Political tensions will make it hard for Ukraine to meet terms of IMF bailout

Unrest, such as nationalist protest this week, could make it hard for Ukraine to meet bailout terms; failure to reform has blocked help before

PUBLISHED : Friday, 28 March, 2014, 10:06pm
UPDATED : Saturday, 29 March, 2014, 1:30am

An hour after Ukraine's lawmakers passed the laws needed to unlock a US$27 billion international lifeline, protesters chanting "Revolution!" gathered by parliament, forcing deputies to evacuate.

The demonstration on Thursday, sparked by the death this week of one of the nationalist Pravyi Sektor group's leaders in a firefight with police, shows the extent of the challenges Ukraine's new leaders must overcome to keep the bailout money flowing.

Weeks after an uprising ousted Ukraine's previous leader, the government is grappling with President Vladimir Putin's takeover of Crimea and a Russian troop build-up on its eastern border. The heightened tensions, which sparked European and US sanctions and rekindled memories of the cold war, risk curbing Prime Minister Arseniy Yatsenyuk's ability to fulfil his promises to the International Monetary Fund.

"Political risks are likely to remain elevated and could flare up, particularly in eastern Ukraine," Barclays Capital said yesterday in a note. "Implementation risks to the reform programme, possibly exacerbated by retaliatory measures from Russia, are also meaningful."

Yatsenyuk's cabinet on Thursday agreed on a preliminary deal with the IMF, which will supply as much as US$18 billion. In return, Ukraine must slash spending and raise household heating tariffs in the wake of the worst political crisis since independence in 1991.

The IMF's so-called "standby arrangement" will form the heart of a broader package released by other governments and agencies amounting to US$27 billion over the next two years.

Already dealing with a third recession in six years and dwindling reserves, Ukraine's acting president, Oleksandr Turchynov, says the Kremlin is fomenting unrest in the former Soviet republic's eastern provinces, where Russian is widely spoken.

Russia's stance on its neighbour, as well as the austerity plan, "serve as a catalyst for further social dissatisfaction in the near future", Nomura analysts Dmitri Petrov and Peter Attard Montalto wrote in a note.

Under the IMF deal, Ukraine will narrow the budget gap to 2.5 per cent of gross domestic product by 2016 and raise retail energy tariffs towards their full cost.

"This package of laws is very unpopular, very difficult, very tough - reforms that should have been done in the past 20 years," said Yatsenyuk, who last month called his task as premier a "kamikaze" mission because of an empty treasury and foreigncurrency reserves that have been "robbed".

In a sign of opposition to some of the IMF's demands, lawmakers on Thursday rejected a tax-overhaul bill before eventually passing it in a second vote.

That reluctance echoes Ukraine's history of derailing rescue packages. The IMF has frozen loans to the nation of more than 40 million on two occasions since 2008 after governments balked at measures they had agreed to carry out, such as cutting utilities subsidies.

The government in Kiev reached a staff-level agreement with the IMF for a two-year loan of US$14-18 billion. The cabinet must complete "prior actions" to receive the first instalment as early as April.