The dependence on exports-particularly of steel-has made Ukraine an almost “mono-crop” economy. Since Ukraine does not have a fully developed domestic market for products, nor the capacity to manufacture high end consumer goods, it relies too heavily on exports of products that lack the added value to promote real and sustained economic growth.

While the crisis has highlighted this, and there is considerable economic pain all around, it may actually give Ukraine an opportunity to develop manufacturing for the domestic market. The recent imposition of import duties-while not positive-could have the effect of strengthening the domestic industrial sector.

The best scenario-and we are an optimistic bunch-will be that Ukraine attracts more manufacturing, especially from Western Europe-as the costs are quite cheap by comparison. In addition, when the domestic market for finished goods matures, Ukraine will be poised to see real sustainable growth. Of course, this will all depend on the political situation. Right now, that looks as stalemated as ever.

Ukraine’s rust belt: the eye of the economic storm (from AFP)

MAKIYIVKA, Ukraine (AFP) - The giant Soviet era notice board to record production achievements and the photographs of the heroes of labour still stand proudly outside the factory.

But the main steel plant in the southeastern Ukrainian city of Makiyivka will not be breaking any output records now amid a devastating economic crisis that has forced it lay-off thousands of workers and almost halt production.

The groups of disaffected young men stalking the town in search of temporary work to make ends meet underline the problems of this region, which has the biggest concentration of mining and metals plants in the country.

Already rocked by the collapse of the Soviet Union’s command economy, the global economic crisis means the metals factories have been struck by a plunge in export orders that count for 80 percent of their production.

“The economic crisis has affected everything and has affected me in particular because I have lost my job,” said Roman Sleznyov, a metals engineer, as he looked for temporary work outside the factory.

“I have a higher education qualification in engineering but at the moment all the factories have virtually stopped working and it is impossible to find work.

“I’m looking for work now but something very simple. I just want to find work and to feed myself,” he said.

According to local unions representative Anatoly Akimochkin, the Makiyivka Metals Factory, once renowned in the Soviet Union for its use of experimental technologies, has laid off 7,000 workers due to the economic crisis.

The figures speak for themselves: in the first two months of this year, industrial production in the Donbass region fell by 35 percent and metals production fell by 44.2 percent, according to official statistics.

“The crisis has taken on a very serious magnitude in our region, primarily because the economy of our region is an export dependent economy,” the Donbass region’s governor Volodymyr Logvynenko told AFP in the regional capital Donetsk.

He said that factories were not just suffering from a fall in orders but above all from the plunge in global prices for their products.

A statue of Lenin still stands in the centre of Donetsk, a city founded in the 19th century by a Welsh mining entrepreneur. A plinth with a slogan by the first Soviet leader shows the importance of the region in the Soviet psyche.

“The Donbass is not a region by chance, it is a region without which Socialist construction would simply remain a nice wish,” it reads.

Ukraine is one of the countries worst hit by the global economic crisis worldwide. According to Ildar Gazizullin, senior economist with International Centre for Policy Studies the national economy will contract by 13 percent in 2009.

Economists said that while Ukraine’s notoriously chaotic politics has not helped matters, the main reason why the country has been hit so hard is the failure of regions like the Donbass to diversify their economies.

With the big factories so reliant on export markets and small businesses slow to develop, the country has always been hugely vulnerable to such a crisis.

“Ukraine is a small and very open economy,” said Gazizullin.

“If you look at the ratio of our trade to GDP it is one of the highest ratios in the world, we export a lot, so the dramatic decline in steel prices and demand in October and November last year hit the economy hard.”

“If you look at the structure of the Ukrainian economy, especially in manufacturing, it didn’t change much after the collapse of the Soviet Union.”

When leaders in Western Europe talk about Ukraine and other Eastern European nations in terms of security or economics, there is often a disconnect between what is real and what is imagined. For example, many believe that defaults and economic downgrades will not affect Western Europe to any great degree and that the crisis will somehow contain itself within Eastern and Central Europe with moderate fallout in the West. Sort of like Chernobyl. 

These naïve politicians believe there is a “Berlin Wall,” still extant that keeps Europe neatly divided in favor of the West. This is patently wrong. If Europe does not address the banking and credit challenges of its neighbors, these problems will increase and could bring down the entire European economic structure.

As the article from the Wall Street Journal (www.wsj.com) states, Western European banks and ultimately the citizens of the EU will bear the brunt of Eastern European sovereign defaults. Simply: if Ukraine goes down, the EU could be pulled down with it.

Eastern Europe and the Financial Crisis

Easy credit fueled a boom in the ex-Communist world too.

