Ukraine’s Jail Joust Jolt
Ukrainian debt was off 10 percent on the EMBI, joining the 40 percent stock market loss as a frontier index laggard, as opposition head Tymoshenko got a 7-year prison sentence for alleged power abuse during her stint as prime minister in a court decision and process roundly condemned by democracy watchers. She was specifically found guilty of striking an expensive illegal gas deal with Russia in 2009, and thousands of her supporters clashed with police when the verdict was announced. EU negotiators, in the final stages of setting a formal partnership with the country, had urged a compromise, but President Yanukovich insisted the judiciary alone would shape the outcome. The disconnect reminded investors of the lengthy non-compliance with IMF demands after receiving $3 billion of the $15 billion agreement, with energy prices again at the center of dispute along with fiscal and pension changes. External debt, approximately half corporate, remains onerous at $125 billion or 85 percent of GDP, and T-bill redemptions next year are also $4 billion to sustain local deficit spending. After a loan from Russia’s state-owned VTB and expectations the Fund relationship would resume a Eurobond was floated several months ago, but international reserves dropped 10 percent in September to revert to the end-2010 level on capital flight and efforts to defend the 8 to the dollar currency line. The sum comprises two-thirds of short-term foreign debt due, and CDS spreads widened toward 950 basis points on an imminent squeeze as the government admitted to just “months” of sufficient funding. The hyrvnia is forecast to dip again to the crisis 10 threshold on the political and diplomatic aggravation of economic and financial tensions, with Western unease likely to postpone the arrival of a fresh mission from Washington to get the multilateral arrangement on track.
Moscow, despite urging Ukraine to join its new Eurasian Union with Belarus and Kazakhstan, also criticized the proceeding insofar as it questioned sensitive gas sales, with Prime Minister Putin now running again for president using the phrase “counterproductive and dangerous.” The ruble too is at risk after a 15 percent drop since August as capital outflows through Q3 reached $50 billion. Finance Minister Kudrin, who has served in the post for a decade, was dismissed after he expressed reservations about budget policy and unwillingness to continue another term, and the central bank spent $10 billion intervening to preserve the dollar-euro basket. After divulging his re-election intentions, Putin spoke to a global business forum with a commitment to “further fiscal discipline and liberalization of strategic industries.” Foreign companies were wary and Russian ones, preoccupied with repaying overseas creditors $30 billion by December, have other pledges in mind.
