The Frightful Fortnight of Ukraine’s New President

(Bloomberg) -- Ukraine’s embattled leader suffered another body blow, this time over financing, to cap off the toughest two weeks of his fledgling presidency.

An International Monetary Fund mission left Kyiv on Friday without the preliminary deal for $5 billion of funding that the government had sought. While discussions on a new program will continue, the Washington-based lender didn’t pull any punches in its statement.

“Growth is held back by a weak business environment,” IMF mission chief Ron van Rooden said. He cited “shortcomings in the legal framework, pervasive corruption, and large parts of the economy dominated by inefficient state-owned enterprises or by oligarchs—deterring competition and investment.”

Up until recently, it had all been going so well for President Volodymyr Zelenskiy. He’d dazzled investors with a flurry of reforms, brought back prisoners from Russian captivity and was enjoying an approval rating that topped even Vladimir Putin’s in neighboring Russia.

But it’s begun to unravel for the former TV comic who shot to power in the spring, backed by voters who yearned for a fresh start after years of corrupt rule.

What started with complaints he’s too close to a local billionaire snowballed as a respected reformer saw her house burned down and Zelenskiy found himself at the center of the impeachment probe into U.S. President Donald Trump.

Friday’s news could hurt most for a country whose currency is this year’s best-performer against the dollar. It was made worse by the resignation later in the day of Oleksandr Danylyuk, a popular reformer, as head of the National Defense and Security Council. He’s set to leave the administration having not been offered another position. The government’s foreign-currency bonds pared gains after the announcement.

Without the IMF, “foreign money can flee even faster than it came in,” said Mark McNamee, practice leader for Europe at research and advisory firm DuckerFrontier. While “bona fide reforms are taking place, this is unlikely enough to encourage financial investors to keep their money in Ukraine.”

The IMF setback is a result of Zelenskiy’s other problems. While pleased with much of Ukraine’s reform work, agreeing on a staff-level agreement at this point was difficult for the fund amid the attacks on ex-central bank Governor Valeriya Gontareva and the situation around the country’s No. 1 lender, Privatbank.

The IMF had supported the nationalization of Privatbank in 2016, with subsequent investigations unearthing fraud that required billions of dollars of taxpayer money to remedy. But one of the former owners, billionaire Igor Kolomoisky -- whose TV channel aired Zelenskiy’s shows -- says he did nothing wrong and speaks openly of a potential compromise.

A court challenge next week could annul the Finance Ministry’s purchase of Privatbank’s shares and restore the previous ownership structure. That’s a no-go for the IMF and would concern investors.

The storm around Trump is also important.

Zelenskiy doesn’t come out well from a readout of a phone conversation between the two men in July, during which Trump repeatedly asks his opposite number for an investigation into Joe Biden, a potential opponent in next year’s U.S. presidential election.

Peace Talks

And remarks to Trump by Zelenskiy about a lack of support for Ukraine from the European Union will do him no favors as he leans on the bloc in talks with Russia to end the five-year conflict that erupted after Vladimir Putin annexed Crimea.

Zelenskiy’s popularity, which the most recent polls in early September put at 71%, may suffer more from speculation about links to Kolomoisky than the U.S. scandal. But finding a win to counter the tide of negative headlines will be tricky.

The next item on Zelenskiy’s policy agenda is ending the war with Kremlin-backed fighters and reintegrating the eastern regions where it’s taking place. A summit with the leaders of Germany, France and Russia may be arranged for the coming weeks.

Zelenskiy has indicated he can be more flexible than his predecessor. But he shouldn’t rely on Putin to hand him an easy victory.

--With assistance from Volodymyr Verbyany, Kateryna Choursina and Marton Eder.

To contact the reporters on this story: Andrew Langley in London at alangley1@bloomberg.net;Daryna Krasnolutska in Kyiv at dkrasnolutsk@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Balazs Penz

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