U.S. leaders say loans will arrive with reform-oriented coalition

Meeting with Ukrainian President Petro Poroshenko, U.S. President Barack Obama confirmed on March 31 that the U.S. is ready to provide the third tranche of USD 1 bln in loan guarantees, Poroshenko’s press-service reported on March 31. The guarantee could be provided “upon completion of the formation of a new government in Ukraine,”  the press-service said.

In his meeting with the Ukrainian president, U.S. Vice President Joe Biden also mentioned the USD 1 bln guarantee will be offered upon “the formation of a new government, oriented on reforms and cooperation with the IMF”, Poroshenko’s press service reported. Biden also informed Poroshenko about a decision to provide an additional USD 335 mln to reform Ukraine’s security sector, including the Armed Forces, State Border Guard Service and National Guard.

With U.S. Secretary of State John Kerry, they also discussed the possibility of deploying an international security mission to Donbas. They agreed that Russia needs to fulfill security conditions in order for Ukraine to implement the political requirements of the Minsk accords and that sanctions need to be extended until Russia fulfills the Minsk accords. They also discussed ways that the U.S. could be involved in the Minsk talks. Kerry said he will visit Ukraine in the nearest future.

Alexander Paraschiy: The U.S. loan guarantee, as well as IMF tranches worth up to USD 5.8 bln (including USD 3.3 bln in carryovers from the 2015 plan), are considered by the Ukrainian government to be key sources of financial support and boosted international reserves in 2016. The government has the potential to attract USD 10 bln in international lending this year. In 1Q16, Ukrainian government received only USD 0.3 bln in international loans.

Judging from how the statements of his press-service are tailored, Poroshenko is trying to shift the emphasis on gaining the loan guarantee on the “new government”, which falls in line with his goal of replacing PM Arseniy Yatsenyuk with his ally, Volodymyr Hroisman. However, we believe the U.S. government and the IMF is more concerned that any Ukrainian government that emerges is “reform-oriented,” and that fighting corruption in Ukraine goes beyond adopting legislation and creating numerous anti-corruption bodies. The press-service’s statements add little confidence that Ukraine will receive new IMF and U.S. loan tranches in the near future.

It’s possible that a new coalition and a new Cabinet will emerge in Ukraine as early as next week, though such a development does not guarantee restoring international lending programs to Ukraine. In the best case, we expect Ukraine will receive no more than two IMF tranches this year, worth USD 3.0-3.5 bln, and Ukraine’s end-2016 international reserves will amount to about USD 16.5 bln. If cooperation with IMF isn’t restored in 2016, Ukraine’s gross reserves will fall below the current level of USD 13 bln by the year’s end.