Four Years of Drama: Outgoing Interview with the Head of IMF Mission to Ukraine
2 July, 2017

Firmness in principles and policies is especially important for the International Monetary Fund (IMF) in dealing with Ukraine going forward, says Jerome Vacher, the Resident Representative in Kyiv for the IMF.

By the time the Maidan Revolution swept President Viktor Yanukovych’s government out of office in February 2014, Ukraine already had huge unsustainable imbalances, says Vacher. The new policymakers were faced with a unique situation of strong external shock with the conflict in the east of Ukraine, trade shocks, and the need to adjust currency and policy. With an empty coffer and low credit in the international community, the Ukrainian economy was on the edge.

Fortunately, the new government showed willingness to cooperate with reforms. Since February 2014, Ukraine has received around 9 billion USD in support.

In this period, Ukraine faced and is still facing many issues that have economic impact, including the nationalization of Privatbank, the biggest bank in the country, the war on corruption, and land and taxation reforms.

To discuss Ukrainian economics and its crises since the Euromaidan Revolution in 2014, structural reforms and Ukraine’s economic future, Hromadske sat down with Jerome Vacher, the IMF’s outgoing Resident Representative in Kyiv.

Jerome, you have been here before, during very dramatic times. I’d like you to give a general, overall impression. Ukraine at some point was at the edge of default, on the edge of bankruptcy. And now, it is kind of a steady corporation. So, can you very generally say what is the state of affairs? What were the risks? And what condition is it in now?

Jerome Vacher: I would say that, the first thing is that in 2013, there were already large imbalances in the economy. It was not a sustainable situation. You had a large, very large government deficit, a large fiscal deficit, no growth, reserves that were being exhausted, and an unsustainable exchange rate. So that was the starting point, but of course, with all the shocks Ukraine has been going through, it made the situation extremely difficult. And starting very quickly in the spring of 2014. And so, Ukraine has faced a very unique situation with a strong external shocks, with a conflict (ongoing), with trade shocks, and with the adjustment which was needed; in any case, to adjust from those large imbalances which were pre-existing. So it is a unique combination of factors, and certainly for the IMF, it has been a unique situation to deal with.

When was there was talk about this big deal, a loan, or reconstruction of a loan? Nobody saw it as something and then later we heard that we were on the edge of not getting it and without the country's economy would have collapsed. If you remember, what was critical? In this particular case what was critical for you and the IMF for the whole thing to happen?

Jerome Vacher: I remember vividly from some of the first meetings, February 24, 2014, for example. So these moments were pretty decisive and I think the international community reacted very quickly at the time. Of course, there was a lot of commitment from the authorities at the time to show that they were ready to take reforms. That was something we forget now, but was very important for the international community, because of the experience previously with Ukraine had been of a lack of commitment to undertake reforms and a number of failed attempts. So there were moments in the very first months, especially in 2014 that were critical.

Over this time Ukraine has received almost nine billion US dollars. We had loans. We had the resecuritization of national debt. That looks good so far. But we know Ukraine has to repay the loans. And especially that would be the casse in 2018–2019. Would Ukraine be able to repay those loans or would we have another table resecuritization of the debt? Or postponing?

Jerome Vacher: I think when we put an IMF program, an IMF support, which we re-assess periodically for each review. Everytime we look at the capacity of the country to repay. We do not want to overburden the country. The debt restructuring has allowed for the gaining of some breathing space over time. But indeed, that also means that the repayments will start to increase after some point. All this in fact should be, I think, an additional motivation for the authorities to understand that they need to continue to accumulate reserves. That they need to be very careful of the developments of underground account, and the deficit. But more importantly, they need to make the connection between the need of structural reforms and the external situation. Basically, that means, Ukraine at the moment is still not attracting enough foreign direct investment. It is not attracting enough privatization related revenues which could also help for foreign exchange reserves. So that linkage still has to be made.

Today, we can already assess the way the government is working, there is the plot of the reforms. How do we get out of this vicious circle of the country getting more and more loans rather than being able to pay them. So, at this point, you mentioned some of critical things with privatization. But do you see enough being done in order to work according to the plan?

