It has been a thousand years since the Vikings established Ukraine as a trading area. In the 10 centuries since, Ukraine has been a pivot point in terms of trade and security for both East and West.

Interesting, that the descendants of the Vikings-modern day Scandanavians-appear to be apprehensive about Ukraine’s inclusion into the “new” Europe. While it is understandable that European politicians would question the admission of potential members-especially a nation like Ukraine that still has not emerged completely from it’s Soviet past-the EU should be rolling out the welcome mat. In fairness-rarely a trait that politicians actually apply-Ukraine is no better and certainly no worse than other recent entries into the European club.

A Ukraine in the EU would be a good for BOTH Ukraine and Europe and would stabilize Central and Eastern Europe to a greater degree than present borders are capable of. It would also force more rapid economic and political reform in Ukraine and perhaps pave the way for reforms further east in Russia and some of the former Soviet republics, to say nothing of new markets and trade.

While Ukraine would be best served by a Swiss-style neutrality that takes advantage of its geographical position, entry into the EU is a good second option. Of course, the actions of the EU will have the greatest influence over the ultimate direction. It should weigh it very carefully. If the EU accepts Turkey into the EU, but rejects Ukraine, the consequences for the EU as a whole could be negative. The EU would begin to resemble the fragile polyglot of the Austro-Hungarian Empire, and would set the stage for instability beyond Europe.

Swedish politician: The question is not about what Europe can bring to Ukraine, but what Ukraine can bring to Europe

“The question of Ukrainian membership to EU is not about what Europe can give to Ukraine, but what Ukraine can give to Europe”, said Anders Bengtsson, the Swedish parliamentarian while addressing the third Europe-Ukraine forum participants in Kiev on February, 26, reports a REGNUM correspondent.

“Sweden is in favor of EU expansion, but we still see many problems in the Ukraine, which do not promote Ukrainian membership to the organization. Of course, there are great amount of newspapers and free press, but there is still a lack of democracy. Ukraine faces huge social gap, which is increasing. There is enormous problem with corruption. Besides, there is a large gap between the living standard in Kiev and countryside”,- said he.

The Swedish politician underlined that “it is important not the fact, that political elite wants to be in EU, but also the rest population of Ukraine have to understand it. EU will join not the political elite, but the whole country, that is why the people of Ukraine should realize to the full extend what to expect while being in the EU”.

Ukraine’s credit rating continued its slide and is now on par with that of Pakistan. As reported at www.bloomberg.com, Ukraine has the lowest rating in Europe. Concurrent with this news, the Ukrainian currency-the hryvnia (UAH)-has been moving steadily downward and is rapidly approaching 10 hryvnia to 1 U.S. dollar. Just as $4USD gasoline was the tipping point in the United States that led to political change, 10 hryvnia to the dollar may be the trip wire here.

Locally, the prices in stores and restaurants have been increasing, while the availability of imported food is declining.  Here in Odessa,  famed Deribasovskaya Street in the very center of the city has seen real estate sales prices decline from a stratospheric $4,000+ per square meter to $1,200 and lower…with more price discounting expected to follow.

Ukraine Ratings Cut to CCC+ by S&P on IMF Loan Risk 

By Daryna Krasnolutska

Feb. 25 (Bloomberg) — Ukraine’s credit rating was cut two levels by Standard & Poor’s, a day after Latvia was downgraded to junk, because political turmoil poses growing risks to the country’s International Monetary Fund loan.

The long-term foreign currency rating was lowered to CCC+, seven levels below investment grade, the rating company said in an e-mailed statement. Ukraine’s rating is now the lowest in Europe and on a par with Pakistan. S&P left Ukraine’s outlook negative, indicating it may reduce the ratings further.

Ukraine turned to the International Monetary Fund for a $16.4 billion loan in November after its financial system and markets were battered by the global financial crisis and economic downturn. The country’s ability to meet IMF terms by cutting spending has been hampered by the battle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, who planned a 5 percent budget deficit this year, the president’s office claims.

“The downgrades reflect intensifying execution risks associated with Ukraine’s arrangement with the IMF, due to the absence of broad political backing for necessary budgetary revisions and banking system reform ahead of the January 2010 presidential elections,” S&P said in the statement.

Contracts to protect Ukraine’s government bonds against default cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps at 11:40 a.m. in London. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide, Bloomberg data show.

