IT IS the Christmas season in Ukraine (they celebrated Christmas day yesterday). The economy, though, is not getting into the festive spirit: it looks worse than ever. In 2014 its economy probably contracted by a tenth and its currency, the hryvnia, lost about half its value. Figures released yesterday showed that inflation is now touching 25% (imports are now much more expensive). The government is fast running out of cash. Ukrainian bond yields fell to record lows this week: financial markets are preparing for a default.
Ukraine passed a budget on December 29th (though for the next month or so it is subject to revisions). That means that the International Monetary Fund, which has been supporting Ukraine financially for the past few months, will return to Kiev today. The IMF will be looking to disperse two more dollops of money, probably worth around $3 billion in total. So far it has lent about $5 billion.
But $3 billion is unlikely to be enough; even if Ukraine gets that it will struggle to avoid default in 2015 (see chart). In the chart we make a series of rosy assumptions, but default still looks very likely—unless the West is prepared to lend much more money.
What does the chart show? Ukraine’s foreign-exchange reserves are at about $9 billion, having been above $20 billion a few months ago. They fell in 2014 because the central bank tried to prop up the hryvnia. Ukraine has also cleared big debts with Russia for gas imports. But next year’s debt repayments and gas bills will probably send them into the red. The biggest payment comes in December, when Ukraine needs to repay a $3 billion bond to Russia.
Trouble may come sooner than that. Ukraine’s official state-finance statistics are released in March or April. According to a bizarre rule of the $3 billion Russian bond, Ukraine’s debt-to-GDP ratio cannot exceed 60%. If it does, the Kremlin can force Ukraine to pay back the bond immediately. Not only that: Ukraine would technically be in default of all its international bonds, meaning that other creditors could demand immediate repayment. Everyone suspects that Ukraine already has breached the 60% threshold; but that will only be known for sure when official figures are released.
The second caveat is Ukraine’s budget deficit. In the graph above we have assumed that Ukraine will have no budget deficit next year. That is highly unlikely: some people think that the deficit could be as high as 10% of GDP. Ukraine’s tax revenues have dived and the military is eating through cash. The latest budget assumes that the government will raise 26% more in taxes than it did last year—an optimistic assumption, says Timothy Ash of Standard Bank. The government may also be forced to come to the rescue of the banking sector, which is in desperate need of dollars. All this would leave Ukraine with an even bigger hole to fill.
The West could help. Ukraine probably needs more than $20 billion-worth of funding for next year alone. There is talk of a “donors’ conference” soon. The EU has publicly admitted that Ukraine is running out of money. But nobody has yet been willing to stump up.