Currency in Circulation, or Investors at Sixes and Sevens

Ukraine is again friends with the International Monetary Fund. A special IMF mission worked in Ukraine all the last week, and mission head Emanuel van der Mensbrugge appeared quite optimistic on Friday. Speaking with First Vice Premier Mykola Azarov, she rated highly Ukraine’s chance to renew the loan program. Ukraine has received IMF loans for the past three years, and this created, incidentally, no special problems for the government. As usual, the cabinet explains the decision to take new loans by the need to improve the investment climate. “If Ukraine cooperates with the IMF, this will give a positive signal to other investors,” Mr. Azarov believes. In his view, the International Monetary Fund could approve a loan program later this year.

Ms. van der Mensbrugge is scheduled to report on her visit to Kyiv at the next session of the IMF Board of Directors in late November. Ukraine is a candidate for the strangely called precautionary standby arrangement.

This 3-5 year program provides for loans up to $800 million. This country is supposed to be borrowing this money as and when necessary. Yet, this does not mean that the Fund will refrain from attaching political strings to its loans. Suffice it to recall that as recently as in September the IMF expressed concern over Ukraine’s entry into the SES and opposed the parliamentary debate on tax amnesty.

Incidentally, Ukraine’s governmental circles resumed a heated debate on whether Ukraine should pay off its IMF debts ahead of schedule only after IMF Deputy Managing Director Ann Krueger said that joining the Single Economic Space could delay Ukraine’s entry into the WTO. Although these debts now come to $1.8 billion, National Bank Governor Serhiy Tyhypko still thinks it possible to withdraw this amount of money from our country’s hard-currency reserves at any moment. These steeply growing reserves have already reached almost $5 billion. On October 3, the Fitch Rating Agency’s international management told Mr. Azarov that by paying the debt ahead of schedule Ukraine could “risk losing its attractiveness to foreign investment.” Experts fear that a sharp drop in NBU hard-currency reserves will undermine investor trust.

Nevertheless, many in Kyiv will not like the way the IMF functionaries spoke out, especially when it comes to a purely political assessment. The Cabinet of Ministers has postponed the final decision on early debt clearance until late October. Premier Viktor Yanukovych has already made it clear he is not exactly enraptured over this idea. Whatever the case, it is the foreign policy interests of Ukrainian financial-industrial groups that can solve this problem.

Thus the talks on a new loan program appear rather strange against the backdrop of the ongoing debate. Yet, it is quite simple to explain this predicament. Negotiations with the IMF is the traditional preserve of Mykola Azarov, and the Board of Directors is scheduled to discuss the Ukrainian question precisely in the late autumn. Mr. Tyhypko, in his turn, must be working to a schedule of his own, and the idea of early debt clearance was born on the spur of the moment. However, the proof of our government offices being at variance with each other failed to upset the IMF, for it announced on September 25 that it was highly probable that the loan program would be resumed and welcomed the intention to pay off the $1.8 billion within a year or two. It is easy to predict the reaction of foreign investors for whose “favorable climate” the government has invented this “precautionary standby.”