Eastern Woes

Eastern Europe’s economies have been hit by financial meltdown and economic recession, which have dried up demand for exports while shutting off credit and investment.

Latvia’s credit rating was cut to junk by S&P yesterday, the second European Union nation to receive such a grade, because of a “worsening external outlook” triggered by the global financial crisis.

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade on Feb. 12 and kept the outlook “negative,” indicating they may fall further. Moody’s said yesterday it may cut Ukraine’s ratings within three months.

S&P lowered Ukraine’s credit ratings twice in 2008 on concern over the country’s banking system, weakening hryvnia and slowing economic growth.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Ukraine’s growth slowed to 2.1 percent last year, compared with 7.6 percent the previous year. The economy may contract 9 percent this year, according toAlexander Morozov, the chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank.

The crisis in Ukraine is also a crisis for Europe.  If Western European countries fail to address the problems here, the spillover effect will be huge. Ukraine is key to security of Europe-much more than politicians acknowledge. Moreover, the banking and credit systems of Europe are integrated with those of Eastern Europe, and the markets-both financial and trade-are too fragile for those ties to be ignored.

From the Financial Times (www.ft.com):

Kiev crisis tests Berlin and Moscow

By Quentin Peel

Frank-Walter Steinmeier, Germany’s foreign minister, is not normally a man lost for words. In an interview with the FT last week he talked fluently on how to cope with the global economic crisis and on relations with Russia.

On one subject, however, he was temporarily silenced: what to do about the crisis in Ukraine.

 “We haven’t got an answer to everything,” he said with a grin.

Ever since the collapse of the Soviet Union, Ukraine has been a high priority for German foreign policy. Russia has never come to terms with the idea of the country being independent – Vladimir Putin, then Russian president, said as much when he attended last year’s Nato summit in Bucharest. It is a vital conduit for 80 per cent of Europe’s natural gas supplies from Russia, as last month’s total shutdown of the transit pipes demonstrated.

Berlin wants stability in Ukraine, to avoid creating the grounds for any unnecessary conflict with Moscow. Russia wants a compliant government in Kiev that does not talk about joining Nato and does not control the transit routes for Russia’s gas supplies to Europe.

Mr Steinmeier’s concern, however, is that instead there is “complete deadlock” in the Ukrainian political process with the stand-off between the president, Viktor Yushchenko, and the premier, Yulia Tymoshenko.

It undermines attempts to draft a recovery programme in the face of a collapse in gross domestic product – down 20 per cent in the 12 months to January.

“On the one hand it makes them incapable of acting, and on the other the preparation for elections is not happening,” he said.

“We have supported Ukraine at the IMF [which agreed a two-year standby credit last year of $16.4bn], and we supported them at the [European Bank for Reconstruction and Development]. Whether we can do more, I do not know.”

Yet more is almost certainly needed. For a start, the gas deal negotiated with Russia in January could well fall apart in a matter of months, if not weeks.

Naftogaz, the Ukrainian state gas monopoly that is responsible for paying Gazprom, the Russian supplier, is in effect bankrupt. It is forced to sell gas to Ukrainian consumers at a huge markdown and loses about $2bn (€1.5bn, £1.4bn) a year, a sum that has to be met with government subsidies.

The second tranche of Ukraine’s IMF credit has been suspended while the government argues over whether its budget deficit should be 1 per cent or 3 per cent of GDP. The fund will only allow the latter if extra finance is found.

‘If you say Yes to Ukraine, what do we do in Moldova or in Georgia? Where does it begin, and where will it end?’

Anders Aslund, former adviser to the Ukrainian government, is more sanguine than Mr Steinmeier. He argues that Ukraine simply has “the most open democratic discussion that you hear anywhere, apart from Britain and India”.

He also believes that the economy has already hit bottom. But another $5bn is needed – beyond the funds from the IMF, World Bank, European institutions and commercial banks – to plug its financing gap.

“It is very small money,” he says, “but the consequences of not giving it are horrendous. It is important that you should have funds available that can be used for fire brigade exercises.”

Mr Steinmeier is unhappy about any such idea. “If you say Yes to Ukraine, what do we do in Moldova or in Georgia? Where does it begin, and where will it end? Can you restrict it to Ukraine?” he asks.

