Ukrainian economy threatened by massive street protests
Kyiv, Ukraine – Behind the fierce struggle over whether Ukraine will set its sights on Europe or Russia lurks the prospect of bankruptcy. Someone will have to contribute at least $10 billion in the coming months if Ukraine is to keep its economy afloat.
As talks on resuming International Monetary Fund credit stall, President Viktor Yanukovych visits Moscow on Tuesday to see what Russia could offer in return for freezing a strategic trade deal with the European Union .
Analysts say that if President Vladimir Putin offers anything to Ukraine, one of Europe’s poorest countries, it could be a combination of credit, investment promises and a discount on energy prices, particularly natural gas.
But the Russian leader may not be generous, given the crisis endured by Yanukovych and his ruling party and the volte-face of Ukraine’s leaders on whether his allegiance is to Moscow or Brussels.
Putin’s goal “will be to keep Ukraine borderline and dependent on Russian credits, to continue to pressure Ukraine to eventually sign” the Moscow-led Customs Union, an organization that now includes Belarus and Kazakhstan, said emerging markets analyst Timothy Ash. with Standard Bank in London.
“It is still Putin’s No. 1 strategic goal, as part of his grand neo-imperial design to rebuild Russia’s great power status,” Ash said.
But many of Ukraine’s 46 million people oppose it.
Massive crowds have demonstrated in central kyiv for weeks against Yanukovych’s decision last month to avoid closer ties with the EU and push his country towards Moscow. Protests were galvanized after dozens of activists were injured when riot police violently broke up a small gathering on November 30.
Yanukovych hopes he will find some sort of redemption when he meets his potential savior, Putin.
Without cash and cheaper natural gas, Ukraine’s public finances will become increasingly unsustainable and could drive the country into default next year.
First Deputy Prime Minister Serhiy Arbuzov said earlier this month that Ukraine needed a loan of around $10 billion to meet its payment obligations. However, the central bank has depleted its reserves and had only $18.8 billion on hand as of December 1, down a quarter from the same period last year.
One of the biggest drains on Ukraine’s economy is its energy sector, which the World Bank has described as one of the most energy inefficient in Europe.
In a country where the unemployment rate is 7.5%, the price of electricity for households is kept artificially low. This forces the industry to bear the burden and results in higher prices for its products.
Coal is subsidized because Yanukovych is keen to maintain his base of support in eastern Ukraine, where the coal industry is located.
Yanukovych inherited these problems when he became president in 2010, but during his two terms as prime minister over the past decade he also failed to address these structural flaws.
Ukraine hoped to secure a loan facility with the IMF of up to $15 billion by March to finance its external debt. But in return, the Washington-based bank’s demands would include Ukraine’s weakening of the local currency to boost export industries, balance its budget and raise energy prices for households.
Many of these stipulations require time to have a positive impact on Ukraine’s economy and poor business environment – and time is a luxury that Yanukovych does not have.
The political crisis is causing a downward spiral as investment freezes, capital flight increases and tax collection becomes increasingly difficult.
“The longer the standoff continues, the greater the risk that political uncertainty will increase demand for foreign currency, cause foreign investment to dry up, or trigger capital flight, leading to further loss of reserves and increasing the risk of disorderly movements of foreign exchange. currencies,” Fitch Ratings wrote on Monday.
Seeing Yanukovych’s precarious situation, Putin is likely to lead a difficult negotiation. Still, any deal the two might strike could backfire as pro-Western Ukrainians view Moscow with suspicion and the Customs Union as a modern incarnation of the Soviet Union.
“If the agreement is signed, he (Yanukovych) can stay in Moscow and not return to Kyiv,” opposition leader Arseny Yatsenyuk told about 200,000 anti-government protesters in the city’s Independence Square on Sunday. capital city.
“At the heart of Ukraine’s problems are not public finances or the current account deficit…it’s a hugely dysfunctional political system,” said Lars Christensen, head of market research emerging markets at Danske Bank in Denmark.
“The government and the opposition over the last decade have proven to be exactly the same in terms of their inability to reform the country and to do anything in the long run,” he said.
In Brussels, EU foreign ministers said the door remained open for Ukraine to belatedly sign a political and economic cooperation agreement – a key demand from protesters – even though consultations with Ukraine on the way to put pen to paper were suspended this weekend.
On Sunday, EU Enlargement Commissioner Stefan Fuele suspended those consultations, saying Yanukovych had not guaranteed Ukraine would sign the deal soon.