Ukraine economy under threat amid street protests
Published Monday, December 16, 2013 7:48AM EST
Last Updated Monday, December 16, 2013 12:01PM EST
KIEV, Ukraine -- Hidden behind the tug of war over whether Ukraine will cast its lot with Europe or Russia is the prospect of bankruptcy. Someone will need to chip in at least $10 billion in the coming months, if Ukraine wants to keep its economy afloat.
With talks on resuming credit from the International Monetary Fund stalled, President Viktor Yanukovych heads to Moscow on Tuesday to see what Russia might offer in exchange for freezing a strategic trade deal with the European Union.
Analysts say that if President Vladimir Putin offers anything it could be a mix of credit, investment pledges, and a discount on energy prices, particularly natural gas.
But the Russian leader is unlikely to be very generous, given the crisis being endured by Yanukovych and his ruling party and the flip-flopping by Ukraine leadership about whether its allegiance lies with Moscow or Brussels.
Massive crowds have protested in the centre of Kyiv for weeks against Yanukovych's decision last month to shun closer ties with the EU and to push his country toward Moscow. The demonstrations were galvanized after dozens of activists were injured when riot police violently broke up a small rally on Nov 30.
After a string of visits to Kyiv by top Western diplomats and a threat of sanctions from Washington last week, Yanukovych has been trying to appease the protesters.
He has called for the release of some of the detained demonstrators and suspended two top officials for their alleged roles in the violence.
On Monday, the ruling Party of Regions demanded a government reshuffle but ignored the protesters' demand that the president and government resign.
But all eyes will turn to Moscow, where the embattled Yanukovych will meet his potential saviour, Putin.
Timothy Ash, an emerging markets analyst with Standard Bank in London, said Russia would like to "drip feed" aid to Ukraine until Yanukovych's political clout is restored -- a hope that dims the more he buddies up to the Kremlin.
"Whatever Moscow offers in terms of credit/long term investment commitments, it is unlikely to ease street protests in Ukraine. Indeed, if anything this may see an intensification of these protests," said Ash.
First Deputy Prime Minister Serhiy Arbuzov said earlier this month that Ukraine needs a loan of some $10 billion to meet its payment obligations. However, the central bank has been burning through its reserves and only had $18.8 billion as of Dec. 1, down a quarter from the same period last year.
Ukraine was hoping to get a loan facility with the IMF for as much as $15 billion, but in return the Washington-based bank's demands would include Ukraine weakening the local currency to boost export industries, balancing its budget and raising household energy prices.
Many of these stipulations require time to have any positive impact on the economy and Ukraine's deplorable business environment -- and time is a luxury Yanukovych doesn't have.
Russia is expected to be far less demanding and to primarily seek loyalty. That could translate into a pledge to integrate Ukraine's economy with the Moscow-led Customs Union, an organization that now includes Belarus and Kazakhstan.
Pro-West Ukrainians regard it as a modern embodiment of the Soviet Union. Such a deal could further aggravate the crisis on the streets of Kyiv.
"If the agreement is signed, he (Yanukovych) can remain in Moscow and not return to Kyiv," opposition leader Arseniy Yatsenyuk told about 200,000 anti-government protesters in the capital's Independence Square on Sunday.
Even if Yanukovych returns from Moscow with a deal, it is likely to only be a stopgap measure that fails to address the economic crisis.
"At the core of Ukraine's problems isn't public finance or a current account deficit ... it is an extremely dysfunctional political system," said Lars Christensen, head of emerging market research at Danske Bank in Denmark.
"The government and the opposition over the past decade turned out to be exactly the same in terms of inability to reform the country and do anything long-term," he said.
In Brussels, EU foreign ministers said the door remains open for Ukraine to belatedly sign a political and economic co-operation agreement -- a key demand of protesters -- even though consultations with Ukraine on how to get pen to paper were put on hold over the weekend.
EU Enlargement Commissioner Stefan Fuele shelved those consultations Sunday, saying Yanukovych had failed to guarantee that Ukraine would sign that deal soon.
Raf Casert contributed to this report from Brussels.