Financial stabily assured in Ukraine – Really?

August 6, 2011

Now you expect leadership and reassurance from those you put in charge.  If you didn’t, in a democracy, you wouldn’t put them in charge.  At least that is the theory we all assume to be the case with fairly democratically elected officials.

Therefore it is quite natural for Ukrainian officials, in this case Ukrainian Prime Minister Azarov, to come out and state that there is no threat to the national currency even during the current uncertainty over the global economic situation.

Expected reassurances aside, the question is how much truth there is in his statement “Once again I want to stress that citizens and businesses can count on the financial stability in Ukraine, the stability of the national currency.”

One is immediately reminded of those luminary statements of his predecessor Yulia Tymoshenko who, at the commencement of the financial crisis in 2008, informed the Ukrainian nation that Ukraine would not be affected by those events.  Those global events, needless to say, kicked the stuffing out of Ukraine far harder than most other nations and in the process displayed an economic awareness of Ms Tymoshenko equal to that of my cat.  However, I do not wish to dwell on porr judgment or Ms Tymoshenko.  She has enough problems right now.

The question is, does Mr Azarov, given the fact that the global money is in a panic with both US and Euro under extreme pressure due to loss of confidence in governmental/organisational economic management?  Ukraine is hardly an island with a closed economy from the rest of the world.  It is a major exporting nation, albeit most growth being reported at the moment is domestically driven.

Prime Minister Azarov

The pension reform and current unwillingness to address the raising of utility prices to the public by reducing subsidies, both requirements for further IMF borrowing remain unresolved.  Whilst Ukraine is currently holding record currency reserves and may not need the IMF money tomorrow, the stand-off with the IMF will have a causal effect of raising the interest cost to Ukraine on the bond market if IMF demanded reforms stall.

The local currency is, in effect, unofficially pegged to the US$ value.  That said, whilst the US$ has lost value against major currencies around the world it has remained steady in Ukraine with almost no fluctuation, due no doubt, to intervention here.

How long can domestically generated growth make up for the lack of global demand in Ukrainian major export markets?  Long enough to maintain financial stability in Ukraine as Mr Azarov claims?  We are looking at quite a number of years for reliable, non-derivative/non-bubble driven, sustainable growth to come back to the world economy with the inherent positive effects for an exporting economy such as Ukraine.

However, if you want to look at the fundamentals of Ukraine through rose-tinted glasses, it would appear quite a sound proposition compared to many other nations.  In truth, it generally is doing quite well and has huge potential if the fundamentals are supported through transparency and effective, universally applied rule of law.  Whist the fundamentals are good, the risks are fairly high without effective structural and agency support or a very good and connected guide through the labyrinth of bureaucracy, vested interests and regional patrons.

Writing a raft of acceptable laws in parity to those of other nations is one thing – applying them is quite another, and application rather than legislation is one of the major difficulties in Ukraine due to the influence of the national and regional patronage.  Nevertheless, the new legislation has generally been steps in the right direction, even if unpopular with society on several occasions.

So, returning to the question, will Mr Azarov be right?  I would have far more belief if those words had left the mouth of Irena Akimova to be honest.  In the immediate term he probably will be.  Six months from now may be a very different matter and those circumstances with which the Ukrainian leadership will have to deal, will largely be created by external actors.

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