You're reading: Crisis: From Political To Economic

There’s another reason to hope Ukraine’s political crisis ends soon: The health of the economy depends on it.

Russia’s $15 billion bailout, announced on Dec. 17, looked promising until Russian President Vladimir Putin suspended the lending at $3 billion, pending formation of a Kremlin-friendly government to replace Mykola Azarov, who resigned as prime minister on Jan. 28. To reinforce the message to Ukrainian President Viktor Yanukovych, Russia has held up Ukrainian exports at the border again.

But while the nation’s currency has sunk to a five-year low, ending at Hr. 8.95/$1 on Feb. 6, the expectation is that the hryvnia will not crash and that the government will not default on its debts.
But confidence in the markets is clearly eroding as the anti-government EuroMaidan protests enter their 79th day on Feb. 7 with no political solution in sight.

With the national debt reaching 40.5 percent of gross domestic product in 2013, the highest in a decade, and credit ratings close to default levels, Ukraine is having trouble borrowing money.
On Jan. 4, the market ignored five of six bonds that the government offered.

Yanukovych thus far has not found a way to solve the nation’s political or economic problems, ultimately choosing to rely on Russia. He is set to meet with Putin again on Feb. 7 on the sidelines of the opening ceremony of the Winter Olympic Games in Sochi. If the talks don’t go to Putin’s liking, Ukraine could be left without any short-term bailout.

Moreover, the central bank has limited ability to prop up the hryvnia, which reached 9.4 on Feb. 5. Foreign reserves were a meager $17.7 billion at the end of January, according to Standard Bank, an indication that Ukraine burned through Russia’s $3 billion tranche in just one month.
Thus far, Ukraine’s leaders have shown no willingness to meet the International Monetary Fund’s conditions for more lending.

“I might be unduly pessimistic, but I see Ukraine heading straight for a financial crisis that could have not just regional, but global implications,” Mark Adomanis, a contributor to Forbes, said in interview to the Kyiv Post. “Unless the political crisis is decisively resolved within the next month, I think you’re going to see some combination of a messy devaluation and a default on foreign debts.”

Ukraine also needs to cover an estimated Hr 59.5 billion budget deficit this year, while Oleksandr Parashchiy, head research at Concorde Capital, predicts the actual deficit could be Hr 25 billion higher.
Adomanis said that Yanukovych’s Dec. 17 deal with Putin – which included a 33 percent gas price discount besides the $15 billion for purchase of Ukrainian government eurobonds – is “not a bad deal (for Russia) if Ukraine is able to pay the money back. However, as should be clear from the chaotic and near-revolutionary situation in Kyiv, that’s a pretty big ‘if.’”

Further aid from Russia may be conditioned on Yanukovych ordering police to forcefully disburse protesters, as Putin aide Sergey Glazyev advocated in an interview with Kommersant newspaper this week.

An IMF loan would come with a 4 percent interest rate, said former Deputy Prime Minister Yuriy Boyko. But IMF fiscal requirements are rigorous, including: hryvnia exchange rate flexibility, household gas price increases and reduction of state subsidies.

Opposition leader Arseniy Yatsenyuk,  has asked the IMF for $15 billion in financial aid.
European Commission President Jose Manuel Barroso said that Western powers are working on a financial plan for Ukraine, but it is not likely to come quickly.
Meanwhile, the global economic situation isn’t too friendly for Ukraine.

World grain prices have been dropping lately, due to record harvests in 2013. Foreign investment into the Ukrainian economy will likely shrink in coming months. Reflecting the political instability, yields on the country’s 2014 eurobonds kept growing over the past month from 4.7 percent to 12.7 percent as their prices went down. Ukraine’s credit default swap spread reached 981 basis points on Feb. 4 – Europe’s highest – with an 11.2 percent probability of default, according to Deutsche Bank.

Yet Global Templeton – a multibillion-dollar investment fund that holds 40 percent of Ukrainian eurobonds – remains optimistic. Having acquired Ukrainian securities at minimum prices before the deal with Russia, it aims to make a profit by selling bonds after their prices increase or by holding them to maturity.
Adnan Abdel-Razzak, the fund’s communication manager, drew parallels between Ukraine and Ireland, whose high risks in 2011 scared away investors, while Global Templeton took an early position in the country which proved to be advantageous.

“The group has the size to take what may seem like large stakes in a single country, and hold those positions for as long as needed, given how small these positions are relative to the larger diversified portfolios,” added Abdel-Razzak.

Whoever becomes Ukraine’s next president or prime minister will have to confront the weakening position. For now, that’s Yanukovych and Acting Prime Minister Serhiy Arbuzov.
“It’s just our own problem, as people in the government and local city councils just want to make profits,” laments Romana Yurovych, Ukrainian-Czech real estate agency director.

Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected]. Kyiv Post staff writer Olena Goncharova contributed reporting to this story, she can be reached at [email protected].