Ukraine faces the looming prospect of default on its massive foreign debt in 1999 if it does not receive large quantities of new loans in the near future, a Jan. 22 Finance Ministry memo warned.
And no one, it seems, thinks Ukraine stands much of a chance at securing those loans.
According to the Finance Ministry, Ukraine needs to raise $2.2 billion in 1999 in order to keep its economy stable.
'Our report computes how much money Ukraine needs for 1999 and where we hope to get it,' said Finance Ministry spokeswoman Irina Dozerkhova. 'The arithmetic is quite clear.'
There are different estimates of just how much foreign debt Ukraine is scheduled to service this year, but all estimates put that total well over $1 billion. The Finance Ministry statement put its 1999 external payments at $1.17 billion. According to Wood and Company figures, those payments are higher (see chart, page 4).
The state budget, which was signed into law by President Leonid Kuchma on Jan. 26, plans for a deficit of $1.6 billion. It also calls for covering about half of that through external sources.
The new Finance Ministry plan calls for raising a whole lot more. To do that, Finance Minister Ihor Mityukov is counting first and foremost on $520 million from the International Monetary Fund.
The World Bank is expected to chip in an additional $410 million. The government also expects 1999 loans from the European Union, Japan and foreign capital markets to Ukraine at $180 million, $35 million and $102.7 million, respectively.
Parliament, which has threatened to skewer new international agreements of any sort – including foreign loans – must approve any new loans not called for in the 1999 budget (the planned World Bank, Japanese, EU and foreign capital loans are expected in the 1999 budget, according to an Interfax report).
But the leftist-leaning parliament is hardly the biggest obstacle standing in the way of financial security for Ukraine.
For the financing plan to work, Ukraine's prospective lenders – especially the IMF – must step up to the plate with some cash for Ukraine. Right now, the IMF is threatening to play hardball.
'You are not going to be able to borrow money in large amounts unless you reform your economy,' said Mohammed Shadman-Valavi, director of the IMF's most recent mission to Ukraine. 'Not from us [the IMF], not from anyone else.'
The IMF left town on Jan. 26 without announcing whether it would grant Ukraine the next installment of a $2.2 billion Extended Fund Facility loan negotiated last September.
The World Bank, which is supposed to be the second most generous source of financing for Ukraine this year, made the IMF's lukewarm commitment appear rosy by comparison.
'We are not going to loan money [to Ukraine] with our eyes closed,' said Grigori Jezrejczak, head of the World Bank's mission in Ukraine, on Jan. 14. 'Unless we see a real project with a real chance of its being repaid … we have other countries we can lend the money to.'
In the absence of loans from the big international lenders, private industry is unlikely to fill the void – as even the Finance Ministry admits.
'Raising loans on external capital markets can only be expected at the end of 1999 and on the condition of successful cooperation with international financial organizations, including the IMF,' Reuters reported Mitiukov as saying. Some in private industry are even more pessimistic.
'I don't think it's a realistic plan,' said Michael Karpilovsky, vice president of Alfa Capital in Kyiv. 'They're [the government] hoping that all these things will come through. I don't think that all these agencies will be as willing to part with their money as they plan.'
If foreigners don't cough up the requisite cash in the necessary volumes, what, then, does Ukraine's macroeconomic future hold?
The Finance Ministry statement offered this prediction: 'If not enough foreign credits are drawn, this will lead to a considerable load on the foreign-currency reserves, and as a result, a drop in the hryvna rate, and destabilization on the financial market.' Independent analysts were equally dour, if more specific.
'If Ukraine does not get the money it needs,' said Ivan Kompan, Wood & Company Kyiv's head of research. 'Then you have no choice but to print money.'
That is a tactic the Ukrainian government has grown quite accustomed to in the days since independence. In 1994 and 1995, Ukraine attempted to balance the state's budget with issues of billions of karbovanets, Ukraine's former currency. The populace soon came to know the karbovanets as 'fantiki' ('play money').
If the government did resort to printing money, it would solve Ukraine's problem of chronic state debt to pensioners and government workers.
But if Ukraine chooses to print its way out of debt, then full-scale default on its foreign obligations would automatically follow, experts agreed.
It would follow that even the strongest industrial concerns, which are the only source of real revenue to the government, would lose what little ability they have presently to trade their goods – internally or externally. That, in turn, would put tens of thousands out of work and choke off foreign investment indefinitely.
However, Ukraine has a few options to fill the hard-currency deficit – if it chooses to exploit them.
'The main source of money [for Ukraine] is foreign investors,' Kompan said.
To entice those foreign investors, Ukraine might consider selling off a state property that would interest them.
Karpilovsky said the most likely candidate for such an offering by the state would be state telecoms giant Ukrtelecom.
'I don't have any indications [that an Ukrtelekom sale will take place, but] it's a logical step,' he said. 'If there are no alternatives, then it's better to sell part of state-owned companies than default.'
Privatizing 20 to 25 percent of Ukrtelekom could generate $500 to $1 billion, according to different estimates. But with a presidential election coming up and with parliament often dead-set against privatization, that will be no easy chore, Karpilovsky cautioned.