By DAVID ROCHE

As a rule, middle-class societies newly liberated from dictatorship generally go on a credit binge that ends in tears. It’s like giving a released prisoner a limitless credit card — a spending spree is sure to ensue. That’s what happened in Asia and Latin America in the past, and what more recently happened in the former “Eastern Bloc” nations of Europe.

Unlike past examples, however, the credit binge in Eastern Europe has been in foreign currencies, with Western European banks or their subsidiaries extending most of the foreign credit. In 2007, private-sector foreign currency equalled 126% of foreign-exchange reserves in Eastern European countries. And in 2008, the region’s banking system borrowed an additional $100 billion.

The European Union’s (EU) decision earlier this month not to provide a massive, 180 billion euro bailout to Eastern European banks made headlines around the world. But that doesn’t mean the richer nations of the eurozone have abandoned their poorer neighbors to the east. Instead of handing over billions to bankers who made terribly poor decisions, as the U.S. Treasury has done in America, each bailout will be considered on a case-by-case basis, and each will be subject to strict “conditionalities” similar to those imposed in any IMF agreement.

Such a prudent approach does not mean Europe is now being divided between east and west along old lines. On the contrary, countries like the Czech Republic, Slovenia and Slovakia, which have pursued sane and sober economic policies, are just as opposed as Germany to bailing out the likes of profligate Hungary, Latvia, Romania and the Baltic states. Key EU leaders are simply not prepared to provide a blanket handout to those EU countries that got themselves into deep trouble through the siren call of excessive credit.

Remember, the liquidity boom in emerging Europe was almost solely in the private sector. While the region’s public-sector net external debt (after subtracting increased foreign-exchange reserves) fell from 2002 to 2007, private-sector foreign-currency debt rose to 126% of foreign-exchange reserves. This launched a property boom that was based on households taking out mortgages, not in high-interest local currencies, but in low-cost foreign currencies such as Swiss francs, euros or even yen. As a result, 50% of household debt is now in foreign currency in Hungary; 30%-40% in Poland and Romania; and over 70% in the Baltic states.

Eastern Europe’s corporate sector also expanded on the basis of “cheap” foreign-currency debt. By mid-2008, nonfinancial foreign-currency corporate debt had reached over 45% of all corporate liabilities in Bulgaria; over 30% in Ukraine and the Baltics; and over 20% in Hungary and Russia.

Eastern European banks expanded their foreign currency lending to households and corporations. Incredibly, between 2002 and 2007, bank credit to homeowners doubled each year in Romania. It rose 60%-80% a year in the Baltics and Bulgaria, and 20%-30% in Poland and Hungary. Meanwhile, lending to corporations grew by about 20%-30% a year.

Not surprisingly, asset-price bubbles followed. House prices rose sharply. Double-digit growth was the norm. Annual price rises accelerated to reach around 30% in Poland, Bulgaria and Slovakia and over 25% in Russia. In turn, the real-estate boom sparked a consumer boom. As in the U.S., consumer spending rose quickly and household savings rates plunged.

But the credit crunch changed all that. Global capital flows dried up. The assets bought in a carry trade with foreign currency (homes and investments) sank in value. The music stopped and so did the dancing — local currencies have fallen like a stone as capital flows reversed. The countries of Eastern Europe are left with huge imbalances on their external accounts and massive amounts of foreign debt.

Without capital funding to tide them over, Eastern European households with large foreign-currency mortgages and companies with large foreign-currency debt are going to default. Even if we see an economic recovery in the region, the potential net losses are massive, ranging from about 5% of GDP in Turkey, Russia and Romania, up to 6% in the Czech Republic and Poland, and 8%-10% in Hungary, Bulgaria and the Baltics. Such losses would virtually wipe out foreign-exchange reserves in Latvia and take out around 40% of reserves in Turkey, the Czech Republic, Poland, Hungary and Ukraine.

There’s little doubt that Eastern Europe’s credit crunch will ricochet back into Western Europe. Most Eastern Europe banking systems are dominated by Western European banks. Indeed, this could add another $130 billion to the losses that European banks have already incurred. Such a loss would destroy nearly another 10% of tier one capital (equity capital plus disclosed reserves) in Western European banks.

The hit would be even more serious for the banking systems of several small and medium-sized European countries. Austria is most vulnerable, since the Eastern European exposure of its banks is about 80% of the country’s GDP. Losses for Austrian banks could run as high as 10% of GDP, or over 25% of Austrian bank capital. If the Baltic states were to default on their obligations, Swedish banks would face losses equivalent to 20% of their capital.

