Washington Forgives Yushchenko But Says: No Reforms, No Loans

The visit of Premier Viktor Yushchenko to the US last week should be called successful at least for the reason that it happened. On the other hand, it also turned out successful because the premier not only received assurances of support but also achieved a tactical win in a big game known as “financial assistance to Ukrainian reforms.”

The phrase, “our attitude toward Ukraine will entirely depend on the momentum of economic reforms,” pronounced practically at all meetings, were apparently not only addressed to the direct participants of negotiations but also symbolized political support for the premier whose government is feeling growing mistrust at home.

It is James Wolfenson, the World Bank president, who expressed himself most definitely, saying that today’s Ukraine is seeing a struggle between the reform forces and those who “will lose their long- lasted privileges as a result of reforms.” Moreover, these forces try to seize any opportunity to counter government actions, including those on the international arena. It is not ruled out that these words were intended to let Mr. Yushchenko know that international financial organizations share the premier’s preoccupation with another problem the solution of which was also one of the main aims of his US trip. In other words, the resumption of IMF and WB credits will depend on specific and perceivable political decisions (not only and not so much by the premier) referred to as “privatization, and reforms in power engineering and agriculture.”

As to the situation that did not allow the premier to visit the US about two months ago, it seems likely to be solved soon. On the Monday before last in Washington, Prime Minister Viktor Yushchenko, National Bank Governor Volodymyr Stelmakh, and Minister of Finance Ihor Mitiukov, offered explanations to International Monetary Fund governors representing the G-7 and Russia, about the results of the first stage of the National Bank of Ukraine audit. The next stage will be a positive decision by the IMF Board of Governors. Finance Minister Mitiukov said in this connection, “It will be good if they (IMF governors —Ed.) confirm that there were no illegal operations, nobody received any political or private gain from these operations, and Ukraine is doing its best to avoid such misunderstandings, or even mistakes, in future.”

It will be recalled that the audit report submitted by PricewaterhouseCoopers to the IMF says that the National Bank of Ukraine (NBU) had carried out a series of illegal operations that overrated its actual hard-currency reserves by more than $700 million at the end of 1997. The audit revealed the NBU had made 21 illegal transactions (with the IMF being unaware of seven of them) worth $340 million), up to the audit. This led to the overrating of reserves, which constituted $391 million in September 1997 and $713 million in December 1997. While Ukraine was overrating its reserves later in 1997, the IMF gave it three installments worth about $200 million.

The total value of funds involved in secret operations which let this country mislead and get credits from the IMF reached $1.28 billion. According to PricewaterhouseCoopers, the overestimation of NBU hard currency reserves varies between $391 million in September 1997 and $713 million in December 1997. Many experts predict that the IMF has no other option but to oblige Ukraine to return to the fund a part of or the whole amount of the credits received as a result of those operations. However, Mr. Mitiukov said the question of returning the credits was not raised during the US negotiations. This is what the “incriminating evidence” essentially boils down to. However, some other conclusions of the auditors, eliminating this evidence, could make the basis for a Board of Governors decision favorable to the Ukrainian side.

There also are some equally important details of the PricewaterhouseCoopers report which have escaped the attention of commentators but still have something to do with this IMF credit resumption story. First, the auditing firm failed to collect information about all transactions involving NBU assets made by commercial banks because the latter simply did not respond to the auditors’ request. Secondly, all NBU assets, except for $15 million, were returned, which the bank has never concealed. Thirdly, no misappropriation of assets was found. These three conclusions are extremely important to the IMF. Fourth and most importantly, the auditor does not and is unlikely to ever have information on the income from investments (in favor of third juridical persons) and the ways these were utilized (i.e., the key problem of the scandal that broke out). This plays into the hands of Ukrainian officials.

The complaints about the quality and results of the audit were determined beforehand. On the one hand, no audit should give political or legal appraisal of banking operations. On the other hand, the auditors should not be blamed for a low- quality “investigation” because it did not comply with international accounting standards. At that time, this country’s banking system was only beginning (and is still continuing) to gradually adopt these standards. The operating methods the NBU employed under a standard agreement with the IMF testify to the fact that the National Bank management is not the sole culprit. In addition, the management of hard currency reserves has been greatly improved since mid-1998 (a fact the IMF helpers have confirmed), while the true value of the reserves has been reduced considerably. This happened just as the NBU publicly admitted (after the IMF had come to know this) it had been using a dual accounting technique for estimating the reserves. Incidentally, the premier confirmed that the approaches of Kyiv and the IMF to assessing the balance-sheet positions were finally “harmonized” only in the late fourth quarter of 1998. This enabled the two sides to avoid such differences, including those in reserve assessment, later.

