Ukraine Targets $13.5 Billion Aid in 2014 as EU Warns Russia

Ukraine said it stands to receive $13.5 billion of international funds this year as the European Union threatened Russia with more sanctions.

Moody’s Investors Service, citing the political crisis afflicting Ukraine, cut the country’s credit rating yesterday. Moody’s lowered the rating one level to Caa3, two steps above default, with a negative outlook.

The financing for Ukraine will come from the International Monetary Fund, which is due to sign off on an aid package this month, as well as the World Bank and the European Bank for Reconstruction and Development, Prime Minister Arseniy Yatsenyuk said yesterday.

“It’s difficult to persuade foreign investors that everything’s OK in your country when thousands of Russian troops and hundreds of tanks are on Ukraine’s borders,” Yatsenyuk told business leaders gathered in the capital, Kiev.

After only a “token” withdrawal of Russian forces from Ukraine’s eastern frontier, new penalties “have to be ready,” U.K. Foreign Secretary William Hague said in Athens.

Ukraine is battling to rescue its cash-strapped economy while still under military threat from Russia, whose takeover of the Black Sea Crimean peninsula has reignited Cold War tensions with the U.S. and Europe. As the standoff rattles financial markets, Ukraine leaders on April 3 accused the Kremlin of involvement in the deaths of anti-government protesters in Kiev in February, while Russia detained 25 Ukrainians for alleged terrorist plots.

Weakened Hryvnia

Ukraine’s hryvnia weakened 1.3 percent to 11.6 per dollar yesterday. It’s this year’s worst performer among more than 150 currencies tracked by Bloomberg with a 29 percent drop.

Russian bonds and stocks advanced and the ruble strengthened on investor optimism that tensions over Ukraine are abating. The currency rose 0.7 percent to 41.1592 versus the central bank’s basket of dollars and euros by 6 p.m. yesterday in Moscow, a 1.5 percent weekly gain. The Micex Index climbed 1.2 percent to 1,382.41 at the close, the strongest level since Feb. 28. The yield on ruble-denominated government notes due 2023 fell 11 basis points to 8.81 percent.

Ukraine sealed a preliminary bailout agreement with the Washington-based IMF last month, envisaging as much as $18 billion in loans over two years. The rescue would unlock additional international financing, bringing the total package to $27 billion. The World Bank was holding talks last night with Ukraine’s government over the first tranche of a $1 billion loan, the Unian news service reported.

Economic Threats

With foreign reserves dwindling and the economy set to shrink 3 percent this year, Ukraine faces threats from weak banks, lower foreign investment and a halt in trade with Russia, according to Yatsenyuk, whose administration isn’t recognized by the Kremlin.

The credit-rating cut by Moody’s rakes into account the agreement with the IMF to provide “near term liquidity relief,” according to a report published yesterday.

“The political situation is complicated by a challenging economic environment,” Moody’s analysts led by Frankfurt-based Thorsten Nestmann wrote in the report. “An escalation of economic sanctions by Russia, with increases in the gas price and potentially escalating to trade restrictions, would also be detrimental to Ukraine’s economic outlook.”

Russia’s Squeeze

Russia is intensifying an economic squeeze on its neighbor, saying April 3 it will charge Ukraine a quarter more for natural gas after raising prices by 44 percent at the start of the month. Russia’s state-run OAO Gazprom said Ukraine owes more than $2.2 billion for gas and must take steps immediately to repay its debt while adding more fuel to storage to ensure uninterrupted transit to Europe.

European shipments have been disrupted at least twice since 2006 by Russia cutting Ukraine’s supplies during price disputes. Ukraine relies on Gazprom for half its gas, while carrying about 15 percent of Europe’s demand through its pipelines from Russia.

Supplies won’t be cut if Ukraine pays its debt, Gazprom spokesman Sergei Kupriyanov said by phone yesterday.

U.S. Vice President Joe Biden talked with Yatsenyuk by telephone yesterday and “emphasized the importance of improving Ukraine’s energy security,” according to a statement released by the White House.

Biden pledged that the U.S. would “work closely with Ukraine and other countries across Europe to ensure that no country can use energy as a political weapon,” according to the statement.

Diplomats’ Meeting

Military security remained the focus for EU officials before a foreign ministers’ meeting in Athens. Catherine Ashton, the bloc’s foreign-policy chief, said Russia must follow through on a pledge to withdraw its forces from Ukraine’s border.

“It is really, really important that Russia shows that it is serious about de-escalation by moving troops back,” she told reporters. “That’s something that I hope we will see happening. But we are watching with great care.”

While the meeting won’t decide on sanctions in addition to the visa bans and asset freezes already announced, the situation remains “very dangerous” and “very tense,” Hague said.

U.S. President Barack Obama signed legislation April 3 that imposes sanctions on Russians for the incursion in Crimea and provides economic aid for Ukraine.

In an interview with BBC Television aired early yesterday, Yatsenyuk said the U.S. and Europe “can do more,” calling financial and economic sanctions the “key tool” to rein in Russia.

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