$20 Billion Untapped in 15 Years Clouds Ukraine-IMF Outlook

(Bloomberg) -- History suggests Ukraine may not squeeze much more from its latest $17.5 billion bailout.

While the International Monetary Fund has approved the third tranche of the rescue after a yearlong delay, the former Soviet republic failed to draw down the full amount from all but one of the seven loans it took between 1995 and 2010, leaving $19.5 billion untapped. The figure excludes $12.5 billion from a 2014 package that, while already faltering, was later expanded into the current program, which runs through 2019 and has $9.8 billion remaining.

The government that took over Ukraine after pro-Russian leader Viktor Yanukovych was ousted in 2014 is struggling to improve on previous administrations’ track records on bailout loans. The $1 billion cleared Wednesday by the IMF’s board was scaled down from $1.7 billion and held up over budget disputes, the resignation of the prime minister and foot dragging over measures to eradicate decades of post-communist corruption.

$20 Billion Untapped in 15 Years Clouds Ukraine-IMF Outlook

“The risks are still high, given the delays in the last tranche,” said Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow. “Unfortunately they’ll stay high for well-known reasons: vested interests, domestic political hurdles, the economic environment, the conflict in the east and insufficient reform momentum.”

Ukrainian officials are nonetheless bullish on the prospects for receiving more IMF money. Central bank Governor Valeriya Gontareva said Thursday that another $1.3 billion tranche is possible by year-end, along with about $1.7 billion in aid from allies including the U.S and the European Union. The bank and the Finance Ministry have made restoring IMF ties a priority.

Western backers’ investment in Ukraine and their determination to make a success of the country mean it’s hard to halt assistance, according to Sergei Strigo, who helps manage about $750 million as head of emerging-market-debt at Amundi Group in London.

“It’s a political decision for the IMF, the EU and the U.S. to keep funding Ukraine,” he said. Nevertheless, he predicted further delays in disbursements, citing domestic politics and a lack of progress on reforms as the main obstacles.

Alternative Financing

There are reasons for pessimism. Approval of the fourth disbursement hinges on thorny issues such as pension reform, which contributed to the collapse of the 2008 program. Corruption is continuing to hold back Ukraine’s development, EU commissioner Valdis Dombrovskis told reporters Friday in the capital, Kiev.

Eurasia Group says another IMF disbursement before April is “highly unlikely,” while Fitch Ratings said delays in transfers can’t be ruled out.

Foreign reserves back above the closely watched threshold of three months of imports also provide less of an incentive for the government to meet the fund’s terms. Indeed, with yield-hungry investors buying up Ukrainian debt, Finance Minister Oleksandr Danylyuk is already penciling in a 2017 return to international debt markets, a move that risks eroding reliance on IMF inflows and the reforms they demand.

That would be a familiar scenario for Ukraine watchers who remember how government officials jetted off to the U.S. to meet investors in 2013, shortly before an IMF mission touched down in Kiev to discuss reviving the failed bailout from two years earlier.

They’ll hope the past doesn’t repeat itself this time.