EU talking to IMF, World Bank, others about Ukraine assistance

Wed Dec 11, 2013 10:52am EST

* International lenders and EU discussing Ukraine aid

* Talks focus on help to Ukraine if it signs EU trade deal

* Discussions involve IMF, World Bank, European Investment Bank

* Aim is not to coordinate a single package of support

By Luke Baker

BRUSSELS, Dec 11 (Reuters) - European officials are in discussion with the International Monetary Fund, the World Bank and other major financial institutions on ways to help Ukraine if it decides to sign a free-trade agreement with the European Union.

Ukrainian Prime Minister Mykola Azarov was quoted as saying on Wednesday he had asked the EU for 20 billion euros ($27 billion) in aid to offset the cost of signing the EU deal, which Kiev backed away from last month in favour of closer ties with Russia, sparking huge street protests and a financial crisis.

It is not clear how Azarov came to the 20 billion figure, but EU officials believe it was based on broad estimates of the cost of lost trade with Russia, Ukraine's former overseer and largest trading partner, and the financial burden of adopting a wealth of regulations that come as part of the EU deal.

There is no question of the EU providing 20 billion euros to Ukraine - the most Brussels has so far offered is 610 million euros - as it would be almost impossible to get pan-EU agreement at a time when it is struggling to help several indebted euro zone member states.

But the combined impact of aid and financing programmes from multiple institutions, including the EU, might go some way to providing Kiev with the investment it needs to remain solvent in the event it rejects Russia's advances and signs up with the EU.

"We're not talking about a coordinated package to entice Ukraine out of Russia's arms and into the EU's," one official familiar with the discussions told Reuters. "That would be the wrong way of looking at it.

"It is just a case of the various institutions doing the sums and working out what investment programmes there already are and what others are in the pipeline and could be activated if Ukraine decides to sign the association agreement."

As well as the IMF and World Bank, the discussions involve the European Investment Bank and the European Bank for Reconstruction and Development.

All four institutions already have operations in Ukraine, though the IMF has suspended talks on a stand-by loan facility because of Ukraine's failure to meet the conditions.

The World Bank mostly lends to specific industrial sectors via its International Finance Corporation arm, while the EIB has a mandate to finance major infrastructure projects, such as roads, railways and power lines. The EBRD has invested nearly 9 billion euros in a range of public and private investments since it first moved into Ukraine in 1993.

"We are a major catalyst for foreign direct investment in Ukraine," said Anton Usov, a spokesman for the EBRD in Kiev. "If we say we are staying here and investing, that sends a strong message of confidence to the wider investment community."

IMF LOAN TALKS ON HOLD

The discussions among the institutions have been taking place for several weeks as concerns have grown about how to hold Ukraine's economy together, with solvency a pressing issue.

The cost of insuring Ukrainian bonds against default - a measure of the risk international investors attach to owning Ukrainian debt - rose towards a four-year high on Wednesday.

Much of the debt is denominated in dollars but must be financed using the local hryvnia currency, which is at a four-year low against the dollar and forecast to lose a further 9 percent in the next six months.

Without international aid, investors fear Ukraine will struggle to repay $7 billion of hard currency debt falling due next year, while it is also dealing with a balance of payments deficit and unpaid gas bills from Russia.

In its efforts to find a solution to the rapidly escalating crisis, the EU has also explored whether it could bring forward financing that would have gone to Ukraine over the coming seven years as part of its association agreement.

Any advances would only happen if Ukraine signs the deal, and the current amount available - the 610 million euros - is in any case conditional on Ukraine securing an IMF agreement.

The IMF wants Ukraine to introduce more exchange rate flexibility - effectively allowing the currency to devalue - and remove subsidies from domestic gas supplies, but Kiev has refused.

Some EU officials say the IMF is prepared to be flexible in applying its conditions, for example by allowing Ukraine to phase in the removal of subsidies or retain them for less well-off Ukrainians. But publicly, the IMF's line remains firm.

"The IMF is ready to move, especially on the commodity prices issue," said the foreign policy adviser to one EU leader, who spoke on condition of anonymity.

"If you ask them, they will deny it, but behind the scenes there is a lot of discussion going on along those lines."

Asked where talks stood, an IMF official dealing with Ukraine said there had been no progress, but the issue would be discussed at a board meeting in Washington on Dec. 16.

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