From the
Wall Street Journal, Jan. 17 2010:
Ukraine's presidential election yesterday [January 16 2010] —which appears headed to a second round run-off on Feb. 7 between the two leading candidates, Viktor Yanukovych and Yulia Tymoshenko—unfolds against the background of financial ruin.
It has long been obvious that the defeat of the incumbent, Viktor Yushchenko, who has painted himself into the anti-Russian nationalist corner, would produce a political rapprochement between Ukraine and Russia. Mr. Yanukovych is committed to non-alignment (meaning no application for NATO membership) while Ms. Tymoshenko promises to submit to popular referendum any decision to join a military alliance (in practice ruling out NATO membership, which, as revealed by a long series of opinion polls, is opposed by a solid majority of Ukrainians). What seems much less widely appreciated is the prospect of this geopolitical shift being magnified by Ukraine's imminent national bankruptcy—casting Russia in the role of "Abu Dhabi" to Ukraine's "Dubai" in the sense of easing the financial distress of a closely related neighbor.
In October 2009, the IMF suspended the latest planned disbursement of $3.8 billion (€2.6 billion) from its $17 billion rescue loan to Ukraine, citing the need to wait for the presidential election campaign to run its course before the Ukrainian authorities would be in a position to pursue responsible economic policies. In the meantime, the IMF has quietly helped keep Ukraine's funding crisis at bay by a series of expedients, culminating in approval for a drawdown of $2 billion of the Ukrainian central bank's foreign-exchange reserves to meet this month's $900 million payment for imported Russian gas.
From now on, however, the cupboard is bare. Total austerity will be the only way to preserve Ukraine's reserves and prevent another run on the currency—which would be ruinous, given the mountain of public and private debt denominated in foreign currency (exceeding 100% of GDP at the start of the crisis). The newly elected president, and whatever government emerges from the presidential election, will have to abandon their election promises by slashing public spending (the budget deficit reached around 12% of GDP in 2009, largely financed by printing money) and passing on higher energy costs to domestic consumers. Failure to cut spending will lead to widespread defaults. Already, the state-owned energy and railway companies (Naftohaz and UkrZaliznytsya) have been unable to meet their contractual obligations on foreign loans and entered into restructuring negotiations with their creditors.
This is substantially higher than the proportion of U.S.$-denominated debt in Argentina when the Argentinian peso collapsed in 2001, with virtually no warning of the precise time. Similar collapses of the Phillippine, and Indonesian currencies in 1997 also could not be precisely timed in advance, but were caused by very high national debt rollover requirements. (The 1997 Thai baht collapse's timing was controlled by the Thai central bank.)
....
.... Let's assume, for the sake of argument, that the country miraculously escapes its political trap with the emergence in the next few weeks of a strong leader in control of both the presidency and the parliament, and hence able to take decisive policy action. Even then, with IMF loan disbursements renewed and with some recovery in battered investor confidence, Ukraine would face massive external financing gaps. A recovery in the price of Ukraine's exports (mainly ferrous metals and bulk chemicals) would be offset by the closely correlated moves in the prices of its (energy) imports—and any temporary decoupling of those prices is unlikely to be in Ukraine's favor, given the surge in Chinese steel production.
Above all, Ukraine has $37 billion in external debt falling due in 2010. Even assuming, in this miracle scenario, that half of that could be refinanced (despite the bitter taste left by recent defaults), the financing gap would remain above $10 billion in 2010—rising to $15-$24 billion in 2012-13 as the IMF disbursements first cease and then themselves start falling due for repayment.
The only plausible way to plug these gaps is to tap the huge savings of the Russian government. Will Ukraine ask for such assistance from Russia and, if it did, how would Russia respond?
Well,
one plausible way to plug these gaps. I'm not close enough to fact-check the speculation in the rest of this article.
