By Christina Ling
KIEV, Aug 3 (Reuters) - Slow but steady may win the race for some, but when
it comes to economic reform, Ukraine -- where the pace has been far more slow
than steady -- has reason to wish these days that it had started faster.
With Russia still floundering in the throes of financial crisis, its smaller
neighbour to the west is viewing with alarm the wide ripples encircling its own
economy.
"The financial crisis in Ukraine is no less complicated and frightening than
in Russia," President Leonid Kuchma told visiting U.S. Vice President Al Gore in
July.
Ukraine, perhaps the republic most closely integrated with Russia before the
collapse of the former Soviet Union in 1991, has been one of the hardest hit of
the former Soviet bloc economies amid Russia's problems.
"Russia is a very important benchmark for Ukraine," said Tomas Fiala,
director of Kiev's Wood & Co. "(They) were one economy for 70 or 80 years and
they have similar problems."
Those problems, to name just a few, include capital flight, chronically low
revenue collection, non-payments and wage arrears, as well as burgeoning shadow
economies as a result of burdensome and opaque tax systems.
And as emerging market sentiment has turned sour, investors fleeing Russia
-- perceived as one of the least restructured and riskiest markets in the region
-- have left Ukraine in the dust.
Ukraine's PFTS stock market index has slumped to below 40.00 from 100.00 at
its launch in October, 1997 and treasury bill yields have soared to around 60 to
70 percent.
Interest rates have risen sharply since the end of September 1997, and
long-term government debt regularly fails to sell at weekly auctions, tightening
the government's painful short-term debt crunch.
Ukraine got a powerful shot in the arm on Friday when an IMF mission said it
would recommend approval of a three-year Extended Fund Facility of $2.2 billion,
with a first $200-250 million tranche likely at the end of August.
But with fears resurfacing about Russia's ability to improve tax collection
and avert serious labour unrest over chronic wage delays, the outlook for
Ukraine, struggling to get reforms back on track in a race against time, is
still hazy.
UKRAINE'S FINANCIAL "CRISIS" IS SLOW BURNING
Signs of deepening economic distress in Ukraine can be hard to see, as wage
arrears and other cash-flow problems have been a persistent problem in recent
years.
Nor have the main fiscal achievements of the past two years -- a stable
currency and inflation rate -- yet been breached.
The hryvnia, introduced in September 1996, has held a steady course since
then, and exchange rates are still within the corridor of 1.80-2.25 hryvnias to
the dollar set for 1998. Inflation, targeted at below 12 percent in 1998, is
also stable.
The low level of development of Ukraine's financial markets also helps to
disguise the state of alarm felt by investors watching reserves, $1.77 billion
on July 1 according to official data, dwindle as debt repayments start to mount.
"In Ukraine they have the dubious luxury of having relatively closed markets
so the pain can be dragged on for a much longer period of time," said Roland
Nash, head of credit research at Moscow-based MFK Renaissance.
But looming ever closer on the horizon is at least $1 billion in domestic
and foreign debt redemptions due in August, including a $450 million bond led by
Japan's Nomura.
TURBULENCE IN RUSSIA MEANS A BUMPY RIDE FOR UKRAINE
Economists differ on how long Ukraine's reserves would have lasted without
IMF support, and the IMF mission's decision was met with relief after gloomy
warnings last week from S&P and Moody's rating agencies.
"For Ukraine it is very good news and for markets it is also good news. It
means the threat of default is not an immediate one," said ING Barings emerging
markets economist Caren Gaboutchian.
Underwriters have said Ukraine will use proceeds from a new $250-million
hryvnia-linked bond to part-repay the Nomura bond.
The IMF's stamp of approval is expected to unlock funds from other
international lenders and soften investors toward Ukraine, thus easing its
return to capital markets to finance repayments.
But in the context of ongoing bearishness on Russian markets, despite the
support of $11.2 billion from the IMF, Ukraine may not see smooth sailing for
some time yet.
"Unfortunately both from a fundamental point of view and purely sentiment
point of view the issues of Russia and Ukraine are interlinked," Gaboutchian
said.
"If things go well in Russia then chances are Ukraine's market will also go
quite well. If sentiment turns bad in Russia that will affect Ukraine."
Dangers also lurk for Ukraine's real economy, if markets in Russia, which
accounts for about a quarter of all Ukraine's exports and a little under half of
its total imports according to official figures, continue to slide.
If Russia was forced to devalue the rouble -- despite steely statements to
the contrary -- analysts say Ukraine's hryvnia could be dragged from its
pedestal, too, making Ukraine's foreign debt repayments much harder.
Ukraine also owes millions of dollars to Russian natural gas monopoly
Gazprom <GAZPq.L>, which is itself under intense pressure at home to collect
payments. All of which comes as Ukraine is gearing up for presidential elections
next year.
UKRAINE'S BEST DEFENSE IS REFORM
Kuchma will be forced to toe a strict fiscal line under the IMF's
restructuring package, something which is unlikely to go down well with unpaid
miners and other public sector employees and which will certainly be grist to
the mill of his opponents.
"It's the worst possible time to be in this position," said a foreign
diplomat. "If they had been doing all this in 1996 and 1997...they would have
been much more favourably placed."
But whatever happens in Russia, Ukraine is its own worst enemy, economists
stress, pointing to the relatively minor effect Russia's woes have had on more
economically reformed former Soviet bloc countries, such as Poland.
"They're both near to Russia, so the problem is that Poland has undertaken
reforms where Ukraine hasn't," said David Snelbecker, macroeconomic policy
adviser to Ukraine from the Harvard Institute for International Development.
Like it or not, reform remains the single most effective means of weathering
the storm, analysts say, applaudung Kuchma's recent spate of reform decrees and
parliament's decision to hand him control of budget cuts, both of which cleared
the way for the IMF loan recommendation.
But Ukrainian reform, traditionally a hostage to the lack of cooperation
between Kuchma and parliament, has derailed before under lesser pressures than
the coming year is likely to exert, and observers are withholding judgement for
now.
"I don't think it's a sign of a new era yet -- that would have to be
confirmed by more decisions," said Wood & Co.'s Fiala. "It's a sign that
(Kuchma) understands the seriousness of the matter."
((Kiev Newsroom, +380 44 244 9150 e-mail:kiev.newsroom@reuters.com))
Comments