This follows the $3.2 billion in International Monetary Fund loans released under the IMF stand-by arrangement earlier this month, and then borrowed for $1 billion under the US loan guarantee program.
All this builds to the case of those arguing that the West will support the EuroMaidan administration, at all cost.
I still tend to think that what happens in southeastern Ukraine, and therein in terms of the relationship with Russia, is as important as Western cash inflows, but in the short-term Western financing plugs some of the holes, and buys time
As if to affirm the challenges to the broader Ukrainian economy from events in southeastern Ukraine, the National Bank of Ukraine released its various production indices for April which hinted of the risks.
Many people have been surprised thus far over the remarkable durability of the Ukrainian economy through the EuroMaidan Revolution, then the civil war, in effect, breaking out in the east – real gross domestic product only fell by 1.1 percent year-on-year in Q1 2014, which at first glance makes the government/IMF forecast for a 3 percent real GDP contraction seem achievable.
It is probably fair to argue though that Q1 data was still to some extent pumped by the strong agricultural/food sector performance from the 2013 harvest, plus the EuroMaidan did not do that much to disrupt economic activity throughout the economy – business pretty much continued as normal, and the Viktor Yanukovych regime only eventually fell in late February.
Indeed, Q1 may have seen increased consumer demand via stockpiling, and consumption brought forward on fears over larger exchange rate moves, and problems in the banking sector.
The data for April though begins to tell a different story, and this is perhaps reflective of the disruption to economic activity caused by the annexation of Crimea and then the outbreak of civil strife in Donetsk and Luhansk.
Herein, the overall production index dropped by 6.2 percent year-on-year in April, from the 3.4 percent drop in March, and within this chemical production dropped by 23.3 percent, engineering by 18.9 percent and metallurgy by 12.8 percent.
This fits in with anecdotal reports of strikes/disruptions to various production facilities in Donetsk and Luhansk and also to transport services, particularly rail transport.
Plants across Ukraine may now be struggling to receive parts from operations in Luhansk, Donetsk and even Crimea. A Kyiv Post report yesterday suggested significant problems emerging in the auto sector.
All the above would tend to suggest a more precipitous fall in economic activity is under way – perhaps more in line with recent European Bank of Reconstruction and Development/Moody’s forecasts for a 7-7.4 percent real GDP decline this year.
The latter, if delivered, would make adherence to IMF targets that much more difficult, and “recalibration” of the IMF programme that much more likely later this year.
The media seems to have finally discovered that Ukraine’s president-elect is an oligarch – shock, horror!
References are now being drawn to various less than complementary U.S. government commentary on Poroshenko in Wikileaks correspondence – who isn’t referred to nicely in Wikileaks?
I doubt that this will have that much resonance in Ukraine, as the 54 percent of the Ukrainian electorate that opted to vote for Poroshenko on May 25 were well aware of Poroshenko’s past.
True, he is an oligarch, but he is not that different in that respect to the various former Soviet oligarchs that now have various and extensive business and political interests in the West (owning football clubs in the United Kingdom, basketball teams in the US, while no self-respecting former Soviet Union company does not have major Western politicians on their boards, and all for a little more than a few pieces of silver I would hazard to guess).
And there tends to be lots of noise/commentary over the origins of oligarch wealth across the former Soviet Unin – particularly that gleaned in the mid-1990s which was the Wild East in the former Soviet Union space, when lines were very often crossed in order to do business.
It is probably more important to ask which particular lines were crossed. And, true, Poroshenko was a key part in the Yushchenko-Tymoshenko battle for power, which ultimately saw the first Orange administrations fail, and which allowed the re-emergence of Viktor Yanukovych as president – Poroshenko was close to Yushchenko, and seen then as a bitter (even “arch”) rival of Tymoshenko (he was head of the National Security Council, appointed by Yushchenko, when Tymoshenko was prime minister and the two fought tooth and nail).
Poroshenko also served under Yanukovych, and was part of the oligarchic business/political elite class, that arguably has been part of the problem in Ukraine over the past 20 years.
