Ukraine: Default concerns fade amid deal with Russia
January 9, 2014
The Kiev protests triggered by President Viktor Yanukovich's decision to pull out of a landmark deal with the European Union continue. However, while the protests drew hundreds of thousands in the early weeks, they have now dwindled to tens of thousands and no longer pose a threat to Yanukovich's government. Backed by a comfortable majority in Parliament, Yanukovich resisted protestors' demands for signing the EU agreements and calls for new elections. Instead, the President carried on with his agenda of forging closer ties with Russia.
On 24 December, the Russian government announced that it would purchase USD 3 billion worth of Ukrainian bonds. The deal represents the first tranche of a larger USD 15 billion purchase, which President Viktor Yanukovich and the Russian government agreed upon on 17 December. The deal helped to mitigate immediate concerns regarding a sovereign default and stabilized the hrvinya. Reflecting the improved financial conditions, Standard and Poor's improved Ukraine's outlook from negative to stable just two days after the first tranche of the program was released.
In addition, Russia agreed to cut the price of gas by one third (from approximately USD 400 to USD 269 per 1,000 cubic meters). As a result, Ukraine is expected to save USD 7 billion per year in gas imports. The gas price will be revised quarterly, which most analysts see as an instrument that Russia can use to influence Ukraine if the country decides to resume negotiations with the EU.
The deal with Russia has solved the country's liquidity problem, and thus brought back stability in the short run. However, most analysts remain skeptical about the implications of the agreement in the long run as the agreement with Russia does not plot a path to a sustained recovery of the Ukrainian economy.