Ukraine and the IMF. A Wartime Partnership

The International Monetary Fund can be safely considered to be one of Ukraine's major creditors. In the news, we often hear about a fresh tranche, loan, or other financing method for Ukraine coming from the IMF. However, everything has a price, especially these kinds of programs. The pre-war program was meant to reduce the budget deficit and/or prepare for the privatization of banks. It is clear that neither of these things can be done during wartime, which is why Ukraine terminated the aforementioned Stand-by program. The IMF provided two emergency loans totaling $2.7 billion. It is important to note that Ukraine has had loan obligations to the IMF since the preceding years, and they must be repaid. As a matter of fact, $2.38 billion have been spent on repayment of other loans from the IMF, and Ukraine has barely managed to break even.

As one could expect, the increase in military spending and the decline in tax revenues have created a deficit of about $38 billion. The US and the EU have already pledged to cover a portion of the expenses, but roughly $8 billion remains to be raised. That is why a new program tailored to the needs of the war has to be developed to replace the terminated IMF program. The IMF Staff Monitored Program does not provide for the allocation of funds; it is instead a set of steps called the five structural beacons that the state must meet in order to secure a new loan program.

The first beacon reads as follows: "Develop an action plan to ensure the prevention and repayment of arrears during the implementation of the budget for 2023 and thereafter. This refers to the arrears in certain types of public expenditures that have arisen because the government allocated funds mainly to finance defense needs."

At first glance, this seems to be of little significance, but if one digs deeper, a disappointing picture emerges. The issue in question is a change in the government's inflation policy. High rates of inflation is a method of supporting Ukrainian capital that is linked to government contracts.

Our Western "partners" seek to reduce inflation in order to fix exchange rates, create stable and equal conditions for their monopolies and our local capital, and put government contracts under transparent control. All of the above benefits only foreign capital, which will benefit from the weakening of state protectionism, thus giving it even more opportunities to expand their markets in Ukraine. At the beginning of the war, the National Bank of Ukraine set a fixed exchange rate, which kept rising throughout the war. Still, the National Bank did not abandon regulation altogether. Nevertheless, inflation grew, and the hryvnia even had to be devalued. Devaluation is a process in which a currency becomes cheaper relative to "hard" currencies, such as the dollar. This process leads back to further inflation and a rise in prices for imported goods. The budget was also financed by issuing hryvnia(UAH).

Currency issuance is a tool used to inject more money, bonds, etc., into circulation, essentially activating the "money printing machine," which, in turn, often leads to higher inflation. A floating exchange rate is more profitable for Ukrainian capital that specializes in exports, as after selling their products they profit in dollars, and because of the fixed exchange rate, they lose their profits when converting to hryvnia.

In general, this scheme is common for countries that export raw materials, and Russian raw material oligarchs utilize the same strategy. Western capital expects to withdraw profits from Ukraine; to do so, it needs to convert the hryvnia into a stronger currency, and the high hryvnia exchange rate against the dollar reduces profits and the desire to invest, respectively.

That is why the NBU is currently balancing the interests of two forces, external and internal, although the NBU has already announced that it will abandon the use of issuance-based budget financing, which should slow down the inflation rates. In this context, the IMF is nothing more than an instrument of pressure, that, as noted above, represents the interests of foreign capital. Our local business, which works on government contracts, also benefits greatly; in fact, it is a shadow, informal part of the economy that is linked to the state and is a tidbit that is of benefit only to our oligarchs. One may recall the scandal with food purchases for the army, when the prices of products in the contract exceeded market prices by 2-3 times. It is clear that Western "partners" are not interested in this state of affairs and will put pressure on our government to implement reforms aimed at increasing transparency.

The second beacon expands on the assumptions of the first, namely: "To register three laws in the Parliament aimed at increasing tax revenues: a law lifting the moratorium on tax audits, a law abolishing the simplified taxation system with a 2% tax on income, and a law ensuring the effective use of PTRs and restoring liability for violations in this area. The respective laws should come into force on July 1, 2023."

These laws are related to the crackdown on small business in Ukraine, a topic recently covered in our "News of Labor and Capital". As of February 20, a parliamentary committee has already supported the abolition of the 2% tax exemption for individual entrepreneurs, another concession to creditors that makes life worse for everyone except the IMF. In general, this is a process of shifting the economic burden of the war to the petty bourgeoisie, leading it to bankruptcy, bringing it under the control of the state, i.e. the control of large monopolistic capital, and potentially clearing the market for foreign capital. These measures, although they will lead to the inflow of funds into the economy in the short term, will lead to the disintegration of the petty bourgeoisie and, consequently, to its proletarianization in the long term.

So, this must be all there is to this beacon? Far from it, as the gambling business has been evading taxes through preferential taxation schemes. Currently, the President has already passed a law abolishing preferential taxation of gambling businesses. However, as it turned out, this rabbit hole is much deeper. The state lost more than 10 billion UAH through these shady schemes. The most interesting thing about these schemes is that they involved banks that were fully aware of the damage they were doing to the budget and still charged a decent commission for it. There is more to it than that: a state-owned bank was one of those involved in these schemes.

But what is a PTR and why is the IMF so eager to implement it? First of all, we need to define what a PTR is. A payment transaction recorder(essentially an electronic cash register) is a device that stores information about all monetary transactions and transmits them to the tax authorities, i.e. a device that renders tax fraud impossible. It is precisely because of the lack of implementation of PTRs that our oligarchs could evade taxes by using shell companies that enjoy tax privileges. The IMF is so insistent on the introduction of an "effective PTR" because it would bring a large part of the economy out of the shadows and put our oligarchs under control.

