Kiev fears default as MPs prepare to vote on debt restructuring

Roman Olearchyk 

War-torn Ukraine faces a threat of imminent default and a deep financial and political crisis if its parliament fails to back a $18bn debt restructuring plan on Thursday.

Figures close to the reformist government and, more recently, western policymakers, have become increasingly worried that the plan could fall victim to a political backlash over Ukraine’s economic problems and squabbling within the ruling coalition.

A government adviser warned that if parliament rejected the debt deal, Ukraine would be unable to repay a $500m bond due on September 23.

That would push Ukraine into default, erasing tentative hopes for the country after fighting in the breakaway eastern regions between pro-Kiev forces and Russian-backed separatists suddenly de-escalated this month.

“The consequences are very simple. If the deal is not approved by the parliament, Ukraine would enter into default and for a very long time,” the adviser said.

Default would almost certain derail a $40bn international bailout, led by the International Monetary Fund, where the debt restructuring is an important component.

The financial and political fallout would inevitably have broader geopolitical implications for Ukraine’s confrontation with Russia.

One EU foreign minister told the FT that Vladimir Putin, Russian president, may have backed away from military escalation in eastern Ukraine “because he is now betting on an internal Ukrainian implosion, which is not impossible”.

Washington indicated this week that it was ready to offer more financial support to prop up the reformist government led by prime minister Arseniy Yatseniuk.

Ukrainian officials said on Wednesday they would work through the night to persuade coalition and opposition lawmakers to back a debt deal struck three weeks ago after months of hard-fought negotiations with creditors.

“Everything can change overnight,” said Viktoria Voytsitska, an MP in the Self-Help party that is part of the ruling coalition.

“There is no monolithic position” across parties, she said. Many lawmakers want “to understand what consequences it will have for Ukraine for many years to come,” she added.

Though the restructuring includes a 20 per cent “haircut” or writedown, many MPs fear that elements which link repayment to gross domestic product could significantly increase the country’s debt burden in the long term.

The concerns are shared by some lawmakers within President Petro Poroshenko’s Solidarity party.

“A large part of the faction was wavering, but I think the majority will vote for it,” said Oleksiy Goncharenko, an MP in the pro-presidential parliamentary faction.

IMF disbursements this year have replenished central bank reserves to some $12.6bn as of August but Ukraine’s currency remains fragile, even if it has recovered a little since March.The IMF expects the economy to shrink 9 per cent this year, after a 6.8 per cent contraction in 2014.

Without international aid, Kiev — which has clashed twice with Moscow since 2006 over the price of gas imports — could struggle to afford enough supplies for winter.

Parliamentary rejection of the debt deal could lead to the fall of Mr Yatesniuk and his cabinet.

The Fatherland party of former prime minister Yulia Tymoshenko has threatened to quit the ruling coalition, citing transparency concerns over utility tariff increases. The Radical party quit the coalition this month.

Unpopular austerity measures set as conditions for the IMF-led bailout package, including sharp utility tariff increases and more currency flexibility, are starting to stabilise the country’s battered public finances.

But they are also having a punishing effect on the population at a time of mounting impatience over the pace of economic reforms and efforts to curb corruption.

“We are living on the edge . . . I don’t know how much longer this can continue,” said 59-year old Nadia Ivanivna, one of dozens of rural pensioners selling homegrown produce on a sidewalk in Kiev.

“For the first time in a decade I’m scrapping to survive by making a daily six-hour round trip from my village to sell my homegrown produce here in Kiev.

“My 1,100 hryvnia ($50) monthly pension will not be enough to cover the utility bills this winter,” she added.

US assistant secretary of state Victoria Nuland said: “You can feel the concern, you can feel the tension,” at a conference in Kiev over the weekend.

Citing polls conducted this summer, Iryna Bekeshkina, director of the Kiev-based Democratic Initiatives Foundation think-tank, said “the population is obviously not living better and the absolute majority feel that there are no reforms under way.

“There are no signs that the situation has yet reached a boiling point as polls show that few citizens are for now ready to take to the streets in protest but the ratings of all the politicians has fallen sharply: this has them turning populist ahead of the October 25 regional elections, which makes things ever more dangerous,” she added.

Ms Nuland joined western economists in praising the government for its reform efforts but also urged speedier efforts to crack down on corruption and break the tight hold on the economy and politics by oligarchs that was undermining stability and reforms.

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