7:15 AM Sunday, October 21, 2018
IMF Stiffens Spine on Anti-Corruption, While Poroshenko Wobbles
Kyiv government seems to think it can muddle through to March 2019 elections, without taking the hard decisions on corruption
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LONDON -- Both the IMF and now the World Bank have made it clear over the past few days that they are not yet happy with the current draft of the presidential bill on creating anti-corruption courts which seems to be the main issue stalling the resumption of lending under the $24 billion Western support package to Ukraine agreed April 2015.

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Neither the IMF nor the World Bank have particular specialism in the field of anti-corruption. The Ukraine program is a trial case where the International Financial Institutions, of IFIs, have set fighting corruption as a key, central tenet of conditionality attached to financing programs. Both are demurring to the specialist knowledge of the Venice Commission in the case of anti corruption courts. The Venice Commission has been clear that the current presidential draft does not meet its standards.

The fresh snow was bright, but the hryvnia on Wednesday afternoon in Kyiv was nudging 29 to the dollar. If Ukraine misses out on as much as $6 billion in cheap IMF and IFI money this year, Poroshenko risks campaigning for re-election this time next year with the exchange rate over 30 to the dollar. (James Brooke)

Why is anti corruption taking center stage in IFI support programs to Ukraine?

This is reflects a number of factors:

First: There is universal consensus now that corruption is the number one challenge hampering the development of the Ukrainian economy. This comes out in most surveys.

Second: This is the consistent message from business and NGOs operating in Ukraine. There is domestic ownership of this issue, clamoring for the IFIs to hold out on this issue to help make meaningful progress in this area.

Third: For IMF and IFI shareholders there are particular sensitivities in lending to Ukraine, given concerns over corruption, and the fact that past IMF programs have failed. There is sensitivity that Western tax payer money is not used to bailout corrupt oligarchs in Ukraine.

Fourth: The IMF and other donors understand that, while Ukraine may have secured macro stability under the current program, the economy will not take off unless the issue of corruption is addressed and the business environment is improved to spur investment.

Previous IMF programs failed perhaps because this issue was not adequately addressed. There is a sense that it is now or never in terms of Ukraine. There is frustration that the Ukrainian economy on the growth front is not doing better. The 2-3% growth seems feeble given the now low base, but also given the stellar growth rebound playing out across the rest of Emerging Europe.

Why no take off? Perhaps because corruption in Ukraine remains entrenched and puts off business from investment.

After a quiet year where the hryvnia only lost 3.1% against the dollar, Ukrainians once again are back to keeping an eye on the exchange rate boards. (UNIAN. Vladimir Gontar)

How is it all going to pan out?

We are at this stage: four years after Euromaidan, real questions are being asked about whether the Poroshenko administration and the Rada are actually serious about fighting corruption. There have been some significant reforms to reduce scope for graft, including the introduction of Prozorro in public procurement, VAT refund reform, plus reform of energy pricing. Some institutional steps have been taken to cast greater transparency over those who govern in Ukraine - including the e-declaration system. NABU has also been created to identify corruption and to point prosecutors/judiciary to take action against corrupt individuals.

But as yet few, if any, have been brought to account, raising serious questions as to the desire and ability of the leadership of the criminal justice system to bring to account those responsible for corrupt practice. Hence, there is this desire to create independent anti-corruption courts.

The basic question has to be asked: four years after Euromaidan, has corruption been reined in? I hear mixed views. But I think most agree that the pace of improvement is too slow. It seems that elites and vested interests are stalling reform and progress - hence the focus of the IFIs on this issue.

For the IFIs, the creation of a new law on anti-corruption courts, compliant with the advice of the Venice Commission, is a deal breaker for release of further credit tranches from the IMF, World Bank, EU and other bilateral and multilateral lenders. Now as much as $5-6 billion in disbursements this year could be stalled on this issue.

Is it a make or break time for the Poroshenko administration? Is it really serious about fighting corruption? Or is it just playing games with the IFIs and indeed its own population about reining in corrupt practice?

The fear from many is that Ukrainian elites -- “the system” – has been so corrupted over the years that they fear the consequences personally of rolling out fully functioning anti-corruption entities such as anti corruption courts. Many think they will inevitably go to jail.

Elite Plays Games with IMF/World Bank

So a game is being played out between elites and the IFIs.

The former pay lip service to supporting the fight against corruption, but fail to really act. It is becoming trench warfare, with one step forward and one or two steps back.

When pushed, new institutions are created, like NABU or the e-declarations or Prozorro, but then the elites try to capture these same institutions for their own advantage and ultimately to prevent being held to account. They seek to continue Ukraine’s own “Game of Thrones”, which is a “Game of Graft” - take, or see others take, and eventually be taken over or out yourself. These are the rules of the oligarchic game in Ukraine. The population of Ukraine are the subjects in all this. The challenge is to change the rules of the game.

It seems the IFIs are going to hold the line over the anti-corruption courts. They see the issue as pivotal in the fight against corruption. They think they have some leverage over the Ukrainian government, given the weight of official financing now stalled

The strategy of the Poroshenko administration is less clear cut.

Despite crystal clear messaging from the IFIs over the fact the current bill on anti corruption courts fails to make muster, Poroshenko presses ahead with pushing the legislation through the Rada, in its unreformed state.

Perhaps there is a sense that the IFIs will at least see this as some show of progress, and will inevitably cave in and still release financing. A similar approach was taken last year over pension reform. This fails to recognize the IFI position: under the current Poroshenko bill there are insufficient safeguards to ensure against “capture” of the anti corruption courts by vested interests. This would ensure that they will not be independent, but likely will be used, as is much of the criminal justice system at present, as a tool against political opponents and business rivals. In Ukraine, these are often one and the same people.

From the Poroshenko perspective, this is just a case of buying time, to string negotiations out with the IFIs, to stall introducing effective anti-corruption entities until after the 2019 elections, if ever. Legislating an anti-corruption court bill gives the administration something to take to international capital markets. It can imply progress with the IMF agenda to enable market access and financing. This would be an alternative to the IMF, even it would come at a much higher price than IMF/official financing.

Taxpayers then would need to ask: why their policy makers are willing to borrow from the market (say $3-4 billion this year) likely at 7%, when IMF financing is available at much lower rates --half the cost. This would cost taxpayers up to $130 million per year for the duration of the financing. This would be the price of Ukraine’s elites not having to roll out an anti-corruption agenda.

So the taxpayer risks paying the price for corruption -- and for not fighting corruption -- a double whammy exacted by its own elites.

Interesting thought: could Ukraine come to market without IMF sign off on anti corruption bill, but with IMF staying engaged?

In current liquid global market conditions still, yes, albeit current market liquidity might not sustain as Fed tightens and if US data (inflation) begins to surprise on upside.

Could Ukraine come to market with a formal break with IMF, say over anti corruption bill?

Possibly yes, notwithstanding global liquidity conditions, but likely at much higher price/cost and shorter duration. This would then risk a domestic political price to be exacted.

In conclusion, we are at the stage where we have to ask fundamental question: is the Poroshenko administration really serious about fighting corruption? The Kroll report on the Privatbank case released this week by the NBU perhaps laid bare some of the challenges and the urgency to move in this particular field.

Timothy Ash is senior sovereign strategist for emerging markets at BlueBay Asset Management in London and a member of the UBJ Editorial Board.

Posted Jan. 17, 2018

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