IMF and Ukraine: Bleak Prospects for Future

Valentin KATASONOV | 04.03.2014

 It was reported recently that the International Monetary Fund (IMF) and Ukraine planned launching talks to nail down a new aid package. This year Ukraine is to pay off 6 billion dollars. It has asked the IMF for a $15 billion loan. Kiev hoped to receive it as early as April. But the talks have not started so far (a group of IMF experts is to visit Ukraine in early March) and there is no talking about any time frame.

Ukraine joined the International Monetary Fund in 1992. Its quota is 1, 37 billion SDR (SDR – Special Drawing Rights – supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund). In 1994 Ukraine became part of such programs as STF, Stand-by and Extended Fund Facility (EFF) to address balance of payment and trade problems. It is important that the IMF funds were also used for accumulation of currency reserves. The credits helped to implement a monetary reform and make the national currency – hryvnia convertible. Chart 1 displays the data on 20 years’ history of cooperation between the International Monetary Fund and Ukraine.

Chart 1 

IMF loans to Ukraine, history of repayments and service (Special Drawing Rights*)


Transfer of funds loan

Repayment of principal debts

Payment of Interest














































































* SDR (Special Drawing Rights) – supplementary foreign exchange reserve assets issued by the International Monetary Fund and used for denomination of credits and loans. Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged. As of February 2014 1 DRR was 1, 5414 US dollar.

All in all, Ukraine has received SDR 12.259.827.500 from the International Monetary Fund or, approximately, $12, 26 billion during the recent twenty years. As of March 1, 2014 one SDR was equal to $1, 5414. According to this rate, Ukraine has totally received 18, 9 billion US dollars.

9 years (2002-2007 and 2011-2013) out of the 20 years history of its cooperation with the International Monetary Fund Ukraine got no funds at all. More than three fourths of all loans were transferred in three years – 2008-2010 (SDR 9, 25) when the Ukrainian government was headed by Yulia Timoshenko and Nikolay Azarov. The following three years (2011-2013) Ukraine got back SDR 5,89 billion or 63,7% of the funds received. The outstanding amount of the debt for the loans granted in 2008-2010 was SDR 3, 36 billion as of December 2013. Interest rates make it SDR 4, 73 billion or, according to the current exchange rate, $7, 29 billion as of December 12, 2013. 

During the twenty years of «cooperation» with the International Monetary Fund Ukraine has paid $2, 29 billion (the current exchange rate) in interest rates payments. The interest rate payments are equal to 12, 1% of the total amount of credits granted. It significantly exceeds the interest rates normally required in case a loan is granted by a private bank what makes the International Monetary Fund look like an ordinary loan shark! There are serious doubts the IMF loans are beneficial from economic point of view (not talking about tough political conditions) in comparison with other potential sources of money lending.

Ukraine’s debt burden

The plight of Ukraine is complicated enough. It has state and non-state, external and internal debts denominated in national currency (hryvnia) and foreign currencies (dollars, euro, SDR, rubles). Besides the debts emerged as a result of loans and credits, there are debts resulting from non-payments for imports. Trying to make head or tail of it, one can see some figures for debts mentioned in media are understated. For instance, many media outlets wrote that the Ukraine’s public debt was $60, 05 billion as updated on December 31, 2013. It consists of domestic public debt ($32, 15 billion) and external public debt ($27, 9 billion). The figure does not include sovereign guarantees comprising credits and loans of Ukraine’s different organizations. Sovereign loans added, the Ukraine’s total public debt is $73, 08 billion. This is the structure of the total public debt as of December 31, 2013 (%)

Chart 2

Total public debt of Ukraine updated on December 31, 2013 (billion dollars)

Creditors Direct governmentdebts Sovereignguarantees, externaldebt Totalexternal debt
International financial organizations 7,71 2,03 9,74
Foreign bodies of state governance 0,91 0,25 1,16
International commercial banks 3,45 3,45
Others 19,28 3,90 23,18
Total 27,90 9,63 37,53

Source: The Ukraine Ministry of Finance

Chart 3

Share of separate international financial institutions and foreign commercial banks of the Ukraine’s total public debt updated as of December 31, 2013 (%)

 Creditors Direct government debts Sovereignguarantees, externaldebt Totalpublicexternaldebt
The International Monetary Fund 7,45 2,26 9,71
The Bank for Reconstruction and Development (IBRD) 4,20 0,33 4,53
The European Reconstruction and Development Bank (EBRD) 0,82 0,13 0,95
The European Investment Bank (EIB) 0,69 0,69
International commercial banks * 4,72 4,72
Total 13,16 7,44 20,60

*The share of Russian VTB, Sberbank and Gasprombank in the total public debts of Ukraine is 1, 88%.

