Ukraine wins IMF lifeline as Russia faces growth slump

KIEV/MOSCOW Fri Mar 28, 2014 2:51am IST

People walk past a mural showing a map of Crimea in the Russian national colours on a street in Moscow March 25, 2014. The mural reads: ''Crimea and Russia''. REUTERS/Artur Bainozarov

People walk past a mural showing a map of Crimea in the Russian national colours on a street in Moscow March 25, 2014. The mural reads: ''Crimea and Russia''.

Credit: Reuters/Artur Bainozarov

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KIEV/MOSCOW (Reuters) - Ukraine won a $27-billion international financial lifeline on Thursday, rushed through in the wake of Russia's annexation of Crimea, while Moscow's economy minister acknowledged that his country's growth would slow dramatically as funds flee abroad.

The International Monetary Fund announced a $14-18 billion standby credit for Kiev in return for tough economic reforms that will unlock further aid from the European Union, the United States and other lenders over two years, effectively pulling Kiev closer to Europe.

Raising the political temperature, former prime minister Yulia Tymoshenko, released from jail last month after her arch-rival Viktor Yanukovich fled from power in Kiev, announced she would run again for president in an election on May 25.

The declaration by the flamboyant Tymoshenko, 53, set up a contest with boxer-turned-politician Vitaly Klitschko, who has also announced his candidacy, and other figures who have emerged to contend for top posts after four months of political turmoil.

Tymoshenko, who appeared without the blond peasant hair braid that has been her trademark for years, pledged to fight "lawlessness" and said she hoped to recover Crimea. But she remains behind her two rivals in opinion polls.

The IMF deal was a boost for the pro-Western government that replaced the Russian-backed Yanukovich last month, prompting Moscow to seize Crimea.

"The financial support from the broader international community that the programme will unlock amounts to $27 billion over the next two years," an IMF statement said.

The IMF said it did not see a need to restructure Ukraine's debts for now.

The Ukrainian parliament later backed a law accepting the austerity measures demanded by the IMF, after initially voting against it.

"The decision we have to take is extremely unpopular," far-right nationalist leader Oleh Tyaynibok told parliament. "But if this decision is not taken then (President Vladimir) Putin in Moscow will applaud that the coalition has been split."

FINANCIAL AID

President Barack Obama said the IMF agreement was a major step forward that would help stabilise Ukraine's economy.

China, which failed to back its ally Russia in a vote on Crimea at the United Nations this month, said it would play a "constructive role" on aid for Ukraine, but stopped short of saying whether it would participate directly.

The European Bank for Reconstruction and Development could direct up to a billion euros a year into Ukraine over the next few years, while the EU could provide 850 million euros within three months.

The Ukraine crisis has triggered the most serious East-West confrontation since the end of the Cold War a quarter of a century ago, deepening the slump in Ukraine's economy, centred on coal and steel production, gas transit and grain exports.

Without IMF-mandated austerity measures, the economy could contract by up to 10 percent this year, Prime Minister Arseny Yatseniuk told parliament, explaining why his government had bowed to the Fund's conditions.

"Ukraine is on the edge of economic and financial bankruptcy," he said.

Kiev opened the way for the IMF deal by announcing on Wednesday a radical 50-percent hike in the price of domestic gas from May 1 and promising to phase out remaining energy subsidies by 2016, an unpopular step Yanukovich had refused to take.

The prime minister, who took on the job a month ago saying his government was on a "kamikaze" mission to take painful decisions, said the price of Russian gas on which the nation depends may rise 79 percent - a recipe for popular discontent.

The IMF statement said a key element of the programme would focus on cleaning up Ukraine's opaque energy giant Naftogaz, which imports gas from Russia's Gazprom (GAZP.MM). Naftogaz's chief executive was arrested last week in a corruption probe.

The IMF also wants the national currency, the hryvnia, to float more freely against the dollar, and a more stringent fiscal policy.

ECONOMIC PRICE

The international rescue for Ukraine was in sharp contrast to Western measures to isolate Russia diplomatically and charge it an economic price for the annexation of Crimea, home to Moscow's Black Sea fleet and an ethnic Russian majority.

Further isolating Moscow in the eyes of the West, the United Nations General Assembly passed a non-binding resolution declaring invalid Crimea's Moscow-backed referendum earlier this month on seceding from Ukraine.

In Washington, the U.S. Senate and House of Representatives easily passed bills to provide aid to Ukraine, back a $1 billion loan guarantee for the Kiev government and impose sanctions on Russians and Ukrainians over Russia's annexation of Crimea.

The United States also announced a ban on licences for the export of defence items and services to Russia.

Targeted U.S. and EU visa bans and asset freezes against senior Russian and Crimean officials, with the threat of tougher economic sanctions to come if Putin goes any further, have accelerated capital flight from Russia.

Russian Economy Minister Alexei Ulyukayev said on Thursday capital outflow could be around $100 billion this year, and would slow economic growth to well below earlier forecasts of 2.5 percent this year.

"If we assume in the first quarter capital outflow was $60 billion ... then (it) will reach around $100 billion for the whole year," Ulyukayev told an investment conference.

"Under this scenario, we estimate that economic growth will slow down to 0.6 percent."

The World Bank gave a gloomier forecast, saying that in a high-risk scenario of persistent tension over Ukraine, Russia's economy could shrink by up to 1.8 percent, even without Western trade sanctions.

Ukraine's dollar bonds jumped on news of the IMF bailout and the cost of insuring its debt against default fell sharply. Russian stocks fell on economic pessimism there.

In a sign of growing concern about the impact of potential sanctions, the head of Russia's state nuclear corporation, Rosatom, said nuclear industry contracts with other countries could be affected by Western measures.

After Visa (V.N) and MasterCard (MA.N) stopped providing services for payment transactions for clients at Bank Rossiya, which is under U.S. sanctions, Putin said on Thursday that Russia would develop its own credit card system.

(Additional reporting by Pavel Polityuk in Kiev and Lidia Kelly and Jason Bush in Moscow; Writing by Paul Taylor and Giles Elgood; Editing by Alastair Macdonald)

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