Ukraine looks for new loans amid funding crisis
Ukraine turns to Russia, United States, as further IMF support remains unclear
By
Polya Lesova, MarketWatch
Last update: 12:51 p.m. EST Feb. 9, 2009
NEW YORK (MarketWatch) -- Ukraine has requested financial support from a number of countries, including Russia and the United States, as its economy and public finances continue to rapidly deteriorate at a time of increasing uncertainty over the disbursement of more money from the International Monetary Fund.
Russia's finance ministry said in a statement Monday that it has been asked by Ukraine to assess the possibility of giving a $5 billion credit to cover the Ukrainian budget deficit.
The government of Prime Minister Yulia Tymoshenko has sent letters to the United States, the European Union, China, Japan and Russia, requesting financial assistance to cover the budget deficit, according to a statement posted on Tymoshenko's Web site. Tymoshenko made the announcement at a briefing in Munich over the weekend.
Russia has agreed to give Ukraine a loan, Tymoshenko said, according to the statement.
"Russia is ready to facilitate the signing of such loan agreements," she said.
A separate statement on the Ukrainian government's Web site also confirmed that Ukraine has sought financial support and quoted Tymoshenko as saying that "we have already received positive replies to these letters from some countries, including Russia."
The budget approved by the Ukrainian parliament in December 2008 projects a deficit of 3%.
The Russian finance ministry said it has asked Ukraine to provide additional information about the current situation of the Ukrainian economy.
Political complications
Ukraine is one of the Eastern European nations most adversely affected by the global financial and economic crises. The country is also plagued by political instability; only on Friday Tymoshenko's government survived a no-confidence vote in parliament. The situation has been further complicated by a power struggle between Tymoshenko and President Viktor Yushchenko, once a close ally.
"It's obvious that the situation in Ukraine is extremely critical," said Lars Christensen, chief analyst at Danske Bank. "We have a total macroeconomic, and partly a political, collapse."
"Public finance reform is key," Christensen said. "Ukraine has a serious funding problem. To get that [reform] done, you need to implement an austerity package that is likely to be highly unpopular with voters, but is the only way forward."
Policy towards neighboring Russia has been a particularly contentious issue. It came to the forefront during the bitter gas row between Russia and Ukraine in January that cut off gas supplies to most of Europe.
Ukraine is a key transit route for Russian gas to Europe, while Russia is a key trade partner for its smaller neighbor. However, relations between Russia and Ukraine have been strained in part because of Ukraine's desire to pursue closer integration with Western Europe and to join the NATO military bloc.
"One could get concerned about Ukraine asking for loans from Russia and the geopolitical implications of that," Christensen said. "There might be some bargaining in terms of Ukraine saying to western donors -- well, if you don't lend us any more money, we'll have to go to Russia. That is where a potential bailout becomes blackmail. It's a dangerous strategy for Ukraine to do this."
More IMF aid stalled?
Since Ukraine secured a $16.4 billion stand-by arrangement with the IMF last November, its economy has continued to deteriorate. The IMF has disbursed only $4.5 billion so far.
An IMF mission reviewing Ukraine's arrangement with the fund left Kiev last week without making it clear whether or not more money will be disbursed.
"Significant progress has been made in discussions on fiscal, monetary, and exchange rate policies, and on measures to strengthen confidence in the banking system, but a few issues remain outstanding," said Ceyla Pazarbasioglu, head of the IMF mission, in a statement on Friday.
Discussions on these issues will continue in the coming weeks and the mission should return soon to Ukraine, she said.
The economic situation remains "difficult" because of falling demand for Ukraine's major export, steel, and the sharply reduced access to international capital markets, Pazarbasioglu said.
The depreciation of the Ukrainian currency has improved the outlook for export industries. Implementing the bank recapitalization program should help restore confidence in the banking system, according to Pazarbasioglu.
"The sharper-than-expected contraction in economic activity requires a recalibration of economic policies," she said. "In particular, the IMF team and the authorities have discussed potential revisions to the program's balanced budget target for 2009, taking into account the availability of financing."
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