But, as noted above, the electorate were well aware of this when they overwhelmingly gave him the mandate to rule. But they saw Poroshenko as the right man for the time, a potential unifier who has links both east and west, and has a huge amount of business and political experience, within the Maidan and Regions’ political circles, plus business interests in Moscow.
Poroshenko is hence viewed as someone who has the potential to resolve conflict and re-unite the country and build bridges with foreign partners. Encouragingly, and despite bitter historical rivalries, the presidential election campaign between Poroshenko and Tymoshenko was quite sedate, and Tymoshenko seems to have buried her hatchet (for the time-being) with Poroshenko, in defeat promising to support Poroshenko as president. Unfortunately Ukraine has no Vaclav Havel, but Poroshenko is probably its best hope at this stage.
Focus today will be on the conflict on the ground in SE Ukraine and three way gas talks between Ukraine, Russia and the EU. The latter comes as the Russian deadline to cut off gas supplies to Ukraine looms next week. The fact that Naftogas was recapitalised (again) yesterday with UAH22bn in new 7Y debt is encouraging in that it suggests that the Ukrainian side might be preparing to pay the USD2bn first instalment on debts owed to Gazprom – that said Naftogas also reported that it has formally started legal action in the Stockholm Court of Arbitration presumably over the enforceability of the 2009 take or pay gas deal, et al.
The conflict on the ground in Donetsk and Luhansk remains difficult, as reflected in the heavy losses suffered by the Ukrainian military yesterday – not much sign of either side being able to deliver the knock out blow just yet. What has been notable in recent days, and reported in various media outlets, is that a large number of the separatists appear to be Russian citizens – even the self-declared leader of the Donetsk Peoples Republic, is open about the fact he is a Russian citizen.
All this comes as the US now accepts that Russian troops have begun withdrawing from the border with Ukraine, as the risks of a formal Russian intervention recede. The market has bought into this, assuming that without a formal Russian intervention, the sanctions threat has receded. That said, the longer the conflict on the ground continues, and the larger the loss of lives, then the greater the risk is that the US refocuses back on Russia’s use of “hybrid” war tactics, and goes back to pushing various sanctions buttons.
In terms of bigger picture geopolitics, maybe what we have today is a “time out” by Russia and the US, with both taking a breather to figure out the next step. Both perhaps wanted to see the results of elections in Ukraine, and the EU, and how this would change the political mix with respect to the crisis in Ukraine
Russia for its part post-Maidan tried to engineer a scenario to allow direct intervention in Ukraine, via the annexation of Crimea, and then via supporting separatist elements in southeast Ukraine.
But this failed to win popular support on the ground, important to allow any formal and direct Russian intervention to be sustainable over the longer term without huge casualities/cost. So it is reverting to the “hyrid” war of making life difficult for the Maydan administration in SE Ukraine, and waiting to see what the new Poroshenko administration is willing to offer in terms of concessions for some kind of normality in terms of the relationship with Russia. Moscow will be content in that its activities over the past few months have reinforced the view (in Kyiv and Western capitals) that no government in Ukraine can succeed without dealing with Moscow.
The US for its part is probably relieved to have halted Russia’s expansion plans in Ukraine, for the time-being, and encouraged by the first impact of sanctions, but mindful that pushing forward furthers sanctions now will be tricky and costly, and it will have to expend considerable political capital to bring its Western allies on board to this – it will do this if it has to though.
Washington is probably content that it “has marked Vladimir Putin’s card” and let it known to Moscow that it knows his game plan and is willing to counter that, and that this can be at a considerable cost to Moscow.
It also seems to want to see what Poroshenko can deliver in terms of some form of agreement with Moscow.
But its strategy of countering Russian expansion has succeeded in buying the EuroMaidan administration some time – albeit the situation on the ground in southeast Ukraine still has the potential to wreak significant havoc to the Ukrainian economy, blowing big holes in the Western financial support program.
And, therein, the problem is that the West does not have a whole lot of additional cash to throw at Ukraine at this stage – recalibration of the IMF program might involve sharing the cost/pain to other stakeholders. So the situation on the ground in southeast Ukraine needs resolving, and quite fast.
Timothy Ash is an analyst with Standard Bank in London.
