The issue of new Eurobonds by Ukraine expected next week will mark the biggest step the country has taken to recover its economic sovereignty since Russia initiated armed aggression against it in 2014. Not many Ukraine watchers expected the country to return to the sovereign debt market so soon. Yet investors have welcomed the prospect of a new bond issue. Moreover, it shows that Russia’s effort to block Ukraine’s path to the West by reducing it to the status of a financial basket case has failed.
The scale of this turnaround is worth considering. At the peak of its crisis, Ukraine’s currency, the hryvnia, lost 59 per cent of its value against the dollar, foreign reserves fell to $7.5bn, inflation hit 61per cent and gross domestic product shrank by 17 per cent. The picture today could hardly be more different. The hryvnia has recovered 80 per cent of its value, foreign currency reserves have been restocked and inflation is projected to fall to single figures by the end of the year. In 2017, growth was at 2 per cent, with 3.5 per cent forecast next year and 4 per cent the year after, according to World Bank forecasts. Credit agency Moody’s recently upgraded Ukraine’s outlook from stable to positive.
Of course, none of this would have been possible without the financial lifeline thrown to Ukraine by its Western allies, especially the $17.5bn loan facility provided by the International Monetary Fund. Perhaps more important than the money itself has been the conditionality attached to it, which has spurred the reforms needed to move Ukraine forward again. The fruits of this include a streamlined and more business-friendly tax code, an open and transparent public procurement system, the establishment of a new National Anti-Corruption Bureau and action to strengthen the financial sector by closing failing banks and recapitalising others. The long overdue raising of domestic energy tariffs to market levels has strengthened Ukraine’s national finances and removed a major source of corruption and inefficiency.
The IMF’s role in pressing for many of these reforms has been instrumental. Indeed, there is concern that Ukraine’s ability to return to the international capital markets could reduce the IMF’s influence and weaken the impetus for further reform. In this pessimistic scenario, the only changes that matter are those that can be imposed from outside. Yet this assumption can be faulted on two counts. It understates the extent to which pro-reform sentiment has taken root in Ukraine and overstates the wisdom with which the IMF sometimes wields its authority. There is at least one area in which a stronger Ukraine could lead to better policy.
When the IMF’s mission to Ukraine arrives in Kiev next week, two issues will be top of the agenda: pensions and land reform. Progress on both is considered essential to unlocking the next tranche of IMF funding. There is consensus on the action needed to make the pensions system financially sustainable. A bill to increase the entitlement threshold from 15 to 25 years of contributions is already before parliament. The issue of land reform, however, is more contentious. A moratorium on the sale of agricultural land has been in place since 2002. Opposition to lifting it stopped the government from submitting planned legislation in July.
There is no disagreement that Ukraine stands to benefit from the creation of a functioning market in land. The 41 million hectares of land available for agricultural use represent its biggest and most underutilised asset. It has the potential to attract tens of billions of dollars of new investment and add around 12.5 per cent to GDP within a decade. There are, however, legitimate concerns that a big-bang liberalisation might deepen some of the country’s most persistent problems, most notably the entrenched power of the oligarchs, the excessive concentration of wealth and the systemic corruption that comes with both.
We have been here before. The shock therapy privatisations of the early post-communist years often took place before the necessary legal and regulatory safeguards had been put in place. This enabled networks of insiders, including some with criminal ties, to acquire assets on the cheap and grow staggeringly rich as they reflated to their real market value. Many sensible Ukrainians worry that in a country where property rights remain weak and most people lack the resources to stake a claim in the market, the spoils of liberalisation could once again go to those with the capital and connections to game the system. These concerns need to be taken seriously.
The IMF should take heed of its own experience of imposing ideologically-inspired blueprints without sufficient regard to local circumstances. Instead of treating scepticism as evidence that Ukraine is backsliding on reform, it should be working with the government, and just as importantly with civil society, to develop a plan for the sale of agricultural land that spreads the benefits as widely as possible. If this means that reform takes longer, so be it. The results in the long term will be better for Ukraine and better for its international partners.
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