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Ukraine: Capital Markets Decision Arouses Speculations

Washington, 8 December 1997 (RFE/RL) --Ukraine has decided to stay out of world capital markets until sometime in the next year, but the question in global financial circles is whether Kyiv was pushed back by the International Monetary Fund or stepped back on its own volition as a prudent business decision.

The question is being asked by international investors who are reassessing the countries where they have money in the wake of the Asian financial crisis. This is one of the normal ripple effects of any financial crisis and the investors who are re-examining their investments say it could make a difference if Kyiv is still dependent on the IMF to keep out of trouble or is beginning to make some of these choices on its own.

The Financial Times newspaper last week said it was the IMF which brought a halt to Ukraine's plans to issue several hundred million dollars in Eurobonds, but denominated in Ukrainian hryvnya.

To protect foreign investors from devaluation of the hryvnya, the bonds were being designed with a special feature that protected the purchaser, but left Ukraine open to a large risk of very high costs.

The IMF refused to comment in any way on the story, but a spokeswoman for the Ukrainian embassy in Washington said it wasn't the IMF at all, it was the Kyiv government which had stopped.

She said Finance Minister Ihor Mityukov last week announced the postponement of all Ukrainian operations in international financial markets, including both Eurobonds and Samarai (Asian) bonds, because costs were just too high.

One byproduct of the Asian financial crisis has been a sharp rise in the interest rates developing and emerging market countries must pay to borrow money globally.

Russia has suffered a particularly large outflow of money as foreign investors began withdrawing from government bonds and notes. Moscow was forced to raise its rates significantly in the past week to prevent the situation from getting worse even as it began talking with major global commercial banks about loans totaling around $2 billion to help the country get through the current difficulties.

Ukraine had been much slower getting into global bond and note markets, but had intended to begin issuing bonds first on Asian, and then on European and North American markets.

Sources in global securities markets say the Ukrainian government may also have acted to keep its sovereign credit ratings secret. Kyiv got its ratings from the three private firms which make the ratings world-wide -- IBCA, Standard & Poors, and Moodys -- early last week, but declined to reveal them. Since most countries are anxious to have their ratings known, the suspicion is the ratings are much lower than was expected and lower than that of neighboring countries.

The sovereign credit ratings are necessary before any country can sell bonds or government notes on capital markets in other countries.

While the IMF would not comment, market sources said the advise sounded like something the fund would say in Ukraine's situation. When it agreed to release two monthly tranches totaling about $103 billion from Ukraine's stand-by loan, the fund said it was releasing the drawing because of Kyiv's "renewed commitment to speed up structural reforms, particularly in the areas of privatization and deregulation."

The fund also praised Ukrainian authorities for moving quickly to increase interest rates and reserve requirements to contain pressures on the foreign exchange market during the Asian crisis. But they said it was important the country preserve the gains that had been achieved, and that would mean, importantly, keeping borrowing costs within bounds.

The experts point out that while the feature the financial firm Merrill Lynch was designing into the bonds would expose Kyiv to the possibility of unexpected high costs, it would have been a feature necessary to attract foreign investors in current market conditions.

Whether Kyiv jumped or was pushed will not be as important after the markets see how Ukraine does handle itself when it decides to go back into the world capital markets.