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Ukraine nearly bankrupt

Arne Lichtenberg / slk
February 23, 2014

Not only does Ukraine face a volatile political crisis, it is also in the midst of a dire economic emergency. As Kyiv's foreign exchange reserves dwindle, the country's public debt continues to rise.

Ukraine - Bilder der Krise
Image: DW/D. Posdnjakova

Ukraine's political crisis has brought the country to the edge of the abyss. And worse yet, the standoff between the government and demonstrators has reduced the economy to a shambles. The latest setback came over the weekend, when the ratings agency Standard and Poor's (S&P) cut Kyiv's credit worthiness to CCC, just a few notches away from being classified as insolvent.

Ukraine's currency, the hryvnia, has lost more than 10 percent of its value against the euro since the beginning of this year. Meanwhile, the country's foreign exchange reserves are melting away rapidly. As a consequence, Ukraine's public debt is soaring because a large portion of the loans taken out were in foreign currencies.

"A bankruptcy is absolutely possible," Theocharis Grigoriadis, an economist with the Eastern Europe Institute at the Free University of Berlin, told DW.

Theocharis Grigoriadis Wirtschaftswissenschaftler FU Berlin
'Bankruptcy is absolutely possible,' warns GrigoriadisImage: privat

According to Grigoriadis, the country's impending bankruptcy was the reason why Ukrainian President Viktor Yanukovych rejected the EU association agreement last year and instead accepted a multi-billion dollar loan from Moscow.

"There was at that time the threat of bankruptcy and Russia was the only country that could offer a short-term solution," Grigoriadis said.

Enough money for six weeks

However, following the ousting of President Yanukovych the Russian Finance Minister Anton Siluanov indicated that Moscow would hold back the next instalment of its financial aid package for Ukraine, at least until the political situation stabilizes.

With its foreign exchange reserves dwindling, Ukraine will soon face problems paying for imported goods, according to Thomas Baumann, who heads the Eastern Europe department at the Association of German Chambers of Commerce.

"Ukraine can only cover its imports for less than two months," Baumann told DW. "That means that for the next six weeks Kyiv can continue importing the goods to supply the country's needs."

Kiew - Geldautomat
The value of Ukraine's curreny has dropped precipitouslyImage: picture-alliance/ZB

Ukraine actually has a lot of economic potential, despite its current crisis. The country is rich in raw materials such as iron ore, magnesium, nickel and mercury. Ukraine is also one of the world's largest exporters of grain.

"Ukraine is a country with a very strong orientation toward agriculture," Grigoriadis said. While agriculture is predominant in the East, heavy industry and mining are concentrated in the West. But both parts of the country face a common problem.

"Ukraine does not have a highly industrialized infrastructure," Grigoriadis said. As a result, foreign companies face difficulties investing in the Eastern European country. Corruption is rampant and legal uncertainty is systemic. Furthermore, a large portion of the infrastructure that does exist dates back to the Soviet era.

Political opening for EU?

According to Grigoriadis, the economic crisis offers a chance for the EU to prove its long-term commitment to the Ukraine, "so that the pro-European voices in the country are strengthened."

Tobias Baumann
It would be a big mistake not to help Ukraine, says BaumannImage: DIHK

The EU, World Bank, International Monetary Fund, and - if possible - Russia need to sit down at one table and develop a plan for Ukraine, Grigoriadis said. Yanukovych rejected IMF loans because they required stringent economic reforms.

"In order to meet the conditions of the IMF, Ukraine needs a new government," Baumann said. The country must resolve its political crisis in order to confront its economic problems head on - but it is going to have to move fast.

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