Tuesday, February 10, 2009

Ukraine Tries to Secure Release of Second IMF Loan Tranche with Loans from Russia and Others

Sources: Financial Times, Ukraine Pushes for Loans to Meet Shortfall; Kyiv Post, Tymoshenko: Ukraine in Talks with Six Nations for Financial Help with 2009 Deficit; Kyiv Post, Yushchenko: Possible Taking of $5 Billion Credit from Russia Leading to Privatization of Ukrainian Gas Transmission System; International Herald Tribune, Ukranian President Criticizes PM Over Russian Loan; Wall Street Journal, Uncertainty on IMF Loan Sends Ukraine to Moscow; Forbes, Ukraine Govt Seeking New Credits, PM Says

The second tranche of the IMF's $16.4 billion loan to Ukraine is supposed the be released this month, but talks have stalled over Ukraine's failure to meet certain loan conditions. $4.5 billion of the loan was released in November, with the understanding that several conditions, including a balanced budget, would be necessary to move forward with the second tranche. The 2009 budget, however, is expected to have a three-percent deficit that is a sticking point with the IMF mission.

To make up this deficit, Prime Minister Yulia Tymoshenko has reached out to six foreign governments, including the U.S., Russia, China, Japan, and the European Union. The U.S. State Department reports that it is considering the request for a loan, while Russia plans to loan Ukraine $5 billion. However, Ukrainian President Viktor Yushchenko has expressed concern about using Russian money to finance Ukraine's deficit, due to worries about Ukraine's natural gas transmission system.

A dispute over gas prices erupted this winter between Russia, who supplies gas to Europe, and Ukraine, whose transmission system stands between Europe and Russia. Control over this pipeline is necessary for Ukraine to exert some control over prices, but if Ukraine defaults on the $5 billion dollar loan, Russia would be likely to take control of the pipeline. The state gas company, Naftogaz, is already very heavily indebted to Russia, and acquisition of the gas pipeline in Ukraine would not be unprecedented. Russia used a similar strategy in Belarus, Armenia, and Moldova, increasing gas prices greatly and then waiting for debt to accumulate before buying their gas transmission systems as a payment against the debt. Yushchenko noted that there would be not other feasible way to deal with the gas company's enormous debts, and so this loan is particularly dangerous. Tymoschenko, however, has promised that the country will not default and that it will maintain control of the gas transmission system.

1) What do you think of the Prime Minister's strategy to ask other countries for a loan to cover Ukraine's deficit? Keep in mind that the economic situation is quite poor due to falling prices of its major exports, so simply re-balancing the budget would entail severe hardship.
2) Do you think that it is worth the risk to Ukraine to accept a loan from Russia, considering its current economic system and the dangers inherent in a default?


Anonymous said...

Russia has made clear in recent reports that its perception is that Ukraine will always be part of Russia rather than an independent country. The Ukrainian PM is walking a very risky path and gambling with the hard fought independence gained. The only question that she needs to ask is what does Russia have to gain by lending money to Ukraine?

Alex said...

Seven ways of stealing from budget

1. "Make an order".
Speed limiters, for instance. Do you know why they appeared recently? And why they are being mounted three or even four in a row? The answer is very simple: capital authorities pay Uah 50000 for mounting the single one, while wholesale cost of it is Uah 300. They earn 100 times including installations maintenance. Sudden replacement of old traffic lights that took place all over Kiev hardly could be explained by sudden care of pedestrians ‘cause no "zebra" markings were refreshed .