So what is Western Europe doing to avert these losses? The EU recently agreed to up its support for the IMF by $100 billion and double its 25 billion euro line of credit for non-eurozone members that it started last December. Still, the more prudent EU members are hesitant to throw good money after bad, preferring to handle any bailouts through the IMF with the requirement of greater oversight. This week’s $20 billion bailout of Romania was led by the IMF and only backed by the EU.

The risk now is that soft options will be adopted that attempt to avoid the necessary pain that must follow. Already the IMF has announced a “flexible” credit facility for “good” borrowers and relaxed monitoring of funds for others. Still, IMF conditionalities are better than nothing. Without them, bailing out Eastern European banks and creditors that set up a system based on foreign currency they couldn’t afford to repay would be the extreme of moral hazard, and an even worse example than that set by the U.S. bailouts.

Mr. Roche is president of Independent Strategy, a London-based consultancy, and co-author of “New Monetarism” (Lulu Enterprises, 2007).

from www.theeconomist.com:

Political turmoil in western Ukraine

Mar 23rd 2009
From the Economist Intelligence Unit ViewsWire

Yuliya Tymoshenko’s party has been beaten soundly in its heartland in Ukraine

The result of a controversial regional election points to a collapse in support for Ukraine’s prime minister, Yuliya Tymoshenko, in her political heartland, with voters flocking to a radical nationalist opposition grouping. In the context of a deep recession, a fall in support for the government is not surprising—and is reflected in opinion polls. However, the Ternopil result points to extreme levels of dissatisfaction with all established politicians. Thus it is far from certain that the 2010 presidential election will be a straight fight between Ms Tymoshenko and the runner-up in the 2004 ‘Orange revolution’ vote, Viktor Yanukovych.

Five days after the west Ukrainian region of Ternopil held an election for its regional assembly, the country’s national government continues to contest the outcome. On March 18th a court in the capital, Kiev, issued an injunction banning the publication of official results, pending the resolution of a suit brought by one of the parties in Prime Minister Yuliya Tymoshenko’s government. On March 19th, however, a representative of the Central Electoral Commission said that the results had already been published and so the election process was at an end.

The election result amounts to a political earthquake in Ukraine. In the 2007 parliamentary election, the Yuliya Tymoshenko Bloc (YTB) won Ternopil with 51% of the vote. It was the YTB’s third-best result across the country’s 27 administrative regions. In the March 15th election, with turnout estimated at a respectable 51%, the YTB finished a distant fourth with 8.1%. The clear winner was the radical national bloc Svoboda, led by Oleh Tyahnybok, with 34.9%. United Centre, a new grouping formed by the head of the presidential administration, Viktor Baloha, came second with 14.2%. The Party of Regions (PoR), led by the former premier and de facto leader of eastern Ukraine, Viktor Yanukovych, came in third with 9.8%. Our Ukraine-People’s Union, the party established by President Viktor Yushchenko, but now only partially loyal to him, was sixth with 5.5%.

The election was controversial even before the results were published. It was called in December 2008, but on March 3rd the YTB and PoR joined together in the national parliament to cancel the election, although Ternopil’s courts ensured that it went ahead. Seemingly, both parties feared that they would perform poorly if the vote was held. The YTB now insists that the election was manipulated by Mr Baloha, noting that the head of the Ternopil regional administration, Yuriy Chyzhmar, was the first name on the list of the United Centre Party. Moreover, the YTB says it did not campaign and so the result cannot be viewed as an accurate indicator of its level of support in the region.

Contested collapse

Given the circumstances surrounding the election, drawing firm conclusions from Ternopil about the national situation is tricky. The YTB’s claims about its level of support being suppressed, and United Centre’s being inflated, cannot be dismissed out of hand. Moreover, although turnout was impressive at 51.1%, this was appreciably lower than the 76.5% turnout recorded in Ternopil for the 2007 parliamentary election.

Thus, the actual level of support for the YTB in western Ukraine—Ms Tymoshenko’s political heartland—may not be down to a single digit. As a corollary, the prime minister’s party may not actually trail behind the PoR in a region that Ms Tymoshenko is counting on if she is to have any chance of winning the presidential election due in 2010.

However, it is difficult to dispute the conclusion that the YTB’s support has collapsed; the only argument is about the scale of the collapse. The PoR, by contrast, has seen its support in Ternopil more than treble compared with 2007, although this is from a very low base of just 3%. Our Ukraine fared very badly too, polling to 5.5% compared with the 35.2% share it claimed (in alliance with People’s Self Defence) in 2007. It is reasonable to assume that Mr Baloha’s United Centre was a beneficiary of the collapse in support for the YTB and Our Ukraine.