Jerome Vacher: I think we have seen a lot of changes, but as we underlined on a few occasions, I would certainly leave that as a message, there is really a need to accelerate reforms and what we call structural reforms; which, in the case of Ukraine, are very focused on the need to improve the business environment, to improve the situation with respect to corruption. That takes many forms, including, for example, reforming your state-owned enterprises; which is not only a fiscal issue, but an issue of governance.

According to different kinds of research, approximately 40 percent of the Ukrainian economy is a shadow economy, so really, how do you get out of this situation? How can we get out of a situation if it is such a big part of our economy? With no tax being paid to the budget, what is to be done?

Jerome Vacher: Well, I mean, it’s one of the most difficult challenges that we see not only in Ukraine, but in many other countries, including in the Euro area, for example. But clearly, the estimate differs on the shadow economy, but it is clearly fairly large in Ukraine. And it is clearly a problem, because that means the burden of the adjustment from, for example, from a fiscal perspective, forced on those who are paying taxes and honestly paying taxes. That some of the impunity we see in the business environment is removed.

Is Ukraine still an oligarchy?

Jerome Vacher: It is still a system where you have a number of large groups which are in different sectors of economy, where vested interests are very powerful, and your political system. At the same time, we do not see a for large small- and medium-sized enterprises and that is one of the things we need to change going forward to make growth much more sustainable. It’s a pity, because we see a lot of potential in Ukraine. There are a lot of sectors where we see potential for development. We all know that in Ukraine, there’s a tremendous potential in I.T., in a few of others sectors. That’s the sectors where we can see the development of small- and medium-sized businesses and quite dynamic ones. And these are also industries which are less regulated, or less prone to vested interests. So that’s where there’s an avenue to expand the size of the economy. But it is also important to make sure that the conditions for fair competition, proper competition, are met in the economy. That means probably addressing the future issues relating to the way the competition is monitored in the economy. Looking at the role of state-owned enterprises, because very often there’s a larger influence of vested interest in those enterprises. So there are a number of things which still needs to be done.

How were your personal encounters and personal communications during this week with these people like Rinat Akhmetov and Ihor Kolomoyskyi, who you can’t ignore if you speak about the Ukrainian reform. What would be your impression? What communication were you supposed to have in any case? And also how do you see their role in the future of the Ukrainian economy?

Jerome Vacher: As an institution, we are not dealing with individuals or individual companies specifically. So my main task is to discuss with the authorities and to discuss the policies. But that’s the way I approach it; we do not assign a more important role to different people and we do not deal specifically with individual institutions. So we discuss the policies with the authorities who are in charge of implementing the commitment they make with the international community.

But in the end, how do you deal with it? A lot of IMF requirements are about how the state deals with oligarchs and their opinionx, if you're talking about these huge changes. And in the different institutions, obviously the international partners, they are supposed to speak to those who matter, not just to the authorities. What could be done with that, because they would remain, they are still the owners, Mr. Akhmetov, Mr. Kolomoyskyi, and others–owners of the large industries. And without their will and without the way they deal, we can’t go with privatization, there is the issue of bank reform… So how do you see that?

Jerome Vacher: We do not see that there are some individuals who should be treated as if they're above the law. The law should apply to everybody and a good part of the policy we support is also to end some of the impunities that we have seen for way too long in Ukraine. But it’s also important to see that there a number of policies which are not labelled as anti-corruption but which have an important impact. In particular, you alluded to the financial sector, where a lot of the effort has been made by the central bank to ask, when there are vulnerabilities which are detected, to ask the bank owners to put capital into the bank. If they do not manage to put capital into the bank, then the solution has to be in front for the institutions. Similarly, there was a big effort done to address issues of what we call "related party lending," when a lot of banks are used by their owners to finance their own activities, in breach of Ukrainian credential regulations, but any kind of international best practice. And that’s also a way to protect the depositors themselves. And it’s no surprise that we see also very often some resistance from vested interest through the political system, to those policies.

So we started to speak about the National Bank. Valeria Gontareva has resigned and we are already talking about a new person. What kind of tasks are you expecting from the new head of the National Bank?

