Basil Kalymon: Ukraine’s is not a hopeless situation

This interview was triggered by the phrase in a recent Reuters article “Insight: West’s offer to rebuild Ukraine faces reality check” by Robin Emmott and Anna Yukhananov. The phrase reads ‘The public administration needed to run a state is simply not there,’ said one Western donor consultant working in Kiev”. We asked professor of Ivey Business School Basil Kalymon, who is also the head of the Canadian-funded Economic Advisory Council for the Ukrainian Government, whether he shares this point of view and what he thinks about the current economic turmoil in Ukraine. The country’s currency hryvnia experienced a freefall when it depreciated from 17 to around 35 per US dollar in a matter of days last week, and the whole economy is in a state of shock due to its high dollarization. Mr. Kalymon’s answer to the first question was negative – no, he does not think that there is no public administration in Ukraine, but he thinks that the government is “horribly unreformed”. Then, we moved on to what is going on in Ukraine’s economy and financial sector.

NP: Canada recently provided new financing for your Advisory Group. But after that the new Advisory Council was created for the President of Ukraine headed by former Georgian President Mikheil Saakashvili. Is that a separate entity?

BK: It is a separate entity. We will be talking with the people in the presidential Administration as to how that might work. Our Group is formulated at the Ministry of Economic Development and Trade, not under the presidential auspices.

NP: How would you evaluate Ukraine’s recent progress in terms of reforms? Recently, the expectations have been higher because of the influx of the new people into the government, including foreigners, in particular, from Georgia.

BK: A couple of weeks ago our Group had working meetings with Prime Minister Yatseniuk and key Cabinet members including Ministers of Economy and Finance Abromavicius and Jaresko, and head of Ukraine’s gas monopolist Naftogaz, Kobolev. There is a very good group of young ministers totally committed to reform, and not only the foreigners, but Ukrainians too. There is hope in that regard but the progress is still very slow. The new Rada took office only in December and the progress has been very slow. There are hopeful signs – they’ve recently suspended the head of the tax administration on corruption charges.

NP: When will the amendments to the 2015 state budget to obtain the new IMF loan be passed?

BK: Minister of Finance Natalie Jaresko has submitted the revised budget to the Rada and there are discussions as to when it will be voted upon, but I think pretty soon. We meet with a number of parliamentarians couple of weeks ago as well. They are very committed too, but many of them are still on the learning curve. I cannot imagine that the Rada does not pass the amendments to the budget because they are absolutely critical – Ukraine is on the verge of default, it needs the IMF funding and will have to restructure its debt with the IMF assistance. Ukraine has hired the investment bank Lazare Frere out of Paris to restructure the debt, as part of the agreement with the IMF.

NP: The Reuters article says that there is a total of $65 billion in Western funding ready for Ukraine and that much of that may not get disbursed because “without some kind of breakthrough on how to spend the money, officials say privately that the donor aid is wishful thinking”.

BK: The IMF has already committed $17.5 billion, but only about $5.5 billion of that is new money and $12 billion is what was announced before. The European Union, the United States and the World Bank have committed $7 billion. These are firm commitments and, on top of that, Ukraine could restructure about $15 billion in debt, which is currently trading at less than 50 cents on the dollar. In total, these numbers add up to almost $40 billion over 2015-2019. There could potentially be further funds coming many of which will be very dependent on the progress on reform. The total of $65 billion does not sound very realistic to me.

NP: It is often being said now that the West is committing a lot of money in Ukraine which means that the West is going to defend Ukraine against Russia and that the West has agreed with the President and Government of Ukraine about deep reforms which will ensure that the funds will be spent well.

BK: This is not the largest international assistance program, for example, the EU gave $300 billion of credits to Greece. In terms of reforms, a lot of the money for Ukraine will not be paid upfront, Ukraine should get around $4.5 billion very quickly (Ukraine’s Finance Minister Natalie Jaresko has said that in the first year Ukraine will get up to $11 billion and will try and get as much as possible in the first installment). The rest of the money will be very conditional on the actual progress of reform. The West wants to help Ukraine, they want to save Ukraine from collapse and chaos, but you won’t see further funding until there is progress in reform.

NP: It certainly has looked like chaos recently in the Ukrainian finances.

BK: We’ve been saying this for a while: they have to get the budget in order and the gas pricing right, they are being pushed in that direction by the IMF. This revised budget is moving Ukraine much closer there – they are not totally decontrolling gas prices, but they are tripling them, it’s a substantial movement in that direction. I’ve told you before that this could happen and the current meltdown of the hryvnia is partly because the previous budget was not properly reformist. The new budget and the IMF funding should halt the decline of the hryvnia. I don’t think it’s a hopeless situation.

NP: Do you think that the IMF is exerting pressure on Ukraine to stop the war on any terms and at any cost, and are closing their eyes to any violation of the ceasefire by Russia, because they don’t want to finance a country at war?

BK: You are absolutely correct. The announcement of the IMF funding came on the exactly same day as the Minsk-2 agreement, there is no question in my opinion that they were working in lockstep. There are technical issues for the IMF to finance a country at war, but I think the issues are mainly political that made the West press on Poroshenko to agree to the ceasefire which is not very advantageous for Ukraine.

NP: Is it all about money – Germany is a big IMF contributor, that they don’t want to lose money?

BK: I don’t that money is as critical in this situation as you suggest. I think their main concern is their business interests with Russia and their gas supplies from Russia and the fear of a serious conflict with Russia.