The turn against established parties and their leaders is a nationwide trend. A Razumkov Centre poll published in mid-March, asking voters whom they would support in the event of a snap presidential election, showed that support for Mr Yanukovych stood at 17.1%, compared with 27.8% a year earlier, and that support for Ms Tymoshenko had fallen to 15.7% from 25.3% a year ago. Support for Mr Yushchenko fell to 3.5% from 11.6% over the same period. The Ternopil result suggests the level of disenchantment with the established order is much higher, however. And there is support for this view in a mid-February poll by the Research and Branding Group, which asked voters to describe their attitude towards the authorities (respondents could agree to more than one description). Just 2.8% indicated respect for the authorities and 3.4% showed support; 18.5% were indifferent. The final two numbers are the most shocking: 20% felt hatred and over 71% distrusted the authorities.

It’s the economy, stupid

That the public should have turned against their leaders is not particularly surprising. Ms Tymoshenko enjoyed high opinion-poll ratings last year, when the economy was growing and her government busied itself with inflationary increases in wages and benefits, as well as a vote-grabbing scheme to compensate those who had lost money in the old Soviet savings bank. The fact that inflation was running close to 30% for several months in the middle of the year remained a background issue.

However, from autumn 2008 the Ukrainian economy started to turn down. Industrial output contracted by around 24% year on year in the final quarter, exports shrank sharply, the government rushed to conclude a US$16.4bn IMF package to stave off a financial crisis, and domestic sources of credit came close to a standstill. The currency, which for several years has traded at roughly HRN5:US$1, fell to HRN8:US$1 by the end of the year. Loan defaults and redundancies rose sharply. In 2009 the economy has contracted further, inflation is stuck above 20%, gas prices are set to rise sharply as a result of the deal Ms Tymoshenko negotiated under pressure with Russia’s Vladimir Putin and government squabbling has put the IMF deal in jeopardy. Although the country appears on the edge of ruin, Ms Tymoshenko and Mr Yushchenko seem to devote an inordinate amount of time to fighting with each other rather than fixing the economy.

Open contest

YTB allegations that administrative resources in Ternopil were deployed in favour of United Centre, thus skewing the result, miss the point. Mr Tyahnybok’s Svoboda took 2.4 votes for every one claimed by United Centre, and there are no suggestions that its success was the result of administrative resources. The party’s success in the strongly nationalist region suggests that voters disenchanted with the current crop of politicians are shifting their support primarily to leaders espousing populist chauvinism as real wages decline, loan burdens increase and redundancies grow.

One question that arises from the Ternopil poll concerns the attitude of the electorate in eastern and southern Ukraine. Are fringe parties there ready and able to exploit dissatisfaction with established parties by eating deeply into the PoR’s core electorate? Or will Mr Yanukovych be shielded because he is not in government, and his allies have perhaps a tighter grip on society and regional media in the east and south of the country? The PoR leader might take comfort from Ternopil, not only because his appeal has seemingly risen there but also if he calculates that his support is more recession-proof than Ms Tymoshenko’s.

In several European countries, local elections are a way for voters to fire a warning shot to incumbent governments, rather than a firm statement of future voting intention. If the Ternopil voters were not engaging in signalling behaviour, Ms Tymoshenko’s presidential ambitions are in serious jeopardy. Even if the electorate was sending a warning, it is tempting to conclude that the prime minister has a mountain to climb: there is little or no scope in the budget for popularity-raising giveaways, while the economy is yet to hit the bottom and seems unlikely to return to growth before the presidential election must be held.

For all Ms Tymoshenko’s efforts to build support in eastern Ukraine and neutralise Russian opposition to her candidacy, with a view to boosting her chances of beating Mr Yanukovych in a run-off, it may be the recession that defeats her. It is dangerous to write off a politician of Ms Tymoshenko’s acumen at this juncture, but in the wake of Ternopil, it can no longer be taken for granted that she and Mr Yanukovych will face off for the presidency in one year’s time.

“This could be the beginning of a beautiful relationship,” as the character “Rick” in the movie “Casablanca” states to his new found friend, Ukraine and other emerging market nations may be thinking the same regarding economic giants.

Ukraine would receive a short term benefit from selling pollution credits to fully developed economies. A well timed infusion of cash into the Ukrainian treasury would certainly help, as well as increased economic ties with nations like Japan. However, the system is ripe for corruption as governments would have an incentive to manipulate the system and under-report so called greenhouse gasses. Moreover the carbon credit scheme could limit the development of industry in nations like Ukraine. Emerging market economies would be under pressure to conform to arbitrary standards that even a technologically advanced manufacturing platform like modern Japan cannot meet.

What will probably happen are the enactment of new standards that will include waivers and exclusions…or loopholes…so that nations could conform without really producing or reducing anything. For the financial industry this will be a windfall as another set of derivatives are born to be traded and sold for profit.

