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14th Aug 2022

Putin remarks at EU summit raise concern on Ukraine economy

  • Ukrainian banknote: The country has enough dollars to 'pull through' if things don't get worse (Photo: evilsoapbox)

The prospect of a financial crisis in Ukraine has increased, despite an emerging solution to the political crisis in one of the EU’s biggest neighbours.

The US-based ratings agency, S&P, cut Ukraine’s debt rating to CCC+ on Tuesday (28 January), putting it on a par with Argentina, and added that it may slip further in future.

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“We now assess Ukraine … as exhibiting characteristics of a ‘distressed civil society with weakened political institutions,’ diminishing the government’s capacity to maintain timely debt service,” it said.

It added if the opposition takes power “and if diplomatic relations with Russia deteriorated, we believe the $15 billion in direct financing to the Ukrainian government from Russia could be put at risk.”

Another agency, Moody’s, on Monday said: “Market-based probabilities of default for Ukrainian government debt jumped sharply this past week.” The third leading agency, Fitch, issued a similar warning one week ago.

The S&P downgrade came after Russian leader Vladimir Putin equivocated on the status of his bailout at an EU summit in Brussels earlier the same day.

On one hand, he told press: "Regarding your question whether we will review our agreements on loans and the energy sector if the opposition will take power ... No, we will not.”

But on the other hand, he noted that the package, which is implemented in quarterly tranches, is tied to an agreement made by Ukraine’s outgoing Prime Minister Mykola Azarov. “We had an agreement with Azarov … At this point, since no one knows what the future government in Ukraine will be, no one can say what its economic plans will be,” Putin added.

His deputy PM, Igor Shuvalov, added more doubt.

According to Reuters, he told press in Brussels that: “If the position of the new government is different, we will have the right to consider this issue, report to the President and see how the situation develops.”

For his part, Alexander Morozov, HSBC bank’s chief economist on Russia and Ukraine, agreed with S&P’s reading of Putin’s remarks.

“Russia may reconsider the disbursement of the remaining $12 billion,” he told this website on Wednesday.

But he noted that Ukraine has enough foreign currency, $20 billion, in reserve to “pull through this difficult time … if there is no deeper political uprising, no bank runs on hard currency.”

He added that if Russia freezes payments, but Ukraine’s new government puts forward a “credible reform programme,” then “it would most likely be supported by international lenders, in particular, the International Monetary Fund, which has a track record of acting in similar situations.”

The speculation on Ukraine-Russia relations comes after Azarov and his pro-Russian cabinet stepped down on Tuesday. The Ukrainian parliament also voted to repeal a set of controversial anti-protest laws and will discuss an amnesty on political detainees on Wednesday.

The developments come amid visits by two EU envoys, commissioner Stefan Fuele and foreign relations chief Catherine Ashton, as well as a group of MEPs.

But with the structure of the new government in doubt and with the repeal of the anti-protest laws still pending ratification, protesters continue to occupy public squares and buildings in multiple locations in the country.

For its part, Canada on Tuesday showed it believes the crisis is far from over by joining the US in imposing sanctions on Yanukovych officials.

The EU last week opted not to join in.

But Croatia, Latvia, Lithuania, the Netherlands, and Romania have shown some interest in exploring a potential asset freeze and travel ban on officials linked to the violence.

The EU should “start considering inventorisation of possible options” a diplomat from one of the group of five told this website on Tuesday, despite the Azarov resignation.

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