KIEV (Reuters) - Ukrainian Finance Minister Oleksandr Danylyuk said on Wednesday he had been asked to support “political corruption” or to quit after Prime Minister Volodymyr Groysman formally asked parliament to sack him.

Ukraine's finance minister Oleksandr Danylyuk speaks to a Reuters journalist during an interview in London, Britain July 5, 2017. REUTERS/Hannah McKay

The two men have been at loggerheads since Groysman rejected Danylyuk’s candidate for deputy minister in charge of tax policy. Danylyuk then accused Groysman of favouring candidates chosen by the inner circle of President Petro Poroshenko and wrote a letter airing his grievances to the G7 group of nations.

The timing of the spat is awkward for Kiev, which is trying to persuade its international lenders to release another tranche under a stalled $17.5 billion aid programme. The move to sack Danylyuk drove Ukrainian debt prices lower on Wednesday.

Ukraine’s parliament is due to vote on Thursday on the creation of a special anti-corruption court, a key condition for the International Monetary Fund to approve more funding.

Danylyuk, Kiev’s point man in the IMF talks, said that he had come under huge political pressure to support a spending programme for socio-economic development in Ukraine’s regions.

“Translated into human language it is the distribution of money to the projects of ... lawmakers,” he said in a statement. “This - political corruption - is known by people as ‘buckwheat’”.

“Buckwheat” refers to the practice of bribing voters with food or by other means during an election campaign. Ukraine holds presidential and parliamentary elections in 2019.

Danylyuk has also accused Groysman of blocking his attempts to reform Ukraine’s tax service.

“This will not help our cooperation with the IMF,” said Serhiy Fursa, an analyst at Ukrainian investment bank Dragon Capital, after the news broke of Danylyuk’s likely exit.

“The resignation of Danylyuk will have the most important impact on the country’s ability to issue Eurobonds and on the market’s readiness to accept these Eurobonds and to the budget deficit in 2018-2019,” he added.

“DISTORTED INFORMATION”

Groysman said Danylyuk’s actions may have hurt Ukraine’s negotiations with the European Union, from which it is also seeking more economic aid.

“The dissemination of distorted information among our international partners on the eve of important negotiations with the EU could jeopardise their results,” Groysman wrote on Facebook.

With reforms slowing down, Ukraine has not received money from the IMF since April 2017, which it needs to manage a rising sovereign debt burden.

Ukraine must repay $15 billion of debt between now and the end of 2020, the central bank says, and may struggle to keep its budget deficit to the IMF’s 2.5 percent target.

Timothy Ash, an economist at Bluebay Asset Management, said Groysman’s move to sack his finance minister was badly timed ahead of the vote on the anti-corruption court (ACC).

“Remember the ACC passage is key to getting IMF lending back on track,” he wrote, adding he was sure many lawmakers would be glad to vote out of office the “reform-minded” finance minister.

The European Bank for Reconstruction and Development (EBRD), in a statement to Reuters, urged Kiev to keep cooperating with the IMF.

But it is unclear whether the ACC law, after around 2,000 amendments, will pass muster with the IMF in its current form.

The law is meant to ringfence court decisions from political pressure or bribery in Ukraine, where entrenched corruption remains a deterrent to foreign investors. Trusted international organisations will help select judges.

The government has also yet to fulfill other IMF conditions such as raising gas prices and has pushed back on other reforms, such as lifting a ban on land sales.

Ukraine’s economy is still recovering from a steep recession following Russia’s annexation of Crimea in 2014 and the outbreak of separatist fighting in the industrial Donbass region.