Economy & Trade, Europe, Financial Crisis, Headlines | Analysis

UKRAINE: Struggling to Find a Saviour

Analysis by Zoltán Dujisin

BUDAPEST, Mar 26 2009 (IPS) - Who will save Ukraine? On the verge of state bankruptcy, the country is considering its options both East and West.

Less than a year from the January 2010 presidential election, the political rivalry of President Viktor Yushchenko and Prime Minister Yuliya Timoshenko, former pro-Western allies and likely rivals at the polls, still seems to take precedence over the catastrophic consequences of the global financial crisis.

The Ukrainian national currency, the hryvnya, is swinging vertiginously and has become an important source of profit for speculators. The crisis in the important metallurgical and construction sectors threatens to spread to the entire economy in the country of 46 million.

Gold and currency reserves are insufficient to cover for the state’s present debts to businesses and banks, a situation that President Yushchenko said in a report published late last year could lead to the country defaulting.

Western governments and bodies, worried that Russia will increase its influence on its south-western neighbour as a result of its crisis, are calling on Yushchenko and Timoshenko to bridge their differences and cooperate in fulfilling the International Monetary Fund’s demands for granting it a 16.5 billion dollar loan.

The IMF, the World Bank and Western diplomats are losing patience with Ukraine’s parallel diplomacy, carried out by Yushchenko on the one hand and Timoshenko on the other.

On Mar. 11, the Ukrainian leadership sent a letter to the IMF claiming it had resolved contentious points. The IMF welcomed the statement as a show of good intentions but is concerned with the actual implementation of measures.

The country’s two leaders have several times before agreed to put an end to bickering only to stab each other in the back as soon as an opportunity arises.

Ukraine is allegedly contacting a variety of countries for funding, although Western powers are unlikely to provide further aid unless it agrees to conditions stipulated by the IMF, which include the revision of macroeconomic indicators, a gradual raise in retirement age and a rise of gas prices for the population to market levels.

Worried by the IMF’s conditions, Ukrainian trade unions accused the cabinet this month of “putting the deep crisis, which broke out because of the cabinet’s inaction, on the shoulders of the poorest people and pushing them to hopeless poverty.”

The main opposition force, the Party of the Regions, popular with Russian speakers in Ukraine, is also opposed to the IMF loan.

Timoshenko is also in talks with Russia on getting a 5 billion dollar loan to cover Ukraine’s budget deficit, although she is avoiding public comments on the topic.

The advantage of a Russian loan is that it could be easier to fulfil Russia’s conditions, but Timoshenko’s plans “immediately started speculation about the consequences of such a move,” Natalya Shapovalova, analyst at the Kiev- based International Centre for Policy Studies told IPS.

President Yushchenko’s entourage is accusing Timoshenko of betraying Ukraine by making concessions to Russia, who many believe will use the crisis to gain control over Ukraine’s gas network.

Shapovalova believes that it is not realistic to think Russia, which has many problems of its own, will bail out Ukraine. “It would be too dangerous for any government to make such a move while facing a presidential election, and considering the many difficult issues in relations with Russia, it’s also dangerous in the long run.”

Ever since Ukraine elected a pro-Western government in 2005, Russia has refused to provide its neighbour what it calls “subsidised” gas, leading to recurrent price wars and harsh verbal exchanges.

But there have been signs of a rapprochement. Recently Russia’s Prime Minister Vladimir Putin announced that state energy giant Gazprom would not demand Ukraine pay a fine relating to gas supplies, assessing its neighbour as being in “an area of pre-default.”

The people’s verdict is that the blame lies on politicians: fresh polls indicate that 70 percent of Ukrainians think authorities are unable to solve the crisis, and 64 percent are willing to take part in peaceful protests.

Agitation has taken hold of an impoverished Ukrainian society: strikes are becoming frequent and bank robberies have been reported. In Kiev students organised a protest against a four-fold increase in metro ticket prices by pulling their trousers down, and a Ukrainian TV channel featured a Western Ukrainian who illegally sold his kidney abroad to pay off a loan.

January saw an upward swing in deposit outflow, and it is practically impossible to borrow money from the National Bank of Ukraine, threatening the entire Ukrainian banking system.

Ukraine’s national bank was accused of offering obscure financial aid to banks that did not qualify for it and which used it for currency speculation, further weakening the hryvnya and aggravating the crisis.

The government’s new regulations on financing and the consequences on the liquidity of the banking system could force many of Ukraine’s 186 banks to close shop.

“It is not only a problem of a lack of financial resources but a policy problem. The government has to come up with an anti-crisis programme and to commit to the obligations given to the IMF,” says Shapovalova.