It may seem as though the IMF is explicitly concerned about the welfare of the Ukrainian people as it fights the oligarchs, when in fact it is using the aforementioned tools to fight one oligarch to bring in another, foreign one. Our oligarchs will not be able to compete with their Western imperialist comrades on a fair footing, and so the adoption of these laws will not only hurt local oligarchs, but also strengthen the Western ones. We should also take into account the fact that the IMF is interested in getting its money back, and Ukrainian oligarchs who don’t pay taxes will, obviously, not contribute to the repayment of the funds invested.

The third beacon is related to social protection and its "reform", namely, the following target is set: "Prepare a policy paper on reforming the social protection system and ensuring targeted support to all socially vulnerable groups, while maintaining fiscal sustainability."

Sounds perfect! Are the IMF creditors so kind as to improve our lives on top of lending us money? While this may sound appealing, the reality is that social security has been undergoing reform for many years already, or, perhaps we should say, undergoing demolition? Let's put aside the irony and consider the situation: our country is facing a budget deficit, a war, and is begging for charity from the IMF, the US, and the EU. In such circumstances, effective and fair reform of the social insurance system is impossible, whereas cuts in the wrapper of a "reform" are, on the contrary, quite achievable. Moreover, we are completely dependent on the West when it comes to financing the welfare sector.

Another point worthy of additional attention on our part is the so-called "targeted assistance". Targeting will help cut costs, but there is another nuance that we are not taking into account. Targeted assistance binds a particular group of people to the master in the form of the state, which undermines the worker solidarity and slows down the class struggle. In this way, the government can kill two birds with one stone, cut costs and slow down the pace of class struggle in society.

"To prepare terms of reference describing the methodology and procedures for future diagnostics of banks, which should identify their need for additional capitalization, as well as set the priorities in dealing with non-performing loans" is the subject of the fourth beacon.

Yet again, nothing seems to be out of the ordinary, but it is worth considering that prolonging the war will lead to more and more banks facing problems. The IMF wants to impose its own ways of solving these problems, which will definitely not result in positive economic changes in the country. The same can be said about non-performing loans, the IMF aims to establish as much control over the Ukrainian banking system as possible.

Overall, the IMF benefits from the stability and controllability of the banking system for further debt collection. The state's fight against the former Alfa-Bank, now Sense-Bank, is particularly illustrative in this regard. Since the beginning of the war, the large systemic banks of the Russian Federation have been withdrawn from the market, and the remaining banks whose owners were of Russian origin have been keeping their heads down in hopes of waiting it out. Interestingly, the bank operated without restrictions until September 30, i.e. until the "accession" of the LDNR, Kherson and Zaporizhzhia regions. This is how a fairly large bank, seemingly an enemy of our country, has been operating since the beginning of the war, and it was only under the pressure of the latest developments that Zelensky decided to nationalize the bank. Potanin proposed to recapitalize the bank by $1 billion, but this proposal was not backed up by any real actions. This is the story of the state's struggle against Sense Bank, although the state is more so struggling with itself than against the bank, since it is impossible to nationalize the bank under any of the current legal procedures. Andriy Pyshnyi has already instructed to prepare amendments to the law that will finally allow the bank to be nationalized.

The fifth beacon is the shortest in terms of content, but of no less importance. "Appoint the Supervisory Board of Naftogaz through a transparent competition." The composition of the new supervisory board is now known, as are the "independent" members: Thor Martin Anfinnsen, former senior vice president of the Norwegian oil company Equinor; Anthony Marino, CEO of the Canadian energy company Tenaz Energy; Richard Hookway, board member of the British electricity supplier Centrica; Ludo Van der Heyden, member of the Naftogaz Supervisory Board in 2019-2021.

These names alone are not very telling, although one of the recent issues of "News of Labor and Capital" covered the latest developments related to the new members of the supervisory board as well as the reasons they got their seats.

The appointment of these particular individuals is also a clear reflection of foreign influence on a large state-owned company. It is also worth noting that only Natalia Boyko and Rostyslav Shurma represent the interests of the Ukrainian state. This interest of foreign capital in Naftogaz is due to the gas crisis in the EU, and Naftogaz produces more than 70% of natural gas and 60% of Ukrainian oil. This is further supportedby the news of plans to increase gas production by 1 billion cubic meters in 2023.

In order to further analyze the supervisory board and its goals, a closer look at gas prices is in order. For heat producers, Naftogaz set the price per 1000 m at UAH 29,485.50. The price at the TTF gas hub (Netherlands) per 1000 cubic meters is UAH 19,882.50. Of course, Naftogaz claims that this amount includes VAT and delivery, but the markup of UAH 10,000 is still rather steep. A supervisory board is needed to control this phenomenon and to purchase gas abroad from Western capitalists, which will bring profits to their energy capital. And what about our gas? It can be sold to Europe at reduced prices, covering the energy crisis. For the European capital, this is a situation where they continue to maintain the balance on a tightrope, but for ours, it is yet another push towards the chasm.

...So what's the bottom line? The monitoring program does not provide for the allocation of funds, prepares "reforms" of the welfare sector, and strengthens Western control over banks and state-owned corporations. Is this a good thing? The question is, of course, only rhetorical. Despite the talk of defending independence, the bourgeois authorities are putting on and tightening the credit noose around the neck of Ukraine and its people. At the time of writing, all five beacons of the monitoring program have already been met, and the Ministry of Finance expects to receive funding starting from the second quarter of 2023, i.e. from April.

We can also conclude from the latest news that our government's appetite for IMF financing has only grown, with Prime Minister Denys Shmyhal stating that Ukraine is already counting on a $15 billion loan.