Ukraine’s Spilled Cup Condemnation

Ukrainian shares were relatively flat on the MSCI index as the current account deficit hit a post-crisis high of 5.5 percent of GDP last year due reportedly to Euro football championship import needs, and jailed opposition leader Tymoshenko was visited by international physicians demanding she receive urgent medical care. The trade claims, combined with official intervention to support the currency, brought foreign reserves to $30 billion to cover only 60 percent of short-term external debt. A $2 billion loan was renewed by Russia’s VTB Bank and another $500 million bilateral facility was taken for winter gas supplies, but $3.5 billion is due in IMF repayment in 2012 as the suspended $15 billion program awaits energy price and other politically sensitive fiscal shifts heading into October parliamentary elections. European banks continue to pare their local lines as non-performing loans stand at 15 percent and FDI otherwise is lackluster. Metals exports rely on Asian industrial trends and agriculture has again been hit by a deep freeze. GDP growth is forecast at 3 percent with consumption as a main driver, while inflation may be double that print and could catapult with eventual subsidy removal under Fund conditions. The interbank rate was yanked to 15 percent in January as liquidity evaporated and rumors spread of impending devaluation from the 8 hyrvnia to the dollar zone following a Moody’s outlook downgrade to negative. Credit may again increase on recovering deposit inflows, but accountholders recall the 2009 imposition of capital controls to prevent bank runs and have yet to regain confidence. Further privatizations may be attempted after the state phone company selloff to satisfy multilateral mandates but sweetheart oligarch deals for the soccer cup event have since drawn popular criticism.

With the sovereign rating cut, a Eurobond issue as in mid-2011 is unlikely to be repeated and VTB’s $2 billion loan has only been rolled over until June. The institution itself seeks additional state funds after the expensive takeover of scandal-ridden Bank of Moscow and its faltering share price after a “people’s IPO” had been injected into the presidential campaign with Putin’s call for a retail investor-only buyback. The lender’s Eurasia Union engagement has also been questioned in Belarus, which has also been unable to come to terms with the IMF under its authoritarian pariah leader Lukashenko. The currency has lost three-quarters of its value and inflation is over 100 percent, but the regime continues to spurn liberalization moves while recently ordering salary hikes. Putin too campaigned on a platform of minimum wage rises and higher defense spending to reprise the seat of power in defiance of street demonstrators and approved challengers including the business titan Prokhorov. Capital flight is still at an estimated $10-15 billion monthly and a proposal to impose withholding tax on corporate overseas issuance is designed to staunch balance of payments and fiscal leakage rocking the boat.