Jerome Vacher: I think it’s important to see that Mrs. Gontareva, as Governor of the National Bank of Ukraine for all those years has done a tremendous job in doing what has not been done in too many years; properly supervising and cleaning up the banking sector. But also reforming the Central Bank as an institution; it is now a modern Central Bank with which we can have an informed dialogue. It is really a revamped and new Central Bank. That’s an important legacy which has to continue and it’s important that all those gains are not reversed. That would be fundamental going forward. A lot of the heavy lifting has been done on cleaning up the banking sector, there’s still some way to go and there is an ongoing process of recapitalization and also addressing "related party lending" in the system, properly supervising the banks--that has to continue. And then there are the number of new issues that also arise, some of them are not completely new, but take a new dimension. For example, there will be an important effort, together with the government and the Ministry of Finance, to have a proper strategy for state-owned banks, for ensuring a proper governance for state-owned banks. So that is one of the challenges that is still ahead. Another challenge which is still ahead for the government as a shareholder is to recover as much as possible from the loans in some of these institutions.

We see a bit of a difference in the way IMF and other international partners really take credit for the work Mrs. Gontareva has done. But she’s a pretty unpopular figure in Ukrainian society. In the political environment there is a lot of criticism of her–on her different business, and particular cases like the Mykhailivsky Bank, all kinds of things. And it’s pretty present in the Ukrainian public discourse. So there is support from the international community and huge criticism from part of the society. How would you explain that, when such a good job has so many critics?

Jerome Vacher: I think, like in other episodes of economic history, it will take some time before people fully realize what has been done and how important it was. So it’s entirely natural what most people see is a negative aspect of it. And there were some of these, what I would call, economic illusions, for example on the exchange rate, on the health of the banking system which were maintained for too long. So of course it’s a very harsh adjustment. The other one is that there are a lot of vested interests, there are a lot of bank owners–including in parliament, which of course we are not happy with some of the policies that were put in place. In particular those that I mentioned; properly capitalizing the banks, making sure the banks are not lending to their owners, making sure they are implementing the right policies–for example on anti-money laundering and a lot of things. So of course there were a number of unhappy people.

Can you tell us the story of the nationalization of Privatbank, as this is a very important issue of the last year? What was the role of the IMF and the international community?

Jerome Vacher: First of all, the story’s not over. It’s an ongoing process and we should not forget that. It took several years, first of all to understand the extent of the program. Like for many other banks which were weak and improperly managed, that was the first step and it was not an easy step. Then once a clear diagnostic was made and there the National Bank as a supervisor, and also with technical support from the international community. Once that diagnostic was made, there are the usual policies that the owners are asked to recapitalize. And in the end if they are unable to do so then the solution maintain stability in the system. Of course a lot of the concern at the time was to make sure that whatever solution was implemented for the bank would not affect financial stability because the bank was systemic in a sense that it could potentially have an impact on the whole banking system–and in particular on the liquidity of the banking system, on the deposit base. So it has been a difficult operation for the authorities but I think on preserving the stability of the financial system at that time that it was done, that has been achieved. There are a lot of challenges still ahead with the nationalization of that bank, meaning in particular that there is still a strong need to make the utmost effort to recover as much as feasible from the loans which were not paid. That is, I believe, not only important from a fiscal perspective–that has a significant fiscal cost–but it is also important for governance and to make sure that we do not see similar issues in the future and a proper recovery of the funds which were misallocated.

You mentioned that the story is not over. What would be the biggest issue that we have in the Privatbank at the moment?

Jerome Vacher: At the moment it’s very simple and complicated at the same time. But it’s basically to recover the loans which are due to the bank. Most of them, as you know, were granted to related parties, and shareholders. That is the main task at the moment. The task of stabilizing the liability side which is basically the deposit side has been achieved. But there is an important component which is also in the commitments Ukraine is taking with the IMF in particular to recover as much as possible.

How much is that burden for the Ukrainian economy?

