Prime Minister Arseniy Yatseniuk's interview to FT

Financial Times: Do you have a particular message for EU leaders at the Riga summit?

Arseniy Yatseniuk: Act boldly and wisely, do not be scared of Russia. It is for Russia to be scared of all of us. Don’t be scared of the word enlargement. The larger we are, the stronger we are, and the more successful we are, and the more opportunities we get, all our nations.

FT: But this summit won’t provide any explicit membership perspective?

AY: We didn’t expect it, frankly speaking. It’s important not to exaggerate expectations. So this is a normal, regular working summit, but a normal summit in an abnormal situation: illegal annexation of Crimea, Russian aggression against Ukraine. Russia acts as an international criminal, trying to intimidate the world, trying to split the EU, and trying to undermine the situation in the entire free world. And it’s important for the EU to realise that Russia poses a threat not just to Ukraine, [but] a threat to the free world, to democracy, to freedoms and liberties, to our peaceful and successful future.

I do understand the cautions and concerns of our European friends, [who say] look, we need to have the dialogue with Russia. That’s true. But dialogue envisages a two-way street. The way we have dialogue with the Russians today — by “we” I mean the free world with Ukraine included — we talk to them, and they cheat us. And not just cheat, they bluntly violate the international law, and they act as a clear-cut aggressor, a military, armed-to-the-teeth, aggressor, which is unacceptable in the 21st century.

So the aim of the Riga summit is to support those who share European values, to reach these European values.

FT: Are you disappointed that the concluding statements will be fairly cautious?

AY: I have no right to be disappointed!

FT: Why? The EU led Ukraine down this road, then Russia decided to try and halt its progress. Should the EU not be doing more to help you?

AY: Well, think positive and act positive, this is my motto. It wasn’t just the EU who did it. The Ukrainian people decided to choose the European way. But in this case Europe has to realise that this is our joint quest, for a new Europe, for a bigger and stronger Europe. And again, be courageous. This is another request for our European friends. Even in terms of sending a very clear message that, look, our fellow Ukrainians, if you meet the criteria, we are to become one united family. For today, we are just relatives, but we have to be family.

FT: Negotiations with creditors are clearly very difficult...

AY: Very difficult! And it’s normal again. We want to pay less, they want us to pay more

FT:…is Ukraine prepared to default if creditors don’t agree to a debt reduction?

AY: Let me put it this way: we would be happy to repay our debt. But on the terms and conditions that are offered by the Ukrainian government. And I ask our international creditors to be co-operative and collaborative. This is about justice. Ukrainian people have sacrificed and paid too much. My job is to clean up the system, which is overloaded with a huge debt burden.

For 2014, from all our international creditors — international support, the programme with the IMF — last year we received $9bn. This is the support we got. And we paid back to our international creditors $14bn. A type of Ukrainian business with a negative $5bn margin!

When I was sworn in as Ukrainian prime minister, the external debt was about $72bn, so I reduced it in 12 months to $69bn. Look at the numbers for the next four years. Former president Yanukovich who fled the country — it’s amazing — in three years he [borrowed] $40bn. So international creditors were so generous and benign to president Yanukovich, knowing that he is definitely not the best guy in the world. But they offered to his dictatorship regime $40bn. And today we have to repay this debt.

Under the IMF programme, we are to get $17.5bn, and $7.5bn from other international creditors. Only $15bn of this cash are we allowed to use to repay our international debt. But we have to repay back to our international creditors in the next four years $30bn, and an additional $17bn for the domestic debt. The overall number is $47bn, minus $15bn, so the negative margin is $32bn. It’s very simple math.

Let me reiterate, we ask private creditors to support Ukraine, and in this case to sacrifice their own share. The [parliament] passed the bill that allows the government to pass a moratorium. I believe that we will find a compromise with our creditors, and we will find a solution. But if not, I have no other option, other than to make this tough decision. It’s my job to make these tough decisions.

FT: Are you talking about a moratorium or a default?

AY: I am talking about a moratorium. In order to hammer out the deal with our creditors.

Are you worried that creditors are deliberately holding out, believing if they do so long enough, there will be another bailout and then they’ll get paid in full?

AY: Here won’t be another bailout, and they have to realise this. I cannot get new credits to repay the previous ones. This is the vicious circle. So I have to decrease the debt burden. This is my job and my task, for the sake of the Ukrainian people and future generations. I do understand the problems that private capital face. But we are facing tremendous challenges and problems — annexation of Crimea, war, a death toll of about 8,000 people. 1.2m [internally displaced persons]. For you, it’s like the whole of Birmingham moves to London. And you cannot collect a penny from Birmingham. And you have to pay wages to 1.2m Birmingham people who moved to London. What’s going to happen to the British economy?

FT: Is the $25bn, plus the debt restructuring if you can agree it, going to be enough?

AY: Well, it’s better than nothing. I presented you the numbers. It’s not enough. But it depends on the pace of reforms. And on the way Russia implements the Minsk deal and de-escalates the situation. If the investment climate improves, we can get more.

FT: Should the international community be doing more at this stage?