Japan to seal carbon deal with Ukraine soon: source

Japan is set to complete a deal this week to buy emissions rights from Ukraine, marking its first deal via a government-to-government trading scheme under the Kyoto Protocol, a Japanese government source familiar with the talks said on Monday, according to Reuters.

Ukraine will deliver 30 million tonnes of so-called Assigned Amount Units (AAUs), half of which will be delivered in the Japanese fiscal year that ends this month and the other half in the next fiscal year, the source said.

Japan`s greenhouse gas emissions rose to a record 1.37 billion tonnes in the year to March 2008, putting it at risk of failing its Kyoto target to cut emissions by 6 percent from the 1990 level of 1.26 billion tonnes in carbon dioxide equivalent.

Over the past two years, Japan has talked with about 10 eastern and central European countries, including the Czech Republic, Poland and Hungary, to help it meet its greenhouse gas emissions target under Kyoto.

Japan hopes to complete another AAU deal with a different eastern European country, estimated to be worth tens of millions of tonnes in April, the source added.

The source declined to comment further about the second AAU deal.

A second government source said talks with Poland and Hungary had been delayed.

Japan has pledged to buy 100 million tonnes in carbon offsets from abroad during the 2008-2012 Kyoto period to supplement the country`s voluntary industry-led plans to improve energy efficiency and reduce fossil fuel use.

In the two years through March 2008, Japan has bought the equivalent of 23.1 million tonnes from abroad, all of which are CERs, or offsets generated by clean energy projects in developing countries under Kyoto`s Clean Development Mechanism scheme.

Ukraine and Lativia warn of financial disaster in the West if they are not helped

Ukraine and Latvia have warned that Western Europe faces financial disaster unless it unites to help stricken countries in the former Soviet bloc.

By Adrian Blomfield in Kiev 
Last Updated: 9:52PM GMT 15 Mar 2009

Government officials from the two countries, which are at risk of bankruptcy as a result of the global financial crisis, told the Daily Telegraph that the European Union’s biggest powers were in danger of repeating the worst mistakes of the 1930s depression by retreating into isolationism and protectionism.

Grigory Nemyria, Ukraine’s deputy prime minister, said that the EU had to overcome bitter internal differences over how to deal with the economic crisis in eastern Europe when world leaders met next month at the G20 summit in England.

“The EU should not just be helping Ukraine because Ukraine is helpless,” Mr Nemyria said. “It should be doing so because it is in the EU’s self-interest.

“There is a high exposure in the [Western European] banking sector to Ukraine, Latvia etc that can only be addressed by acting in concert. The cost of inaction will be far greater than the cost of action.”

Strategists have warned that collapsing financial sectors in countries like Ukraine and Latvia could infect the rest of Europe, leading to a series of continent-wide bank failures.

But an Austrian plea for a £140 billion bail-out funded by the EU was rejected by Germany and a similar Hungarian proposal was given equally short shrift. Instead the West has signalled to some in the East that it will take care of itself first.

Nicolas Sarkozy, the French president, has come under fire after calling on leaders of industry to close factories in eastern Europe to save jobs in France. “An important challenge of the G20 is to send a message that such policies could lead to disaster,” said Mr Nemyria.

His message was endorsed by Andris Miglaus, chief advisor at Latvia’s finance ministry.

“Populist protectionism is creating internal frontiers that will negatively affect other areas of Europe,” he said.

After a decade of impressive growth, Ukraine’s export-driven economy is in meltdown. Demand for its steel and agricultural products in Russia and the European Union has collapsed, helping drive down Ukraine’s currency, the gryvnia, by over 50 per cent in the past nine months.

Forecasters say that Ukraine’s economy - like Latvia’s - could shrink 12 percent this year.

Most experts do not think Ukraine will default this year. Instead most concern is being directed at Ukraine’s financial sector, which is dominated by the subsidiaries of Western European banks.

Like other countries in the region, Ukraine has been on a credit binge. Since 2006, Ukraine’s mortgage bill has increased by over 4,000 per cent. Over 10 million Ukrainians have loans, compared with under 100,000 in 2002.

But many, like Olga Symonchuk and her husband Nikolai, are now struggling to repay the banks.

A year ago, the Symonchuks decided that life in a two-bedroom Kiev flat with their two sons and their fiancées was getting a little too cramped. They decided to take out a £58,000 mortgage with a subsidiary of BNP Paribas to buy a second flat in the capital’s suburbs.

They chose a mortgage based in dollars, because interest was half that of a local currency loan. But as the local currency collapsed, their repayments soared. The couple were also put on half-pay. Despite having their mortgage restructured, the Symonchuks have missed two monthly payments.

