In the condition of “certain balance”

Last summer the expert community mostly viewed 2012 as a year of stability, but they did not dare forecast the situation in 2013 due to tremendous Ukrainian foreign debt payments. The situation in Ukraine has changed today – not always for the better. This country has been in fact cut off the financial markets of the West which, incidentally, has problems of its own. Accordingly, experts hold other views and make other forecasts today. You can hear every now and then such sinister horror words as “default.”

Vasyl Yurchyshyn, economic program manager at the Oleksandr Razumkov Center, says that the 2012 situation is not as rosy as we would like it to be. Displaying slides with charts and diagrams, he first speaks about the possibilities of Ukraine to pay off its foreign debts. The expert clearly does not want to irritate the National Bank of Ukraine which somewhat nervously reacts to criticism and, for this reason, cites information from Credit Swift, a well-known investment bank. According to the bank, to discharge its debts, Ukraine will have to spend 40 percent of its GDP this year, i.e., 60 billion dollars, including 10 billion to make up the foreign trade deficit and 30 billion to pay off short-term debts. Ukraine will have to spend about 8 billion dollars from its gold and hard-currency reserves. Yurchyshyn notes that process has already begun. Two billion dollars have already been taken from the reserves in less than two months (May to June). So Yurchyshyn thinks that losing 8 billion dollars is quite an optimistic forecast.

The current balance on a slide, which the expert was showing me, almost coincided with the curve for the pre-crisis 2008. For this reason, Yurchyshyn does not rule out the possibility of a devaluation of the hryvnia and reflects on whether this can help Ukraine. The expert is convinced that devaluation can only produce a positive effect if structural changes are being made in the economy at the same time. But, as these changes are unlikely to occur, there can only be a short-term relief from the shock caused by foreign trade problems, as was the case in 2008. Yurchyshyn also adds that this country has in fact been living in the conditions of a creeping devaluation since early May and even supports this NBU exchange rate because this creates the impression of “certain balance.” However, the expert says that public debts (in the broad sense of the word) have already outweighed the gold and hard-currency reserves, which may become a major blow to the economy. And if we take into account that Ukraine will have to pay 6 billion dollars to the IMF alone next year, the risks will remain dangerously high “until we make a deal with the IMF.” Yurchyshyn expects this deal to be made in February-March 2013 at the earliest. In the meantime, Ukraine will be in the condition of a “smoldering shock.” Still, Yurchyshyn ends his analysis on an optimistic note. His forecast is that next year Ukraine’s results in a number of areas will be better than this year, and the country will manage to avoid a default.

Serhii Sobolev, MP, head of the shadow government, voices a very typical opinion. Aware of the reaction that the frequent use of the world “default” can trigger in this country, he does not focus at all on this thing, preferring only to speak about the risks that Ukraine’s economy is facing. In his view, the number-one danger is budget-related problems which depend very much on the steelmaking sector’s performance. The latter has worsened due to the fall of world markets and a low demand for metal. Sobolev is also worried about the oil market situation. According to his information, the government is going to take an unprecedented step, when 10 million out of the 15 million tons of the imported oil will be exempt from VAT. On the one hand, this seems to be aimed at reviving oil refineries, the MP notes, but while previously the company Livela was responsible for this, now this will be done by way of the government’s direct intervention into the distribution of budgetary resources.

Speaking again on the impact of the world crisis on Ukraine, Sobolev stressed that the greatest attention should be paid to the situation in the Chinese economy which is showing all-time low results and may pull the whole chain after itself. He also emphasizes that “failure to sign [the agreement on] and introduce an area of free trade with the European Union, which could balance things, is also a risk of sorts which may deny [Ukraine] access to the International Monetary Fund’s cheap resources.”

The oppositionist also notes that the NBU has not been announcing for two months the amount of the printed money. He puts this down to the fact that the Ukrainian central bank has been assigned a key role in fulfilling the president’s pre-election social promises. He therefore stresses that elections are the dominant risk-forming factor in Ukraine.

Yet, in the view of Erste Bank analyst Marian Zablotsky, the situation in Ukraine is far from being as alarming as various rating organization claim sometimes. In particular, when a large number of factors are taken into account, as was done recently in a scandalous report that placed Ukraine among the five default-prone countries, our country could find itself in the 50th, not 5th, place in the world. In his words, Ukraine’s foreign debts were in this case “twice overrated and twisted.” The expert assures us that “there will be neither a default nor a devaluation in Ukraine if there is no panic among the populace” because the latter owns 70 billion dollars, with 13 billion added this year alone. “Things will be OK in Ukraine if the government manages to stabilize the public mood and governmental officials themselves do not cook up all kinds of horror stories,” Zablotsky says.

Yurchyshyn shares this viewpoint. He urges the grassroots not to give in to panic and the government to explain its steps, including the invisible devaluation, and tell people “the naked truth.” When a journalist traditionally asked him in what currency it is better to keep money now, he said he would prefer the hryvnia to the dollar. He explained that recent innovations about the Banking Deposits Repay Fund had resulted in the foreign currency being protected worse than the hryvnia, which equalizes chances.