December 28, 2020
The International Monetary Fund (IMF) finished the first round of talks with the Ukrainian government. The mission didn’t visit Ukraine and held the negotiations online.
The talks will resume after the winter holidays. Ukraine hopes to renew the IMF’s loan program and get a $700-million tranche at the beginning of 2021. The negotiations themselves are a good sign for Kyiv.
Still, there are a number of reasons to fear that, even after the positive decision, the long-term relationship could be spoiled by Ukrainian officials who try to find a compromise between the country’s obligations and their personal political interests.
For now, we don’t know for sure that the talks will bear fruit. According to Finance Minister Serhiy Marchenko, Ukraine managed to meet some of the IMF’s key markers — for example, it united the fiscal and customs services and improved the policy for gas and electricity tariffs. But there are still several problems, and the most crucial ones are the court system reforms and anti-corruption politics. We could also add the issue of the National Bank of Ukraine, the independence of which came under question after the forced resignation of its previous head, Yakiv Smoliy.
The main problems with meeting IMF criteria and the main issues of the Ukrainian state are the same — nepotism, the selective application of justice and excessive state regulations.
We have plenty of examples, even in the last month. For instance, just on the eve of new talks with the IMF, the Verkhovna Rada passed a new bill, which lowered the VAT rate for agricultural products from 20% to 14%. That goes against Ukraine’s obligations under the Association Agreement with the European Union. This is the step that the IMF has been asking Ukraine to avoid for several years. It’s a clear example of lobbying, and it will hurt the already stretched budget for 2021.
The anti-corruption infrastructure is also a mess. Since August 2020, the Special Anti-Corruption Prosecutor’s Office hasn’t had an official head. The Verkhovna Rada has also failed to pass a new law on the National Anti-Corruption Bureau (NABU), which means that, after Dec. 17, a number of critical aspects of the old version of the law no longer function.
Meanwhile, the President’s Office, with the help of the Prosecutor General’s Office, is working against NABU, trying to save Zelensky’s Deputy Chief of Staff Oleh Tatarov from the NABU detectives, who are investigating him for bribery.
The new law against unlawful enrichment, passed by parliament after the Constitutional Court canceled the previous one, is much more forgiving than before — in fact, it’s so weak that the National Agency for Preventing Corruption (NAPC) asked the president to veto it, to no avail. In the past month, every anti-corruption institution came into conflict with the President’s Office, parliament or court system. The central anti-corruption agency, NABU, is in conflict with all three.
All of that creates a terrible background for talks with any international donor, IMF included. Still, there are some reasons to believe that the current talks will be successful, at least partially.
The sole fact that the IMF leadership supported the renewal of talks at the end of the year, despite all the above-mentioned problems, is a good sign for Ukrainian officials. The recent negotiations between Zelensky and Managing Director of the IMF Kristalina Georgieva indicate that the Fund still hopes that Ukraine has no other way but to fulfill its obligations under current circumstances. That’s true: The budget deficit is dire. Ukraine needs the IMF loan — not just for the money, but as an indicator of creditors’ trust in Ukraine.
This reminds me of one example from the history of Ukraine-IMF relations. During the years of 2008-2009, Ukraine also was in dire need of the IMF to survive the global financial crisis. The crucial marker for the IMF mission, headed then by Jeyla Pazarbaziolu, was a healthy gas tariff policy. Then-Prime Minister Yulia Tymoshenko secured an increase in tariffs and wrote a letter directly to IMF Managing Director Dominique Strauss-Kahn, asking for a loan for Ukraine and promising personal guarantees of a stable tariff policy. Strauss-Kahn approved it, despite some objections from the IMF staff.
But after the loan was transferred, the Kyiv District Administrative Court supported the claim of Ukrainian trade unions and canceled raising of tariffs. It saved the Ukrainian government from the electorate’s wrath, but dealt a heavy blow to Ukraine-IMF relations for years, and Pazarbaziolu had to leave her position.
This example shows us the most remarkable strategic problem of Ukraine’s relations with all of its donors: Even in the worst possible situation, when help is direly needed, Ukrainian political actors can spoil a strategic relationship for short-term tactical benefits.
Ukraine needs the IMF loan, and its people deserve to get help to withstand the current circumstances of both war and the pandemic. Still, Ukrainian politicians’ promises should be considered very carefully — not only for the sake of donors but also for the future of the country itself.
Victor Tregubov is a Ukrainian columnist, political blogger and the former editor-in-chief of Petr and Mazepa online news outlet. He is also a co-founder of the Democratic Axe (Demokratychna Sokyra) political party.