AY: There is a very bad example. There is one country, with a population four times less than Ukraine. It collected $300bn, and never passed these kinds of tough reforms that Ukraine already passed. And never had a war with Russia, thank God. And Ukraine, with one even can say almost insurmountable problems, was promised $25bn. This is the comparison.

We are not begging for cash — “just give us please another $1bn”. This won’t work. This has to be a two-way street. Ukraine is a country with huge potential. It’s one of the biggest agricultural players in the world, it has enormous natural resources, including oil and gas. An amazing population which is well skilled. So jump in, let’s make business. I’m not asking for cash for social expenditures. I do understand that this is the way to nowhere. And this is why my government passed three austerity packages. We have frozen all salaries, we increased communal tariffs, by six times. We severely eliminated subsidies to the energy sector, we eliminated subsidies in the gas sector, mainly. But the thing is that we need together to make real business.

So this is the opportunity for our international partners. I beg not for credits, I beg for investments. That’s what I ask for.

FT: But will investors come when there is a war in the east, or a frozen conflict?

AY: That’s what Putin knows. This is his clear-cut strategy. He tried to eliminate Ukraine’s future with a number of tools. An offensive military operation, proxy hybrid war. Press on Ukraine with this $3bn Russian debt.

FT: Did creditors in effect take a bet, knowing what Ukraine under Yanukovich was like?

AY: That’s what I told you. They offered to Yanukovich’s regime $40bn, they were well aware that this is a very risky affair. They actually sponsored a pro-Russian, dictatorship regime, which wasn’t based on free-market European rules and standards. We are in a state of war with Russia. The Ukrainian people have paid too much. And the international community is very supportive of Ukraine. And private [creditors] have to realise that they are responsible too. And they can sell it to the world, saying ‘We do understand what happened to this country, we want to support these people. And this is our contribution, to peace and stability in Ukraine’. This would be the right message. And this would be even a new story for private capital in the world, if they did this.

They can lose capital, but they can gain a reputation, which is much more precious than capital.

FT: Could Ukraine declare some of this debt odious debt?

AY: I cannot comment on this. But I will do everything to restructure the debt. We will use all legal tools and means to restructure the debt. We will treat everyone appropriately and fairly, in the same way. Including Russia. But if Russia believes that they will be separate or alone, no. Let me just remind you that these $3bn were a geopolitical bribe for President Yanukovich from President Putin, for not signing the [free trade agreement with the EU].

On the economy, the figures for the first quarter were . . . Staggering!

FT: Staggering. A 17.6 per cent contraction. And industrial production down 20 per cent again in April, despite the Minsk ceasefire. When will things turn around?

AY: We actually lost 20 per cent of the Ukrainian economy, and we lost mostly industrial areas that today are controlled by Russian-led terrorists. We lost Crimea. So we lost a huge swath of market, of both production and consumption. This is the outcome of the Russian-led aggression. But in the first quarter this year, my government collected an additional 35 per cent of revenues, compared with the first quarter of last year. And do I understand that this is after depreciation, but this is a good sign.

Look at the real estate market. It is still quite stable. Prices are still too high, and rent hasn’t [fallen], so something positive is going on. I would say that the first grassroots of this probable positive economic performance have already emerged. We are too far from real growth. But as we deregulate the economy, as we passed amendments to the tax code, as we tried to eliminate red tape, overhaul the IRS, the key problem I have is that I am out of tools to boost economic growth. We cannot launch QE, because Ukrainian QE will lead to hyperinflation, and under the IMF programme we are not allowed to do this.

What is needed for Ukraine is investment. This is why we already passed a resolution for privatising a number of energy assets. This is the way to tackle corruption in state-owned enterprises on the one hand, and on the other, how to get additional investment and high standards of corporate governance from the west. But again, jump in!

And our western partners have to realise that in some cases they have to share the political risk with private investors too. So support them. Give them the leverage and the incentive to invest in Ukraine.

FT: But with a contraction of this scale, inflation so high, will it be too much for Ukrainians to bear? There was a demonstration today . . .

AY: On the one hand, this is democracy. That’s what Ukrainians have been fighting for. And it happens in every European country. On the other hand, I want to be very clear that my government passed very painful and tough reforms. And everyone anticipates that the outcome of these reforms will come two weeks after we pass a bill. In Singapore, it took 20 years.

I always say, look, if this is the ceasefire, explain to me what fire means. We have lost about 90 Ukrainian soldiers after the ceasefire was put in place, more than 400 injured. The next precondition is to pull back forces, pull back heavy artillery. You know what they did? They pulled them back, into the kindergartens, garages and supermarkets.

So we are facing tremendous challenges. And as the government has frozen all social payments and wages, living standards dropped substantially. There is social unrest. But this is the price that we are paying for doing nothing in the last two decades. And I commend the Ukrainian people who are still ready to bear the brunt of these reforms. This won’t last for ever, no doubt. But it is all up to the Ukrainian people. We all have to realise, empty promises lead to nothing.