For the Symonchuks, read millions of Ukrainians, the majority of whom hold their debts in foreign currency.

As personal defaults grow, so do fears of a systemic collapse in the Ukrainian banking sector.

For the moment, the major foreign players in the market - Austria’s Raiffeisen and Italy’s UniCredit - have promised to support their Ukrainian subsidiaries. Swedish banks have promised to do the same in Latvia. But as the crisis worsens, it is unclear how long such commitments can be honoured.

Western European banks are exposed to over £1 trillion of eastern European debt, leading to comparisons with the subprime crisis in the United States. Austria is particularly affected, with an outstanding loan portfolio to eastern Europe of £213 billion, 71 per cent of GDP.

Austria’s exposure has drawn ugly comparisons with the past. In 1931 Austria’s Creditanstalt collapsed because of its exposure to Eastern Europe, triggering a wave of worldwide bank defaults and unleashing the darkest days of the Depression.

While the current financial crisis is the “front burner” issue for most politicians, national security and foreign affairs is not taking a back seat. The inevitable discussion in Eastern Europe is always about the expansion of NATO and whether new members-particularly Ukraine-are going or should be admitted.

While it is the opinion of MBS Ltd., that this is beyond our pay grade and scope of our business, our 2 kopeks worth of advice is that Ukraine is far better off to remain neutral and free from entangling alliances with Western Europe. As we have stated in previous essays, Ukraine should emulate Switzerland and become a free trade and buffer zone between East and West.

Moreover, the idea that NATO should come right up to the border of Russia flys in the face of 1,000 years of Russian history. For the Russians-be they Putinesque or otherwise-would react in a negative way despite assurances from the West regarding the benign nature of the alliance towards Moscow. 

NATO should include Ukraine, Belarus - Havel

NATO should include Ukraine and Belarus in future, former Czech president Vaclav Havel told Czech Radio (CRo), shortly before attending the conference on 10 years after NATO enlargement organised in Prague, according toCzech Happenings.

The Czech Republic joined NATO along with Hungary and Poland 10 years ago, on March 12, 1999.

Havel said the country`s accession to NATO was a result of a long process because the Alliance was unsure whether to offer membership to countries that had been part of the Warsaw Pact.

Havel told CRo that NATO enlargement should have its limits.

“The alliance is defined both by common values and geographically, it cannot extend forever,” he said.

Havel said he believed that NATO should end at the Belarussian-Russian border or the Ukrainian-Russian border.

He expressed hope that the dictatorship in Belarus and confusion in Ukraine would end and both countries became NATO members.

According to him, a new security system should be formed in the Caucasian region, including Armenia, Azerbaijan and Georgia that would guarantee independence to one another.

Havel indicated that he clearly prefers non-violent solutions to conflicts.

“It would be good if the alliance did not have to use force anywhere, but, unfortunately, this will probably never happen,” he said.

Russia’s Putin says Ukraine on verge of bankruptcy

MOSCOW, March 12 (Reuters) - Russian Prime Minister Vladimir Putin on Thursday said Ukraine was on the verge of bankruptcy but promised Moscow would not push its ex-Soviet neighbour over the edge with high gas bills, local news agencies reported.

Pegging a currency in a tumultuous global financial market may have short term gains, mostly political, but in the long run it’s a huge mistake. Although it is politically difficult to float the Ukrainian currency now, it’s important that the world know the real market UAH/dollar rate. Currency fluctuations are one important way of assessing the risk of emerging markets. Such is the dilemma of central banking. It must be perceived as politically independent and transparent in its decisions, but its duty is at some level to help the people survive difficult times. Artificially raising the value of UAH is fight against real reforms that albeit painful are still necessary to secure the state currency. Forcing people to buy and sell at certain rates is a negative sign to investors that will only make the pain of coming reforms last longer and further depreciate the currency over the medium term.

Hryvnia Plunges as Ukraine Warns Banks to Keep to Official Rate

Ukraine’s currency tumbled for the first time in seven days even as the central bank warned 17 lenders not to buy or sell the hryvnia for less than the exchange rate it sets, according to Bloomberg.

“We have contacted the first group and issued warnings,” Serhiy Kruhlik, the central bank’s head of external relations in Kiev, said in a telephone interview today. “We’ll talk to a second group this week and the approach will be the same.”

Ukraine’s currency has slumped 42 percent against the dollar in the past six months, the second-biggest loss worldwide, causing the central bank to drain a third of its foreign-currency reserves. The ex-Soviet republic, which is struggling to fund a $12.3 billion current-account deficit amid frozen credit markets, is receiving a $16.4 billion bailout loan from the International Monetary Fund on the condition that it avoid further depletion of reserves.

