Ukraine’s cooperation with the International Monetary Fund is “absolutely necessary” and the country hopes to obtain the next round of funds as early as next month, Foreign Minister Petro Poroshenko said, according to Bloomberg.

The former Soviet state is dependent on a $16.4 billion IMF loan to avoid bankruptcy amid a recession and to maintain payments for the transit of Russian natural gas to Europe. The Washington-based IMF earlier this month decided to delay disbursement of the next $3.4 billion portion of the loan after Ukrainian lawmakers failed to rein in social spending.

Ukraine’s hryvnia pared intra-day losses after Poroshenko’s comments, and traded little changed at 8.1250 against the dollar at 5:37 p.m. in Kiev. It earlier declined as much as 0.9 percent. The extra yield investors demand to own Ukraine’s international debt dropped for the first time in three days, declining 17 basis points to 11.25 percentage points, according to JPMorgan Chase & Co. EMBI+ indexes.

“We have a new project of the budget law and we’re preparing a special letter from the prime minister and finance minister to the IMF and a separate letter from the governor of the national bank,” Poroshenko said in a Bloomberg News interview in Brussels today. “It has helped a lot to put cooperation with the IMF on track and we expect the IMF mission to return to Ukraine by the end of this year.”

December ‘Possible’

Poroshenko, head of the central bank council, said he thought payment of the next installment of the IMF loan to Ukraine would be “possible” in December. The country has already used $10.6 billion of the credit in three installments to stay afloat after the global economic slump cut demand for its exports, such as steel, and hit its banking industry.

The loan should not be spent on financing a budget deficit but for “helping Ukraine to provide reform to the sectors that most urgently need it” such as the energy and financial sectors, Poroshenko said.

Countries including France and the U.K. announced at a meeting today of European Union foreign ministers in Brussels that they want “strict conditionality” on the next installment of IMF loans for Ukraine.

“There’s real disappointment among many of Ukraine’s friends over the inability to enact reforms,” Pierre Lellouche, France’s European affairs minister, told reporters.

The suspension of IMF financing prompted Fitch Ratings on Nov. 12 to cut Ukraine’s long-term foreign-currency credit rating to B- from B, six levels below investment grade and on par with Argentina and Lebanon.

Political Infighting

The economic situation in the east European state has been aggravated by political infighting before presidential elections scheduled for Jan. 17. Ukrainian President Viktor Yushchenko, Prime Minister Yulia Timoshenko and pro-Russian opposition leader Viktor Yanukovych are competing in the race.

“I’m an optimist and I think it will be absolutely necessary for Ukraine before and after the presidential election to continue cooperation with the IMF,” Poroshenko said. “It would be impossible during the crisis and a very difficult economic situation to find a way out without cooperation with the IMF. I think all participants of the presidential race are fully in support of this position.”

Poroshenko said Ukraine’s economy may show a “modest growth” next year after shrinking an annual 15.9 percent in the third quarter and 17.8 percent in the second. At the same time the country will have to cut spending, “undertake serious steps” to pay back its debt and demonstrate that it is a “reliable partner for investors,” he added.

Budget Policy

Implementation of a “firm” budget policy by the government and continuation of cooperation with the IMF should help bring back investors to Ukraine and provide for the country “a great chance to demonstrate certain stability of national currency,” Poroshenko said.

The central bank “almost didn’t spend” its reserves to support the hryvnia in the last month, he said, adding that the stabilization of the currency reflected the “return of trust” from investors.

“It’s been self-regulating within the last several weeks because of firm monetary policy and because of stopping pressure from financial speculators,” Poroshenko said. “The firm monetary policy will continue.”

“But if necessary, Ukraine has currency reserves and the central bank has a possibility to intervene and to support the hryvnia,” he said. “But that would be only to take away the peak of demand, we cannot run against the trend. We cannot waste our gold currency reserves.”

Commodity Prices

The hryvnia has rallied almost 10 percent from a six-month low on Sept. 4. With the Ukrainian economy being export- oriented, the stability of the currency will also depend on global commodity prices, especially steel, agriculture and chemical products, according to Poroshenko.

Poroshenko said he didn’t expect any disputes with Russia over the transit of gas via Ukraine to western Europe. A dispute between Russia and Ukraine in January left more than 20 countries without gas for almost two weeks.

“This year’s situation is completely different from the previous one,” he said. “Beforehand it was a dispute on prices and we didn’t have an agreement. It was a political question. Today we don’t expect any disputes, neither on price, nor on the essence of the agreement.”

Russia’s Prime Minister Vladimir Putin said last week the country may halt gas transit through Ukraine if the former Soviet state can’t keep up payments. Ukraine ships about 80 percent of Russian gas exports to Europe.

“We don’t have any problems with supplies,” Poroshenko said. “Ukraine pays for gas in time and has more than 27 billion cubic meters of gas in underground storage that can be used as a reserve to supply gas to Europe. The only question we can discuss is to continue cooperation with the IMF and with the European Union.”

By Ewa Krukowska, Bloomberg