You're reading: Demise of euro could be as bad as ‘collapse of USSR’ for Ukraine

How much would a euro-dollar collapse cost?

When heavy-metal band Metallica moves the dates of its Europe tour forward for fear of a euro zone collapse, you know the single currency is in a bad shape.

Yet Ukraine is no island, and trouble in Europe could spell domestic woes.

The world’s eyes are focused on European Union leaders as they continue to negotiate the fate of the euro.

What started as a bad case of profligacy and book-cooking in Greece has spread throughout the single currency union, and could easily devastate the entire region.

The EU accounts for a third of Ukrainian exports.

The domestic economy is dependent on capital flows, tourists, and workers sending money back home from the EU.

A euro zone collapse, once unthinkable, is now a distinct possibility. Jacques Attali, the top economic adviser to French President Nicholas Sarkozy, warned that “there is a chance out of two that the euro will disappear.”

Bookmakers, who have financial skin in the game, are even more pessimistic. William Hill, one of the largest bookmakers in the United Kingdom, is now offering three-to-one odds that the euro will cease to exist by the end of 2012.

Meanwhile, the rating agency Standard & Poor’s shocked investors by declaring, just hours after France and Germany announced plans of treaty change, that it put 15 out of 17 euro zone countries under a negative credit watch.

The unprecedented move includes the Netherlands and Germany, previously seen as safe havens.

So far Ukraine has been holding up fairly strong. Even if the current volatile situation persists, Ukraine will only face a slowdown of gross domestic product growth to 3 percent in 2012, according to Anastasia Golovach, a Kyiv-based analyst for investment bank Renaissance Capital.

However, a euro breakup, the expert warned, could cut Ukraine’s central bank reserves, which are already under pressure. Further drops would add urgency to cooperation with the International Monetary Fund and unlocking billion-dollar loans from it.

Some believe that Ukraine will be sheltered from global turmoil. Alexander Pecherytsyn, head of research at ING in Ukraine, said the direct impact would be rather small.

According to him, a combination of lower vulnerability of the banking sector, the “Euro 2012 effect,” and better economic relations with Russia would limit the damage. Thus, GDP growth in 2012 could simply cool down from around 3 percent to 1.5-1.7 percent.

But others are not as upbeat. Dmytro Boyarchuk, head of CASE Ukraine, an economic think tank, explained that a euro collapse would likely result in a double-digit GDP drop in Ukraine. Given that Russia is also dependent on exports to the EU, Ukraine would lose its key markets and main earnings.

According to Boyarchuk, the hrvynia could suffer even more than the euro, alongside a liquidity crisis in the banking sector and a possible technical default on sovereign debt.

“In short, I think for Ukraine a collapse of the euro will have a similar effect to the collapse of the USSR,” he said.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].