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Ukrainian PM Demands President Resign As Economy Worsens

Former allies Yushchenko and Tymoshenko are now at the center of an intractable feud
KYIV (Reuters) -- Ukrainian Prime Minister Yulia Tymoshenko has called on President Viktor Yushchenko to resign, accusing him of putting personal ambition above the country's interests.

Tymoshenko has long been at odds with Yushchenko, her former ally. But her direct call for his resignation on December 19 suggested a serious worsening of political tensions ahead of a cabinet meeting on December 20.

"I believe the president of this country, who works according to the [principle]...that whatever is worse for the country is better for me, who makes money out of the misery of people, must step down tomorrow together with the head of the central bank," Tymoshenko said on an evening television talk show.

Ukraine's central bank said on December 19 that the government had run out of money to pay wages and meet its financial obligations. Central bank moves, including a 4-5 percent rise in overnight refinancing rates, helped drive the hryvnia up for the first time in two weeks to 8.6 to the dollar from about 9/$ on December 18, when the currency touched 10/$ at one point.

But trade in the currency looked to be drying up on December 19. The hryvnia has lost roughly half of its value since June, raising the prospect that heavily-leveraged companies could fail to pay off maturing dollar-denominated debt.

Serious Debt

The central bank's attack on the government was the latest salvo in a feud which flared on December 18 when Tymoshenko called for the bank's chairman to resign over the fall in the hryvnia.

"The government's inept policies in running the economy...led to a situation in December in which the country could find itself in internal default," the central bank said in a statement. "The government now has no funds to pay salaries, pensions, and social benefits or to cover its domestic and external obligations."

Massive corporate debt, a tumbling currency, a Russian threat to cut off gas supplies, and feuding between state institutions have prompted some analysts to say Ukraine could be the next big casualty of the global downturn.

In the first 10 months of this year the budget had been in surplus. The finance ministry said late last month Ukraine will reach its budget revenues target for the year, despite a sharp fall in industrial output.

In another challenge to Ukraine's battered economy, Russian gas giant Gazprom is threatening to cut off supplies unless Kyiv pays $2 billion the Russian firm is demanding in arrears for gas supplies.

Yushchenko issued a statement on December 19 challenging suggestions from Russian officials that Ukraine next year should pay $250-$300 per 1,000 cubic meters of gas. A price of about $100 would better reflect world prices, the statement said. Negotiations over 2009 prices could have a bearing on the debt dispute. European countries are watching the dispute closely because a brief cut-off of supplies to Ukraine in 2006 over a similar dispute had a knock-on effect on gas deliveries to Europe, which relies on Russia for a quarter of its gas needs.

Mud-slinging between institutions whose job it is to manage the economic crisis -- including a feud between Tymoshenko and Yushchenko -- has helped undermine many investors' faith in the Ukrainian economy.

Hours after the central bank's statement, Yushchenko told it to secure "total control" over banks' purchases of dollars and issued a deadline for it to stabilize the currency market. "There are no economic reasons for not having a stable rate. In 10 days' time we should organize the market in a way that maximizes dollar supply," Yushchenko said at a meeting with central bank and commercial bank officials.

Trading Insults

Tymoshenko and Yushchenko have traded increasingly personal insults since September when a coalition of their parties in parliament fell apart, after months of squabbling.

Although the coalition has since been reinstated, there are few signs that the two have resolved their differences a year before a presidential election.

The economy sank 14 percent in November compared to the same month last year as industrial output fell 30 percent. Inflation, which peaked at 31 percent in May, remains high at 22 percent. The central bank has begun imposing what some analysts have called capital controls to stem the hryvnia's losses, limiting sales of its dollars only to importers and clients needing to service their foreign debt in December. It has also moved to defend the currency by raising the overnight refinancing rate to 22 percent from 18 percent on secured deposits and to 25 percent from 20 percent on unsecured deposits.

Deputy Chairman Anatoly Shapovalov said the central bank sold $180 million on December 18 and would intervene next week. But dealers, frustrated for weeks with the central bank's lack of clear communication, complex intervention procedures, and limits on dollar sales, said the hryvnia could have risen higher had the bank not unexpectedly offered to buy dollars.