Ukraine, IMF reach conditional agreement on $5.5 billion loan (UPDATE) - Dec. 08, 2019

In a well-timed show of support, the International Monetary Fund and Ukrainian President Volodymyr Zelensky announced a staff-level agreement on a possible three-year, $5.5 billion loan agreement.

The announcement came on Dec. 7, only two days ahead of a meeting in Paris between Zelensky and Russian President Vladimir Putin, gathering as part of the Normandy quartet that includes French President Emmanuel Macron and German Chancellor Angela Merkel. The talks, the first in more than three years, are aimed at ending Russia’s war against Ukraine.

There’s a lot of ifs in the tentative agreement, however.

“This agreement is subject to IMF management approval and to approval by the Executive Board, and the effectiveness of the arrangement will be conditional on the implementation of a set of prior actions,” said Kristalina Georgieva, the IMF managing director, in a statement after she and Zelensky talked by telephone.

She did not specify the “prior actions” needed to unlock the new financing, but the IMF has been very concerned about the re-emergence of oligarch privileges that hamper Ukraine’s development of a free and competitive economy in which the rule of law is strong. The international lender also wants more action in recovering more than $15 billion in taxpayer money lost through fraud and insider lending in Ukraine’s banking sector. The chief culprit is billionaire oligarch Ihor Kolomoisky, accused in a $5.5 billion bank fraud that left PrivatBank on the verge of bankruptcy before the state nationalized it with a taxpayer bailout.

“The president and I agreed that Ukraine’s economic success depends crucially on strengthening the rule of law, enhancing the integrity of the judiciary, and reducing the role of vested interests in the economy, and that it is paramount to safeguard the gains made in cleaning up the banking system and recover the large costs to the taxpayers from bank resolutions,” Georgieva’s statement said.

She said that she praised Zelensky “for the impressive progress that he and his government have made in the past few months in advancing reforms and continuing with sound economic policies.”

Zelensky, on the president’s official website, said: “I am glad that we have reached a full understanding and our turbo-mode has been praised by the IMF. I am grateful to the Parliament, the Government and our entire team for their tireless work for the sake of Ukraine. The new program of cooperation with the International Monetary Fund aims to accelerate economic growth, actively eradicate corruption and improve the well-being of every Ukrainian. We are not satisfied with the current rate of economic growth, therefore, in order to accelerate economic growth, we, together with our international partners, will continue reforms to catch up with our neighbors in terms of economic development and prosperity.”

Timothy Ash, a London-based analyst who has studied Ukraine for more than two decades, said the agreement is a victory for Ukraine’s reformers, but noted that they must deliver progress in order to get the money. He also described the deal as a show of faith in Zelensky by the IMF’s Georgieva.

“There were many questioning the logic of extending a program when on the key issue of corruption and reining in oligarchs the Zelensky administration has sent very mixed signals and particularly over the PrivatBank case,” Ash wrote. “In the end, Georgieva has decided to trust in Zelensky to deliver… Georgieva is covering herself somewhat given this is just a staff-level agreement and still needs to be approved by the management of the IMF and the IMF board. Also, there will be extensive prior actions before any monies are disbursed – and therein I also assume the program will be backloaded in terms of cash disbursements. Prior actions likely will revolve around PrivatBank and land reform. In particular, I think the fund will want to see a resolution around the risks from the looming Dec. 19 court hearing which could still result in the denationalization of the bank. The fund will also want to see assertive action from the Zelensky team to recover the bulk of the $15 billion in losses from the 2015-17 banking crisis.”

Ash noted that “earlier in the week, it appeared that no IMF deal was possible before year-end: The mood music from the Ukrainian side, at least, was downbeat. But something seems to have changed in the last few days to focus and concentrate minds. I sense Western partners wanted to send Zelensky into talks with Putin with a strong statement of support from the West, which a new IMF program assures. I also think that by cutting Ukraine some slack with a new IMF program that they hope Zelensky will be minded to compromise, from a position of strength, with Putin over gas talks and the Normandy format talks. Compromise on either though is difficult for Zelensky, as any concessions to Putin will enrage patriotic sentiment at home. Street protests are already being organized.

Ahead, Ash wrote: “I would watch now for pushback by Kolomoisky. They will do everything to derail this program and still have many tools in their armory. At this stage, I think there is a high chance the December 19 Privatbank case goes against the authorities and then there might be pressure to cut deals with Kolomoisky, deals which likely cut against the requirements of the IMF program.”