Ukraine risks bankruptcy without rapid financial aid: analysts

Ukrainians are rushing to withdraw cash and the markets are panicking as concerns mount over the effects of the violence in Kiev on Ukraine’s fragile economy.

Tensions in the country have alarmed investors for months and the risk of default looms unless Ukraine rapidly receives financial assistance.

It was the recession from which Kiev only tentatively emerged last year that brought a shock decision to scrap a free-trade deal with the European Union at the end of November.

Instead, Ukraine turned to neighbouring Russia, on which it is still very dependent. Moscow offered a $15 billion (10.9-billion-euro) loan and a cut in gas prices worth several billion dollars.

President Viktor Yanukovych, as close as ever to the Kremlin, accepted the deal, sidelining the EU in a move denounced as treacherous by the anti-Russian opposition.

The protests escalated in late January and Thursday’s bloody violence plunged the country back into uncertainty.

But while Russia handed over a $3-billion instalment in late December, this week it cancelled a planned $2-billion payout, saying that it was waiting for a return to calm.

The sudden burst of caution by Russia is ill-timed for Ukraine, where signs of the political crisis spreading to everyday life are multiplying.

Across the country, the public has anxiously stockpiled basic foodstuffs and rushed to withdraw money from banks as local lenders close branches or reduce hours.

Limits on cash withdrawals have prompted long lines at ATMs, but authorities said the caps were for security reasons, not because of any crisis in the banking system.

Ukraine is one of the world’s great suppliers of wheat, but grain prices have risen, driven up by stockpiling by certain key producers, according to French farming consultancy Agritel.

-Default without Russian support-

The crisis has prompted some panic on the markets. Short-term bond yields have soared to 34 percent against 5.0 percent a month ago. Ten-year bond yields have risen from 8.5 percent in January to 11.3 percent.

While tensions on markets and the streets of Kiev were easing somewhat on Friday, with a deal between the opposition and government in the cards, such rates are well beyond those of such troubled economies as Greece.

Uncertainty hangs over the economy as Russia mulls the situation. The European Union and the United States have also raised the possibility of aid in recent weeks without giving any figure.

Economist Chris Weafer at Macro Advisory said on Friday: “The peace proposals offered by the president – an early election and a power-sharing government – is a positive step forward in terms of politics but does little to resolve some of the key questions for investors and concerning the economy in 2014.”

He said: “The ‘deal’ leaves open the question of who will provide the rescue deal that Ukraine critically needs and on what terms.”

Standard & Poor’s ratings agency on Friday lowered Ukraine’s long-term rating from ‘CCC+’ to ‘CCC’, meaning that the country is close to default.

It said it was “increasingly uncertain” whether Russia would hand over the money promised to Ukraine and predicted that if it did not, Ukraine would default on the $13 billion of debt it is due to pay back this year.

S&P said the Ukrainian opposition lacked a clear leader and was “less cohesive” than during the 2004 Orange Revolution that brought in a pro-Western government.

The Ukrainian authorities spent billions of dollars in propping up their currency last year while the country was in recession and its currency reserves are now dangerously low.

“The only scenarios where a default could be avoided would still mean a substantial deterioration of the economic situation in Ukraine,” Societe Generale said in a research note.

If Ukraine allies itself more closely with Russia, this would put the brakes on Western investments, while on the other hand a rapprochement with the European Union risks leading to a further drop in business dealings between Ukraine and Russia, which accounts for a quarter of Ukraine’s trade.