Ukraine is in the midst of a financial and banking crisis, exacerbated by political turmoil, that has driven the principal national stock equities indicator, the PFTS Index, down 78% from a high of 1,209 in mid-March to 266 on Monday. The country relies heavily on external finance, and its banking system is by some measures the most at risk after Iceland’s, which collapsed only days ago. On the basis of the cost of its credit-default swaps, Ukraine is the least creditworthy of all of Europe’s emerging markets.
For all the hand-wringing and justified concern about Asian economies, many countries in the region are in much better shape than several of the emerging markets in Europe. Hungary may yet have recourse to lending from the International Monetary Fund (IMF), while the Iceland debacle has received a good deal of publicity. Ukraine's plight is hardly less extreme.
During the first two weeks of October, a bank run depleted aggregated accounts by about US$1.3 billion and the National Bank of Ukraine had to give a $1 billion stabilization loan to the sixth-largest bank in the country. Since then the central bank has reduced reserve requirements, forbidden the premature cashing-in of bank deposits with maturity dates, imposed limits on loans, and established a maximum 5% collar between the buy and sell rates for foreign-currency trading.
The foreign exchange market is negatively affected also by the external balance, the state's debt to Russian energy giant Gazprom, and also the debt to the central government incurred by Ukraine's various regional authorities for natural gas distributed throughout the country.
The national banking authority has had to sell US dollars to prop up the value of the hryvnya, the national currency, which has declined by 20% in recent weeks and by 12% just this month. The ratings agencies have responded unsympathetically. To give an example, Standard and Poor's downgraded the country’s long-term foreign currency sovereign credit rating to BB- from B+.
To complete the painting of the economic picture, metals account for one-quarter of Ukraine’s gross domestic product and over two-fifths of exports, and as I have noted elsewhere (see Crash, Asia Times Online, October 11, 2008), prices for metals have fallen worldwide; at the same time, subsidies on energy prices in Ukraine have been increasingly reduced under pressure from Russia, from which Ukraine imports much of the energy it consumes.
For all these reasons, the IMF is setting up a US$14 billion standby facility for the country to stabilize its financial system. This is all taking place in a political context of continuing intra-elite conflict and turmoil that has been going on since the "Orange" revolution at the end of 2004.
Viktor Yushchenko was sworn in as president in January 2005 and Yuliya Tymoshenko, a former minister of energy, was named prime minister. Eight months later, Yushchenko dismissed Tymoshenko's government and named one of his own allies to replace her. Four months after that, in January 2006, a vote of parliament removed this new government over an agreement with Russia that sharply increased the cost of imported gas (see Ukraine clash threatens oil to Europe, Asia Times Online, August 2, 2008).
Yanukovich’s (Moscow-oriented) Party of the Regions became the largest party in parliament after March 2006 elections. It was outnumbered by the "orange" coalition (Yushchenko’s party plus Tymoshenko’s bloc), but this group was unable to form a government. Finally, in July 2006, Yanukovich was named prime minister on condition that he continue a pro-Western foreign policy orientation.
In January 2007, Yanukovich's supporters in parliament voted a law to reduce the president's prerogatives in governing. Yushchenko responded two months later by dissolving parliament. In new legislative elections, the orange parties gained a bare majority and Tymoshenko was (again) named prime minister, with no votes to spare. Earlier this year, she survived a no-confidence vote, only for one of the president’s chief assistants to accuse her in the press three months ago of treason to Ukraine’s national interests for not supporting Georgia against Russia.
Last month, Tymoshenko’s group voted with Yanukovich’s party to (again) limit by statute the president's powers, following which Yushchenko's parliamentary allies left the orange coalition. In this context, following the inability of anyone to form a new ruling coalition, Yushchenko two weeks ago called for new parliamentary elections.
A great deal of criticism has been voiced in Ukraine over this intra-elite jockeying, which many observers see as positioning by Tymoshenko for a run for president in 2009. According to one report, the IMF has "recommended" cancellation of the snap parliamentary elections "as a condition" of access to the aforementioned $14 billion facility. On Monday they were postponed by a week from December 7 to the 14.
It is not altogether clear that the elections will take place even then, since administrative preparations are behind schedule and the cost of holding the elections may be deemed excessive in the midst of the immediate financial crisis. An improvised election campaign at present would only increase negative sentiment and paralyze the government, while energy costs, inflation and the current account deficit continue to increase.
Compared to this tableau, some Asian economies are not in such a bad situation after all.
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First published in Asia Times Online, 22 October 2008.