Ukraine’s economic overhaul lagging behind promises, EBRD says

2015-01-30 11:35:31

Ukraine isn’t acting quickly enough to stave off a financial collapse that’s possible in months, according to the European Bank for Reconstruction and Development.

“Right now I see much more conversation about what needs to be reformed and less in terms of actual achievement,” said Francis Malige, the London-based lender’s managing director for eastern Europe and the Caucasus. “It has to do with reforming the country, really changing it, not just passing laws.”

A faster economic overhaul would help Ukraine attract loans from international organizations, including the EBRD, which invested about 1 billion euros ($1.1 billion) in 2014, Malige said in an interview in his office in Kiev. Banking, energy, the investment climate and the rule of law are all in need of a revamp, according to Malige, who moved to Ukraine in August.

Ukraine’s government took power after the nation’s Russian-backed leader was ousted last year, with the new team vowing to sweep away Soviet-style rule and build a pro-European democracy. Mired in a 10-month conflict with pro-Russian insurgents in its east, an energy revamp and efforts to tackle graft are bogged down. As the economy shrinks along with foreign reserves, the government wants to expand a $17 billion bailout.

An International Monetary Fund mission is visiting Kiev, while the European Union and the U.S. have pledged funding. Ukraine has limited time to secure more cash, Malige said.

“If there’s no support plan coordinated by the IMF within a very short time, that’s a risk,” he said. “I’d say it’s probably a matter of a few months. If the IMF package is confirmed by the end of February, that would be good.”

‘Insider’ Deals

Ukraine’s economy is in its second year of recession as the war ravages industry and investment, while reserves have shriveled to $7.5 billion from $24.5 billion two years earlier. Government debt due 2017 has plunged to 54 cents on the dollar from 90 cents in October, data compiled by Bloomberg show.

The EBRD may boost investment if economic overhauls proceed, according to Malige. Key to reviving growth is the financial industry, which has been rocked by the hryvnia’s 47 percent dive to the dollar in the past 12 months, the second-worst performance among global currencies tracked by Bloomberg.

“The banking sector is suffering from poor governance, too much insider lending, which is out of control, and insufficient capitalization,” Malige said. “Much still needs to be done.”

Banking Clearout

The central bank, which has closed or put under temporary management 42 lenders, plans to complete a “cleansing” of the industry in 2015, First Deputy Governor Oleksandr Pysaruk said this month. Ukraine had 165 banks as of Dec. 1.

In energy, the EBRD may lend “hundreds of millions” via import-trade facilities to help Ukraine buy natural gas and fill up storage in the off-season, Malige said. The central bank’s foreign reserves have been used as state-run NAK Naftogaz Ukraine purchased gas from Russia.

“It’s a matter of national security to reform the energy sector” because “there’s so much opportunity for corruption,” Malige said.

Ukraine ranks 142nd of 174 nations in Berlin-based Transparency International’s latest Corruption Perceptions Index, six places below Russia.

The EBRD has also been urging Ukraine to permit it to sell bonds denominated in hryvnia, a move that may help attract bilateral funding. Any economic revival depends on investment beyond international lenders, according to Malige.

“The key to success is that we get private sector investments as a second wave,” he said. “Right now, there’s no confidence and the private sector isn’t here.”