Timoshenko Murder Rap Could Jeopardize IMF Talks

January 30, 2013
Anthony T. Salvia
Director, American Institute in Ukraine

Last week at the World Economic Forum in Davos, President Viktor Yanukovich called Europe Ukraine’s “preferred” vector (in other words, we have nothing against Russia, we just happen to prefer Europe), and said his country would enter into a free trade agreement with the European Union by November of this year if not sooner.

You should be careful about biting the only hand capable of feeding you: Russia responded on January 26th by slapping Ukraine with a $7 billion invoice for breach of the gas contract negotiated in 2009 by Mrs. Timoshenko – her main political legacy.

This is awkward as Ukraine is seeking $15 billion in new loans from the International Monetary Fund, which is by no means a sure thing, and without which the government will in all likelihood default on its financial obligations. An IMF delegation arrived in Kiev this week. It is not known if the Ukrainians plan to ask them for an additional $7 billion to pay Russia’s unexpected bill.

There are further complications: Kiev’s declaration of its preference for a free trade agreement with the European Union over a customs union with Russia has played out against the backdrop of the State Prosecutor naming Mrs. Timoshenko a suspect in the 1996 contract killing of Evgeniy Shcherban.

Twenty seven European governments, plus the European Parliament, will be required to ratify the so-called Deep and Comprehensive Free Trade Agreement and broader Association Agreement if and when it is signed. Unanimity is required. As it happens, many of them are shocked and angered by what they see as a politically motivated campaign against Mrs. Timoshenko (politics, needless to say, play no role in the administration of justice in the West).

The Timoshenko murder rap also jeopardizes Kiev’s on-going talks with the International Monetary Fund for renewed lending – vital if Ukraine is to have access to global capital markets, pay its bills and have any hope of getting its economy back on track.

Ukraine is seeking to persuade the IMF to resume lending, suspended since 2011 for the government’s failure to meet a number of loan conditions, above all the curtailment of subsidies to domestic gas users. Its needs the cash infusion to cover a current account deficit of $14 billion together with $8 billion in sovereign debt repayments -- $6 billion of them to the IMF! Ukraine owes the IMF four payments in the course of 2013 of $1.3 billion each, with the first payment due on February 12th and the next on April 30th.

To make matters worse, the IMF insists Ukraine meet two conditions for renewed lending – neither one politically attractive: 1) a six fold increase in gas prices to Ukrainian enterprises and households, and 2) devaluation of the hryvnia to stimulate exports and reduce the nation’s growing current account deficit – a major blow to Ukrainians with dollar-denominated earnings.

In addition to these specific demands, which Kiev appears to be moving to accommodate, the IMF and Europe are insisting on economic reforms and greater liberalization. In the words of Timothy Ash, head of emerging markets research at Standard Bank, London: “The price [of a deal with the IMF] could yet be a firmer commitment to maintain and defend the democratic standards that were so craved by the population in the Orange Revolution.”

Whether that’s a good thing for Ukraine or bad is debatable, but one wonders why any of this would appeal to a Yanukovich administration. And why if it truly prefers “Europe” and the West it would undercut its cause by pressing its case against Mrs. Timoshenko.

There is an alternative to this bleak picture, but Ukraine is determined not to grasp it. It would entail cutting a deal with Russia to slash gas prices, and provide funds for covering the government’s cash shortfall. Russia, of course, like Europe and the IMF, would exact its price: the transfer to Gazprom of Ukraine’s gas pipeline network (it’s a white elephant of declining value, so no great loss), and membership of the Eurasian Customs Union (there’s more for Ukrainian businessmen and workers in free access to a dynamically growing, Russian-speaking Eurasian market than in hooking up with a terminally moribund Europe.)

The government may be correct to give preference to the European vector, but it’s hard to know because the talks leading up to the DCFTA were closed, its contents have never been published, and the media have shown little interest in investigating the matter. Russia, as Churchill said, may be a riddle wrapped inside a mystery inside an enigma, but in the matter of DCFTA vs. Eurasian Custom Union, its cards are on the table, whereas Europe’s are not. It is not even clear that Europe, in the end, will ratify the Association Agreement and DCFTA.

All of this must be somewhat galling to Prime Minister Azarov. Indications are he sees the connection between the Timoshenko affair and Ukraine’s fraught status vis-à-vis both “Europe” and the IMF. The Frankfurter Allgemeine reported last October, even before the Prosecutor charged Mrs. Timoshenko with murder, that the Prime Minister, in comments made internally, blamed the state’s handling of the Timoshenko affair for harming Ukraine’s relations with the West and blocking Ukraine’s access to IMF funds.

Meanwhile, he sits in his office planning for a November signing ceremony that may or may not take place.