Ukraine’s financial timebomb set to explode
Ukraine EU Russia
UKRAINE’S viability as a sovereign state is in doubt. The prospect of a default by Kiev, and the spectre of a European Union bailout, are alarming governments under pressure from austerity, writes World Review expert Professor Stefan Hedlund.
Greece believes its needs are greater. Slovakia regards Ukraine as a US-Russia conflict. And German taxpayers are wary of being left with the bill.
Fears that Ukraine would be dismembered and that its economy would collapse have not fully materialised. Crimea is lost but war in the Donbass has been contained. The economy is in a sorry state but a sovereign default remains weeks off.
The Kremlin’s worst nightmare is that Ukraine might implement democratic reforms and a market economy.
That is why Russia has focussed on making Ukraine dependent on its goodwill. War has been linked with economic threats.
The West’s support for Ukraine is a victim of wishful thinking. A defining moment came on April 30, 2014, when the International Monetary Fund approved a US$17 billion credit package. With support from the EU and the World Bank, the total reached US$27 billion.
It was thought sufficient to put Ukraine’s economy on the road to recovery. It was not to be.
Ukraine’s third quarter GDP fell 5.1 per cent compared with the same period in 2013, following declines of 1.1 per cent in the first quarter and 4.7 per cent in the second.
Indicators for exports, industrial production, tax revenue, retail sales and real incomes all show a double digit slide. Ukraine’s currency, the hryvnia, lost more than half its value, but failed to boost exports.
Military expenditure continues to rise. In July, defence spending for 2014 was doubled to US$4.19 billion. A month later, Ukraine’s President Petro Poroshenko allocated US$3 billion to re-equip the army.
Severing links between the countries’ military industries, however, would be devastating for Ukraine. State-owned Antonov recently lost a US$150 million contract to supply aircraft to the Russian air force.
A reduction in trade with Russia could cost Ukraine US$15 billion annually. At worst, the loss to 2018 could be US$100 billion.
Ukraine had about the same GDP per capita as Poland in 1992. Today it is one-third of Poland’s.
The banking system is frozen and requires US$5 billion in recapitalisation. The funds will have to come from the same people who ran the sector down, making it unlikely. Without functioning financial markets, talk of recovery is nonsense.
Kiev’s immediate problem is servicing its foreign debt. At the end of November 2014, international reserves had dropped to below US$10 billion, from US$12.6 billion at the end of October, and total debt due until the end of 2016 comes to US$14 billion.
The ‘financing gap’ for the coming six months is estimated at US$10-15 billion. A sovereign default is highly likely.
The Kremlin has rigged the financial market. In return for shunning a free trade deal with the EU, a US$3 billion Ukrainian government bond was issued in December 2013 as part of a US$15 billion bailout.
The bond has a clause giving Russia an edge. If Kiev fails on any obligation to the same creditor, such as US$1.6 billion due to Gazprom by the end of 2014, the bond will be in default. If Ukraine’s debt reaches 60 per cent of GDP, which it could be already, Russia can demand immediate payment.
And if Kiev cannot pay, its whole foreign bond debt of about US$16 billion will be in default.
Ukrainian sovereignty cannot be separated from management of its debts, which leaves the West with a dilemma.
It can pick up the bills, knowing that billions of dollars will flow into Russian coffers and Ukrainian banks, with little hope of it bringing economic recovery.
Or it can allow Ukraine to default and face subsequent demands for a rescue package which could end up costing more.
Ukraine Strives to Maintain Fragile Truce After Day of Peace... 12.12.2014 | BSSB
What would be the impact on Europe should Ukraine go bust? Video... 05.01.2015 | BSSB
Ukraine’s Slow Descent Into Madness – 1... 29.10.2014 | BSSB
Why nations fail 16.03.2018 | BSSB
- Romanians back on the street 14.08.2018
- Think Tanks in Free Societies 13.08.2018
- 1. Disappointing EU member states 13.08.2018
- Eastern Europe Is Showing the Way 10.08.2018
- 1. The Global Magnitsky Act for Moldova 10.08.2018
- Great Decisions 2018 09.08.2018
- 1. Changing the direction of Romania 09.08.2018
- Geopolitical Future of Europe 08.08.2018
- “Kozak plan” or a back up plan 08.08.2018
- Saving Europe from Itself 07.08.2018
- Moldova: ‘grand theft’ — part № 05.08.2018
- The Eastern Edge of a Europe 03.08.2018
- After Europe 03.08.2018
- Europas Dilemma 02.08.2018
- 1. EU: wrapped in the flag of democracy 02.08.2018