Ukraine Faces Devaluation as Politicians Haggle Over `Lifeline'

By Sebastian Alison and Daryna Krasnolutska

Nov. 3 (Bloomberg) -- Ukrainian politicians have been unable to agree on much of anything since the country rejected its Soviet past in the 2004 Orange Revolution. Their squabbling now may lead to a currency devaluation and more capital flight.

Parliament took more than a week to pass legislation on Oct. 31 accepting the initial terms of a $16.5 billion International Monetary Fund loan, as a tumbling currency and $100 billion in debt to be repaid next year threaten the economy and the financial system. Still to be debated are the final belt- tightening measures required by the IMF.

President Viktor Yushchenko has called an early election to face off against pro-Russian Viktor Yanukovych, who initially claimed victory in the rigged 2004 presidential election that led to the Orange Revolution, and his own prime minister, Yulia Timoshenko. Yet he can't fix a date because Timoshenko doesn't want to. Her party has prevented lawmakers from voting on a date by physically barring access to the chamber.

``Instead of uniting to save the country, they're falling apart,'' said Ariel Cohen, a political analyst at the Heritage Foundation, speaking of Yushchenko and Timoshenko by telephone from Washington. `` The IMF threw them a lifeline. Instead of grabbing it, they're pushing each other away from it, so everyone sinks.''

Ukraine needs the money because much of its debt is in dollars. As the currency, the hryvnia, falls, the cost of repaying the debt rises. Yushchenko puts the value of debt due to be repaid next year at about $80 billion in corporate debt and about $20 billion that is owed by the state.

Second-Worst

Foreign-currency reserves stand at about $30 billion and investors are fleeing: Ukrainian stocks are the world's second- worst performers in the past twelve months, after Iceland's. They were the best in 2007. Central bank Governor Volodymyr Stelmakh warned on Oct. 29 that Ukraine may be forced to default on billions of dollars of debt should it fail to secure the promised IMF loan.

``Devaluation is inevitable,'' said Katya Malofeeva, an economist at Renaissance Capital, by telephone from Moscow.

The hryvnia has fluctuated this year despite a currency band within which the National Bank supports it. In September the level was set at 4.85 hryvnia per dollar, with a permitted fluctuation of 4 percent. On Oct. 7 this was lowered to 4.95, with a fluctuation of 8 percent. In practice it hasn't worked: on Oct. 29 the hryvnia traded at 7.055 per dollar.

Floating Currency

The IMF has asked Ukraine to move away from a managed exchange-rate system to a freely floating one, although details of its conditions haven't been made public.

In a worst-case scenario the currency could reach 15 to the dollar by the end of next year, said Olena Bilan, an economist at Dragon Capital in Kiev. If the financial crisis stabilizes then she expects 9 to the dollar.

Malofeeva was less pessimistic, saying Renaissance sees the hryvnia at 6.5 to the dollar by the end of 2009. All agree that the government urgently needs to set a coherent plan for the exchange rate.

``We just want clarity in terms of exchange-rate policy,'' said Timothy Ash, head of emerging-market research at London- based Royal Bank of Scotland Group Plc, in Kiev on Oct. 30. ``What is the policy? It's not clear.''

Tempers were running high as deputies in the Rada, the parliament, argued about the terms of the IMF loan. They passed a series of bank-capitalization and deposit-guarantee changes as a condition for receiving the money late on Oct. 31, after starting the debate on Oct. 22.

Not Understanding?

``Don't you understand!'' shouted the speaker of the parliament, Arseniy Yatsenyuk, 34, during the debate. ``Someone is going to get $16.5 billion, but it's not going to be Ukraine if you don't stop arguing,'' he roared.

About half the country supports the pro-Western policies of Yushchenko, who is pushing for Ukrainian membership in the European Union and NATO. Timoshenko, whose party initially supported him, has wavered between his pro-Western policies and a more conciliatory attitude to Russia. The other half backs Yanukovych, 58, who ceded to Yushchenko after a court ruled his victory in the 2004 presidential election was rigged.

Timoshenko, 47, and Yushchenko, 54, have fallen out, leading to the standoff over the early parliamentary election. Opinion polls suggest Yanukovych's party will win 28.4 percent of the vote against 27.6 percent for Timoshenko's bloc, ensuring a continuation of the paralysis. Yushchenko's party has the support of 8.2 percent.

Balanced Budget?

Though parliament met IMF demands on bank recapitalization, more requirements are ahead. The IMF wants Ukraine to have ``strong monetary and prudent fiscal policies,'' said Ceyla Pazarbasiogan, head of the lender's mission to Ukraine, on Oct. 29. Specific budget strictures will come after the IMF votes on the Ukraine loan; no date has been set because of parliament's delay on the initial measures.

Finance Minister Viktor Pynzenyk said earlier this month that he already plans to propose a balanced budget. Passing it might be tough: lawmakers are refusing to delay raising minimum wages next year, which will increase spending by 35 percent, said Oleksandr Shlapak, deputy head of the president's staff.

The infighting during the crisis is leading the country to hold its politicians in contempt, as many did before the Orange Revolution, said Taras Kuzio of the Institute of European, Russian and Eurasian Studies at Carleton University in Canada, by telephone from Toronto.

``All of this undermines Ukraine's democracy as it leads to a growth of legal nihilism and cynicism'' he said.

To contact the reporters on this story: Sebastian Alison in Kiev via the Moscow newsroom at Salison1@bloomberg.netDaryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net