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08/02/1998 23:31:12 FEATURE - Russia crisis spreads alarm in Ukraine

Обновлено: 3 авг. 2018 г.

By Christina Ling

KIEV, Aug 3 (Reuters) - Slow but steady may win the race for some, but when

it comes to economic reform, Ukraine -- where the pace has been far more slow

than steady -- has reason to wish these days that it had started faster.

With Russia still floundering in the throes of financial crisis, its smaller

neighbour to the west is viewing with alarm the wide ripples encircling its own


"The financial crisis in Ukraine is no less complicated and frightening than

in Russia," President Leonid Kuchma told visiting U.S. Vice President Al Gore in


Ukraine, perhaps the republic most closely integrated with Russia before the

collapse of the former Soviet Union in 1991, has been one of the hardest hit of

the former Soviet bloc economies amid Russia's problems.

"Russia is a very important benchmark for Ukraine," said Tomas Fiala,

director of Kiev's Wood & Co. "(They) were one economy for 70 or 80 years and

they have similar problems."

Those problems, to name just a few, include capital flight, chronically low

revenue collection, non-payments and wage arrears, as well as burgeoning shadow

economies as a result of burdensome and opaque tax systems.

And as emerging market sentiment has turned sour, investors fleeing Russia

-- perceived as one of the least restructured and riskiest markets in the region

-- have left Ukraine in the dust.

Ukraine's PFTS stock market index has slumped to below 40.00 from 100.00 at

its launch in October, 1997 and treasury bill yields have soared to around 60 to

70 percent.

Interest rates have risen sharply since the end of September 1997, and

long-term government debt regularly fails to sell at weekly auctions, tightening

the government's painful short-term debt crunch.

Ukraine got a powerful shot in the arm on Friday when an IMF mission said it

would recommend approval of a three-year Extended Fund Facility of $2.2 billion,

with a first $200-250 million tranche likely at the end of August.

But with fears resurfacing about Russia's ability to improve tax collection

and avert serious labour unrest over chronic wage delays, the outlook for

Ukraine, struggling to get reforms back on track in a race against time, is

still hazy.


Signs of deepening economic distress in Ukraine can be hard to see, as wage

arrears and other cash-flow problems have been a persistent problem in recent


Nor have the main fiscal achievements of the past two years -- a stable

currency and inflation rate -- yet been breached.

The hryvnia, introduced in September 1996, has held a steady course since

then, and exchange rates are still within the corridor of 1.80-2.25 hryvnias to

the dollar set for 1998. Inflation, targeted at below 12 percent in 1998, is

also stable.

The low level of development of Ukraine's financial markets also helps to

disguise the state of alarm felt by investors watching reserves, $1.77 billion

on July 1 according to official data, dwindle as debt repayments start to mount.

"In Ukraine they have the dubious luxury of having relatively closed markets

so the pain can be dragged on for a much longer period of time," said Roland

Nash, head of credit research at Moscow-based MFK Renaissance.

But looming ever closer on the horizon is at least $1 billion in domestic

and foreign debt redemptions due in August, including a $450 million bond led by

Japan's Nomura.


Economists differ on how long Ukraine's reserves would have lasted without

IMF support, and the IMF mission's decision was met with relief after gloomy

warnings last week from S&P and Moody's rating agencies.

"For Ukraine it is very good news and for markets it is also good news. It

means the threat of default is not an immediate one," said ING Barings emerging

markets economist Caren Gaboutchian.

Underwriters have said Ukraine will use proceeds from a new $250-million

hryvnia-linked bond to part-repay the Nomura bond.

The IMF's stamp of approval is expected to unlock funds from other

international lenders and soften investors toward Ukraine, thus easing its

return to capital markets to finance repayments.

But in the context of ongoing bearishness on Russian markets, despite the

support of $11.2 billion from the IMF, Ukraine may not see smooth sailing for

some time yet.

"Unfortunately both from a fundamental point of view and purely sentiment

point of view the issues of Russia and Ukraine are interlinked," Gaboutchian


"If things go well in Russia then chances are Ukraine's market will also go

quite well. If sentiment turns bad in Russia that will affect Ukraine."

Dangers also lurk for Ukraine's real economy, if markets in Russia, which

accounts for about a quarter of all Ukraine's exports and a little under half of

its total imports according to official figures, continue to slide.

If Russia was forced to devalue the rouble -- despite steely statements to

the contrary -- analysts say Ukraine's hryvnia could be dragged from its

pedestal, too, making Ukraine's foreign debt repayments much harder.

Ukraine also owes millions of dollars to Russian natural gas monopoly

Gazprom <GAZPq.L>, which is itself under intense pressure at home to collect

payments. All of which comes as Ukraine is gearing up for presidential elections

next year.


Kuchma will be forced to toe a strict fiscal line under the IMF's

restructuring package, something which is unlikely to go down well with unpaid

miners and other public sector employees and which will certainly be grist to

the mill of his opponents.

"It's the worst possible time to be in this position," said a foreign

diplomat. "If they had been doing all this in 1996 and 1997...they would have

been much more favourably placed."

But whatever happens in Russia, Ukraine is its own worst enemy, economists

stress, pointing to the relatively minor effect Russia's woes have had on more

economically reformed former Soviet bloc countries, such as Poland.

"They're both near to Russia, so the problem is that Poland has undertaken

reforms where Ukraine hasn't," said David Snelbecker, macroeconomic policy

adviser to Ukraine from the Harvard Institute for International Development.

Like it or not, reform remains the single most effective means of weathering

the storm, analysts say, applaudung Kuchma's recent spate of reform decrees and

parliament's decision to hand him control of budget cuts, both of which cleared

the way for the IMF loan recommendation.

But Ukrainian reform, traditionally a hostage to the lack of cooperation

between Kuchma and parliament, has derailed before under lesser pressures than

the coming year is likely to exert, and observers are withholding judgement for


"I don't think it's a sign of a new era yet -- that would have to be

confirmed by more decisions," said Wood & Co.'s Fiala. "It's a sign that

(Kuchma) understands the seriousness of the matter."

((Kiev Newsroom, +380 44 244 9150 e-mail:kiev.newsroom@reuters.com))

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