Jerome Vacher: We’ll have to assess what will be the final cost. The recoveries take some time. For the time being, the cost is an excess of 5% of the GDP. We hope that as much will be done to lower that amount. The final answer on the total cost will only be known when that process of recovery will be achieved. And sometimes it can take a while.

We remember very well those nights, the largest bank in the country, when you woke up and you still didn’t know what happened, there was still very little news about that, and in the morning, everything is done. So of course we know with the nationalization of the bank they don't want to have panic from the population. Still there is too much candid and hidden information for the public about the process that had been done. What was the undercover, behind closed door communication with the owners of the bank? What can we know about that? How many parties were involved?

Jerome Vacher: In all of these cases of bank recapitalization essentially, the process is mostly between the supervisors and the bank owners and we see that in all the countries. Those cases, it has some confidential aspects, it has some information which can be market sensitive which can have an impact of the stability of the financial system. Not only in Ukraine but in other countries, they have these discussions. They take place between the supervisor and the bank owner. But I think the Central bank and the authorities through the Ministry of Finance have been pretty straightforward also communicating on the motivations for the nationalization and quite early on. The problem was known for some time. There was an indication already that these things were looked at. The nationalization was done and there was a fair amount of explanation of more numbers and we will see of course more of that as we move on.

In general if we’re speaking about that, it was never smooth cooperation, it’s not really that smooth. So what are the things that are really annoying for you? What annoyed you during this time?

Jerome Vacher: There are certainly a number of areas where I think things could have gone quicker and where the dialogue was perhaps a bit more difficult or more slow at times. I think a lot more needs to be done on the anti-corruption front and I would like to see much quicker progress and I think we could have achieved quicker progress, on that front and again it covers a number of areas including things like state-owned enterprises, privatization for example, where the process has been very very slow. So that’s the kind of dialogue that sometimes the dialogue can be more difficult because it’s also sometimes politically difficult, it’s a system with its own parts of inertia, it’s own pockets of inertia, and why it takes basically a strong will and determination to change things.

I would really like to clarify because you’ve spoken a lot for a couple of years about anti-corruption, but what do you mean by corruption as a representative of the IMF? I understand what you mean by corruption now if you mean you need to go to school to pay a bribe for your kid, if you need to go to the hospital you pay a bribe and all those kinds of things. We investigate all those things, but when you speak about fighting corruption in Ukraine, what do you mean in particular? What are things you would like to see improved?

Jerome Vacher: We cannot address all those issues and we know that very well so we have tended to focus on high-level corruption because we also think that a lot of the change has to come from the top and in particular from the use of public funds.

So what are you major concerns if you’re speaking about corruption? We mentioned especially privatization, what are the major concerns for the IMF, if you’re talking about corruption in times when you need to have long-lasting structural reform?

Jerome Vacher: Let’s start with some of the problems that we see. I think that some of the problems that we have seen is that there is much more talk about corruption, and much more specific talk about corruption, not only in broad terms but on very specific matters. That is a good thing because shedding light on corruption is the first way to tackle it because corruption doesn’t like light too much. But the flip side of that is that it also raises a lot of expectations from the population and sometimes the perception is maybe that things have not changed or that they are even worse than before, so it’s also a double edged sword.

The only way to address that is to make sure that the Ukrainian side also addresses this issue of impunity. Now I think we have better detection and investigation for that, of some of the high-level corruption in particular. What is missing is basically the last step, which is also perhaps one of the most important, which is at the judicial level. We still see the various things you can get. For example, there’s been a lot of progress done with the national anti-corruption bureau, but what we see is that the cases basically die in court. One of the options that’s being supported by the international community together with civil society is the creation of an anti-corruption court which will seek to address that big gap that we see. It is true in other areas as well, we have talked about the efforts of the National Bank to clean up the banking system but we see in some of these cases where some of the former owners should be sanctioned are actually also dying in courts because there are a lot of issues with the court system. So that is our major examples of things which need to be done.

What we have seen early on was an important step in macroeconomic stabilization which has been very difficult, especially considering the circumstances that Ukraine was facing at the time. What we saw also was some positive developments in dealing with some of the taboos that have not been addressed for a long time, including the financial crisis of the exchange rate but also reforming the financial and starting to reform and clean up the banking sector. We are now in a stage where some of the structural reforms needs to be accelerated and deepened. In many countries it’s actually one of the most difficult stages, because some of these reforms are actually very difficult to implement, they are difficult to design first of all and then to implement. Very often they show the results with some time lag.

