UPDATE 2-Ukraine seeks to overhaul IMF deal, tough talks ahead

* Tough talks with IMF ahead as Deputy PM lays out plans

* Differences over gas, budget and wages appear

* Analysts say room for compromise

(Adds analysts, details, quotes, rewrites)

By Yuri Kulikov and Sabina Zawadzki

KIEV, March 24 (Reuters) - Ukraine’s new leadership went into talks for fresh credit with the International Monetary Fund on Thursday, but did not seem ready to sign up to the fiscal restraint that the Fund has insisted on in the past.

The international lender suspended its $16.4 billion bailout programme to the ex-Soviet republic last November, exasperated by bitter political rows, broken promises and the threat of a dirty election campaign for president.

After the election of President Viktor Yanukovich, however, and the establishment of a new government dominated by his supporters, investors had hoped turmoil would recede.

Gaining IMF funds remains a key test for the Yanukovich leadership as Ukraine’s economy, which shrank 15 percent last year, remains battered by an economic crisis and state finances are sapped by a traditionally bulky social support system.

But as talks began in Kiev with an IMF mission, Deputy Prime Minister Sergey Tigipko set out far softer economic targets than those the Fund believes are right for the ex-Soviet economy.

In the past, the Fund has demanded increases in heavily subsidised household gas prices, the scrapping of a 20 percent minimum wage increase supported by parliament and a 2010 budget with about a 4 percent deficit.

Tigipko, a businessman and former central banker in charge of economic reforms in his new post, seemed to have contradicted all these demands.

He said domestic gas prices might not need to be raised even though Kiev would be paying more for its gas from Russia and expected the minimum wage to rise by 23 percent -- indicating the government intended to go ahead with last year’s law on wage increases.

Tigipko also talked of a “new” two-year deal with the IMF after disbursement of the $6 billion eligible under the present programme once it had been revived.

“Ukraine would like to have a new medium-term programme with the IMF over two years,” Tigipko told journalists.

“We will discuss all questions. We have to agree positions on the 2010 budget and renew the programme. These will not be easy negotiations. We have 10 days before us,” he said.

The IMF has not made recent concrete comments on what conditions it might set in its talks but analysts said Ukraine knows it has to compromise and the IMF, in return, could give some leeway -- as it has done during each review since the start of the programme in November last year.

“I think it is very likely we will see a new programme. I think the IMF will be supportive of this. It will probably be a 2-year programme with some additional monies, perhaps to bulk existing money to $10 billion,” said Tim Ash of RBS.

“Discussions ... are likely to be tricky, particularly if the government persists with the claim that domestic gas prices do not need to be hiked and that minimum wages can be increased,” said Koon Chow of Barlcays Capital.

“However, Ukraine clearly needs IMF funds and to shore up policy credibility by unfreezing the programme. Therefore we think the government will likely compromise,” he said.


Tigipko said gas prices may not need to be raised at home, even though Kiev will pay $334 per 1,000 cubic metres of Russian gas on average this year, higher than last year’s average price estimated by the previous government at $228 per tcm.

“One thing I can say -- $334 is an extraordinarily high price, but with such a price according to finance ministry preliminary calculations we can more or less balance our budget without especially raising prices in the domestic sector,” he said.

Ukrainian officials have also travelled to Moscow this week to try to bring down the price of Russian gas -- at European market levels for the first time this year.

Analysts say, however, that because households consume gas that is extracted by Ukraine itself and not Russian imports that are traditionally consumed by industries, the IMF may relent on this condition.

“The view on domestic gas prices will probably be that if the government wants to keep low gas prices, then savings will need to be made elsewhere in the budget and the same goes with wage, pension hikes,” Ash, head of CEEMA research at RBS, said.

Tigipko, speaking to journalists after a regular cabinet meeting, said the 2010 budget deficit could be 4.5-5.0 percent of GDP, without taking account of any financial support for Naftogaz which last year amounted to 2.4 extra percentage points.

Naftogaz is the sole importer of Russian gas, priced increasingly high yet sold at home at cheap prices. In that way, its finances have become shattered and it has become a big burden on state finances.

Tigipko said the budget deficit last year reached 6.6 percent. He also said he expected real average wages to rise 5.0 percent this year.