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In Ukraine, Impact Of Global Crisis Beginning To Sting

Depositors at an ATM in Kyiv in early October.
Depositors at an ATM in Kyiv in early October.
KYIV -- Political uncertainty is nothing new for Ukrainians. But financial uncertainty is something different -- and deeply unwelcome.

As the effects of the global financial crisis take hold around the world, money flows have become a source of extreme anxiety in Ukraine. On the streets of the capital, many residents expressed worry about the fate of their savings.

"I went to Privatbank to withdraw money from my active account, which I'm supposed to be able to use any time," says one man. "They told me to go away; they didn't give me anything. I'm still fighting about it. Tomorrow I'm going to go and file a lawsuit."

"I have doubts," says another. "This is one of those situations where money is controlling people, rather than people controlling their money."

Others were more sanguine. "I trust the banks. The interest rates haven't gone down and our bank is working normally," says one woman, adding, as an afterthought: "When my deposit comes in December, I can take the money out and put it someplace else."

'Strict, But Correct'

Officials at Ukraine's central bank are all too aware of the risks of public jitters.

Citing a "psychological factor," the National Bank of Ukraine (NBU) this week decided to impose limits on lending, foreign-currency trade, and early withdrawals of certain deposits.

The decision, taken October 13, came after National Bank depositors -- unnerved by mounting inflation and a weakening currency -- withdrew more than $1.3 billion from their accounts in just under two weeks. It's hoped the steps will prevent a full-scale run on the bank by panicking citizens.

The NBU was also forced to provide a $1 billion stabilization loan to the country's sixth-largest bank, Prominvestbank, which failed after panicked depositors in the eastern region of Donetsk rushed to withdraw their money.

Vyacheslav Yutkin, who serves as chairman of the board of the Ukrainian branch of Russia's Sberbank, says the NBU's measures were appropriate but too slow in coming.

"The methods of the Ukrainian National Bank are strict, but correct. It's an important and necessary preventive measure," Yutkin says. "If the National Bank had reacted two weeks earlier, banks would have had the chance to hold on to at least $1.5 billion in accounts, and the current liquidity crisis wouldn't be so bad. But it took a long time for them to make a decision, and that made the crisis even worse."

Pieces Of The Puzzle

Some officials are still offering an upbeat assessment of the economic climate. Economy Minister Bohdan Danylyshyn on October 15 noted Ukraine's 2008 GDP growth stayed steady at 7 percent through September, and still remains strong despite "some decline" in certain sectors.

Other authorities have expressed confidence that Ukraine will escape the worst of the damage brought on by the global financial crisis because the country's still-developing stock exchange is less vulnerable to the vagaries of market fluctuations.

It is difficult to gloss over other indicators, however. Inflation peaked in May at 31 percent -- putting Ukraine higher than any other country except Zimbabwe and Venezuela -- before dropping to a less alarming 16 percent in September. The value of the local currency, the hryvnya, last week sank by 20 percent, forcing the NBU to intervene and sell dollars at an artificially low rate.

With such figures in mind, many economy-watchers acknowledge Ukraine will not be able to avoid the long-term effects of the crisis.

This will be particularly true if a global economic and construction slowdown shrink the global market for commodities like steel, which is Ukraine's top export and responsible for 40 percent of its hard-currency earnings. Many steel mills have already slowed or stopped production because of a drop in worldwide demand.

A global recession would also have a dramatic impact on remittances for Ukraine's large migrant workforce. Ukraine is second only to Russia in remittances in Central and Eastern Europe, sending home nearly $8.5 million a year -- an estimated 8 percent of the country's GDP.

Wild Card

Then there is the critical factor of the price Ukraine will pay for Russian gas in 2009.

Ukraine currently pays just $180 per 1,000 cubic meters. But Russia has repeatedly said it wants former Soviet states to switch to market prices, and has pointedly noted its fees for Western European markets exceeded $500 in October.

A sudden hike in Ukraine's gas prices could have a devastating effect on the country's financial reserves -- although not everyone is worried.

"We shouldn't forget that Ukraine has almost $40 billion in reserves; that's more than enough," says Oleksandr Suhonyako, the head of the Association of Ukrainian Banks, a grouping of the country's major commercial banks and credit institutions. "But the financial crisis isn't going to be over soon, and it just keeps growing every day. I think it's not a matter of a month, but half a year, or even more. In order the meet the problems of the future, we need to start thinking about international loans now."

Prime Minister Yulia Tymoshenko, speaking at a news conference on October 14, avoided answering a question of whether Ukraine was seeking help from the International Monetary Fund (IMF).

Such a move would be interpreted by many as a sign that Ukraine's economy was in deep trouble. Instead, Tymoshenko -- perhaps looking ahead to a presidential bid in 2010 -- stressed that the government was doing "everything possible and impossible" to minimize the impact of the global crisis on Ukraine.

But an NBU official said on October 15 that Ukraine might seek support from an IMF credit program. Hungary, Serbia, and Iceland have already said they will approach the IMF for help gaining access to credit and defending their currencies investors' risk aversion.

Finance Minister Viktor Pynzenyk has begun meeting with members of an IMF expert mission that arrived on October 15, and the two sides "discussed the situation concerning the world financial crises and the challenges facing Ukraine's financial system," Reuters reported.

The statement added that both sides agreed to produce "recommendations for Ukraine vital for the operation of the banking sector and macroeconomic stability for Ukraine, based on the experts' assessment and taking account of the experience of other European countries."

Reuters reported that the IMF's Kyiv office made no comment on the mission, adding that it was expected to remain in Ukraine for at least a week. It cited estimates of the potential IMF largesse to Ukraine at $3 billion-$5 billion.

Speaking to reporters after a cabinet session on October 16, Reuters quoted Tymoshenko as saying that "we have information" that the IMF "is ready to examine special credits from $3 billion-$14 billion to stabilize the financial system," but that it would be contingent on Ukraine calling off early elections announced last week by President Viktor Yushchenko.

No Rapid Reaction?

Accordingly, it's the government's own internal struggles that may prove one of the greatest liabilities as the country fights against impending economic woes.

Ukraine in December is facing its third set of parliamentary elections in as many years, a result of intractable squabbling between Tymoshenko and Yushchenko. The pair's Orange Revolution partnership in 2004 quickly devolved into an intense political rivalry that has mired Ukraine in a protracted political standoff and may continue until 2010, when the two are expected to face off for president.

Yutkin says Ukraine has grown accustomed to political uncertainty, and that the ongoing political drama will not have a noticeably adverse affect on economic conditions.

"I think politics are having only minimal influence in this situation," he says. "The economic system in Ukraine adapted a long time ago to the conditions of political instability and inflation. Higher prices and political upheaval aren't the main factors causing panic among bank depositors."

The World Bank, however, warned this week that policymakers in Eastern Europe and Central Asia "need to be prepared to respond quickly to the rapidly changing international financial environment." Some worry that Ukraine's constant cycle of elections and political infighting mean little, if any, decision making will be done in the interim.

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