With IMF deal done, Yanukovych’s challenges still ahead

Painful IMF reforms could trigger backlash. President Viktor Yanukovych struck a sweet-but-sour victory late on July 28 when the International Monetary Fund approved a $15.5 billion loan agreement with Ukraine to plug a large budget hole.

The money, starting with an initial $1.9 billion tranche to be received in coming days, comes only after Kyiv accepted unpopular austerity measures, starting with a 50 percent increase on household natural gas utility prices.

“The main task of obtaining the IMF loan isn’t about just getting money, it’s about boosting investor confidence, to support foreign exchange stability to finance the state budget deficit,” said Yaroslav Zhalilo, president of the Center for Anti-Crisis Studies.

The IMF has made it clear that to keep the money flowing in, painful measures will be required. And it is precisely the reform efforts sought by the IMF, such as an increase in the pension age, which could trigger a backlash from voters, starting with the Oct. 31 election to municipal and provincial legislatures.

Yanukovych appears poised to follow through with some of these measures. But analysts also see Yanukovych making moves to shelter himself from voter dissent with the aim of preserving his monopolistic grip over political power in Ukraine.

The evidence, analysts say, can be seen in a two-pronged strategy to undercut political opponents while boosting presidential powers.

This week, the president signed legislation that pro-democracy activists say limits the opposition’s chances in the upcoming election. Also this month, Yanukovych’s political allies in parliament appealed to the constitutional court in an attempt to return to a presidential-parliamentary system of rule. The court was asked to cancel constitutional changes adopted during the Orange Revolution, which cut presidential authority.

“Yanukovych is, without a doubt, moving to further consolidate his grip on power, and argues that he needs to, in order to embark on large-scale reforms,” said Serhiy Taran, director of the Kyiv-based International Democracy Institute.


The trade-off

The trade-off, stronger rule in return for reforms, being offered by Yanukovych, according to Taran, could work, and has been tested in other countries.

“Just look back to Pinochet’s Chile, de Gualle’s France or the Asian tiger economies of the 1970s – they all had, to a large degree, strong presidential administrations that pushed through large-scale reforms in their countries.”

However, many are alarmed about the potential risk of Ukraine slipping into authoritarianism under such circumstances, particularly if no clearly-defined checks and balances are introduced, such as an easy impeachment procedure.
On the reform side, Yanukovych’s governing coalition has taken some important steps, albeit under pressure from the IMF.

His government recently sequestered the state budget and moved to wipe out economically-unsustainable utility subsidies. The hiked-up gas tariffs are to take effect on Aug. 1.

According to the IMF, if Ukraine wants to receive additional tranches of the loan, it will need to gradually cut its annual deficit, currently at about 5.5 percent of gross domestic product, down to 2.5 percent in 2012. Overall public debt is to be reduced to below 35 percent of GDP by 2015.


PR help needed

So far, however, the government overhaul has lacked public consensus-building measures that could have allayed public outcry over drastic utility price hikes.

Recent public statements made by Prime Minister Mykola Azarov have been far from explanatory and even members of his own cabinet have contradicted official government moves.

For example, Municipal Utilities and Economy Minister Yuriy Khivrych told Segodnya newspaper on July 26 that natural gas hikes will go into effect on Oct. 15 rather than in August.

“To set single rates for the entire country is complicated, there’s a different price structure in every city,” Khivrych said of the time needed to prepare for the utility price hike.

Inconsistencies like this have alarmed political observers who suspect that the government doesn’t intend to embark on real reform.


Following the money

Led by ex-premier Yulia Tymoshenko, the opposition is sounding the alarm bells, urging the IMF not to unlock fresh assistance to Ukraine that was frozen last autumn. Tymoshenko has warned that Yanukovych’s coalition will use the IMF funds to pay back billions of dollars Ukraine supposedly owes in damages to controversial gas trader RosUkrEnergo.

The Swiss-registered firm was cut out of the multi-billion-dollar gas supply business by Tymoshenko when she was premier in early 2009. Tymoshenko alleges that Yanukovych would have an interest in paying RosUkrEnergo, alleging that the company is co-owned by his inner circle. A Stockholm court recently ruled that Ukraine owes the trader 11 billion cubic meters of gas worth billions of dollars.

Officials close to Yanukovych, meanwhile, claim the government does not have enough resources – either in cash or gas – to pay RosUkrEnergo back. But they have not explained how the dispute will be settled. Meanwhile, the IMF has been largely silent over this politically-sensitive matter.

As nearly $2 billion in immediate IMF aid flows into Ukraine, where it will end up remains a matter of debate.

“The government must tell the public about its reform plans in detail, and show how and where it will spend and invest public money,” Taran said.


Tight noose

Whatever the case, experts expect the IMF to keep Ukraine’s government on a tight leash, closely monitoring how loan money is spent and hanging further assistance on delivered reforms.

If Ukraine’s leadership sticks tightly to IMF conditions, it may not have enough cash on hand to pay back RosUkrEnergo, or stash into private pockets.

Amongst the tough reforms sought by the IMF, Ukraine will have to reduce state-owned energy company Naftogaz’s deficit to 1 percent of GDP and provide targeted support to low-income groups while boosting utility tariffs across the board.

The country will also need to start diversifying and tapping new energy resources such as shale deposits and existing oil fields, according to Ilona Bilan of the Ukrainian Center of Independent Political Research.

An IMF news release said part of the reform program includes restoring public confidence in the Ukrainian banking system, which means making the central bank more independent.

Experts said IMF eyes will be closely watching the central bank to prevent misuse of funds.

Large portions of the billions of dollars in aid the central bank gave to privately-owned banks during the 2008-2009 global recession was, allegedly, misused or disappeared in a sea of murky loan and currency exchange deals.


Kyiv Post staff writer Mark Rachkevych can be reached at rachkevych@kyvipost.com.


Related to this story is 'Wake up' editorial.