AnalyticsWeek’s balance: legitimized blockade, sanctioned banks, and EUR 600 million EU aid
Ukraine has officially banned the movement of goods across the contact line in the zone of the Anti-Terrorist Operation, imposed sanctions against the subsidiaries of Russian state banks, and is now waiting for the next tranche from the IMF as well as a EUR 600 million macro-financial assistance from the European Union - these are the main economic news of the outgoing week.
This week, the blockade of the temporarily occupied Donbas, which has been ongoing for over 40 days, entered a new, official phase. By his decree, President Petro Poroshenko put into effect the decision of the National Security and Defense Council to suspend the movement of goods across the line of contact in the ATO zone.
"Temporarily, until the implementation of items 1 and 2 of the Minsk "Set of Measures" of February 12, 2015, and also until the return of the seized enterprises, the movement of goods across the line of demarcation within Donetsk and Luhansk regions shall be stopped. In this regard, the Cabinet of Ministers must immediately take measures to stop the movement of goods, except for goods that are humanitarian in nature and provided by Ukrainian and international humanitarian organizations," the presidential decree says.
Such step by Kyiv is also caused by the growing threats to the country’s economic and energy security provoked by the "coal" blockade.
The decision of the Ukrainian authorities was a reaction to the seizure by the invaders of enterprises owned by Rinat Akhmetov’s SCM Group and located behind the contact line. Their cost is estimated at roughly $2 billion. For the fourth year of the bloody war, SCM has been constantly assuring that all enterprises located in the occupied areas are in fact registered in the government-controlled territory, observing Ukrainian legislation and, most importantly, paying taxes.
In response to the blockade, militants introduced interim administrations at Ukrainian enterprises. As a result, on March 16, SCM recognized in a statement that it had completely lost control of its enterprises and coal mines in the occupied territory.
The impact of the blockade on Ukraine's economy, which has just begun to recover, is still difficult to assess. According to the government’s preliminary forecast, Ukraine may lose 1.3% of GDP this year alone. In addition, if the blockade continues until the end of the year, it could provoke nearly $2 billion in losses of the balance of payments due to the decline in steelmaking production, one of the key branches of Ukrainian exports, and the growth of energy coal imports at the same time.
"Today, threats have emerged, restraining our economic growth in connection with the blockade in the east of the country. I have already said it, and now I will say that this blockade is exclusively in the interests of the Russian Federation. Those who understand economic processes also understand that this is the case. Now we are looking at what needs to be done to maintain control over the situation and to ensure the corresponding growth," Prime Minister Volodymyr Groysman said.
At the same time, he noted that the government nevertheless assesses positively the prospects of the Ukrainian economy for 2017 due to the reorientation to new markets and the prospects for attracting investments. "We are optimistic about 2017," the prime minister said.
The experts are also optimistic. They believe that, firstly, the blockade will not last until the end of the year, since the local population in the occupied territories is interested in continued operation of enterprises, while these companies’ expropriation by militants doesn’t really help these expectations. Analysts also note that Ukraine’s estimated loss of foreign currency earnings at the level of $2 bln-$4 bln in the total volume of forex earnings is insignificant, and therefore it will not have a strong impact on the hryvnia exchange rate. The national currency will see support from conditions on foreign markets, favorable to Ukrainian exporters.
According to experts, despite all the negative consequences, the blockade may as well have a positive effect on the development of other sources of economic recovery. In particular, to compensate for the losses, the authorities will begin to actively promote the development of small and medium-sized businesses, and boost the reform process to improve the conditions for the rise of entrepreneurship.
It’s a miracle! Russian banks fall under sanctions
In the past week, the National Bank finally heard the demands of pro-Ukrainian forces and moved to impose restrictions on the operations of the Russian state-owned banks’ subsidiaries, after three years of a fierce hybrid war Russia had been waging against Ukraine.
Sanctions against subsidiaries of Russian state-owned banks, including Sberbank, VEs Bank, Prominvestbank, VTB Bank and BM Bank, were introduced for a year. They include a ban on the withdrawal of capital in favor of parent structures, including the provision and repayment of loans, placement of funds in correspondent accounts, payment of interest and dividends, the return of subordinated debt, the distribution of profits and capital. At the same time, sanctions do not affect transactions of Ukrainian clients. The government together with the NBU will ensure the implementation and monitoring of the sanctions’ effectiveness, as well as take measures to prohibit the placement in these banks of state companies' funds.
