The Ukrainian government is negotiating
the issue of rouble-denominated government bonds,
making the country no longer reliant on
International Monetary Fund assistance. Ukraine's
2010 IMF assistance package of US$15.6 billion was
suspended in March 2011 because of the country's
refusal to continue with IMF reforms, in
particular raising household utility prices to
reduce subsidies to the state gas company Naftohaz
Ukrainy. This confirms what the Nikolai Azarov
government has been discussing since summer 2011.
Three November 2011 auctions for three-
and five-year government bonds with 8.22 and 8.75%
returns, respectively, failed to attract buyers,
and a March issue of a $1.5 billion eurobond was
postponed. The Ukrainian Finance Ministry had
until then regularly sold government bonds
denominated in US dollars and euros.
This
is a reflection of an overall Western disinterest
in investing in
Ukraine, as seen by the
lack of Western interest in recent privatizations,
and the bidding conditions for the sale of the
stakes in Ukraine's energy sector have been
specially formulated in order to suit oligarchs.
The main "foreign" investments in the past two
years have been Ukrainian and Russian capital
returning from offshore tax havens such as Cyprus,
which accounts for a third of FDI into Ukraine.
Negotiations for Ukraine to issue
rouble-denominated government bonds are underway
between Ukraine and Russia's central banks,
Gazprom and the two countries' finance ministries.
The bonds would be purchased by Russian banks
active in the Ukrainian market - VTB (President
Vladimir Putin is chairman of its supervisory
board), Russia's Sverbank, Alfa-Bank and
Vnesheconombank (VEB) - and Kiev hopes to raise
$500 million.
Sverbank board chairman
German Gref, a former economic adviser to
President Putin, has stated his readiness to
assist Ukraine in issuing rouble-denominated
government bonds.
Until now, Ukraine has
paid Russia for gas in US dollars and has been
negotiating since last year to reduce the price by
a third, or $250 per 1,000 cubic meter, compared
with $416 last quarter. Ukraine has already
borrowed $2 billion to pay for Russian gas from
VTB Group - a loan that matures in June. Last
month, Ukraine negotiated a second credit line of
$2 billion from Gazprombank to pay for imported
gas.
In 2011, Ukraine spent $1 billion in
foreign currency each month to pay for 40 cubic
meters of imported gas as set in the January 2009
Ukrainian-Russian gas contract negotiated by then
prime minister Putin and his counterpart Yulia
Tymoshenko. The move toward rouble-bonds comes at
the same time as the Yanukovych administration is
preparing the ground after the October elections
for a gas consortium in return for a Russian
"discount" on the gas price.
On November
8, 2011, the government sponsored law No. 9429,
which permitted the reorganization of Naftohaz
Ukrainy (an opposition alternative was proposed
two weeks later). Adopted amendments to the
February 2007 law, initiated by Tymoshenko, will
lead to Naftohaz Ukrainy's reorganization by the
government that will bypass parliament.
This opens up the possibility of
privatization of Ukraine's gas pipelines,
opposition deputy Serhiy Sobolev said, because the
amendments no longer contain provisions banning
privatization, lease or rent of the pipelines.
There are three strategic disadvantages to
Ukraine for issuing rouble-denominated government
bonds.
Firstly, loans in roubles will be
2-4% more expensive than bonds in US dollars or
euros. The rouble's exchange rate is highly
dependent on the price of oil and gas. The cost of
imported gas would be dependent on the Russian
currency which, if it devalues against the US
dollar, would reduce the price, and if it
strengthened the price would rise. In contrast to
Russia, which has a floating exchange rate,
Ukraine's exchange rate is fixed against the US
dollar.
Secondly, Putin has elaborated
Russia's strategic goal of restoring the economic
space of the former USSR (minus the three Baltic
states that are EU members). President Putin
reportedly controls a "war chest" of $20 billion
to purchase strategic economic and energy sectors
in the CIS. Ukraine withdrew from the rouble zone
in June 1992 and began issuing a temporary
currency, the karbovanets kupon, which remained in
place until 1996 when Ukraine launched a new
currency, the hryvnya.
Thirdly, Ukraine's
dependence on Russia will inevitably grow and
reduce Kiev's leverage in negotiations with
Moscow. Russia has long sought to control
Ukraine's gas pipelines, which transport two
thirds of Russian gas, and is pressuring Ukraine
to join the CIS Customs Union. These two goals
will become more achievable if Ukraine issues
rouble-denominated government bonds as Ukraine
would be heavily dependent on Russian banks
crediting the Ukrainian economy.
Kiev has
warned Brussels that the EU should focus on
Ukraine's geopolitical and strategic importance
and ignore democratic regression by threatening
that Ukraine could drop its European integration
efforts in favor of integration with Russia and
the CIS. Kiev's threats should be understood as
real but are likely to be ignored by both the US
and EU, and therefore by the IMF.
Ukraine
is a very low priority for both the Barack Obama
administration, which is in the middle of a
re-election campaign, and the EU, which is faced
with numerous domestic crises.
Ukraine is
over-playing its geopolitical importance and
dialogue between the US-EU, which is all but
frozen. The IMF assistance package is unlikely to
be revived because of US and EU pressure to punish
Ukraine for its democratic backsliding. The
Ukraine-EU Association Agreement was initialed on
March 30, but its signing by the European Council
and ratification by parliaments is frozen until
political prisoners are released and permitted to
participate in elections.
Taras
Kuzio is an Austrian Marshall Plan Foundation
Visiting Fellow at the Center for Transatlantic
Relations, School of Advanced International
Studies, John Hopkins University, in Washington
DC. He edits Ukraine Analyst.
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