Jean Lemierre: Biased Courts and Political Risks Scare Away Investors
The Ukrainian government plans to hold negotiations with the European Bank, World Bank, and International Monetary Fund management before the end of October to find out whether our country can rely on these financial mammoths to help resolve the looming budgetary crisis. This year’s budgetary expenditures can fall short of about UAH 3-4 billion, which could call into question the fulfillment of the so- called protected social items. But even after the first reading when parliament passed an unrealistic budget for next year (as the Cabinet of Ministers thinks), it became obvious that the deficit problem would be further aggravated. The negotiations with EBRD managers have already been held recently.
On October 18, the European Bank for Reconstruction and Development announced it was resuming talks with Ukraine on completing the construction of Khmelnytsky and Rivne nuclear power plant reactors. The talks were suspended a year ago after Prime Minister Anatoly Kinakh had refused to keep his predecessor Viktor Yushchenko’s promise to increase electricity charges. Mr. Kinakh calculated this sacrifice was not worth the $215 million the EBRD wanted to lend to the Ukrainian government for finishing the reactors’ construction.
To find a compromise, EBRD president Jean Lemierre arrived in Kyiv. He announced after talks with Prime Minister Kinakh that the dialog on investments in the nuclear energy sector would continue. Mr. Lemierre still thinks that increased electricity prices will benefit the Enerhoatom national energy company, the likely loan recipient, and help it avoid repayment problems. But this time the revision of tariffs has not been a tough condition for granting the loan. The impression is that the European Bank is not going to set any preliminary requirements for Kyiv. Mr. Kinakh made it perfectly clear to the bank president that the government does not need loans at any price.
Mr. Lemierre said the Ukrainian premier would soon appoint a person in charge of holding talks on joint investment projects. Yet, Mr. Lemierre was less willing to disclose these projects. In his words, the bank hopes to resume crediting Donbasenerho which was deprived of EBRD loans after being illegally privatized. Now that Mr. Lemierre has had talks with Mr. Kinakh, he says again the bank is ready to help upgrade the Starobishev thermal power plant, a part of Donbasenerho.
The European Bank is far more enthusiastic about crediting private projects. Mr. Lemierre said the bank would very soon make a decision to increase the funding of priority investment programs. Under the new EBRD Strategy for Ukraine approved in early September, oil and gas transportation, projects in municipal heat supply, and small business are top priorities. As before, loans will not be given directly but through Ukrainian commercial banks, which will take up some of the credit risks. Mr. Lemierre noted he was satisfied with the quality of cooperation with such banks.
The EBRD president also said he had lately noticed an important rise in interest of Western investors in Ukraine, particularly, in agriculture. The guest singled out a biased judicial system and political risks as some of the problems faced by Western capital in this country. “All the investors I have talked to about Ukraine complained about the judicial system,” Mr. Lemierre confessed. He also believes the Kolchuha radar scandal has affected the business climate quite substantially in our country, making the political situation less predictable. At the same time, the EBRD does not intend to reduce the amount or raise the price of Ukrainian loans for political reasons.
The resumption of a loan-related dialog with the European Bank for Reconstruction and Development is perhaps the most of what could be expected from Mr. Lemierre’s visit to Kyiv. The Ukrainian government has this time not offered any high-profile projects in addition to finishing the construction of power units. In the next two weeks, Mr. Kinakh will hold talks with the World Bank and International Monetary Fund topmost executives. It is from them that the government expects to obtain “hard cash” as early as this year. It is planned to channel the World Bank’s $250 million into the state budget, while the IMF will perhaps fork out an operational tranche as part of a new loan program. The Ukrainian government is badly short of funds in the conditions of a budgetary crisis, but, judging by its negotiations with the EBRD, it is not going to accept any tough preliminary loan-issue conditions.
