Ukraine's economy nears the brink of bankruptcy due to political instability

With 45 million people, Ukraine is the largest of the countries between Russia and the European Union (EU).

For the past three months, protesters have gathered on Kiev’s Maidan Square, hoping to bring Ukraine closer to the EU. These violent protests are causing political instability in Ukraine, which is only pushing the Ukrainian economy closer to the brink of bankruptcy.

People gathered at Independence Square in Kiev on February 25. (Source: AFP/VNA)

Caught in the Russia-EU war

Until 1991, Ukraine was part of the former Soviet Union. After the Soviet Union collapsed, Ukraine became an independent country.

Over the past two decades, with US support, the EU has made efforts to strengthen relations with many former Soviet countries, including Ukraine, to weaken Russia's influence in the post-Soviet space.

The EU has successfully lured former Soviet states such as Estonia, Latvia and Lithuania into the bloc, pushing the EU’s borders ever closer to Russia. In an effort to distance Ukraine from Russia’s influence, Brussels three months ago offered Kiev a trade and association agreement.

Of course, Moscow has not given in to such Western plots. Over the years, Moscow has pursued a variety of strategies. Most recently, in December 2013, Russia promised cheaper gas and a $15 billion bailout package after Ukraine’s president rejected the EU’s proposal.

On the brink of bankruptcy

In the past, Ukraine has benefited a lot from the geopolitical struggle between Russia and the EU. However, that war has also caused many difficulties for this Eastern European country.

At present, with the pro-Western interim government set up by the rebels, Ukraine is facing the risk of losing financial support from Russia.

Russian Economy Minister Alexei Ulyukayev confirmed that the next tranche of $2 billion in aid from the $15 billion bailout package that Moscow has pledged to Ukraine “is ready for disbursement.”

However, Mr. Ulyukayev reiterated Russia's position that it wants to see who will run Ukraine first. So far, Russia has disbursed only $3 billion of the $15 billion bailout package.

On the other hand, Moscow also affirmed that the extension of the agreement on Russia reducing gas prices for Ukraine needs to be negotiated with Ukrainian companies and government.

If Moscow stops supporting Kiev, Ukraine’s economy could be in danger because, according to Commerzbank estimates, Ukraine will need to repay $6.5 billion in foreign debt in 2014 and another $6.5 billion to cover its current account deficit. In addition, Kiev will need $1 billion to pay off its outstanding gas debt to Russia.

Meanwhile, at the end of January 2014, the Central Bank of Ukraine's foreign exchange reserves were about $17.8 billion, the lowest since 2006. However, according to estimates by Goldman Sachs, this number has decreased to between $12 and $14 billion. This amount may quickly run out if this Eastern European country pays its debts.

In that context, on February 23, Mr. Oleksander Turchinov, who was elected as acting President by the rebels in Ukraine, warned that this Eastern European country is approaching the brink of bankruptcy. In his speech, Mr. Turchinov emphasized: "While the world economy is recovering, the Ukrainian economy is approaching the abyss and is in the pre-bankruptcy stage."

Reacting to the possibility of Ukraine defaulting on its short-term debt, on February 25, the country's hryvnia lost more than 6% of its value against the US dollar, the largest single-session loss for the hryvnia since February 2009. The exchange rate between the two currencies rose to 9.8 hryvnia/USD, a record high.

Citi Group expert Ishitaa Sharma said the devaluation of the hryvnia could increase panic in Ukraine because many people will not want to hold this depreciating currency./.

According to VNA