Ukrainian leaders doing battle for the presidency in the coming weeks will face an even more daunting task once in power -- a shattered economy, depleted state coffers and the prospect of default.
In short, they will have to deal with a year worse than 2009 — when analysts said Ukraine’s bankruptcy was imminent.
It wasn’t — despite the suspension of a $16.4 billion bailout from the International Monetary Fund — but the economy shrank by up to 15 percent, one of the worst in Europe.
Lying on the doorstep of the European Union, the nation of 46 million that is among the world’s top ten providers of grain and steel, will hold its first presidential election since the 2004 "Orange" Revolution promised Western-style reforms.
Optimists hope the Jan. 17 election will end the incessant squabbling that has plagued Ukraine since the 2004 protests against electoral fraud and allow politicians to deal with a deep economic recession. But it may not be as simple as that.
Potential challenges to election results, jostling for government positions and a possible snap parliamentary poll all mean the authorities may only start focusing on the economy in April at the earliest and perhaps not until after the summer.
Until then, the export-driven economy may grow but through the statistical anomaly of last year’s dismal performance as comparison and dependent on a global commodity rally.
"No matter who wins the election, the new president will face a heavy task," said analysts at Expert Rating, a Ukrainian ratings agency.
The authorities would have to take control of the stretched state finances, hammered by overspending in the election year, depleted of tax revenues and still missing the IMF’s billions.
"One solution to the prevailing situation would be a declaration of state default on (domestic) debt and its subsequent restructuring," Expert Rating continued.
NO MATTER WHO WINS…
President Viktor Yushchenko, father of the "Orange" revolution, will not be re-elected, polls in December showed.
Viktor Yanukovich, the loser in the Orange revolution, and Prime Minister Yulia Tymoshenko, former Yushchenko ally turned rival, are expected to pass to a second round of voting on Feb. 7.
Few care to guess the winner — a good sign of entrenched democracy in a former Soviet republic, according to commentators — even though Yanukovich was well ahead of Tymoshenko.
The two could not differ more in style — she, a well-heeled former gas magnate turned social crusader and he, a rough-hewn career politician with close ties to the industrial oligarchs. But for those studying the economy, the differences stop there.
"Overall, we think it is largely unimportant who wins, as there is no serious ideological competition between them — both are rather opportunistic," brokerage Renaissance Capital said.
Whoever wins, most expect Central Bank Chairman Volodymyr Stelmakh to go, for his successor to be subject to horse trading and then to play a key role by agreeing, or not, to bankroll government finances, which will be totally squeezed by April.
…FOLLOW THE MONEY
The drop in steel and chemical exports affected not just business and employment but government tax revenues and the hryvnia currency through a dramatic fall in dollar earnings.
The hryvnia has traded at almost half its 2008 peak of 4.5 per dollar for most of this year. Ukrainians are unable to pay back dollar loans at such a rate, shaking the banking sector to the core.
The government has found creative ways to pay debts, wages and gas bills to Russia — vital to avoid rows similar to one in January 2009 when Moscow eventually cut supplies to Europe.
Analysts and officials say hundreds of millions of dollars in gas bills and other obligations were paid through the issue of expensive short-term T-bills bought by the central bank with printed money.
"Despite the economy’s slide into a severe recession in the fourth quarter of 2008, the authorities failed to adjust policy accordingly," Raiffeisen Bank analyst Dmitry Sologoub said.
"As a result, a full-scale fiscal disaster is under way," he said, adding the bank estimates the 2009 budget gap at 9-10 percent, against 1.3 percent in 2008.
Analysts are in particular worried about 3.7 billion hryvnia ($463 million) worth of T-bills maturing in April alone.
Some note the central bank is a majority owner of the debt — compared to owning less than 1 percent at the start of 2008, and so any decision to reschedule repayment would be easy to reach.
This is another reason why the choice of Stelmakh’s successor will be important. Local media have reported that the central bank is unhappy to continue to finance the government in such a way, fearing heavy pressure on the hryvnia’s strength.
Veteran Stelmakh has held his position beyond the retirement age of 60, and a new president will name his successor, to be approved by parliament. Commentators expect the position, which has been a good stepping stone to political careers to be subject to political wheeling-and-dealing.
Meanwhile, several analysts think a Eurobond issue is on the cards early this year if the IMF fails to come back quickly, though others argue that no one would want to invest in Ukraine before the political dust settles. (Editing by Kenneth Barry)