Is it there a case when we see that there would be some progress on land reform? On the way that land will be able to be sold? To what extent is this an issue and is it a case where the IMF sees that it won’t be done any time soon?

Jerome Vacher: Well there are a number of important policy changes that have been undertaken as commitments made by the Ukrainian authorities and that is one of them. For us it’s something that we see as important not only to end an abnormal situation where basically you have millions of landowners who are not really owning their land because they can’t really do what they want with their land. There is also a parallel situation with state-owned land which is very poorly managed and quasi-privately managed in many ways. So we see that, in many ways, not only because there is a need to end this abnormal situation but because we see it as a way of boosting growth in the medium term. So what is important is that the reform gets started quickly and in a way that which can make sure that it is successful, essentially.

To clarify, what we’ve heard is that there is more or less acceptance by the IMF that the land reform wouldn’t take place very soon. That this could be possible and that is accepted.

Jerome Vacher: Well we are still in the process of what we call the review, which is basically a discussion of the policy. There is a backward-looking aspect of it about what has been done and achieved, and there is a forward-looking aspect which is basically the policy commitments taken by the authorities in a number of areas that we could support and that could be discussed at the board. There are several important policy discussions that have taken place, particularly pension reform, anti-corruption, privatization and land reform, and all of these are important aspects for us to be able to move forward with our support and to achieve what I have been mentioning before, this more sustainable growth. As a lender, of course we want to see this economy grow, we want to see this economy modernized and land reform is one important aspect of that.

Speaking about the next loan from the IMF, some of the investors say that there are issues with it. What are the conditions to be fulfilled in order to get it? What is the probability of not getting it? When can we expect it?

Jerome Vacher: I mean it’s an ongoing process of review that would lead to the disbursement of that loan after discussion of the IMF board. Basically, what we need is to have clarity on a number of issues and of course the usual issues that are included in the IMF forum in all areas, including the financial sector, fiscal, energy and so on, but this time around there is a number of policies where there is a bit more focus. We discussed some of them, that includes pension reform, anti-corruption policies, including the creation of an anti-corruption court, land reform and privatization. These are areas where we are doing this review and the discussion will put much more focus so it will be important for us to be able to move forward and present a good case to the international community that we have clarity on those different aspects of what the Ukrainian authorities are in a position to do and implement effectively. The answer is relatively easy, it takes us as much time as is needed to find what we call first a staff level agreement on the policy and then we can move forward with our discussion at the board level.

Do you think Ukraine will survive staying without IMF funds?

Jerome Vacher: Our list comprises different aspects, we provide the financial support which is what is most known, we provide also a lot of technical assistance and advice on policies which can take place with or without funding and in some cases in many countries we do that as well. Again, what we hope to see is that Ukraine can stand on it’s feet in the future and more importantly can achieve sustainable growth. We will always be a last resort for our member countries, that is our role. But I think what is critical now is that Ukraine achieves some of the sustainable growth that needs to be achieved. There is still a need to build reserves and basic protections for Ukraine against economic shocks. So there is still some progress on the external front to be made to make sure that Ukraine full stands up on its feet.

To the person who comes to do what you have been doing what would be the thing he or she needs to know?

Jerome Vacher: We have policies which we follow, part of our role on the ground is to maintain a close policy dialogue, to be able to explain the policies that we will be able to support. To understand also the situation on the ground and to be able to properly analyze the situation. So that is a constant in our work. I think it’s in that work and especially in Ukraine it’s important to be firm, but meaning to be firm on our principles and our policies, especially on the structural changes that are needed to achieve sustainable growth in this country. I don’t think it helps Ukraine if we are softening our principles or changing our principles. We need to find the best policies and we need to provide firm advice.

/Interview by Nataliya Gumenyuk

/Text by Chen Ou Yang, Eilish Hart and Tanya Bednarczyk