The Wall Street Journal reports,''Ukraine’s economic and political crisis may be heating up, but Kiev still has enough emergency cash reserves to cover its obligations for the next two months.
But what would it take to push the country into default? Tensions escalating over Russia’s Crimea incursion, Moscow increasing natural gas prices and any delay in international bailout talks, say economists''.
“The military stand-off heightens Ukraine’s risk of default,” says Lilit Gevorgyan, a senior sovereign risk analyst at the IHS consultancy, in a research note.
But what would it take to push the country into default? Tensions escalating over Russia’s Crimea incursion, Moscow increasing natural gas prices and any delay in international bailout talks, say economists''.
“The military stand-off heightens Ukraine’s risk of default,” says Lilit Gevorgyan, a senior sovereign risk analyst at the IHS consultancy, in a research note.
If the military standoff turns into violent conflict, pitting the interim government in Kiev against Moscow and pro-West Ukrainians against their pro-Russia countrymen, the hyrvnia could fall much deeper into the danger zone.
“We suspect geopolitical risks emerging in the Ukraine are not likely to dissipate anytime soon,” said Eric Green, a TD Securities analyst.
Moscow could also raise the price it charges for the natural gas Ukraine depends on from Russia. To keep Kiev in the Kremlin’s political orbit, Russia has long kept fuel export prices below-market. The cheap imports allowed the government to subsidize lower fuel prices.
But with the IMF estimating that overall energy subsidies in Ukraine topping 7.5% of the country’s gross domestic product in 2012, any upward pricing adjustment has hard-hitting consequences.
The IMF wants a phased-in natural gas price hike to relieve the burden on government finances.
“Yet to do it too fast will be very disruptive, and likely to plunge the economy into further turmoil,” said Brown Brothers Harriman’s currency strategy team said in an email to clients.
Russian President – and former KGB officer – Vladimir Putin knows that. To press Ukraine and the Western officials trying to support the fledgling government in Kiev, Mr. Putin could end the 33% price discount agreed with the now-ousted pro-Russian government last December when the contract comes up for review in April. He could also insist on Ukraine paying off its overdue natural gas bills worth $1.5 billion.
To help buy time for negotiations, the IMF can offer a short-term line worth $1 billion within week. Other countries have also talked about similarly-sized options to encourage the new government.
But for the longer-term, large-scale financing Ukraine needs over the next couple of years to stabilize the economy could prove elusive.
“Without the expected financial assistance from Western donors, Ukraine is likely to default,” Mr. Gevorgyan said.