The hryvnia had stayed unchanged at 7.8500 per dollar for the past week, close to the average 7.98 per dollar set by the central bank on March 6. The currency tumbled as much as 4.9 percent to 8.2350 today as bid and offer prices ranged beyond the average level set by the Natsionalnyi Bank Ukrainy, according to data compiled by Bloomberg.

“This is a tussle between the banks and the NBU,” said Dmitry Gourov, a Ukraine economist in Vienna at UniCredit SpA, Italy’s largest bank. “The central bank could easily make a scapegoat of one particular bank, there’s always that risk.”

‘Verbal Warnings’

The central bank made “verbal warnings” to the country’s larger banks last week that they may lose the right to buy foreign-currency reserves if they traded the hryvnia below the central bank’s rate, said Alexander Pecherytsyn, head of financial markets research at ING Groep NV in Kiev.

Banks adhered to the order because they “fear action from the central bank, such as the withdrawal of their licenses,” Pecherytsyn said. “Some of the smaller banks trade it at a weaker rate but that doesn’t show up on the screens.”

Credit Suisse Group AG hadn’t received any warning from the central bank, said Nikolai Yukovich, a data manager in Moscow. The bank had a bid for hryvnia at 8.2450 per dollar today and offered the currency at 8.3950, according to prices on Bloomberg. Traders at Galt & Taggart Holdings Inc., a Kiev-based brokerage, are seeing bid and offer rates at 8.34 and 8.42 per dollar today, said Jathan Tucker, head of trading.

Coalition

The hryvnia began tumbling in September when the collapse of the ruling coalition between President Viktor Yushchenko and Prime Minister Yulia Timoshenko raised concern that the government would be unable to implement policies to stem the fallout from the global financial crisis.

Standard & Poor’s cut the country’s credit rating two levels last month to CCC+, the lowest in Europe and seven steps below investment grade.

The government approved a budget deficit equivalent to 5 percent of gross domestic product, even as the IMF demanded a balanced budget as part of the conditions for its loan, which is being paid in tranches.

Ukraine’s economy will contract at least 5 percent this year, according to Yushchenko, as steel companies like Yenakievsky Metalurhiyny Zavod reduce output. Industrial production plummeted 34.1 percent in January, while the country’s 20.9 percent inflation rate is the highest in continental Europe. The central bank forecasts inflation of “at least 15 percent” in 2009.

permanent URL of article:

http://www.unian.net/eng/news/news-305002.html

KIEV, Ukraine — After Ukraine’s currency collapsed in the global meltdown, so did Valery Ilyin’s household finances - and, he fears, his family’s dream of a bigger home. Mr. Ilyin, a 37-year-old information-technology manager at a telecommunications company in the capital, Kiev, has a mortgage in dollars for a new, three-room apartment. His payments doubled because of the falling exchange rate, to more than his entire monthly salary.

Some analysts predict that dozens of Ukraine’s 180 banks will go under this year as many consumers are predicted to default on mortgage loans, and bankruptcies could threaten the solvency the banking system.

”First, I was shocked. Now, I am trying to think of ways how I can protect my family in this situation,” said the father of three, who is now forced to spend 10,200 hryvnia to buy $1,200 to cover his monthly mortgage payment on the new apartment, which cost $110,000. His salary is only $880 a month.

So far, he is up to date on his payments, but he can lose the apartment if he is three months late. “I never expected anything like this to happen,” he said.

Mr. Ilyin’s story is familiar across Eastern Europe, where banks in countries like Ukraine, Poland, Hungary and Romania loaned recklessly in dollars, euros and Swiss francs and are now facing a wave of bad loans and defaults after the currencies of those countries plummeted.

Homebuyers took on debt not expecting that a sharp drop in their country’s currency would balloon their payments.

The crisis dims hopes for quick prosperity for these post-communist countries, which had grown impressively over recent years in part because of foreign lending. The foreign-loan problem threatens to spread to an already shaken banking system in Western Europe, where some banks are heavily exposed to these emerging economies.

Analysts say the banking sector likely can stay afloat thanks to a hefty $31 billion aid package from the European Bank for Reconstruction and Redevelopment, the World Bank and the European Investment Bank.

But the region is learning a painful lesson in terms of personal hardship from imprudent borrowing.

”I think this was a serious failure of government policy, of bank regulation and of banks themselves who should have known better and been aware of the risk of the local currency depreciation,” said Toby Wight, an emerging markets banking analyst with Global Insight.

