Last updated: February 16, 2009 9:46 am

Ukraine on the edge

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Ukraine’s name, by some accounts, means “at the edge” – which is where its economy finds itself today. Austria’s finance minister warned last week of the risk of an economic “catastrophe” in the 46m-strong country triggering a “domino effect” of problems further west. Ukraine’s finance minister, meanwhile, resigned amid differences over budgetary policy that delayed the second tranche of a $16.4bn International Monetary Fund loan, due this weekend. Fitch downgraded the country’s credit ratings to B. Some forecasters say the economy could contract by 10 per cent this year; the national currency has slid 40 per cent against the dollar. Spreads on Ukraine’s credit default swaps are more than 3,000 basis points.

Orange squashed

Demand and prices have plummeted for steel, previously 40 per cent of Ukraine’s exports, while industry faces higher prices for Russian gas. Cheap foreign financing has dried up. The woes are compounded by the fact that the president and prime minister, leaders of the 2004 Orange Revolution, spend more time mudslinging than working together on coherent anti-crisis policies.

The main sticking point over the International Monetary Fund loan is a projected 3 per cent budget deficit this year, when the IMF’s conditions stipulated a balanced budget. But scope remains for a compromise to get the IMF programme back on track. If so, notes Dresdner Kleinwort, with public sector gross external financing needs of $3bn this year, the country should still be able to service its sovereign debt, which accounts for only about a fifth of its total $105bn external government and corporate debt.

But with gross financing needs of about $45bn for the economy as a whole, mounting corporate and bank defaults are inevitable – as in Russia. Russia, however, has greater resources for selective corporate bail-outs. And its less dire economic position gives Moscow potential to reassert influence. Russia is one of several partners from which Ukraine is seeking $5bn of loans to bridge its budget gap.

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