Will upcoming elections in Ukraine lead to deal with IMF?

As parliamentary elections in Ukraine approach, due on October 28, one of the main topics under discussion is whether the country will strike a deal with the International Monetary Fund (IMF) in the aftermath.

In 2008, the IMF approved a standby loan of $16.5bn for the country. It now wants Ukraine to raise household gas prices to qualify for this loan.

East Capital, an investor in Eastern Europe, says the government had been reluctant to do that prior to the elections, but the situation may change afterwards.

Renaissance Capital, a prominent investment bank focused on Central and Eastern Europe, Africa and Central Asia, consider a deal with the IMF to be the best scenario for the country, too.

However, its chief economist for Russia and CIS Ivan Tchakarov says the bank’s current forecast for 2013 does not support this outlook.

Renaissance expects more favourable global growth conditions in the coming year, which in his view with “blunt incentives to re-engage with the IMF.”

He says: “We met Ukrainian authorities, banks, international organisations and think-tanks…our key takeaway was there is still a lot of uncertainty about the course of action that the authorities will take in the aftermath of the election.”

“The present high market expectations of an imminent post-election deal with the IMF should be tempered…There is a good probability that Ukraine will continue to hold off [on the deal] for as long as possible.”

East Capital’s senior adviser Aivaras Abromavicius agrees. He thinks it more likely that Ukraine will go down a different road, joining the proposed customs union with Russia, Belarus and Kazakhstan.

This new Eurosian Union is an initiative proposed by Russia’s President Vladimir Putin just over a year ago.

The idea is to combine many of the former Soviet member states, including Belarus, Azerbaijan, Tajikistan and Moldova, into a union based on the European Union (EU) integration model.

Moscow has allegedly promised a 50-60% cut in gas prices if Ukraine joins the union.

Abromavicius says: “It is more likely that Ukraine will have more integration with Russia through a customs union. This will open up the market for Russian companies in the country and might turn red figures into black.”

However, other foreign banks operating in the region, such as Raiffeisen and Commerzbank, disagree.

Raiffeisen says: “We believe that the authorities will turn to the IMF in H1 2013, as other options either look unrealistic (support from China), non-sustainable (no reforms) or unacceptable for the establishment (deal with Russia).”

Commerzbank echoes this view, seeing the IMF deal as the only way for Ukraine to achieve higher currency flexibility, which is slated as the only way to raise the performance of the local currency (the hryvnia).

According to Raiffeisen’s Research, it has already lost 2% against the US dollar since the beginning of the year and the bank expects further depreciation of 10% in the coming year.

“We believe that with the support of IMF funds the peg could be relaxed in a smooth and gradual manner, and thus overshooting could be avoided,” Raiffeisen says.

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