A trigger hook for the introduction of sanctions against the state-owned banks of the aggressor country became the reports on the willingness of parent structures of banks, in particular, Sberbank of Russia, to service clients, holders of “passports” of the so-called “DPR” and “LPR.” This caused a political backlash in Ukraine. Interior Minister Arsen Avakov urged the NBU to respond adequately, and later the NSDC instructed the regulator to develop measures of influence against banks with Russian capital.
The National Bank does not expect negative consequences for Ukraine and its citizens from the sanctions imposed. According to the NBU estimates, restrictions will prevent withdrawal of assets, which today amount to UAH 150 billion and completely cover the liabilities of financial institutions before Ukrainian investors and companies totaling UAH 36 billion.
According to the estimates by ICU Group, the loans of the sanctioned banks’ parent structures exceed $1.3 billion, while the annual amount of interest is nearly $90 million. So, these sums will actually become the capital of the corresponding financial institutions, which will improve their capitalization and provide a statistical increase of foreign direct investment in Ukraine. Experts predict that sanctions will lead to an outflow of deposits from Russian banks, but nonetheless, the insolvency of Russian subsidiaries in Ukraine is unlikely, as shareholders will continue to support them, despite the potential outflow of deposits.
Money on threshold
In mid-March, Ukraine’s main creditor, the International Monetary Fund, confirmed the long-awaited date for the meeting of its Executive Board to assess the economic situation in Ukraine, and approve a third revision of the reform program launched March 2015. The Ukrainian issue remains on the agenda for March 20, as reported previously. The approval of the third revision also assumes the decision to allocate a fourth $1 billion bailout tranche.
The authorities expect that Ukraine will see the money next week, and it will all go to the accounts of the National Bank and replenish the country’s foreign exchange reserves.
Meanwhile, various political forces just can’t get over it and grump about the text of the memorandum signed with the IMF.
"I hear that there is a lot of hysteria regarding our cooperation with the IMF... But you should know that another tranche is allocated once the previous measures have been implemented. That is, the tranche that we can receive following the meeting of the IMF Executive Board to be held on March 20, is the marker of measures’ implementation as of March 2017," the prime minister said during a government Q&A in the Rada.
At the same time, Groysman noted that further steps to continue cooperation with the IMF include, among other things, pension reform; and it’s Ukraine which actually needs it.
Groysman said that Ukraine intends to implement fully and on time the IMF’s Extended Fund Facility totaling $17.5 billion, until 2019, and carry out the corresponding reforms.
In addition to the IMF’s loan, Ukraine will soon receive a EUR 600 million macro-financial assistance from the European Union. The European Commission this week approved the decision on its allocation. The money may come in as early late March or early April. Macro-financial assistance will be channeled to the budget and further positively affect economic development. Ukraine has been awaiting these funds since 2015, when the European Union proposed a new package of loan assistance worth EUR 1.8 billion. Under this program, Ukraine received EUR 600 million euros. However, the allocation of the following credit tranches was suspended until the Verkhovna Rada adopted the necessary bills. In 2016, Ukraine saw no EU credit tranches.
The positive news of the outgoing week was Rada's ratification of a free trade area between Ukraine and Canada, which will open free access to 98% of the Canadian market for Ukrainian producers.
"The free trade agreement with Canada is the first document after the Ukraine-EU Association Agreement that covers such a large market. FTA opens opportunities for Ukrainian businesses. It will allow continued reorientation of Ukrainian enterprises to all markets except Russia," First Deputy Prime Minister, Minister of Economic Development and Trade Stepan Kubiv said while introducing the bill in Parliament.
Canada annually imports goods worth $420 billion, the fact of which Ukrainian exporters certainly should take advantage. In addition, the agreement will strengthen transatlantic trade ties and establish the Ukraine-Canada-EU triangle of free trade.
The next week promises to be just as full of economic news. The State Statistics Service will release data on industrial production in February, which will allow estimating the first losses from the trade blockade of Donbas; while the IMF Executive Board will decide on the allocation of $1 billion to Ukraine, which will help to smooth the negative consequences of the blockade on the country’s economy.