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Ukraine: Report Warns Of Growing Risks For Investors

By Ben Partridge and Ron Synovitz

London/Prague, 30 July 1998 (RFE/RL) -- A leading international credit rating agency, Standard & Poor's, is warning potential investors that the risks of doing business in Ukraine appear to be growing.

A statement issued by the agency's London office this week says that unless Ukraine gets fresh funds to bolster its foreign currency reserves, it will be difficult for Kyiv to avoid an economic crisis.

Another leading international agency, Moody's Investors Service, also is reviewing its rating of Ukraine to reflect a growing risk of crisis.

Both Moody's and Standard & Poor's warn that Ukraine's hryvnia currency faces a possible devaluation because of dwindling hard currency reserves in the Ukrainian National Bank. Moody's says the reserves will be depleted before the end of September unless Kyiv can arrange a new loan from the International Monetary Fund (IMF) or borrow funds from the financial markets.

The IMF has tied approval of a new $2.3 billion loan to the reduction of this year's budget deficit from 3.6 to 2.5 percent of Gross Domestic Product (GDP).

But parliament last week decided not to vote on a presidential decree that would have revised the budget to meet the IMF conditions. Instead, the legislature passed a resolution on the 1999 budget and deputies returned to their home regions before starting a six-week recess.

Meanwhile, a team of IMF negotiators has spent the last week in Kyiv to review the government's progress on reforms. Mohammad Shadman-Palavi, assistant director of the IMF department responsible for Ukraine, said government and IMF officials are likely to make an announcement tomorrow on the outcome of the negotiations.

While parliament dithers on the budget deficit issue, Ukraine's economic situation is becoming increasingly critical. By mid-August, Kyiv must repay about $450 million worth of D-mark denominated Eurobonds. Debt payments during the next two months equal about half of the central bank's reserves -- which stood at $1.75 billion at the end of June.

Ukraine's increasing spiral of debt is similar to the economic crisis in Russia. Earlier this year, investment in hryvnia-denominated T-bills virtually dried up due to traders' fears of a possible hryvnia devaluation.

As a result, Kyiv started to sell D-mark denominated Euro-bonds to raise the money needed to pay off older debts. That move decreased Kyiv's costs for borrowing money on the financial markets. But the D-mark payments now coming due on maturing Euro-bonds put greater stress on the country's dwindling hard currency reserves.

Meanwhile, financial analysts say the possible devaluation of the Russian ruble also could seriously effect Ukraine's economy because it is closely tied to the ruble.

Standard & Poor's report says the risks within Ukraine's banking system are among the highest of all the transitional economies of Eastern and Central Europe. It says Ukraine even lags behind Russia and Kazakhstan's fragile banking system in terms of developing regulations and supervision.

The agency says Ukraines economy also remains stifled by one of the most difficult business environments in Eastern Europe. Problems include the lack of transparency, excessive taxation, burdensome regulations and widespread corruption.

It says the "vulnerable situation of even the largest of Ukraine's banks" suggests lower ratings than at the present. And even the current ratings are seen by investors as a warning to stay out of the Ukrainian market.

Standard & Poor's plans to publish a full report on the Ukrainian market in August.