Yanukovych: No Easy Answers and Not Much Time Either

by Andrew Stuttaford

While the political stalemate drags on in Ukraine, a currency crisis is deepening.

The Wall Street Journal reports:

The U.S. dollar was quoted above 9.00 against the hryvnia [on Wednesday] for the first time since February 2009, according to traders, with Ukraine’s national currency going from its recent steady decline into free fall [only the Argentine peso has fared worse this year]. The exchange rate is widely viewed in Ukraine as a bellwether of economic stability, and the National Bank of Ukraine has for years tightly managed the hryvnia slightly above 8 to the dollar.

Mr. Yanukovych is under pressure from more than two months of street protests against his decision to halt an integration pact with the European Union, instead sealing a $15 billion bailout from Russia. But he is now also facing a financial squeeze after he dismissed his government last week, and the Kremlin said it would pause its bailout until new ministers are appointed.

In essence, the problem for President Yanukovych is that the real price of a Russian bailout (turning away from the West) has provoked the political opposition that may yet bring him down. On the other hand, the structural reforms that the EU and the IMF would insist on as a condition of their support would, by their very nature, represent an existential threat to the crony statism that is the essence of the Yanukovych regime. No less dangerously the economic turmoil that would accompany those reforms (think post-Soviet Russia, but without the oil) would be quite likely to sink whatever government happened to be in charge at the time. Rock meet hard place(s).

Meanwhile with further Russian cash injections suspended until Yanukovych definitively turns east, and any EU/IMF package out of the question until Kiev definitively turns west, Ukraine’s foreign exchange reserves are dwindling rapidly. The country is now widely assumed to be down to a little over two months’ import cover, below the three months that is generally thought to the minimum safe level. Making matters worse, Ukraine has (Bloomberg reports) the “equivalent of $5.67 billion in government debt maturing this year, including a $1 billion dollar note in June. It faces a further $3.81 billion in interest payments in 2014.”

Default and/or an uncontrolled collapse in the currency are now a very real possibility. Yanukovych is not only faced with some very tough decisions, he has very little time in which to make them.

Tick tock.