Major Risks Surround The Vilnius Summit
BMI View: Ukraine appears to be giving the strongest indications yet that it is prepared to acquiesce to the IMF's demands in order to secure the necessary financing to see it through the likely Russian retaliation if Kiev signs the EU's Association Agreement at the end of November. Despite this, we see several major stumbling blocks and caution that even if this hasty deal goes ahead, it is unlikely to herald a turning point in Ukraine's political deterioration.
With Ukraine appearing increasingly likely to sign the Association Agreement with the EU at the end of November, both sides are now preparing for the probable backlash from Russia, which is likely to arrive in the form of an all out trade war between the two countries. In light of Ukraine's extremely precarious macroeconomic position, dwindling public finances and substantial quasi-fiscal liabilities related to state-owned Naftogaz, a trade war with Russia would likely push Ukraine into a full-blown economic crisis without external assistance.
Accordingly the EU and the IMF have stepped up emergency talks to coordinate on the possibility of providing financial support to Ukraine after it signs the Association Agreement. Ukraine still owes around XDR4.3bn from an XDR11bn Stand-By Arrangement loan authorised by the Fund in 2008 which was eventually frozen for non-compliance, mainly pertaining to Ukraine's failure to lift domestic gas subsidies. Unfortunately, not much has improved since 2008, and even the IMF's statement following its recent mission in October - which tend to be perennially diplomatic in their wording - was relatively critical of the state of affairs.
|Time Is Running Out For A Solution|
|Ukraine - International Reserves, US$mn|