Ukraine and the IMF: the pattern across eight programmes

Ukraine has had a continuous relationship with the International Monetary Fund since 1994, comprising a series of arrangements of which a minority were completed as agreed. The pattern of failure is consistent enough to be useful as a forecasting tool.

The recurring sequence

A programme is agreed at a moment of acute pressure — depleted reserves, an approaching repayment, a currency under strain. The first tranche disburses quickly and stabilises the immediate position.

The programme contains a mix of conditions. Some are technical and get implemented: central bank governance, statistical reporting, banking supervision standards. Some are fiscal and get partially implemented. And one or two are politically explosive.

The politically explosive ones are almost always the same: household energy tariffs, pension parameters, and the size of the public wage bill. Reviews slip, the programme goes off track, disbursement stops, and the arrangement is either renegotiated or allowed to lapse and replaced by a new one at the next moment of pressure.

Why gas tariffs, specifically

The recurring failure point deserves explanation, because it is the clearest example of a structural problem being treated as a political one.

Households paid a fraction of the import cost of gas. The gap was absorbed by the state gas company, whose deficit was covered by the budget or by debt. That arrangement transferred several per cent of GDP annually from the fiscal position to household energy consumption, and it also created an enormous arbitrage: buying gas at the household price and reselling it at the industrial one.

Every IMF programme identified this correctly. Every government until 2015 declined to fix it, because tariff increases are immediate, visible and universally felt, while the benefits are diffuse and invisible.

It was finally done in 2015, under conditions that removed every alternative. The reform held. The arbitrage disappeared and the Naftogaz deficit closed.

What the relationship actually delivers

Three things beyond the money.

An external policy anchor. During a programme, decisions that would otherwise be made politically get made against a written benchmark, and officials can decline requests by pointing at the document.

A signalling function. An IMF programme is a precondition for a great deal of other financing — EU macro-financial assistance, World Bank operations, and in practice private market access. The programme's value is often larger than the disbursement.

And a data discipline. Statistical quality, budget transparency and central bank reporting all improved measurably over the course of the relationship.

What to do with this pattern

For anyone forecasting Ukrainian macro policy, the practical rule is straightforward.

Read the conditionality and identify which conditions are technical and which are distributional. The technical ones will be implemented. The distributional ones will be implemented only if there is no alternative, and their slippage is the leading indicator that a programme is about to stall.

Then check the electoral calendar. A programme requiring an unpopular measure within twelve months of a national vote is a programme that will go off track, and this has been true without exception.

Related in this archive

• Emerging-market story or special case? The framing determines the analysis
• The cost of defending a currency peg, and who eventually pays it
• Privatisation: three waves, and what each one produced
• Ukraine Annual Review 2011: a recovery that did not become a foundation

The recurring pattern across eight programmes reminds me of loan agreements: the parties produce a text that reflects not what they signed but how tight they were when they signed it. The real benefit is not the money but the presence of an external audit — I have met that on the company side too. An institution with somebody checking it is better run than one without.