Ukraine braces itself for the consequences of the global financial crisis

The global financial crisis has not affected Ukraine directly as its stock market is underdeveloped, and mortgage loans do not play a major role in the local economy. But the consequences of the crisis should have a significant impact on the local economy, which depends to a large extent on exports, and markets for Ukraine’s main exports such as metals are set to shrink. The Ukrainian economy has seen some bad signs this year, such as high inflation, but that rather was due to domestic factors. The global crisis, however, should exacerbate the situation.

President Viktor Yushchenko was the first top Ukrainian official to comment on the crisis. Speaking on his visit to the United States on September 24, he said he was “convinced that Ukraine will overcome the challenges that our neighbors are facing today.” He said that it was important that the currency crisis and the stock market crisis should not overlap. Yushchenko, who used to head the country’s National Bank (NBU) in the 1990s, said that he had instructed NBU chairman Volodymyr Stelmakh to take steps to prevent the global crisis from affecting the domestic economy, primarily the currency market (Interfax-Ukraine, September 24).

Serhy Teryokhin, a former economy minister, was moderately optimistic, predicting that Ukraine would not be affected as badly as in 1998 because its stock market was “rather narrow.” He also said the NBU, unlike in 1998, had enough reserves to cushion the effect of the global stock market crash. Vasyl Yurchyshyn of the Kyiv-based Razumkov think tank also pointed out that Ukraine’s underdeveloped stock market, which started to fall even before the crisis erupted, did not reflect the situation in the real sector and that there were virtually no investment companies operating in Ukraine (www.for-ua.com, October 1).

Prime Minister Yulia Tymoshenko shared this point of view, saying that the world financial crisis would hardly affect Ukraine, as its stock market “practically doesn’t work,” and “our corporations are not traded on foreign exchanges” (Channel 5, October 1).

Petro Poroshenko, a leading Ukrainian industrialist who chairs the NBU council, predicted that the consequences of the financial crisis would be less significant for Ukraine than those of an ensuing global economic crisis because markets would shrink for Ukraine’s metallurgy and machine-building industries. Finance Minister Viktor Pynzenyk warned that Ukraine’s economy pretty much depended on foreign loans. “Now this market [for loans] is closed,” he said. Ukrainian companies would have to pay $39 billion on foreign loans in 2009, Valery Heyets, a member of the NBU council, added (Zerkalo Nedeli, October 4).

Meanwhile, inflation exceeded 16 percent in the period from January to September; and the national currency, the hryvnya (UAH), has plunged by almost 20 percent against the U.S. dollar on the inter-bank currency market since early September. Robert Kirchner of the German group of advisors to the Ukrainian government said that the UAH had been falling for three reasons: the falling price of metals, Ukraine’s main export commodity; the uncertainty of the price Ukraine would have to pay for Russian gas in 2009; and the effects of the global financial crisis (Ukrainska Pravda, October 6).

The NBU spent $342 million to support the hryvnya on October 3 alone. Preventing the hryvnya from falling further would cost over $2 billion per month, and the NBU’s foreign currency reserve in that case could drop from the current $37.5 billion to $33 billion by the end of 2008, ING Bank Ukraine predicted (UNIAN, October 6).

Several large Ukrainian banks, such as Ukrsotsbank and Nadra, may find it hard to make payments on foreign loans by the end of 2008; but they should be able to cope, the Ukrainian business daily Delo predicted on October 7.

Only one large domestic bank, Prominvestbank, reported serious problems recently, but those were apparently not related to the world crisis. At the end of September, Prominvestbank, which is Ukraine’s sixth largest bank, complained that a certain foreign company had organized a campaign against the bank in the mass media, sowing panic among its depositors in order to weaken the bank and buy it cheaply later. The bank’s depositors in the key region of Donetsk rushed to withdraw their money. The attack was reportedly organized by an unidentified Russian bank (www.ukrrudprom.ua, Segodnya, September 30).

The NBU promptly came to the rescue, allotting a stabilization loan to Prominvestbank equivalent to $1 billion. Prominvestbank stands apart from most other large Ukrainian banks, and its problems should not be viewed as the beginning of a crisis in the country’s banking system. It is one of the least transparent local banks, being one of the very few banks that are not members of the Association of Ukrainian Banks. It is not quite clear who controls the bank. CEO Volodymyr Matvienko is believed to be the main beneficiary, although he officially holds only 0.1 percent of its shares (Kommersant-Ukraine, October 1).

By Pavel Korduban, Eurasia Daily Monitor