Neither Ukraine nor the International Monetary Fund is in a hurry to restart a lending program.
After numerous meetings and missions in 2019, the final IMF mission left town on Nov. 22 for the year, without reaching a staff-level agreement with Ukraine on a possible $6 billion loan installment as part of a new — and hopefully final — three-year program that the Ukrainian government is seeking.
Many predictions were made that the deal would get done this year. So what happened? What went wrong?
From Ukraine’s side, relative economic success has removed the urgency for fresh IMF money. The nation has macroeconomic stability, a strong hryvnia, a $50 billion low-deficit budget for 2020, the ability to borrow money on the private market for reasonable interest rates, $20 billion in foreign-exchange reserves, a declining debt-to-gross domestic product ratio, and growth exceeding expectations (about 3.5 percent annually).
From the IMF’s side, the clues to what went wrong don’t come from the official statement issued on Nov. 24. It was mostly upbeat. It read:
“The IMF staff team had constructive and productive discussions with the Ukrainian authorities and commended them on the considerable progress made during the last few months in advancing reforms and continuing with sound economic policies. The mission made significant further progress in the discussions on policies and reforms that can underpin a new IMF-supported program, including monetary, fiscal, and financial sector policies, as well as reforms to improve the business environment, strengthen the rule of law, and increase economic growth. Discussions will continue in the coming weeks.”
But based on the IMF’s previous on-the-record statements, including the Nov. 7 press briefing by chief spokesman Gerry Rice, the available evidence suggests that the international lender of last resort wants Ukraine to make more progress fighting corruption, as well as reducing the influence of the oligarchs and the state, among deeper structural reforms.
The Wall Street Journal apparently had it dead-on accurate in its Oct. 31 article in which it wrote that the IMF “has put off a bailout for Ukraine because it is worried the country’s president won’t recoup billions of dollars allegedly looted from banks—including one once controlled by a close supporter—according to people familiar with the negotiations.”
Specifically, everyone wants to see Ukraine doing more to recover the $15 billion in direct taxpayer losses from the spectacular collapse of the banking sector this decade, due to an orgy of bank fraud and insider lending. The biggest alleged fraudster in the pack of 100 banks closed or nationalized is, of course, billionaire oligarch Ihor Kolomoisky and his former PrivatBank, nationalized in 2016 at a cost of $5.5 billion to taxpayers.
Kolomoisky, a supporter and former business partner of President Volodymyr Zelensky, is challenging the nationalization and a Ukrainian appeals court is set to rule on Dec. 19. He bragged to the Kyiv Post on Nov. 21 that the IMF knows he’ll get his bank back. And it’s not clear what the Ukrainian government will do if the court rules in Kolomoisky’s favor. These wild cards alone justify a wait-and-see attitude by the IMF.
“It’s a bit disappointing,” London-based analyst Timothy Ash said of the IMF’s decision to withhold new money. “I guess concerns around PrivatBank remain. The IMF will want to see more contingency measures in case nationalization is reversed.”
Valid questions then & now
Why would the IMF lend Ukraine money if the nation’s leaders, including those heading the criminal justice system, are not interested in recovering stolen money or prosecuting former bank owners for bank fraud? Or if these same owners get their banks back?
The questions are as valid today as they were five years ago, yet the IMF still lent money then, even though Poroshenko’s prosecutors didn’t lift a finger to recover the stolen money and let every crook get away with their crimes during five years of squandered opportunities.
In fact, Poroshenko’s criminal justice “reform” turned out to be such a ruse that Zelensky’s team has to practically start from scratch in remaking police, prosecutors and courts into competent and independent dispensers of justice.
It’s no easy task. Poroshenko’s obstruction of justice was astounding, through appointing such buffoonish prosecutors as Viktor Shokin and Yuriy Lutsenko, opposing the Anti-Corruption Court until the public pressure got too high, not setting up a bank fraud unit or reforming the Interior Ministry or Security Service of Ukraine, and not letting the new anti-corruption institutions have true independence.
The Poroshenko administration’s obstruction — if not criminal in and of itself — certainly decreases the likelihood that Ukrainians will ever get this money back or the culprits will go to jail. Over time, evidence gets lost and stolen money transferred abroad gets spent or well-hidden or laundered.
Still, Ukraine is at least starting to move in the right direction. Investigations have started against former bank owner and agricultural tycoon Oleg Bakhmatyuk, who owes taxpayers $1 billion. State-supported lawsuits have been started against PrivatBank’s former owners, including Kolomoisky. And investigations have begun into the head of another large state-owned bank, Ukreximbank, and the suspicious stabilization loans to many private banks just before the collapse, made by the National Bank of Ukraine.
Few people will take this flurry of activity seriously, however, unless the biggest bank-fraud fish — Kolomoisky — gets caught in the dragnet. And still another big question is whether the new Anti-Corruption Court will reach verdicts based on the evidence, free from the influence of corruption or political pressure.
Agricultural land reform
The IMF and other international financial institutions, such as the World Bank, governments and free-market economists have pushed long and hard for Ukraine to end its stifling ban on an agricultural land sales market. The ban is a holdover from Soviet times, in which the land is regarded as such a sacred and strategic resource that it cannot be sold. This ban holds despite the long-established history of private farming flourishing on rented land, while entrepreneurs have difficulty getting affordable credit or making long-term plans because of the moratorium on land sales.
Estimates are that a truly free land market would boost the economy by billions of dollars each year, as farmers are able to boost productivity through investments. An initial draft has been passed by parliament, but already there are worrying signs that the market will be less free and fair than it could be. There is, specifically, strong opposition to foreign ownership of agricultural land, which could depress the market and let oligarchs buy up property on the cheap. At the same time, provisions are strong in the draft law to prevent an excessive concentration of ownership of farmland by any single person or entity.
So this is another issue, like the corruption fight, where much remains unknown and it’s way too early to declare success
What a difference a year makes
Last December, the IMF approved a $3.9 billion line of credit over 14 months to help Ukraine get through the 2019 election year with the ability to pay its debts and keep macroeconomic stability. The IMF had stopped lending in 2017, midway through a $17.5 billion program, concerned by ex-President Petro Poroshenko’s backsliding on the corruption front, oligarch privileges, and anti-free market policies.
The re-start of lending, even though Poroshenko had not set up an agricultural land market, fought corruption or created an Anti-Corruption Court, was seen by some critics at the time as an election-year gift to the beleaguered incumbent, who was leading Ukraine’s defenses against Russia’s war.
It turns out that the loan was of no political help to Poroshenko, who got trounced by Zelensky in a landslide election on April 21.
Maybe next year
So when it comes to IMF lending, Ukraine will have to work hard to get the money in 2020, assuming the IMF sticks to tough conditionality on the anti-corruption fight and agricultural land reform. In the end, IMF loans won’t save Ukraine — policies that encourage competition, economic growth, and rule of law will do the trick.
If that happens, Finance Minister Oksana Markarova may reach her goal making this three-year program the last one — of not needing IMF loans by 2023. In today’s still-uncertain climate, however, Ukraine has got a lot more work ahead to achieve this ambitious aim of financial independence — and a lot of obstructionists in the way. We’re looking at you, Kolomoisky, but not only you.
