Blue &Yellow: Politics and Economics in Ukraine

 The plan provides for lowering the state budget deficit from 5.3 percent in 2010 to 2 percent by 2014, while public debt should be stabilized at 45 percent and inflation is expected to decline from 16 percent in 2009 to 5-6 percent by 2014. In line with IMF requirements, the plan includes increasing the pension age. It is scheduled to start repaying, from August 2010, the multi-billion dollar value-added tax debt to exporters accumulated in 2008-2010, which is one of the main hurdles to foreign investment. A new tax code, to be passed this year, aims to simplify taxation and bring it closer into line with European standards. The share of the public sector in the economy will diminish from 37 percent to 20-25 percent. Talks on a free trade zone with the European Union are scheduled to be completed in 2012 (www.zn.ua/2000/2020/69596). The plan can be summed up in three key words: liberalization, deregulation and Europeanization.

Even Yanukovych’s critics agree that the plan is good, but there are doubts about the seriousness of the government’s intentions. Former Finance Minister, Viktor Pynzenyk, a liberal economist and fierce critic of both Prime Minister, Mykola Azarov’s, cabinet and their predecessors, suggested that the plan was drafted only to coax the IMF into issuing more loans.

From Eurasia Daily Monitor  (Volume 7, Isssue 116," Will Yanukovych’s Reform Plan Convince IMF?", no link), a nice excerpt to go along with the news that the IMF and Ukraine have come to a new standby  agreement for $14.9 billion. Following the agreement Fitch raised Ukraine's credit rating from B- to B. The EU is pitching in by providing "macro assistance" for EUR 500 million.

The plan was most certainly meant to get the IMF to release loans to Ukraine, but its also likely that the government's intentions are serious. Regions has its share of oligarchs (like the not-dismissed SBU chief) who wouldn't benefit from seeing the Ukrainian economy in shambles. Clearly the (expected) autumn local elections and the next Rada elections will test the government's commitment to this plan, will they jump for populist measures or restrain themselves? The the last time Yanukovych was prime minister he increased pensions prior to the Rada elections in 2007. Also, a EU-Ukraine free trade zone would be an accomplishment (in time for the Euro) considering its been discussed since at least 2007.

Of course, CMA market data shows that Ukraine credit fault swaps haven't declined substantially since the announcement, below is July 8 2010 data. Its still in the top ten list for riskiest sovereign debt.