Dec. 20 (Bloomberg) -- President Viktor Yanukovych’s rush to buoy his popularity with handouts after securing $15 billion of Russian aid risks exacerbating Ukraine’s economic tailspin.
A day after the Russian deal, Premier Mykola Azarov vowed to raise social spending such as minimum wages and child benefits, and increase public paychecks three times before 2015 presidential elections. Yanukovych trails opposition leaders including ex-heavyweight boxer Vitali Klitschko in polls.
The president is battling the biggest street protests since the Orange Revolution almost a decade ago as his government struggles to revive an economy stuck in its third recession since 2008. Before accepting the Russian cash, Ukraine snubbed an International Monetary Fund deal that would have narrowed the budget gap and stemmed central bank support for the hryvnia.
“The cash doesn’t help the economy because the Kremlin doesn’t require the government to change its policies in a way that would revive growth,” Alexander Valchyshen, head of research at Investment Capital in Kiev, said yesterday by phone. “This doesn’t offer room for reform but for the government to survive to the next election.”
While President Vladimir Putin’s announcement of Ukraine’s aid package triggered record gains in government bonds, there remains a 51 percent probability the hryvnia will depreciate in the next year beyond 9.29 per dollar, the lowest close on record reached in February 2009, data compiled by Bloomberg show.
The hryvnia weakened 0.2 percent to 8.292 per dollar at 9:55 in Kiev today. Credit-default swaps dropped 99 basis points yesterday to 799, compared with 1,136 basis points on Dec. 10, data compiled by Bloomberg show.
Ukraine’s economy has shrunk for the last two quarters as prices for exports such as steel plunged. This year’s budget deficit is planned at 50.6 billion hryvnia ($6.1 billion), while the current-account gap may reach 8 percent of gross domestic product, the World Bank estimates.
The energy industry weighs “heavily on public finances and the economy,” the IMF said yesterday. GDP may expand 1 percent next year, less than the government’s 3 percent projection, the fund said.
The Russian assistance doesn’t address economic imbalances and raising salaries is counterproductive, according to Liza Ermolenko, an analyst at London-based Capital Economics Ltd.
“It’s kind of doing the opposite of what the economy needs,” she said yesterday by phone. “This loan will help the government meet obligations for the next 18 months but after that Ukraine will need to look for further financing.”
The budget deficit will be 3.6 percent of GDP next year, compared with an earlier projection for a 2.7 percent, according to a revised draft published Dec. 18. The Russian borrowing will push Ukraine’s debt ratio up to about 48 percent of economic output from 38 percent, according to Standard Bank Group Ltd.
Yanukovych’s choice of closer Russian ties over European Union trade and political-association pacts triggered the protests that have engulfed parts of central Kiev. While Western financial aid required cuts to household heating subsidies, greater hryvnia flexibility and spending reductions, the president said yesterday that Russia’s deal has “no strings.”
By refraining from IMF support, Ukraine has “avoided policy conditions ultimately aimed at helping revive its economy,” Fitch Ratings said Dec. 18.
On top of Azarov’s spending promises, Yanukovych said next year’s budget will allocate 6 billion hryvnia to repay depositors who lost money during the Soviet collapse.
“We’re protecting the interests of the Ukrainian nation,” he said yesterday in a televised meeting with reporters. “We’re thinking of how to avoid a decline in social standards. Russia’s loan is beneficial for us, for sure, because it didn’t put forward any demands.”
As well as purchasing $15 billion of Ukrainian Eurobonds, Russia also said this week that it would grant its neighbor a one-third cut in the price of natural gas.
That discount may keep next year’s current-account gap within 6 percent of GDP compared with as much as 8 percent in 2013 and remove “significant pressure” on the hryvnia, Danske Bank A/S economist Vladimir Miklashevsky said from Helsinki.
Russia’s support package “could materially ease Ukraine’s external pressures and support the sovereign rating,” Standard & Poor’s analyst Trevor Cullinan said by e-mail. The company rates Ukraine at B-, on par with Belarus and Egypt and six levels short of investment grade.
The Russian bailout has angered protesters in Kiev, who claim a secret deal has been struck to bring Ukraine into Putin’s customs union, which is planned as an EU rival and which currently contains Kazakhstan and Belarus.
Yanukovych’s popularity has plummeted since he turned his back on the EU last month, according to a poll published by Tyzhden magazine.
He’d lose to any of the opposition candidates if a vote was held now, with his worst result against Klitschko, who polled 46.9 percent, compared with 28.6 percent for Yanukovych, the Nov. 28-Dec. 7 survey of 2,013 people by Perspektyva showed. It had a 2.2 percentage-point margin of error.
The authorities probably won’t change their current economic course before “closely contested” elections in March 2015, according to Morgan Stanley.
“Ukraine will delay the difficult decisions needed to tackle some of its underlying fiscal and external imbalances,” it said yesterday in a note. “The incoming president is likely then to face a challenging situation.”
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