Poroshenko criticizes IMF as Stockholm rules in favor of Naftogaz
Recent weeks brought both good and bad news for Ukraine. First, the litigation between Gazprom and Naftogaz finally ended, with a ruling in favor of Naftogaz, obliging Gazprom to compensate the Ukrainian energy corporation to the tune of $2.56 billion. Gazprom responded by launching an appeal, and announced it was cancelling its gas supply contract with Ukraine. This victory over Gazprom is far more significant than just a commercial dispute. It changes the pattern of communication between Moscow and Kyiv. And it showed Ukrainians that standing up for their national interests can pay off. Of course, Gazprom is unlikely to pay this debt in cash anytime soon. Most likely Russia will use the $3 billion of defaulted Eurobonds issued under Viktor Yanukovych to cancel this liability.
On the heels of the good news from Stockholm came some harsh rhetoric from President Petro Poroshenko over IMF demands regarding an anti-corruption court. On March 1st, the Verkhovna Rada passed the first reading of a bill on a high anti-corruption court, approving provisions that the IMF called inconsistent with commitments under Ukraine’s IMF-supported program, and the recommendations of the Venice Commission. The IMF insists that the appointment of judges to the anti-corruption court be handled by an independent expert commission, given the bitter experience of judicial reform so far. In response, Poroshenko openly criticized this requirement, even calling it unconstitutional and hinting that a version of the law that gave the key role to an independent commission would be repealed. This unfortunate turn of events leaves the chances for resuming cooperation with the IMF slim.
The economy has been improving. The hryvnia strengthened through February-March, after a sharp depreciation in January. Industrial output picked up +3.6% y/y in January, and promises further strong performance, given the low baseline. Retail trade keeps growing strongly, up +9.5% y/y in January. February inflation eased to +0.9% m/m, vs. +1.5% m/m in January, as food inflation slowed. Budget revenues dropped in January by 1.7% y/y, but a surge in VAT reimbursements was the main reason. Core revenues continue to grow strongly. January CAD widened more than predicted, to a $61 million deficit, vs. a $131 million surplus in 2017, on the back of faster non-energy import growth. Non-energy imports surged 36.1% y/y vs +14.2% y/y average growth in 2017. Gross international reserves in February were at $18.4 billion, or 3.5 months of imports, down from $18.6 billion in January.
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