Tymoshenko’s Fate Looms as Ukraine CDS Worst: East Europe Credit

Ukraine, eastern Europe’s least-creditworthy borrower, faces $15.3 billion of debt payments in the next two years as it weighs the fate of a jailed ex-prime minister and whether to fix its future with the European Union.

The cost to insure Ukraine’s dollar debt against non-payment for five years with credit-default swaps rose 15 basis points to 966 at 12:41 p.m. in Kiev. The yield on Ukraine’s April 2023 dollar notes rose to 9.63 percent, compared with 7.40 percent on similar-maturity debt from Egypt, both carrying the same B- junk rating at Standard & Poor’s.

Ukraine must decide whether to release ex-Premier Yulia Tymoshenko for medical care abroad by an EU summit on Nov. 28-29, a condition to sign a free-trade pact with the 28-member bloc. Pressure is also building because the nation, whose currency reserves have fallen by a quarter in the last year, is locked out of global bond markets, according to Fitch Ratings.

The EU deal “would help alleviate the concerns with respect to rolling over short-term debt,” Ronald Schneider, who helps manage 800 million euros ($1.1 billion) of assets at Raiffeisen Kapitalanlage GmbH in Vienna, said Nov. 13 by phone. “The situation has deteriorated quite substantially.”

Integration ‘Desire’

Ukraine’s credit-default swaps are the world’s fourth-highest behind Argentina, Venezuela and Cyprus, data compiled by Bloomberg show. They peaked at 1,122 basis points on Sept. 27 after setting this year’s low of 531 in March.

Signing the EU deal would send a positive message to investors, according to Blaise Antin, who helps oversee $10 billion of developing-nation debt as head of emerging-market research at TCW Group Inc. in Los Angeles.

Such an agreement would show “Ukraine’s interest and desire to further integrate with the large markets to its West,” Antin said by phone on Nov. 13. It would also be a signal of potential interest for “liberalizing not only the economy but also the political system,” he said.

The sovereign next year needs $6.1 billion to service foreign debt, $1.1 billion to repay the International Monetary Fund and $1.2 billion to pay back foreign-denominated domestic debt. It plans to raise $4 billion on global markets, Halyna Pakhachuk, who heads the Finance Ministry’s debt department, said on Oct. 31.

Russian Option

Russia is irked that its neighbor may pursue the EU pact instead of its customs union with Belarus and Kazakhstan and has threatened trade sanctions if the deal proceeds. Joining the union would shrink Ukraine’s current-account gap by cutting the price it pays Russia for natural gas.

The EU treaty would increase the chances of a breakthrough in talks between the IMF and Ukraine over a third bailout in four years, according to Raiffeisen’s Schneider. As Ukraine haggled with the Washington-based lender over energy subsidies, Raiffesisen sold its Ukrainian bonds in September to see how the EU talks pan out, he said.

Ukraine entered its third recession since 2008 in the second quarter as demand for its steel exports shriveled. Central bank reserves dropped to $20.6 billion Oct. 31, less than three months of imports, a level economists use to gauge financial stability.

Tymoshenko, who helped overturn President Viktor Yanukovych’s first election victory in the 2004 Orange Revolution, was sentenced in 2011 to seven years in prison for abuse of office in a case the EU deems selective justice. Lawmakers, who’ve been squabbling over a bill to let her get treatment in Germany for chronic back pain, this week delayed voting on the legislation until tomorrow at the earliest.

‘Attractive’ Debt

Ukraine isn’t dependent on the EU pact, according to Sergei Strigo, the head of developing-nation debt at asset manager Amundi, which oversees about $1 trillion. London-based Amundi holds Ukrainian euro debt because yields trade at “attractive” levels and the country probably won’t default, he said in an interview on Nov. 14.

“Ukraine has many options at its disposal -- one is the EU track and one is Russia, which is very positive for the country,” Strigo said. “All they need to do is choose which they want to go with.”

Citing strained external finances, Fitch cut Ukraine’s credit rating on Nov. 8 to B-, six levels below investment grade and on par with Greece, Cyprus and Egypt. Standard & Poor’s lowered its credit grade to the same level on Nov. 1, while Moody’s Investors Service reduced its assessment of Ukraine to Caa1 in September.

Extra Yield

The hryvnia has weakened 2 percent against the dollar this year, compared with a 7.2 percent decline for Russia’s ruble and a 0.1 percent drop for Poland’s zloty. The extra yield investors demand to hold Ukraine’s dollar bonds over Treasuries narrowed one basis point, or 0.01 percentage point, to 879 today, indexes compiled by JPMorgan Chase & Co. show. Poland’s spread is at 137 basis points and Russia’s at 232.

While Yanukovych can see the potential gains from signing the EU agreement, the recent delays in meeting the bloc’s conditions are a gamble that probably won’t pay off, according to Alex Brideau, a senior analyst at Eurasia Group in New York.

“Yanukovych likely understands the political, trade, and financial benefits that can come with EU integration and wants the deal to happen,” Brideau said Nov. 18 in an e-mailed note. “Yet he is making what he believes to be the optimal political decision on Tymoshenko, while betting the EU will accept his terms. We believe that this won’t succeed.”

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