Good news from Kyiv!! The Ukrainian Government revised the budget to comply with the requirements set forth by the IMF. The Ukrainian currency-the hryvnia-moved sharply higher today. 

We would not take this as the end of the crisis, or even the beginning of the end, but rather the end of the beginning. Ukraine needs reform and a political change.

from www.bloomberg.com:

Hryvnia Soars as Ukraine Revises Budget to Meet IMF Loan Terms 

By Emma O’Brien

March 4 (Bloomberg) — Ukraine’s hryvnia climbed the most in more than two months against the dollar as the government announced budget changes to comply with the terms for a second payment of an International Monetary Fund loan.

The currency jumped 6.5 percent to 7.8500 per dollar by 1:22 p.m. in Kiev, the biggest gain since Dec. 29 and the highest level in three weeks. It climbed as much as 6.9 percent to 9.8243 per euro, the strongest advance since Jan. 19 and the highest level versus the common currency in a month.

Ukraine turned to the IMF for a $16.4 billion bailout last year to avert a default and stabilize its banking system. The former Soviet republic got the first $4.5 billion payment in November before approving a budget deficit of 5 percent of gross domestic product that put the second tranche of $1.9 billion in jeopardy. The IMF had demanded a balanced budget.

“The progress being made between the prime minister and the president has done a lot to soothe people’s minds when it comes to the second tranche of the IMF loan,” said Ozgur Yasar Guyuldar, an emerging-markets strategist in Vienna at Raiffeisen Centrobank. “They’re seeing some positive news flow for once.”

President Viktor Yushchenko announced the budget review on March 2 after a meeting with Prime Minister Yulia Timoshenko, the central bank chief and leader of the opposition last week. The IMF, set to return to the former Soviet republic in the next few weeks to discuss further payments, has praised efforts by the leaders to bury political differences and draft a recovery plan.

Ukraine is facing a 5 percent economic contraction after nine years of expansion and is struggling to finance a $12.3 billion current-account deficit, according to government data.

Job Losses

Unemployment rose to 3.2 percent in January and industrial production tumbled 34.1 percent, the sharpest drop since the country regained independence in 1991. The PFTS stock index has dropped 33 percent this year, as steelmakers including Yenakievsky Metalurhiyny Zavod cut production.

The economic crisis has been aggravated by power struggles between Timoshenko and Yushchenko, hampering efforts to revive growth and cut budget spending.

The two leaders of 2004’s Orange Revolution that overthrew a pro-Russian government have clashed over economic policy and relations with Russia and ended their parliamentary alliance in September last year.

The renewed cooperation is “very encouraging,” said Ceyla Pazarbasioglu, chief of the IMF’s mission to Kiev

The hryvnia has slumped 40 percent versus the dollar over the past six months, making it the worst performing currency tracked by Bloomberg after the Seychelles rupee. The Natsionalnyi Bank Ukrainy has sold foreign currency to prop up the hryvnia on a “daily basis,” Serhiy Kruhlik, head of the bank’s external relations, said in an interview from Kiev.

Currency Auction

The central bank plans to hold a currency auction targeted at households today, Kruhlik added, similar to an auction Feb. 27 that sold $34.5 million to commercial lenders.

Policy makers’ interventions in the currency have been contributing to a reduction in liquidity, which is also supporting the Ukrainian currency, saidDmitry Gourov, a Ukraine economist in Vienna at UniCredit SpA.

“They’ve been keeping interest rates high and pulling hryvnia out of the market through their currency interventions,” he said. “This is forcing people to convert foreign currency.”

Ukraine’s overnight refinancing rate was increased two percentage points to 18 percent last month and the rate for non- collateral loans was raised to 20 percent, from 17 percent, in a bid to help steady the hryvnia, the central bank said Feb. 18.

The extra yield investors demand to buy Ukrainian bonds instead of U.S. Treasuries fell by the most in six weeks today, declining 20 basis points to 35.26 percentage points, according to JPMorgan Chase& Co.’s EMBI+ Indexes. Still, the so-called spread has risen almost 10-fold in the past year.

When the current economic and political mess is sorted out…and at some point it will…Ukraine will once again resume its reach towards realizing the potential. Nice to know that some European companies have a positive vision of this market.

from www.bloomberg.com

Ikea may open first Ukraine store in 2011

Ikea, the world’s largest home- furnishings retailer, may open its first outlet in Ukraine at the end of 2011, the company said, according to Bloomberg.

