Ukraine creditors await election result

A complex restructuring of Ukraine debt this summer, by which the country narrowly managed to averted default, was covered by Euromoney in its August edition. Already, that deal is beginning to look like a postponement rather than a resolution of Ukraine's financial problems. It is hard to see how the country will make the $2.9 billion bond payments that will come due next year - especially after elections that may bring about a radically new government.

On the optimistic side, the debt restructuring process has smoothed out Ukraine's repayment schedule. Before restructuring, repayments due in 2000 amounted to roughly $3.2 billion. Further, much of this amount owed is in soft debt - that is, loans to other CIS countries. Privatization, an area where Ukraine so far lags far behind Russia, may also bring in a few dollars. "There are still a number of major state assets that they could sell to raise cash. And most are betting on that the flow of funds into the country from foreign direct investment will restart after the elections," explains Tomas Fiala, President of Wood & Company, one of the largest brokerages in Ukraine. Total foreign debt amounts to only $12 billion or less than 40% of annual GDP. "This is a drop in the bucket compared to the estimated $170 billion owed by Russia. The real problem is the structure. There is too much short-term debt and no long-term debt".

Regardless of the timetable of when debt payments come due, potential sources of hard currency in the near future, outside of further multilateral loans, seem to be extremely limited. "There is hardly any FDI in the country now, and, regardless of the outcome of the elections, I don't predict there will be any dramatic change in the situation for the next several months", observes Withold Zielinski, Chairman of the Board of Citibank Ukraine. "Other than for massive, large scale privatization starting immediately, the country will simply not have enough hard currency next year to meet its debt repayment. In the first half of 2000, there will either be a massive rescheduling, or a massive default."

If the incumbent candidate President Leonid Kuchma, now the front runner, wins next month, then the debt market will rally. Kuchma has always championed close cooperation with the IMF, acceleration of the privatization process, and has already agreed to a tight spending budget for 2000. He also supports central bank governor, Viktor Yuschenko, who has successfully implemented a strict anti-inflationary monetary policy and is one of the IMF's favourite central bankers in all the emerging markets. Sentiment among Ukrainian bondholders is that with Kuchma and Yuschenko still firmly in office at the end of the year, the IMF will use all means necessary to prevent any Ukrainian debt default in 2000.

If, however, Natalia Vitrenko, leader of the Progressive Socialist Party who consistently ranks a close second in the polls, should win, then the future for bondholders could be entirely different. Her stated aims, to return to a Soviet system of government, eliminate any further links with the IMF, and move Ukraine into economic union with Belarus and Russia, all strike a chord with millions of Ukrainian voters "If either of the two long-shot left-wing candidates win office, it is likely Ukraine will remain at the bottom of the foreign investment league tables for the foreseeable future," Fiala predicts. Theodore Kim