MONTREAL - 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.
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.
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
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,
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
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
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
R M Cutler (http://www.robertcutler.org) is a Canadian
international affairs specialist.