IMF postpones decision on Ukraine funding

As Ukraine becomes increasingly engulfed by crisis, the IMF has postponed the decision as to whether or not to provide Ukraine with the latest tranche of its bailout funding.

That decision was supposed to be made today (Monday 20th March 2017).  Instead, without any formal announcement, the IMF put off the decision, giving no date for when it would be made.

The Ukrainians – but not the IMF itself – are saying that the IMF postponed its decision in order to give the Ukrainians time to provide information about the effect on Ukraine’s economy of the transport blockade of the Donbass.

This is a valid reason to postpone the decision.  The Ukrainian enterprises that the Donetsk and Lugansk People’s Republics have now nationalised paid taxes into the Ukrainian budget.  Beyond the immediate effect on the budget is the larger effect that the transport blockade and the nationalisation of the enterprises is having on Ukraine’s economy.  A Russian expert, Andrey Zolotaryov, has described the effect of the nationalisation of the enterprises this way for TASS

“It is clear that the aftermath for Ukraine’s economy will be very serious and the likelihood of the early elections is growing dramatically. All these developments will lead to further escalation of the internal political conflict in the country and the least-evil solution is the snap elections,” he said.

The expert added that enterprises making part of Metinvest mining and metallurgical company operating in Donbass and yielding 20% of foreign currency revenues for Ukraine’s budget will be affected most. “Ukraine’s balance of payments deficit, that is, the difference between imports and exports, is $4 bln, and it will increase. If that is the case, where will the government get foreign currency? After all, it has to repay external debt and provide for critically important imports. It is obvious that it will resort to printing money,” he noted.

Such actions, in turn, will further devalue the hryvnia. “Meanwhile, ordinary Ukrainians will have to pay for these ‘patriots’ games’ as there are no plans to raise pensions and wages in the public sector while the prices will rise,” Zolotaryov said.

Obviously any reduction in Ukraine’s foreign exchange earnings or losses from its budget impact on Ukraine’s IMF bailout plan and call its viability into question.  That is a good reason to postpone today’s decision in itself.

However if the reason for the postponement was purely the transport blockade and its aftermath, then the IMF might have been expected to say as much.

It is not impossible that a further factor is IMF concern about the outcome of the High Court case in London brought by Russia in connection with Ukraine’s failure to repay the $3 billion debt it owes Russia.  The Russians have applied to the High Court for summary Judgment, and the High Court is expected to rule on this in April.  If the Judgment is in Russia’s favour, then Ukraine will be legally in default to a member of the Paris Club, and according to the IMF’s own rules ineligible for further funding.

Since a Judgment from the High Court in Russia’s favour would call into question the entire wisdom of the IMF agreeing to a bailout plan with Ukraine in the first place, it is understandable if the IMF is unwilling to say anything about it.

Without further help from the IMF the economic pressures on Ukraine will grow.  As Zolotaryov says, Ukraine is already running budget and trade deficits, which the transport blockade and the nationalisation of the enterprises will only make worse.  If IMF funding is cut off following a decision by the High Court in London that Ukraine is in default, then Ukraine will lose its external funding.

Zolotaryov says Ukraine has no option but to cover its existing deficits by printing more money.  If external funding is cut off, money printing will have to accelerate in which case inflation might take off.

The Ukrainian authorities however show no willingness to explain these risks to the population.  Rather than tell them of how the transport blockade is further worsening the already parlous condition of Ukraine’s economy, and instead of taking decisive action to bring it to an end, and to prepare the country for the possibility that the High Court might declare Ukraine in default – which would require serious talks with Russia about the debt if IMF funding is to continue – President Poroshenko has gone to ground, legalising whatever destabilising action those in Ukraine who are euphemistically called “radicals” or “activists” decide to take.

The stakes for Ukraine could not be higher.  The next few weeks will be crucial.  Much will depend on what decisions the High Court in London and the IMF in Washington now take.