Will Kolomoyskiy derail the IMF deal?
When we drafted this report, the IMF mission left Kyiv signaling that the deal was not there. Before that, things in Ukraine seemed to have been moving right along. The Verkhovna Rada had approved a package of very important bills that includes unbundling Naftogaz and reinstating the illegal enrichment provision, and passed the first reading of a land reform bill. The legislature had also approved a realistic 2020 spending plan, with a modest deficit of 2.1% of GDP.
But on the eve of the IMF mission to Kyiv, things suddenly turned quite sour. Firstly, oligarch Ihor Kolomoyskiy dropped a bombshell, telling the New York Times that “financing from Russia could replace loans from the IMF.” He then claimed that Ukraine would receive $100 billion from the Russians. After this, law enforcement agencies arranged a series of arrests among bankers, detaining, among others, Oleksiy Pysaruk, a former first deputy governor of the NBU. These developments created a very unfortunate backdrop for the IMF visit.
Foreign observers have already asked many questions about Kolomoyskiy’s influence, and have been asking President Volodymyr Zelenskiy to show clearly the independence of his decisions. The Office of the President tried to distance itself from the oligarch at a meeting of G7 ambassadors, stating plainly that “there is no reason to return state-owned PrivatBank to its former shareholders.” That was a good start. But after this new set of controversial statements from Kolomoyskiy, it no longer looks like enough. At what was supposed to be an off-the-record meeting with journalists, Chief of Staff Andriy Bohdan complained that he had problems persuading the IMF that Kolomoyskiy was playing his own game. He also noted that the IMF had asked about the arrest of Pysaruk.
The very fact that Kolomoyskiy is making such “interventions” on the eve of critical talks should serve as evidence that this is the only way for him to influence politics in Ukraine. If he were really Zelenskiy’s puppeteer, as many claim, he would sit quietly working in the background to achieve his ends. Instead, he is being very demonstrative and public. We believe his main goal is to cut a better deal. He believes he helped Zelenskiy get elected, and wants to be repaid. But it seems his appetites are excessive, and he is increasing tension between himself and the president.
Still, the IMF has insisted on more solid evidence, especially about the Pysaruk arrest. The National Anticorruption Bureau (NABU), which is running the investigation, is so far considered politically neutral and reputable. But a serious question hangs in the air: why is it not touching people involved in the $5.5 billion of related party loans that nearly bankrupted PrivatBank? Unless this question is properly answered and more active steps are taken to keep PrivatBank out of Kolomoyskiy’s or Ghennadiy Bogoliubov’s hands, the IMF will not be very happy.
Meanwhile, the economy remains in good shape. The CAD is performing better than initially predicted. Good agro-exports coupled with a drop in energy imports has kept the trade deficit from ballooning. By September, the CAD was reported at $2.7 billion, substantially less than the $3.4 billion of a year ago. The hryvnia resumed appreciation in November, hitting UAH 24.06/dollar, a 15.1% rise since the start of the year. The steady inflow of cash from non-residents purchasing state bonds, as well as a narrow CAD, are supporting this dynamic. Inflation slowed faster than expected. The NBU made a further decisive easing move in October, cutting the prime rate by 100 basic points to 15.5%. A stronger hryvnia and disinflation mean there is a high chance for one more cut in December. Budget revenues are underperforming, but the Rada adjusted its revenue plan downward in October, so weaker tax collections are not a problem for now. The strong hryvnia has saved considerably on debt servicing, which made it possible to neutralize the revenue adjustment in relation to the deficit, targeted at 2.3% of GDP for 2019.
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