Europe News

Ukraine’s financial rescue is riding on one vote — and whether its lawmakers can stop fighting

Independence square in Kiev, Ukraine as protests continue on March 2, 2014.
Louisa Gouliamaki | AFP | Getty Images
Key Points
  • Ukraine has mired itself in political drama ahead of a crucial vote, the result of which will determine Kiev's access to a financial lifeline.
  • Lawmakers in the Rada, Ukraine's parliament, will vote Thursday on the creation of an anti-corruption court, a key condition of unlocking the country's $17.5 billion IMF bailout.
  • Adding to the uncertainty is political infighting, which on Wednesday saw Ukraine's prime minister ask its parliament to fire the finance minister, who is seen as a reformer.
Independence square in Kiev, Ukraine as protests continue on March 2, 2014.
Louisa Gouliamaki | AFP | Getty Images

Ukraine has mired itself in political drama ahead of a crucial vote, the result of which will determine Kiev's access to a financial lifeline.

Lawmakers in the Rada, Ukraine's parliament, will vote Thursday on the creation of an anti-corruption court, a key condition of unlocking the country's $17.5 billion International Monetary Fund (IMF) bailout that's been frozen since last year.

Delivery of the funds has been repeatedly put on hold as Kiev struggles to enact the IMF's required reforms, which include the anti-corruption measures and raising household gas prices.

A failure to get enough votes for the anti-corruption court — something Ukrainian politicians have been fighting about publicly, and more fiercely behind closed doors — could tip the nation into deeper uncertainty and send investors running for the door.

Ukrainian Prime Minister Volodymyr Groysman has threatened to resign if the vote is not passed and all IMF conditions are not met, although he has opposed the hike on gas prices.

Ukraine's central bank has highlighted IMF financing delays as "the key" risk to its financial stability. The eastern European nation of 45 million has a national interest rate of 17 percent — the highest in Europe — and rates are only set to be pushed higher if help from the IMF does not materialize. Inflation, too, remains stubbornly high at 13.1 percent.

Four years after mass protests erupted to remove then-President Viktor Yanukovych from power, Ukrainians citizens and international investors are frustrated at an economy that's remained troubled and steeped in corruption. Transparency International ranked Ukraine 130 out of 180 countries in its Corruption Perceptions Index for 2017.

Speaker of Ukrainian Parliament Volodymyr Groysman (R) has been nominated by President Petro Poroshenko's party to head the future cabinet.
Genya Savilov | AFP | Getty Images

Ukraine restructured its debt in 2015 following its sovereign debt crisis triggered by conflict with Russia in 2014, leaving it with large annual payments to make between 2019 and 2027. Its foreign currency reserves are at roughly half the level they were before the crisis.

Political infighting

Meanwhile, Groysman and his finance minister Oleksandr Danylyuk have been in an open spat over the naming of appointees, with the latter having sent a letter to his G7 counterparts complaining that nepotism and political corruption continue to dominate Ukraine.

On Wednesday, Groysman asked the Rada to fire Danylyuk — who's been seen as a major reformer — for misconduct. "I am sure that lawmakers would be delighted to vote the reform-minded Danylyuk out of office," said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management.

Ukraine managed to successfully sell $3 billion in dollar bonds in 2017, helping mitigate a bit of its debt burden, but the recent sell-off in emerging markets is making borrowing costs far more expensive. The Institute for International Finance recently named Ukraine among the five most vulnerable emerging markets to a strengthening dollar and rate rises. It currently has more than $20 billion in outstanding dollar debt.

"Should the vote fail, it will likely exclude additional IMF support for the foreseeable future while also drawing further negative attention to the government," said Maximilian Hess, a senior political risk analyst at London-based consultancy AKE Group.

This combined with the Danylyuk-Groysman feud, and a potential stricture on Ukraine's ability to sell Eurobonds the way it did last year, could cripple the country's ability to tap the private debt market for its financing needs, Hess said.

Andrew Burton | Getty Images

Ukraine's economy has been in turmoil ever since the Euromaidan protests in 2014 that triggered Russian annexation of its Crimean peninsula and a war with Russian-backed forces in the country's east that has engulfed 7 percent of its territory and killed more than 11,000 people.

"While Ukraine maybe — emphasis on maybe — could meet its debt obligations in 2019-20, a new sovereign debt crisis is entirely possible, particularly if additional IMF support is not forthcoming," Hess said.

"Rising interest rates, the continued conflict with Russian-backed separatists in eastern Ukraine, and uncertainty around the elections and about further loans or guarantees from the EU and other Western partners mean that concerns over the sustainability of Ukraine's state debts could return rapidly."