For this reason, the outcome of the current stage of the “harmonization” of relations with the United States in general and the International Monetary Fund in particular will be determined, as before, by the political interests of all the parties involved. For the main “technical” obstacle has been removed, judging by the words of the Minister of Finance: “We heard no warnings today that the EFF program or negotiations in general will only be resumed after the audit’s second stage. And I think this is positive.”

COMMENTS

Taras STETSKIV, People’s Deputy, member of the Reforms Congress faction:

“Why were IMF credits given to all the previous governments, which cannot be called reform-minded even to stretch the point, but denied a really reform one? It seems to me this is connected with the US pre-election domestic situation and with the fact that the Yushchenko government does not suit many oligarchs, so they are acting against him even on the international arena. In all probability, the NBU did perform some operations without consulting with the IMF, but it is also common knowledge that the National Bank would have never done things like this without consultations on the domestic level.

“I think we will be denied loans until the fall, the time of presidential elections in the US. They will perhaps allocate loans after securing certain geostrategic gains for themselves in this region. America is a pragmatic state, it is in its interests to keep Ukraine as a buffer state, while our weakness keeps us from laying claims to a different level.

“Mr. Yushchenko was originally projected as just a label of Ukraine for the West. But he turned out to be the first who failed to solve the Western credit problem, so only one way out remains: to reorient himself and become a reformer in his own country, i.e., to carry out real reforms.”

Viktor SUSLOV, People’s Deputy, SDPU(o) faction:

“The prime minister still holds his position above all thanks to US support. At the same time, the NBU is guilty of a series of gross violations in operations with IMF money, i.e., American money in the long run. So the USA has found itself in an extremely embarrassing situation, for it has been supporting a man who pursued a policy the US needed and, at the same time, was cheating. I admit that the US is now feeling ambivalent, like in the joke: you see your mother-in-law falling in a pit, but in your car.

“I think the chief problem now is to restore trust in Ukraine. Trust will bring loans not only from the IMF but also from other international lending institutions, states, and so on. For if the statements of high officials about the absence of violations are being denied, such officials can no longer enjoy confidence. And no money will be given a person no longer trusted. I, for example, do not think that making public the facts of abuse by some officials would entail excessive losses for Ukraine. Quite the contrary, the state could only benefit if it punished the guilty and dismissed some officials, thus regaining trust in itself.

“Mr. Yushchenko was tipped for prime minister because he allegedly enjoyed confidence in the West, so his advent would lead to the resumption of loans. But things turned out the opposite. The Yushchenko government failed to receive even a dollar of loans, and confidence in Ukraine has been undermined. I am afraid confidence will not be restored while this team is in power.

“Judging by the press releases of the official meeting, Western politicians and diplomats seem to have been in rapture over and greatly impressed by the course and depth of our reforms for all the nine years. But in reality, their real attitude is shown by whether there is real support: if there is no support, this exactly indicates their real toward our reforms.”

Petro POROSHENKO, People’s Deputy, leader of the Solidarity faction:

“The growth of industrial output, GDP, and budget revenues, which was disclosed at a government session, allows us to foresee good prospects in the talks with the IMF. I don’t think they will be upset by the audit results, for, to tell the truth, the mountain turned into a molehill: misappropriation of funds, the audit’s main quarry, was never found. In this particular case, the only question was different methods of estimating gold and hard currency reserves. If the information publicized in The Financial Times were confirmed, this would fundamentally complicate our relations with the IMF.

“In my opinion, our hopes for renewed credits have been seriously thwarted by the appointment of new IMF officials in charge of work with Ukraine, for their previous record shows them to be far more tough and punctilious in preparing recommendations for decisions. I think Mr. Yushchenko’s visit aimed precisely to achieve a greater compromise and responsiveness of fund executives, clarify the stand of the US, which greatly influences IMF decisions, and assess the prospects for Ukraine to receive IMF loans.

“I do not think everybody expects that Mr. Yushchenko’s visit will bring along IMF money. There will hardly be any substantial foreign-debt payments in the next month or month and a half. I think this stretch of time will be enough to build a certain political potential, introduce some legislative changes, and make good progress in the economy, which will allow us to hope that Ukraine will meet the demands the IMF is making.”