Russia, on the other hand, has said yes in principle to helping out. But what strings will be attached? Not the sort of budget discipline Berlin would demand. Mr Putin – and Gazprom – have made little secret that they want to end up in control of all the gas pipelines and storage facilities in Ukraine.

Then there would be no need for any more disputes about gas prices in the middle of winter.

You could title this article from The Economist (www.economist.com): Ukrainian Neros fiddle while Kyiv burns.  

Ukraine is not ablaze yet. That may come if the political stalemate is not resolved. If things get worse for Ukrainians…and the tipping point might be if the hryvnia slides to 10 to 1 U.S. dollar…people could t take to the streets and ignite another revolution.

Doubtful the color would be ORANGE this time around. Indeed it could be Red…the color of blood and the color of extreme forms of socialsm.

Ukraine’s economic slump

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Feb 19th 2009 | MOSCOW
From The Economist print edition

Leaders bicker as the economy sinks

AP

THE D-word is stalking Ukraine. As its political leaders bicker, investors are having nightmares about its defaulting on its sovereign debt. Yulia Tymoshenko, the prime minister, has sought to calm rising investor panic, suggesting that nothing in the government’s finances warrants “pronouncing the word default”. For now, most experts agree. Even though the markets are charging exorbitant annual rates (32%) for Ukrainian dollar debt (see chart), the coffers seem sturdy enough. Sovereign debt accounts for only about one-fifth of total external borrowing of around $105 billion. The government can handle that, at least this year. But an inevitable series of corporate and banking defaults are likely to hasten the economy’s decline.

By now Ukraine should have received the second tranche of a loan from the IMF worth $1.8 billion. But the IMF says Ukraine is not sticking to the conditions of the loan—worth a chunky $16.4 billion in total—and wants greater fiscal discipline. Uncertainty about whether the rest of the loan will be disbursed is causing jitters. But as tension mounts, the president and prime minister are at one another’s throats. President Viktor Yushchenko recently, for the umpteenth time, accused Ms Tymoshenko of “betraying national interests”, by talking to the Kremlin about a $5 billion loan. Playing the anti-Russian card is one of his favourite ways of wooing public opinion in western Ukraine, where there is little love of Russia or its language.

Ms Tymoshenko is resisting IMF pressure to balance this year’s budget, forecast to show a deficit of 3% of GDP. Cutting the deficit would force her to scrap some of the social promises she had made to voters. Mr Yushchenko and Ms Tymoshenko are expected to contest a presidential election in the coming year, and both are playing politics while the sickly economy gets sicklier. Dependent on steel, fertiliser and chemical exports, Ukraine has been hit hard by the global slump in commodity prices. Officials say that industrial output crashed by a jaw-dropping 34% in January year-on-year. Valery Litvitsky, an adviser to Ukraine’s central bank, estimates the economy contracted by as much as 20% in January alone, as a dispute with Russia over gas prices reduced supply and forced the country’s heavy industry to go slow.

The number of Ukrainian banks going bust is meanwhile growing; many Ukrainian workers are on unpaid and indefinite leave; and the currency, the hryvnia, has shed over a third of its value since the autumn. That has made life tough for consumers, many of whom have borrowed in dollars to buy houses and cars.

To make matters worse, Ukraine is now without its experienced finance minister, Viktor Pynzenyk, who has resigned complaining he had become “a hostage to politics”. Opposing the deficit, he refused to approve the budget, and suggested that the government’s overall economic plan was unrealistic. The government is still forecasting that the economy will grow slightly this year, by 0.4%, compared with 2.1% last year. But economists say it will probably contract by around 5% or even 6%.

Ms Tymoshenko is trying to borrow money wherever she can. Her government has sent begging letters to America, the EU, China and Japan, as well as Russia. And she is trying to muster a show of unity for the IMF. She wants Mr Yushchenko to join her in signing a declaration expressing readiness to co-operate with it. To escape this crisis, Ukraine does indeed need the squabbling duo to set aside their rivalry: and not just for show.

With word today of a gov’t cover up of last month’s GDP figures (a 15 percent drop in actuality) it’s becoming clear what lay ahead for the current crew of politicians in Kyiv. Whether they are replaced with leaders who can bite the bullet and serve up the harsh medicine Ukraine needs to survive remains to be seen. Regardless, the world anxiously awaits news from Ukraine with fears that a new contagion is breeding in the Borderlands.

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