You're reading: Borrowing from Russia to pay Russia

The nation’s finances are still in critical condition despite the central bank letting the hryvnia float on Feb. 7 to ease pressure on its quickly dwindling foreign currency reserves. By year-end, Ukraine has to repay approximately $9 billion of foreign currency debt, while the central bank’s reserves are at $17.8 billion, its lowest level since 2006, after in January making $1.1 billion in debt repayments and spending $1.7 on currency interventions in the interbank market.

Additionally, since the start of February, the
corresponding accounts banks have with the central bank decreased by $210
million – this figure allows to estimate amount of regulator’s interventions this month.

On Feb. 11 the hryvnia slipped in value reaching 8.63 to
the dollar, after ending at 8.5 a day earlier. The National Bank’s declared
willingness to let market forces define the rate does not mean that it and its
interventions won’t be a part of these market forces. Consequently, the regulator
needs more money.

Moreover, this week government has to transfer $359
million to the International Monetary Fund, while next month it has to service
$191 million in debt. More challenging will be in the end of April when Ukraine’s
payment schedule includes $1 billion to the IMF.

The situation would not be that critical if Russia would
buy an additional $3 billion of eurobonds from Ukraine as part of the $15
billion bailout package the two sides inked on Dec. 17. However, the agreement
did not have strong binding power, Vasyl Yurchyshyn, director of economic
programs at Razumkov Center, told the Kyiv Post.

After Ukraine issued the initial $3 billion of governmental
securities, which were purchased by Russia in December, the latter decided to
wait until a new government is installed on Hrushevskoho Street, the same
street that has been making headlines in world news due to clashes between riot
police and anti-government protesters. Russia’s suspension of the bailout is rational,
said Yurchyshyn. “Show us the government and we’ll give you money,” he said.

Former Prime Minister Mykola Azarov, who never hid his
pro-Russian views, resigned on Jan. 28. President Viktor Yanukovych offered
Arseniy Yatsenyuk, a leading opposition lawmaker and head of Batkivshchyna’s
faction in parliament, to fill the vacant position, but he refused.

Currently Serhiy Arbuzov is the acting prime minister,
a person considered part of Yanukovych’s family circle.

However, seeing who fills the seats in the new Cabinet
of Ministers is not the only Russian demand. Russian Finance Minister Anton
Siluanov stated that Ukraine will receive the next installment of the bailout
package after it pays its $3.3 billion natural gas bill, which may keep growing
in the future. “We are waiting for Ukraine to fulfill its obligations regarding
the gas payments. It is not a small sum. We would like both sides to fulfill their
obligations,” said Siluanov.

If Ukraine starts paying Russia for gas using Russian
money, it will ultimately enter into a vicious circle that will lead to Moscow
fully engaging in Ukrainian policy, said Yurchyshyn of Razumkov Center.

Given the heavy-handed politics contained in the Russian
borrowing conditions – the bailout package is also contingent on quarterly
reviews – the Ukrainian government now has more reasons to contact the IMF or
the European Union and ask for an alternative financial assistance package.

It already is meeting a key IMF requirement by letting
the hryvnia breathe in a wider trading corridor. Other requirements include
raising household gas tariffs and reducing state subsidies.

“Technically a new IMF lending program could be sealed
in several weeks. Just like in 2008,” Olena Bilan, analyst at the Dragon
Capital investment bank, told the Kyiv Post.

All three major credit worthiness rating agencies – S&P,
Moody’s and Fitch – have recently downgraded Ukraine’s long-term foreign currency
issuer rating in the area of a high default probability. The message is clear:
no cheap loans for Ukraine in the nearest future, the risk is too big.

Kyiv
Post associate business editor Ivan Verstyuk can be reached at [email protected]