In Ukraine, consumers rushed to borrow in dollars to purchase vacuum cleaners, cell phones, apartments and the imported cars that brought Kiev a never-ending traffic jam. They were lured by lower interest rates than on hryvnia-based loans - Mr. Ilyin was offered a 13 percent interest rate in dollars as opposed to 23 percent in hryvnia - and the hryvnia’s previous stable record.

The central bank ended four years of fixed rates for the hryvnia in May, letting the market set the rate. Since the crisis hit in September, the currency has lost 43 percent of its value, from 4.9 to 8.5 against the dollar, as exports fell and investors fled emerging markets.

About 70 percent of consumer loans, which constitute 36 percent of all loans here, were extended in foreign currency, mainly in dollars, according to the Renaissance Capital investment bank in Kiev, meaning that credit payments for these households almost doubled. About half of corporate loans also were denominated in dollars.

As a result, up to 25 percent of loans in Ukraine may go bad this year - some defaulted and some restructured, as opposed to 2 percent to 4 percent during a good year, according to Dragon Capital investment bank.

”The main risk is the growth of problem loans,” said Vitaliy Vavryshchuk, a banking analyst with Dragon Capital.

Troika Dialog Ukraine put the number of poorly performing loans this year at 11 percent to 12 percent.

The central bank already has taken control of eight banks, shaken by deposit withdrawals and bad loan problems.

The crisis threatens losses not only for Eastern European banks, but also their parent banks in Western Europe, such as Austria’s Raiffeisen and Erste Bank, France’s Societe Generale, Italy’s UniCredit and others. Analysts are optimistic that Europe’s banking sector will be revived thanks to the Western banks’ support of their local subsidiaries and the hefty aid package.

Raiffeisen bank has said it will inject $160 million of capital to support its Ukrainian unit.

Mr. Ilyin, who shares a two-room apartment with his wife, Lesya, 36, and three children while their three-room apartment is being built, hopes to keep his mortgage current thanks to his wife’s income as a computer programmer. But tens of thousands of other households here may not be so fortunate.

Ukraine moved closer last week to getting a second crucial installment of a $16.4 billion emergency fund from the International Monetary Fund, after the program was frozen last month because of policy disagreements. A chunk of that loan will go toward recapitalizing the banks.

In neighboring Poland, about 60 percent of retail loans were extended in Swiss francs. That is proving to be a questionable choice now that the Polish zloty lost about 60 percent of its value against the Swiss franc since August peaks.

Poland’s National Bank reported that 3.5 percent of loans to consumers and 6.2 percent of loans to corporations were troubled.

In Romania, foreign currency loans, mainly taken in euros, constitute 60 percent of all retail loans. Defaults on personal euro loans grew 8 percent in December compared with November figures, according to the central bank - a rise attributable to a 20 percent drop of the Romanian leu to the euro last year.

Hungary has 70 percent of household loans denominated in Swiss francs, and with the forint down 50 percent to the franc, things are looking bleak.

“It seems that at that level banks start to feel that their foreign-currency debtors are having problems,” said Peter Duronelly, investment chief at the Budapest Fund Management Co.

Ms. Tymoshenko feels Eastern Europe is “cast adrift.” She looks to France for leadership to push through a new free trade accord with Europe (and cash, too). Free trade is, of course, critical to the success of Ukraine, but free trade is more than just allowing foreign products to be sold domestically without unfair import duties. Free trade is also about making it easier to do business at home for both domestic and foreign companies. Kyiv must create a fair and level playing field for all businesses to compete. This job requires in the utmost transparency in markets and regulatory decisions and an end to the rampant corruption that stymies entry to the Ukrainian market for all but the largest and most powerful corporations — and those willing and able to pay bribes.

If Kyiv wants the rest of the world to take it seriously, it must first put its own house in order. The country remains sealed in a post-Perestroika cocoon awaiting rebirth and neither France nor any other country has an appropriate vision for breaking Ukraine out of its nascent state. A new vision for Ukraine must come from within via a new domestic debate. We at MBS only hope that vision will be one of neutrality in foreign relations and greater freedom for all Ukrainians. From our perspective, the enormous potential of Ukraine can only be unlocked by what Karl Popper called an “open society” that recreates a “country of laws and not of men” as Thomas Jefferson commanded of a new America. Such a reality must not be fantasy, but civil society in Ukraine has a long way to go. The first step is a new attitude from Ukrainian society and some sort of “born again” experience by leaders in Kyiv. Recent cuts in politicians’ wages are a start. Perhaps real reforms can only come from Ms. Tymoshenko’s successor as she clearly misses the boat here. Without a new debate, the future of Eastern Europe’s wobbling domino is lost in uncertainty.  Although the situation may seem dire, there is hope.  The world is looking for a new haven for freedom and liberty.  Why not Ukraine?

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