Russia's provision of USD15bn in financing and cheaper gas to Ukraine significantly cuts the risk of a Ukrainian sovereign liquidity crisis in 2014. However, longer-term political and economic risks to Ukraine's sovereign credit profile remain unaddressed, Fitch Ratings informed.
Russian President Vladimir Putin and Ukrainian President Viktor Yanukovych announced yesterday that they had agreed a deal for Russia to buy USD15bn of Ukrainian government securities, with purchases potentially beginning before year-end, and that the price Ukraine pays for Russian gas will fall by around a third to USD268.5/thousand cubic meters.
The package reduces the key short-term risks to Ukraine's sovereign credit profile that have arisen from a wide current account deficit (CAD) and mounting sovereign external debt repayments. These, in turn, have led to a fall in international reserves and growing pressure on the exchange rate, threatening a disorderly devaluation of the hryvnia, Fitch emphasizes.
The combined impact of cheaper gas imports and Russian debt purchases should narrow the 2014 CAD from a projected 7.3% of GDP to 5.9% (depending on the volume of imports) and, enable Ukraine to meet the USD8bn of external debt repayments due in 2014 (including government and National Bank of Ukraine repayments to the IMF, and repayment of government-guaranteed Naftogaz debt). Assuming wider pressures on the hyrvnia also abate, international reserves could rise to USD25bn at end-2014, up from around USD18bn currently.
But longer-term risks to the credit profile remain. In pursuing Russian rather than IMF support, the Ukrainian government has avoided policy conditions ultimately aimed at helping revive its economy. Similarly, if the Russia deal signals a move further away from an EU Association Agreement (AA), this also lessens the likelihood of reforms that could have promoted efficiency savings and foreign direct investment (FDI) and increased exports to Europe. It is not yet clear what, if any, concessions Ukraine is offering to Russia in exchange for its support.
A deal with Russia may add further fuel to the anti-government protests that were triggered by Ukraine's withdrawal from talks with the EU. Indeed, our initial assessment assumes that the current protests will not escalate to the point where they might derail the agreement with Russia. While the announced Russian support would keep Ukraine funded until presidential elections in 2015, there is also a risk that the government embarks on looser monetary and fiscal policies ahead of elections.
The economic risks associated with the absence of structural reform, and the prospect and potential consequences of continuing domestic political unrest, are reflected in Ukraine's 'B-'/Negative sovereign rating.
"AK&M", 19.12.2013 16:39