Ukraine to use first Russian loan tranche for social payment debt

Prime Minister of Ukraine Mykola Azarov told television reporters on Dec. 27 that the funds his government gained from the USD 3 bln placement (bought by the Russian government) are being used to pay debts on social payments. “We ended up using the first tranche to cover all social payments,” Azarov said. The remainder will be used to modernize the economy, he said. Two days earlier, Azarov stated that the government won’t “eat away” the funds gained from Russia. “There can’t be even any issue of patching up current problems with credit and eat away this resource,” he said, as reported by the Ukrayinska Pravda news site. “”In the first place, the loans will be used to modernize industrial capacities.”

Azarov also criticized the Ukraine-EU Association Agreement, which doesn’t mention Ukraine’s possible EU membership. “We tried to get that for two years and were categorically denied,” he said. Additionally, signing the agreement wouldn’t have led to a visa-free regime in the short term, Azarov said. Ukraine canceled visas for 30 nations in 2005 without an equivalent response from European nations. “We lost a lot of money and respect because no one in this world makes unilateral concessions,” Azarov said.

It’s not possible “with the wave of a magic wand” to introduce European standards in Ukraine, Azarov said. At the same time, the EU is not interested in Ukrainian products. “With what are we going there?,” he said. “We told our partner (the EU) take our railcars. No, they don’t want then. Firstly, their rails are different. But we could have rebuilt our production and made our railcars in conformity with their rails. But they don’t have the desire to buy from us.” The same EU policy applies to Ukrainian planes, pipes and other products. “What can we offer them? Confectionary goods?,” he asked. “They have an excess with brands that have been developed over decades, at that. No one’s going to buy our Roshen.”

Zenon Zawada: Azarov’s statements on Dec. 27 represent a very clever political game that his government is playing. Its goal is to win re-election and few tools are more effective than social payments. Claims about using the funds to modernize industry are strictly a public relations cover because that would bring no political dividends.

Equally dubious are Azarov’s claims about the Association Agreement. It’s unrealistic to expect the EU to declare Ukraine’s membership prospect and visa-free regime without even the minimum steps being taken. While we agree that Ukrainian consumer goods would have difficulty competing in wealthier EU countries, we are confident they would be competitive in eastern European markets. Roshen owner Petro Poroshenko seems to think so as well, given that he’s among Ukraine’s biggest supporters of the EU Association Agreement.

As for the Ukrainian freight railcars, we agree with Azarov that EU countries won’t need them. But neither will the Russian Federation, which has become more self-sufficient with most types of railcars after two Russian producers emerged in the last three years and some existing producers increased their capacities. Therefore, we do not see any improvement in Russian demand even though relations between the two governments have warmed significantly in the last month.