During my lost elections, I promised [nothing] except toil, sweat and blood! I won the elections. I’ve already paid a huge political price for these tough and painful reforms. But my aim is even to sacrifice my political approval rating for the sake of the future. We are building the [foundation] for a new country.

The real problem we are facing is a PR problem. Or an information warfare problem. As we start to “de-tycoonise” the economy, as I call it, the government is under severe attack from [certain] tycoons . . . using their TV channels. They are saying it is better to go back to Russia, they are playing with this post-Soviet mentality.

FT: Can you achieve de-oligarchisation without it becoming just another redistribution of assets?

AY: It’s important to take lessons from history. Monopoly in politics, or monopoly in business or economy, leads to failed political leaders or insolvent business. It has to be in the interests of Ukrainian oligarchs to play by market-based rules. The more competitive Ukraine’s economy is, the higher the price of their assets will be. And if one believes that they can take the assets of one oligarch and distribute to another, he’s entirely wrong. Because he will face the same end as previous political dictators and economic monopolists already faced.

FT: There’s a reported Russian build-up in east Ukraine. How concerned are you that a new offensive is being prepared?

AY: The intel says that more than 40,000 military boots are on the ground in eastern Ukraine, including from 7,000 to 14,000 regular Russian forces. You know that we arrested two GRU [Russian military intelligence] special soldiers just a few days ago. And they testified and opened up their names, and that they are real Russian soldiers that were deployed to Ukraine to fight against the Ukrainian military. Hundreds of tanks, heavy artillery, howitzers, and even multiple rocket launchers. This is a huge, Russian-led army.

What is the reason for Putin to send all these troops into eastern Ukraine? They are prepared for the next offensive, no doubt. All depends on the timetable. I don’t expect that he will go before June 29, before the EU has to decide on rolling over sanctions. But if these military guerrillas do not fight with the Ukrainian army, they fight with each other. And the Russians will do everything to avoid this. So the chances for a new offensive are very, very high.

FT: Why did Ukraine’s parliament add conditions to decentralisation of power that were not in the Minsk II agreement, saying elections must be held first? That risks giving a window to Russia to say Ukraine is not complying.

AY: This is the blame game Russia wanted to launch. But the Minsk deal clearly says we are to hold free and fair municipal elections in Donetsk and Lugansk on the basis of Ukrainian legislation. So we asked ODIHR [the OSCE’s Office of Democratic Institutions and Human Rights] to confirm whether the criteria that exist in Donetsk and Lugansk meet the standards of OSCE and ODIHR. So we are ready to hold free and fair elections. But there is no chance to hold these kind of elections under the barrel of the Russian gun. So, it’s clearly in line with the Minsk deal: pull back your forces first, secure the area. Create the preconditions for free and fair elections. We will hold elections, and the new, legitimate government will get the special status. Otherwise we cannot grant this special status to terrorists.

We want to talk to legitimately elected officials from Donetsk and Lugansk.

This phasing is not explicitly in the Minsk II agreement. There’s now a stand-off with each side saying its interpretation is right . . .

It depends on Russia, which can easily fix it. The quicker the better. If they pull back their forces, if they just start to implement the deal. Because [the] key real precondition is to have the ceasefire on the ground. I always say, look, if this is the ceasefire, explain to me what fire means. We have lost about 90 Ukrainian soldiers after the ceasefire was put in place, more than 400 injured. The next precondition is to pull back forces, pull back heavy artillery. You know what they did? They pulled them back, into the kindergartens, garages and supermarkets. And the same issue is to secure the border. We do understand that Russia is not eager to implement this crucial part of the Minsk deal.

FT: The parliamentary commission was set up to investigate allegations of embezzlement by the government, including yourself, of more than $300m. Can you respond?

AY: This was a mud-slinging campaign against the government. Two weeks after the government started an investigation against the former chief of the general accounting office, he went public to the parliament, even supported by some friends in the coalition, with an accusation that the government has stolen 7.5bn hryvnias. And probably it is true. But there is only one problem, that the figures related to the period of President Yanukovich. And this is the agency that controls state-owned enterprises. And last Friday, when the rivals of the government who chaired this governmental commission reported to the parliament, you can get the quote, they said: Yatseniuk has nothing to do with this, and the government has nothing to do with this. Even despite the fact that they are my rivals. And the general prosecutor’s office said there is not any criminal wrongdoing on the side of the government.

What they are doing, they want to topple the government, and me personally. And the former chief of staff of President Yanukovich, he was yesterday very vocal, saying we want to have snap elections. The same happened 10 years ago, with current president Poroshenko — similar case: allegations with no grounds, he was dismissed from his post, after the Orange revolution, September 2005.

FT: How are your relations with President Poroshenko? There are rumours of friction.

AY: That’s normal. But we will never allow to have a copycat case of relations between [former president Viktor] Yushchenko and [former prime minister] Yulia Tymoshenko. We have proven this already. There are a number of constitutional troubles between the relations of the institute of the president, and the executive. But we have weathered a number of storms. I think the Americans say, we hang together, or we hang separately. The two of us realise that. And we are obliged to act together. We are not allowed to repeat [2005]. This is the last chance for my country.

You can read the interview here.