JOHN MARONE, KYIV
UKRAINIAN LEADERS TURN THEIR BACKS ON FINANCIAL CRISIS
Ukraine is perceived by many to be one of the most vulnerable cases on the world map of imminent financial ruin.
Along with Eastern Europe's other so-called emerging economies, the former Soviet backwater has been posting impressive rates of growth over the past several years. Combined with Kyiv's fiscal responsibility and tight budgets, this growth put the Ukrainian economy on the radar screen of Western investors. Now all that has been undone, and everyone is hoping that the International Monetary Fund will come to Ukraine's rescue.
Last week, the hryvnia continued to slump, hitting an all-time low of 5.9 to the US dollar on October 8. As early as the summer, the hryvnia had been selling at 4.5 to the US dollar. But then came the country's spat with Russia over the latter's invasion of nearby Georgia. The National Bank intervened to prop up the hryvnia, but at the cost of depleting its hard currency reserves by $2.9 billion to $34.5 billion as of October 20.
Even before the Georgian war, the subprime mortgage crisis that began last year in the U.S.A. had been increasing risk aversion by foreign investors to places like Ukraine as well as Hungary and other financial upstarts.
In addition, Ukraine has been quietly plagued by a burgeoning current account deficit, which went from 4.2 percent of GDP in 2007 to 7.9 percent of GDP in the first half of this year. Analysts estimate that the figure could exceed 10 percent by year's end. Not only has global demand for Ukraine's chief export, steel, plummeted, but there is little reason to expect that surly Russia won't follow through on its threats to double the price of its gas exports from the current $179 per cubic meter. Then there is the nagging problem of inflation, part of an international trend caused by markets for food and fuel, but aggravated in Ukraine to the tune of 31 percent in May due to generous government social spending.
Alongside the hryvnia, the country's principal exchange, the PFTS index, has also taken a nosedive, falling by more than 75 percent since the beginning of the year. Most worrying, however, is the condition of Ukraine's wobbly banks. The international rating agency Moody's recently downgraded ratings on 12 Ukrainian banks.
With global lending drying up, not only banks, but private companies and even the government may go into default. Ukraine's foreign-currency denominated bonds are currently rated junk level by Moody's, but still higher than the rating for local-currency debt. As a result, the government has been forced to put off its planned sale of Eurobonds, while the International Monetary Fund (IMF) has slashed its 2008 predictions of growth for Ukraine from 6.4 percent to 2.5 percent.
The IMF is, nevertheless, already on the ground in Kyiv to negotiate up to $15 billion in financial aid.
Could this be the sign of hope so desperately invoked by foreign analysts and local market players alike?
It could, but that’s all of secondary importance in the Ukrainian universe. Western leaders declare financial bailouts like general amnesties, self-satisfied that they have alleviated the economic worries of their constituents.
Ukrainian leaders don’t want the public’s fear to subside, but rather exploit the mounting anxiety and tension in real time to score political points against each other. Why blame one’s opponent for financial incompetence after the crisis has ended when you can hurt his support base using the crisis.
Ukrainian Prime Minister Yulia Tymoshenko, whom polls currently give the best chance of winning the upcoming presidential election, has tried to play up the IMF mission.
"We have practically completed our negotiations with the IMF," she announced recently. "We have got 90 percent agreement on a package of measures that are needed.”
Unfortunately for her, an agreement with the IMF is dependent on the country’s defunct parliament passing a few anti-crisis measures.
On Sunday, October 19, the premier appeared on national television to urge lawmakers from across the political spectrum to join in an anti-crisis coalition.
When lawmakers did meet during the following week, members of Tymoshenko’s BYuT faction blocked the rostrum to prevent passage of legislation that would also facilitate snap elections called by President Viktor Yushchenko.
“I have believed and continue to believe that early elections during a global crisis would be a crime against the state,” she said on October 22. “Our political team will not support a single draft law related to early elections.”
President Yushchenko, whose low rating in opinion polls have not inhibited his desire to seek a second term, did not suspend his recent decree to dismiss parliament in order to help Ms. Tymoshenko save the country from financial ruin.
He did so with the intent of forcing the BYuT faction to pass early-election legislation laced in a package together with anti-crisis bills – or risk looking like a spoiled sport.
For her part, the premier offered the chance of a renewed coalition with pro-presidential lawmakers with the same duplicitous intentions.
Of course, neither politician fell for the other’s trap, but that’s little consolation for Ukrainians who are prohibited from making early withdrawals of a rapidly devaluing currency from jittery banks.
Political instability isn’t behind the failing banks, plummeting stock market and rising inflation, but it is certainly hampering attempts at a resolution.
Word has it that the IMF is primarily interested in a balanced budget, higher interest rates and a more flexible hryvnia as conditions for a bailout.
Ukraine’s self interested political leaders may very well agree to meet these conditions, at the last minute and unexpectedly for dramatic effect.
Judging from their public statements, the president and premier seem to appear on many of the same relief measures such as less spending, more privatization and greater support for banks.
But as long as there is an opportunity to pummel each other in the pubic eye, to bully their opponents into yielding political ground, the country’s financial crisis will serve as the backdrop rather than the center stage of the country’s political life.
John Marone, a columnist of Eurasian Home website, Kyiv, Ukraine
October 27, 2008
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