Engine for reforms

All the talk, gossip, forecasts, and assurances that Mykola Azarov Cabinet’s days are numbered may well be forgotten for the time being, and the doomsayers will have to look for new jobs. It is the International Monetary Fund that in fact bailed out the Ukrainian government and its leader. The latest IMF mission, headed by Thanos Arvanitis, which aimed to revise the stand-by loan cooperation program that was adopted last July, in fact approved the efforts of Azarov and Co. to implement a joint IMF-Ukraine memorandum.

“The talks are going very well,” Max Alier, the IMF resident representative in Ukraine, told journalists. The Cabinet and the IMF have agreed quite rapidly upon the main economic development data, the budgetary policy, the criteria of effectiveness, and the 2011 program structure and targets.

According to Alier, the IMF in general supports the modernization of the taxation system now underway in Ukraine, but it calls for cutting public spending and making it more effective — a condition without which it will be impossible to ease the tax burden on the economy. In other words, the IMF funds (expected in December), are practically in Azarov’s pocket — sorry, in the state budget.

“The talks were fruitful both in the National Bank and the Ministry of Finance,” the premier said with glee. Yet his “flexible” Vice-Premier Serhii Tihipko (Mykhailo Brodsky, chair of the State Committee for Entrepreneurship, deliberately spells his last name with a “b” in his blog — an allusion to the Russian word “gibky”, which means flexible) is not exactly rushing to hearten his compatriots. In his words, Ukraine is in for reforms, such as the one in the pension system, which can hardly be called popular. “But if we do not do this, the country will have no future,” the vice-premier says without explaining whether he means raising the pension age for women or some other, so far “secret” intentions of the government, which has its hands free until the next elections.

Yet this freedom is superficial. In reality, the Cabinet has not yet fully shed its shackles. This is to what the Batkivshchyna party leader Yulia Tymoshenko has drawn the attention of the main engine of Ukrainian reforms, i.e., the IMF. She told Arvanitis that, before issuing a new loan to Ukraine, the IMF should take into account the risks caused by the Stockholm Arbitration Institute’s ruling on the notorious company RosUkrEnergo. (The BYuT leader had also been making similar “patriotic” statements before Ukraine received the first installment.) “I think that, to continue cooperation with Ukraine, which Ukraine really needs, you should look very closely into that deal and see which way the country is going to use this money,” Tymoshenko says. In other words, Tymoshenko is hinting that Ukraine may use the IMF loan installment to fulfill the court ruling and compensate RosUkrEnergo for 12 billion cubic meters of gas, which the court believes was illegally expropriated by her government.

What may have aroused concern at the time was the situation in Ukraine. But what or who is Tymoshenko worried about today? “I know how hard it is for any country to make special financial resources available for the International Monetary Fund,” the ex-premier says. “Every donor country takes this money from taxpayers, and when this money comes to Ukraine, where it may be spent on paying for a not-so-transparent RosUkrEnrgo deal, this will be unfair not only for Ukraine but also for all IMF donor states.” Tymoshenko also informed the IMF about the difficult financial state of Naftogaz, completely forgetting that she is also to blame for this: “This problem concerns the Naftogaz balance sheet, the likely bankruptcy of this company, and, as a result, the failure of this company to reliably transport Russian gas to the European Union.”

Arranging a clearly premature funeral of Naftogaz, the relentless oppositionist also seems to be going to sing a requiem for her own country because Ukraine is really unlikely to survive without cooperating with the IMF. This is the opinion of many experts. Their main idea is that this country is spiralling into debt, while its banking system in fact is not crediting the real economy… because the state floats its own bonds and thus successfully competes on this market with businesses that are unable to service these expensive credits. On the other hand, after selling public bonds, the state utilizes the earned funds to plug budget holes and, hence, allows them to be used up. (Incidentally, Borys Timonkin, chair of the Ukrsotsbank board of directors, has rightfully noted that “using-up” also results in a salary for somebody and, therefore, increased budget re-venues as well.) Be that as it may, Ukraine’s public debt has already exceeded 40 percent of GDP and increased by 93 billion hryvnias to the current 400 billion, in just one year. According to the former finance minister Viktor Pynzenyk, the state budget deficit, supposedly to be made up by this debt, has reached 71 billion hryvnias in ten months. Ukraine has never seen an amount like this in its entire history. But does the blame really fall on the instrument, i.e., government bonds? Naturally, the ex-minister answers this question in the negative. But he agrees that Ukraine’s banking sector is today a kind of a vicious circle that needs to be broken. Pynzenyk is sure that one must begin with an essential reduction of the budget deficit. Is it realistic to do so? He believes this task cannot be fulfilled without a serious rise in foreign investments.

Ihor Shumylo, National Bank of Ukraine (NBU) executive director for economic issues, also favors a gradual reduction of the budget deficit. But he also counters by saying that all over the world a financial crisis is followed by a fiscal one, when budget revenues are lagging behind the economic growth restoration rate. Nevertheless, in his words, the third quarter of the year saw growth of budget revenues, contrary to what was the case in the previous four quarters. Moreover, budget revenue growth outpaces economic growth. Shumylo also said that Ukraine’s aggregate hard-currency earnings in November had outstripped the overall flight of capital by 500 million dollars. With this in mind, the NBU director concludes that this country “has all the grounds to be stable…” He also quotes international financial experts as saying that financial risks for Ukraine are on the wane. Besides, the reduced public bond risk, plus a high bond equivalent yield, has made these securities more attractive for foreign investors who are showing interest in the public bond portfolio at the NBU disposal. Shumylo is not afraid of a mass-scale exodus of investors from the Ukrainian market, which would destabilize the economy. In his view, this illogical behavior is highly unlikely because investors can see the ever-increasing political stability in the country, while the economic policy has won an IMF approval. Besides, the hryvnia may strengthen next year, which will make it still more attractive to invest in public bonds.

The real sector of the economy is a somewhat different question. Experts think the state should focus on supporting national export. This means, among other things, free access to medium- and long-term crediting for export-oriented businesses, a timely refund of the value-added tax, insurance against export and import risks, the drawing-up of import substitution programs, and the creation of more favorable conditions for producers to bid for foreign supply markets.

But let us get back to cooperation between Ukraine and the IMF. Although it is developing quite successfully, some are calling for caution. For instance, Yaroslav Kolesnyk, chair of the Forum Bank’s board of directors, is drawing unconventional conclusions from this situation: “I think the IMF is really interested today in giving us a loan because Ukraine, as a country, is in certain dependence and is becoming controllable to some extent.” Moreover, Kolesnyk is convinced that Ukraine can easily find an alternative to the IMF. “Ukraine must borrow from and be accountable to the populace,” the banker suggests. “Let ordinary people gain interest on capital, and we will develop Ukraine’s economy on the basis of this money.” It is quite a logical idea. It is up to the Ukrainians themselves to break the vicious circle that has formed in regards to the national economy. The only question is does the public trust the government. Once it comes over, the IMF can be “repudiated.”