The first store is likely to be in Odessa on the Black Sea coast, where Ikea owns land, said Frida Malmquist, country manager for Ukraine. The retailer, which opened an office in the country in 2005, sees potential for 25 stores, she said.

It’s a “huge” and “underdeveloped” market, Malmquist said by phone today. “We have an internal timeline that says that we could theoretically open” the first store “at the end of 2011,” she said.

Ukraine, a country of 46 million, is facing a recession after nine years of growth. The global financial crisis forced the country, like Hungary, Romania and Latvia, to turn to the International Monetary Fund for help to avert a default and stabilize its banking system.

While Ikea isn’t halting plans in the country, the company isn’t in a “big rush,” Malmquist said.

“We could have 25 stores depending on the development of the Ukraine and its middle class, which is a big part of our customers,” she said. “It’s tricky to say when the Ukrainian market is ready for the size of retailing that we are coming with.”

It is certainly calm on the surface here in Odessa. The restaurants and shops were busy during the weekend, as winter seemed to be winding down and the sun made a glorious presence. The mood appears to be upbeat, but the talk over restaurant tables is about the bad state of business, jobs, the economy, and the currency.

With the news today that Western Europe is NOT going to approve a comprehensive bailout for Eastern Europe, the IMF stating that Ukraine must comply with a debt ceiling in order to receive the second tranche of a loan, and with the Ukrainian Government in Kyiv recently passing protectionist legislation in the form of a 13% import tax, the environment could change rather rapidly.

As this article from the New York Times states, Ukraine is indeed on the precipice. Whether we see a sovereign default and/or blood in the streets, will depend on the endurance level of Ukrainians.

Ukraine teeters on the brink

Threat to other economies grows

By Clifford J. Levy 
New York Times

Updated: 03/01/2009 09:55:25 PM CST

KIEV, Ukraine — Steel and chemical factories, once the muscle of Ukraine’s economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev’s subway service is threatened. Lines are sprouting at banks, the currency is wilting and a government default seems possible.

Ukraine, once a worldwide symbol of an emerging, free-market democracy, is teetering. And its predicament poses a real threat for European economies and other former Soviet republics.

The sudden, violent protests that have erupted elsewhere in Eastern Europe seem imminent. Across Kiev last week, people spoke of rising anger about the crisis and resentment toward a government that they said was more preoccupied with squabbling than with rallying the country.

The sign held by Vasily Kirilyuk, an unemployed plumber at a recent protest, summed up the pervasive frustration: “Get rid of them all,” it said.

“There will be a revolt,” he said. “And people will come because they are just fed up.”

Kirilyuk, 29, was standing in the same central square where throngs in 2004 carried out the Orange Revolution, a seminal event that brought to power a pro-Western government in Ukraine. He said he was a fervent supporter then, but now he and a few dozen others who have set up tents are demanding that the heroes of that revolution step down.

It is not hard to understand why world leaders are increasingly worried about the discontent and the financial crisis in Ukraine, which has 46 million people and a strategic location. A small country like Latvia is one thing, but a collapse in Ukraine could wreck what little investor confidence is left in Eastern Europe.

It also could cause neighboring Russia, which has close ties to eastern and southern Ukraine, to try to inject itself into the country’s affairs. The Kremlin also would be able to hold up Ukraine as an example of what happens when former Soviet republics follow a Western model of free-market democracy.

“Ukraine is a linchpin for stability in Europe,” said Olexiy Haran, a professor of comparative politics at Kiev Mohyla University. “It is a key player between the expanding European Union and Russia.”

That Ukraine can cause problems for Europe was highlighted in January when Ukraine engaged in a dispute with Russia over how much it would pay Russia to use natural gas, as well as transport it to the rest of Europe. The Kremlin shut off the gas for several days, and some European countries went without heat.

The crisis also has cut deeply because people are disillusioned with the government. President Viktor Yushchenko, a leader of the Orange Revolution, is widely scorned. A recent poll found that 57 percent of people want him to resign.

His rivals have also lost popularity, as the public has become exasperated by years of bickering. In February, the International Monetary Fund refused to release the next installment of a $16.4 billion rescue loan because the government would not adhere to an earlier agreement to pare its budget.

The monetary fund is projecting Ukraine’s economy will shrink by 6 percent this year, but said it was continuing to work with the government to find a way to disburse the rest of the rescue loan.