The IMF Steps In to Boost Ukrainian President’s Re-Election Bid

(Bloomberg Opinion) -- The International Monetary Fund’s new funding arrangement with the Ukrainian government has the added effect of making President Petro Poroshenko a viable candidate in the 2019 elections. An economic collapse before Ukrainians go to the polls is unlikely now, and Poroshenko can run on a record that is neither spectacular nor quite disastrous.

On Oct. 19, the IMF announced it had reached a staff-level agreement to replace Ukraine’s $17.5 billion debt facility, set in 2014, with a new 14-month deal that would give the country access to $3.9 billion, contingent on further fiscal consolidation and efforts to rein in inflation. Technically, this means Ukraine will get less from the IMF than it could count on initially. The fund only disbursed $7.7 billion under the old program, which would have run out in March 2019. The last of the IMF money came in April 2017; another $3.9 billion over the next 14 months doesn’t add up to the $17.5 billion originally offered. The total, $11.6 billion, is also smaller than the $15 billion assistance package that Russia’s president, Vladimir Putin, offered Viktor Yanukovych, the now-deposed Ukrainian president, in exchange for not signing an association agreement with the European Union.

The final amount of IMF support, however, isn’t important in the grand scheme of things. As long as investors know Ukraine is cooperating with the fund, they’ll keep buying Ukrainian bonds. Once the preliminary IMF deal was done, the Ukrainian government started preparations for a 10-year dollar bond issue, something it couldn’t dream of doing without the deal.

The new arrangement also makes it possible for Ukraine to collect a total of $2 billion from the EU and the World Bank. In an October report on the state of the Ukrainian economy, the bank estimated that the country’s gross domestic product should grow 3.5 percent next year given IMF support and probably less than 2 percent without it because of lower investor confidence, weaker macroeconomic fundamentals and debt-repayment concerns. Now, the optimistic scenario is likely to unfold, the government’s liquidity crunch no longer threatens to turn into a full-blown crisis, and the national currency, the hryvnia, is unlikely to tank. 

The IMF stopped providing support to Ukraine last year because of persistent corruption and the government’s slow implementation of key demands such as liberalizing the agricultural land market and removing energy subsidies for households. The corruption is still there, despite a parallel investigation, prosecution and justice system to fight it: The new bodies squabble and no high-ranking officials get convicted. The land market reform has been put off indefinitely. And while the IMF, according to Ukrainian Prime Minister Volodymyr Hroisman, demanded that the government scrap energy subsidies completely, raising the price of natural gas for households by about 60 percent, it compromised on a 23.5 percent increase, accepting the government’s assurances that this was all Ukrainians could bear. 

The IMF deal isn’t an endorsement of Ukrainian reforms: They’re as slow as when the fund stopped lending last year, and it’s hard to expect Poroshenko and his government to do anything radical or painful months before an election. What the fund does with the provisional deal is allow Poroshenko to compete in the election, which pits him against a strong populist rival and a field of relatively weak reformist candidates. 

The latest polls put Poroshenko in second or third place, always behind former Prime Minister Yulia Tymoshenko, whom many wrote off after the 2014 “Revolution of Dignity” as too populist and insufficiently European. With 7 percent to 11 percent support compared with Tymoshenko’s 12 percent to 15 percent, the president is vulnerable; he’s likely to lose a run-off to Tymoshenko, too. 

That wouldn’t be much of a problem if another strong pro-European candidate were running. But neither former Defense Minister Anatoliy Hrytsenko nor Lviv Mayor Andriy Sadovy comes close to Poroshenko’s poll ratings, and the Ukrainian reformist opposition is chronically incapable of compromises that could lead even to temporary unity. Another potentially strong candidate, the rock star Svyatoslav Vakarchuk, hasn’t made up his mind about running yet, and he’s not beating Poroshenko in the polls, either.

The president has done little to weaken the power of Ukraine’s oligarchs and corrupt political elite. After all, these are the people with whom he’s done business all his life, getting rich in the process as a confectionery magnate. But he had bet heavily on integrating his country into the West, and he’s been welcomed, in a lukewarm way, to Western forums and institutions. This allows him to claim at least one major success for his presidency: Visa-free travel for Ukrainians to the EU, received enthusiastically by people eager to travel to Europe as temporary workers and tourists. The travel has grown cheaper thanks to European discount airlines such as Ryanair. About 1.3 million Ukrainians have used the opportunity so far.

That achievement and the support from the IMF, another reluctant nod to his pro-Western orientation, give him a fighting chance against Tymoshenko, whose wildly populist platform could lead to economic experiments that would drive Ukraine, emerging Europe’s poorest country, further into poverty. 

For the IMF and other Western institutions, a bird in the hand is worth any number in the bush. That’s something reformist politicians should have thought about earlier; now, there’s likely not enough time for any of them to win an endorsement from the Western allies that Poroshenko has done his best to cultivate. They’re going for stability, hoping Poroshenko can win, despite his shortcomings, and make sure Ukraine’s European trajectory is irreversible.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg Opinion columnist covering European politics and business. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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