Source: the Ministry of Finance, Ukraine

As Chart 3 shows, international financial institutions and international commercial banks jointly account for 1/5 of the total public debts of Ukraine. The main public debt holders are Ukrainian legal entities and other bodies listed in the «Others» section. As of December 31, 2013 Ukrainian legal entities accounted for 47% of total public debt, others – 26, 4%. Supposedly, by «others» the Ukraine Ministry of Finance means import contracts debts. One can assume that today a major part of Ukrainian public debt is held by Russian companies and organizations. Russia continues to be a Ukraine’s important trade partner. 

Plans for 2014

In 2014 Ukraine is to repay SDR 2, 42 billion (3, 7 billion US dollars) to the International Monetary Fund, the figure is SDR 977 million (around $1,5billion) for 2015. At this stage the payments are to terminate. By September the Ukraine’s debt to the International Monetary Fund is to go down to the level of its IMF quota. The fact is corroborated by the IMF 2013 annual report. The Ukraine’s IMF debt by the end of 2013 was 345% of its Fund’s quota (SDR 1, 37 billion). The report states that the Ukraine’s outstanding debt will go down below 200% of the quota by February 2014 and below 100% by September 2014. It’s clear the International Monetary Fund is trying to get back to the 100% mark because the Ukraine’s quota serves as reliable protection from Ukraine’s sovereign default.

The International Monetary Fund has to evaluate the financial and economic situation in Ukraine to have a clear picture of the financial obligations faced by the state and economic sector this year and in more remote future. There is an impression that the IMF experts are coming to Kiev not for the purpose of making precise the conditions for granting a new loan, but rather to see if the International Monetary Fund could get back the money Ukraine owes to it this year and how quick it could be done.

The country is on the verge of default. The situation is critical no matter what criteria are used for assessment. The Ukraine’s economy is burdened by internal and external debts… Like in any backward country internal debts are the debts of «secondary rate» to be repaid with whatever is left after the external debt is paid off. Today nobody knows exactly, for instance, how much the country’s private sector owes to its employees as wage arrears accumulate. It’s better when it comes to external debts. Last year the amount of external debt grew by 20, 2%. As of December 31, 2013, the total external debt of Ukraine was $140 billion. It’s a lot (80% of the country’s GDP), no matter how you count. It’s a very critical index for economically backward countries. Approximately 65% of external debts are short-term. It’s expedient to compare it with the gold reserves of Ukraine which fell down to $15 billion in February 2014. That is short-term debts exceed gold reserves four and an half times. A matter of great concern!

Around $40 billion out of the total of $140 billion falls on the total external public debt (credits, loans, etc. plus sovereign guarantees). Over $100 billion fall on non-state sector of economy (banks and non-financial companies).

Non-state sector of Ukraine’s economy can default any time. The main reason for concern is the fall of national currency’s exchange rate. As the US Federal Reserve System made known its plans to gradually end quantitative easing, many currencies of the world fell down. The Ukraine’s currency was especially badly hit because of the Maidan events and ensuing capital flows going out of the country. Mass bankruptcies of Ukrainian banks and companies are expected due to their failure to pay off external debts. It entails the domino effect: the state coffers get less income from taxes; the state fails to pay for its debts and interest rates. It all leads to sovereign default.

Let’s surmise at least for a minute that the Ukraine’s economy stays afloat this year, it’ll be a great headache for the International Monetary Fund anyway. Let’s have a close look at Charts 2 and 3. There are multiple miscellaneous holders of the debt all demanding a piece of Ukraine’s rather small financial pie in the form of the budget and currency reserves. Less than 10 percent of total public external debt falls on the International Monetary Fund. Other holders would like to come through unscathed. There is a small chance they will prolong their credits to Ukraine. The state, banks, non-financial organizations of the country will need currency reserves this year more than ever. $15 will not be enough for everyone. IMF experts and officials realize it well. That’s why it is hard to believe the International Monetary Fund will grant a new credit to Ukraine lending a helping hand to the country in a pinch. The IMF will wring out what Ukraine owes to pay off old credits. 

I don’t exclude the IMF and Ukraine may stage a play called the «talks on granting a credit». Each side would pursue its own interest in this game. The International Monetary Fund will try to pressure Kiev into the reforms in the spirit of «Washington’s consensus». The facts the bailout talks are on the way would bolster the Kiev’s credit rating, showing other potential creditors that the situation is not that hopeless.