Russia Lends Ukraine $2bn: What Does It Want In Return?

KIEV, Ukraine -- Now that the west seems to fear to tread very far into Ukraine, Russia is more than happy to step into the breach. A state-controlled Russian bank appears to have granted cash-strapped Kiev a $2bn bridge loan to plug a budget deficit gap after delays in Ukraine’s bid for fresh financial support from the International Monetary Fund.

Mikhail Zurabov, Russian Ambassador to Kiev.

While details of the deal have yet to emerge, it seems that the Russian bank has agreed to shore up the public finances for six months.

The short-term benefits to Kiev are obvious: but the long-term implications of the dramatic increase in Russian influence that has followed president Viktor Yanukovich’s election have yet to become clear.

Asked today at a Kiev press conference if he could confirm the loan, Mikhail Zurabov, the Russian ambassador, said: “I can envision it, as such talks were held in the most recent time period.

And the funds which appeared most recently in Ukraine could be, in their own right, a sort of bridge loan given by one of the [Russian] commercial banks to the government of Ukraine for six months at a pretty good interest rate, of say 6.7%.”

A Ukrainian official told Reuters that Ukraine had “borrowed from Russia” and financial analysts said the funds showed up this week on central bank accounts. Ukrainian news services indentified the Russian lender as Vneshtorgbank, though this could not be confirmed.

The news emerged as Ukrainian officials held talks with an IMF mission visiting Kiev this week. The coalition backing Yanukovich seeks a two-year IMF aid package of $15-19bn, and hopes for a decision soon after a mission returns to Kiev on June 21.

But negotiations have been tougher than the Ukrainian leadership expected, with the IMF insisting on reforms that Kiev is loathe to promise.

Cash-strapped Ukraine has a limited financing options. Anastasia Golovach, analyst at Renaissance Capital in Kiev, told the FT: “Negotiations with the IMF have been delayed.

The Ukrainian government was also planning to tap external capital markets with a new Eurobond issue in May, but the process was postponed due to the turbulence in the global markets.”

Some $11bn in aid provided by the IMF kept Kiev financially afloat during last year’s recession, when gross domestic product plunging 15 per cent. But further assistance from a $16.4bn programme was frozen late last year ahead of a hotly-contest presidential election after rivalries torpedoed reform efforts.

For Kiev’s political opposition, the Russia loan is another sign of how Ukraine has tilted further into Moscow’s orbit four months into the presidency of Yanukovich who replaced the pro-west Viktor Yushchenko.

Whether out of desperation or choice, Ukraine now seems ready to go to Moscow for help when international lenders bargain tough. Kiev also hopes soon to ink a $4-5bn loan from Russia to finance new nuclear power blocs.

It seems clear Russia’s leadership plans to bring Kiev further under its political wing and grab ownership of key Ukrainian assets, such as the gas pipeline and steel mills. Russian groups have recently discreetly moved to acquire two Ukrainian steel mills.

Economists say the relatively expensive Russian loan could, in itself, further complicate talks with the IMF. The Fund has expressed concern over the nation’s budget deficit and swiftly increasing foreign debt. It doubled in the past year to 40 per cent of GDP.

So, both financially and politically, Kiev is stuck between a rock and a hard place - Russia and the markets.

Source: Financial Times