by Timothy Ash

LONDON – I just read trips notes from three US investment banks who have been to Kyiv. It’s all ‘glass half full.’ They see 60:40 chance of some deal with the IMF this year – because: a) Ukraine needs the money b) the IMF will compromise.

I am afraid I just don't see it. The general line is that the IMF will compromise over gas price hikes and the Anti-Corruption Court, or ACC. On both. I just cannot see why the IMF/International Financial Institutions would cave in.

Timothy Ash is not impressed by Petro Poroshenko's political fancy footwork. Here Ukraine's President approaches the podium for his Feb. 28 press conference in Kyiv (UNIAN/Vladimir Gontar)

On the gas price hikes:

It has been so central to the Naftogaz reform story. Given this was a 3rd review condition, promised already, I just cannot see why the IMF would back down. The end of this heating season, in April, is prime tim to hike prices. But any delay to October and the next heating season means that prices are not being hiked, especially given the political setting with elections looming. This goes in the face of all the efforts to get graft out of gas, which have been a huge success.

On the Anti-Corruption Court:

Either you have an independent ACC, or you don't.

I don't get Poroshenko's issue with an independent ACC. If you want to fight corruption, and have nothing to hide, why would you not want independent judges on the ACC?

And let's face it: there just has to be foreign oversight.

Experience shows that when appointments of judges -- officials more generally in the Ukrainian government -- are given over to the executive/Rada they don't chose independents. Friendly faces are typically chosen. Just look at the one year delay looming over the appointment of the NBU governor. Why would the appointment of ACC judges be any different?

With corruption being so central now to the success of Ukraine's reform story, with the IMF seemingly having some leverage now - given the financing position and $5.2 billion in debts falling due this year - why would the IMF/IFIs cave in?

I just cannot see it, and especially given there are so many IMF officials with long Ukraine experience. They know what Poroshenko means by "compromise" solution.

Maybe I am missing something. But if Poroshenko was serious about an IMF/Venice Commission ACC, why would he not have adjusted his own ACC bill at first reading to account for the comments/objections from the Venice Commision and IMF?

It’s just not logical. Logic suggests a non-VC/IMF compliant ACC bill will be passed by the Rada. Poroshenko will hope to sell this as some big achievement, even though, without independent judges it will be a total waste of time and money.

Wishful thinking

But probably the biggest danger is what George Soros calls "reflexivity" which is what I see from these sell side reports - i.e. they are saying what they want/hope (or just easy analysis). But in doing so, they create a situation where the outcome might be different.

By talking up prospects of an IMF deal, we see the market pricing that, and enabling Ukraine market access - or an alternative to IMF financing.

As was always the danger, hopes of an IMF deal ensure Ukraine does not need IMF financing, and hence does not do the kind of reforms demanded by the IMF and actually urgently needed for the long term health of the economy.

It reminds me of Yanukovych - 2011-2013. Then the likes of First Deputy PM Serhiy Arbuzov talked up prospects of an IMF deal and reform to markets, came to market on that promise, borrowed cheaply, and did no reforms - and we ended up in the Euromaidan in 2013.

Solution: the IFIs need to do some straight talking to Poroshenko and his team, but also to the market, to make clear exactly where we are in terms of the state of the current program.

Make it clear: if no gas price hikes/independent ACC, then no next tranche.

Timothy Ash is senior sovereign strategist for emerging markets at BlueBay Asset Management in London and a member of the UBJ Editorial Board.

Posted March 9, 2018