It
is interesting that the foreign institutional investor community is probably
also increasingly lined up (or at least looking to position that way) with the
view that ultimately President Viktor Yanukovych’s administration will sign on
the dotted line come Vilnius.
This
does all then beg the question what if we wake up on November 30 without any
signatures on the free trade agreement – which is now only likely to result
from the failure to reach a resolution over the issue of Tymoshenko, i.e. her
flight to Germany for medical treatment.
My
sense herein is that this will leave Ukraine, its markets and economy brutally
exposed. The macroeconomic story is already fragile, with twin deficits,
dwindling foreign currency and fiscal reserves, already limited and
prohibitively expensive market access, and an economy in recession and with key
industries such as metals struggling against the backdrop of difficult global
market conditions and politically inspired disruption to trade with Russia. The
danger on the back of disappointment at Vilnius is that rating agencies
continue to downgrade Ukraine’s credit ratings, all but closing Ukrainian
issuers out of markets. Institutional investors are then likely to vote with
their feet, risking a follow thru in terms of domestic market sentiment, with a
risk to the hryvnia currency, debt sustainability, the country’s banks and with
a negative feed thru back to the economy.
I
guess the temptation is to think that after failing to secure a signature at
Vilnius this would see Yanukovych’s taking the first flight to Moscow, not Kyiv,
come November 30, to try and secure a back up deal with Russia.
However,
after all the negative rhetoric in Russo-Ukrainian relations over the past few
weeks, and after by then having had his hand called at Vilnius by the EU,
Yanukovych’s position might well appear much weakened in prospective
negotiations with Moscow. Now perhaps Putin will be magnanimous in victory, and
treat Yanukovych as the prodigal son, or “little brother,” and open
the check book to cover Ukraine’s financing needs – with Putin perhaps saying
“I told you those Europeans could not be trusted, while we have a Slavic
bond.”
But
while Russia might well provide significant financing, and cheap gas, I sense
that Putin will be eager to seize the opportunity and to lock Ukraine
irreversibly into joining the CIS Customs Union as the price for any such
bailout. And yet for any Ukrainian political leader I sense this is no longer
deliverable to the population, or more importantly the business elite. Indeed,
for Yanukovych, having sold the vision of European integration so heavily in
recent weeks, it will be a huge political climb down now to go cap in hand to
Moscow. Somehow I just cannot see this happening, as it would make it virtually
impossible for him to win the 2015 election without risking a repeat of the
Orange revolution – something which I sense the administration is determined to
avoid at all cost.
So
what does the above all mean?
Well
I suspect even a back up deal with Moscow is now difficult, indeed, nigh on
impossible to deliver. Meanwhile, the risk of a subsequent brutal market
reaction would mean that even the chances of a muddle through scenario
succeeding are rapidly diminishing. This would suggest that the administration
is still more likely to bite the bullet come Vilnius. That is, if it
understands and accepts the potential market consequences of not now signing up
to the free trade agreement at Vilnius. In effect, with no plan B, the question
is it actually Vilnius or bust? If the administration sees the risks, it will
surely do the deal at Vilnius.
Timothy Ash is head of
emerging market research at the London office of Standard Bank.
