric can bring thousands onto the streets, Tymoshenko thrives on being victimised.
Putting her on trial is fraught with risk for Yanukovich — particularly with a parliamentary election now set for October 2012 — and Western governments have urged Yanukovich not to pursue a vendetta against her.
Yanukovich’s opponents say old-style authoritarianism is on the rise under his rule. But the European Union and the United States, under pressure from media and human rights groups, have urged him to honour his pledges to defend democracy and a free press.
Though Yanukovich says European integration remains a priority for foreign policy, little headway has been made in negotiations on a free trade zone between Ukraine and the bloc.
What to watch:
– Any new attempts to prosecute Tymoshenko and her followers or to put her on trial
– Any signs of growing authoritarianism in Yanukovich’s style of rule. Are media freedoms under pressure? – How far will Yanukovich go in overtures to the European Union to balance his rapprochement with Russia?
