Ukrainian Premier Yulia Timoshenko challenged her biggest rival, President Viktor Yushchenko, by asking the Constitutional Court to strike down a law raising social benefits that threatens the country’s bailout loan, according to Bloomberg.

The legislation, which raises the minimum wage and was signed by the president, was singled out by the International Monetary Fund as a reason to delay the next tranche of its $16.4 billion loan. Lawmakers defied the Washington-based lender in an effort to win voter support ahead of elections in January.

“She will lose” the case, Yushchenko said in a statement on his Web site. “I am sure that the court will not rule that the law contradicts the constitution.”

The country is waiting for a $3.4 billion installment from the loan, which the IMF has said it won’t disburse until politicians “reach a consensus” on spending cuts. Ukraine has already used $10.6 billion from the credit to stay afloat after the global economic slowdown undermined demand for its exports, such as steel, and hurt its banking industry.

The economic situation has been aggravated by political fighting between Yushchenko and Timoshenko, who will compete in Jan. 17 presidential elections. The opposition blocked the passage of legislation in September and October until its demands for higher social spending were met. The IMF stopped its program in February and renewed it in May after Timoshenko pledged to narrow the budget gap.

“I wouldn’t expect” Timoshenko’s move “to impact the IMF’s decision on releasing the tranche,” said Jathan Tucker, head of trading at BG Capital investment bank in Kiev. “It just ensures that no consensus will be reached by the government to restart discussions with the fund while it is tied up in the court.”

Bonds, Currency

Ukraine’s 6.75 percent government bonds maturing in 2017 declined to 73.910, compared with 74.431 yesterday, while the yield rose to 11.898, compared with 11.773, Bloomberg data showed. The hryvnia weakened to 8.1600 per dollar as of 12:11 p.m. in Kiev, compared with 8.1213 yesterday.

Lawmakers have also failed to comply with other terms of the loan, including raising natural gas prices for households and adopting laws needed to stabilize the financial system.

The budget gap rose in the first nine months of the year to 24 billion hryvnia ($2.95 billion) from a 3 billion-hryvnia surplus in the year-ago period, the central bank said in a statement yesterday, warning the shortfall may impact the hryvnia.

“We hope the court will take a positive decision for us and we believe this is going to be a good argument for the IMF to continue cooperation with Ukraine,” Timoshenko said at a meeting with G-8 countries’ ambassadors in Kiev yesterday. The law won’t be implemented until the court rules, she said.

‘Extremely Important’

“It’s extremely important for us to get the fourth IMF tranche as it will be very difficult to combat the economic crisis and stabilize political situation without it,” she said.

Timoshenko also pledged that Ukraine will implement the increase in the price of natural gas price “once political instability ends.”

Russia warned yesterday it may halt gas exports through Ukraine if the bailout-dependent former Soviet state can’t keep up payments in what is becoming an annual dispute between the two countries.

Ukraine, which ships about 80 percent of Russian gas exports to Europe, may have to postpone payments for the fuel if it doesn’t get the IMF funds on time, Deputy Prime Minister Hryhoriy Nemyria said on Nov. 10.

By Daryna Krasnolutska, Bloomberg