Ukraine awaits IMF as Obama warns Russia of consequences

Bloomberg

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Ukraine will receive an assessment today from the International Monetary Fund on the country’s bailout request as the U.S. continues to muster global support for penalizing Russian encroachment on Ukrainian territory.
An IMF mission was completing talks in Kiev on a loan that Ukrainian Finance Minister Oleksandr Shlapak said yesterday would amount to between $15 billion and $20 billion. Shlapak said the team would announce its findings today.
As the government in Kiev pursues the help it needs to avert default, U.S. President Barack Obama is scheduled to speak today on what the standoff with Russia over Ukraine means for European security. Yesterday, he warned Russian President Vladimir Putin that Russia would face more sanctions if it moved further into eastern Ukraine after its annexation of Crimea.
“It is now up to Russia to act responsibly and show itself to be once again willing to abide by international rules,” Obama said at a news conference in The Hague. “If it fails to do so, there will be additional costs.”
Russia has consolidated control over Crimea and is massing forces along the border with Ukraine in what Obama called “an effort of intimidation” in the most serious conflict with the U.S. and its allies since the Soviet Union collapsed. The confrontation has led the U.S. and European Union to impose sanctions on Russian officials and threaten further repercussions if Putin fails to de-escalate the crisis.
Sanctions effect
U.S. and European officials say sanctions are beginning to have an effect. Russia’s Micex stock index has plunged 12 percent this year, worse than the 4 percent decline in the MSCI Emerging Markets Index. It rose 2 percent yesterday to 1,324.44, the most since March 18 and the biggest gain among emerging-market indexes tracked by Bloomberg.
The ruble has weakened 7.7 percent in 2014, making it the second-worst performer against the dollar among 24 developing-market currencies tracked by Bloomberg. It added 1.5 percent to 41.6654 against the central bank’s dollar-euro target basket last night in Moscow, the strongest level on a closing basis since Feb. 24.
Russia’s Finance Ministry canceled its fourth ruble-bond auction in a row, scheduled for today, citing “unfavorable market conditions” in a statement on its website.
Investors have pulled $5.5 billion from Russian equities and bonds this year through March 20, already approaching the total outflow of $6.1 billion for all of 2013, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.
Asset freezes
The U.S. has imposed asset freezes and visa bans on 31 Russians, Ukrainians and Crimeans, including political and business figures close to Putin. The 28-nation EU has put 51 people on its blacklist, including some on the U.S. roster, while stopping short of punishing businesspeople.
In addition to those penalties, Obama and fellow Group of Seven leaders said March 24 they won’t attend a planned Group of Eight summit in the Russian Black Sea resort of Sochi, the venue for the Winter Olympics in February, and will instead hold their own meeting in June in Brussels.
The G-7 remains ready to intensify its response, including coordinated sanctions that would have “an increasingly significant impact” on Russia’s economy if authorities in Moscow escalate the situation, the group said. The move meant the group -- the U.S., Germany, the U.K., France, Italy, Canada and Japan -- reverted to its Cold War-era format, suspending what became the G-8 in 1998 when Russia was welcomed in.
Military moves
U.S. and European warnings focused on potential military moves by the Kremlin into Russian-speaking areas of eastern and southern Ukraine, leaving unanswered whether the allies intend to focus on dislodging Putin’s forces from Crimea, a Black Sea peninsula dominated by Russia since the 18th century.
“We will not accept this kind of behavior,” European Commission President Jose Barroso said yesterday in an interview with Bloomberg Television in The Hague. “There is a heavy price to pay if this kind of behavior continues.”
Further Russian action may trigger wider sanctions that may cover Russia’s energy and finance industries, as well as weapons procurement, Obama said, even though such moves might “cause some disruptions to each of our economies.”
“While a Russian invasion of eastern Ukraine can by no means be excluded, Putin must surely calculate that it would be a poor and risky option,” Roderic Lyne, deputy chairman of Chatham House in London and a former U.K. ambassador in Moscow, said in a comment on the group’s website. “He also knows that it would trigger much deeper Western sanctions, which would hit his Achilles heel -- Russia’s declining, unreformed economy.”
U.S. aid
U.S. senators in Washington yesterday reached agreement on legislation that would codify sanctions imposed by the Obama administration against Russian officials. The measure would also provide the Ukrainian government with $1 billion in loan guarantees as well as $150 million in direct assistance.
The accord, which sets up a Senate vote tomorrow, was reached after Senate Democrats withdrew a provision sought by the Obama administration and opposed by Republican lawmakers that would have increased the U.S. share at the IMF.
In Ukraine, the government was wrapping up negotiations with the IMF to help stave off a default and curb damage to the nation’s economy from a four-month-old political crisis.
Talks on the IMF loan began three weeks ago. To speed up the process, Ukrainian interim Prime Minister Arseniy Yatsenyuk canceled a trip to The Hague, where world leaders were discussing the standoff with Russia over his country.
Ukraine economy
The government, which took power after an uprising ousted Kremlin-backed President Viktor Yanukovych last month, is grappling with an economy threatening to slide into the third recession since 2008 and dwindling reserves.
Ukraine’s economy will contract 3 percent this year, Shlapak said. The Ukrainian hryvnia has plunged 24.7 percent against the dollar in 2014, the most among more than 170 currencies tracked by Bloomberg. It extended its decline yesterday, weakening 2.7 percent to 10.95 per dollar yesterday in Kiev.
While Yatsenyuk has pledged to take any steps needed for an IMF lifeline, unpopular measures may risk further destabilizing the country, said Olena Bilan, an economist at Dragon Capital.
“The government is willing to implement reforms and meet the IMF’s requirements,” Bilan said by phone from Kiev. “The government needs to pay special attention to compensation mechanisms. A sharp drop in purchasing power may fuel the ongoing instability in eastern Ukrainian regions.”

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