Financial Blows Batter Ukraine

KIEV, Ukraine -- The financial crisis here is also a crisis of confidence. Five years ago, hundreds of thousands ignored freezing cold to join demonstrations in Kiev's main square, convinced that their Orange Revolution could make an exemplary democracy of this former Soviet republic.

About 70 bank depositors, most of whom have been told they can't get their money for six months, protest on Kiev's Artema Street. "Even if they rob the people, they don't care," said Vjacheslav Karpenko, right, speaking into a mike.

Today, people's concerns are more mundane. On Artema Street, in front of one of the city's beleaguered banks, 70 protesters gathered this week to vent their anger. Most have been told they can't touch their money for six months. Similar protests are often seen in the city.

The people on Artema don't trust banks, bank regulators, the economy, the currency, the government or politicians. President Viktor Yushchenko -- the man whose orange banner led the revolution -- has an approval rating below 3 percent.

Few countries have been hit harder by the global economic crisis than Ukraine, which is the second-largest nation in Europe, with the sixth-largest population.

Until September, it was one of Europe's fastest-growing economies, with growth of more than 7 percent a year for eight years. Then the roof fell in. The crisis dried up foreign loans, crippled banks with defaults and triggered massive layoffs.

Yushchenko's pro-Western government still hopes to join NATO and the European Union. But some think this country, once seen as a keystone of a revived Eastern Europe, is on the verge of a meltdown.

"If the banking system collapses, and I think it will, we will produce nothing," said Alexander Dubinsky, chief correspondent for the Ekonomicheskie Izvestia newspaper. If production stops, he said, the situation could resemble the economic tumult of the 1990s.

In the chilly morning on Artema Street, bank customers lashed out at Yushchenko and other leaders as they grumbled about their finances.

An office manager who lost her job four months ago said she has a daughter in the hospital and needs money from the bank to get by. "It's impossible to find a job," she said.

An engineer said he can't go to work because his company didn't pay its electricity and Internet bills. One man said he desperately needs money for his wife's operation. "What if she dies?" he asked.

The crowd was mostly middle-aged and carefully dressed. Many were pensioners. Some clutched files of letters and telegrams to bankers and bank regulators, all unanswered. They spoke together about possible corruption on the part of the country's leaders, who are locked in an acrimonious power struggle.

"Even if they rob the people, they don't care," said Vjacheslav Karpenko, the unemployed engineer. A barrel-chested man in a black cap with fur earflaps, he stood on the front steps of the bank and snarled into a bullhorn, urging the crowd to chant angry slogans so the employees inside could hear them.

Some in the crowd said their only hope lies with the World Bank and the International Monetary Fund, if those global institutions make sure that relief money coming to Ukraine finds its way to Artema Street.

At the World Bank's offices above the thawing Dnieper River, Martin Raiser, director of the bank's programs in Ukraine, said, "I understand the sentiment." He added, "The fundamental problem here is the lack of trust in state institutions."

Ivan Lozowy, president of the Institute of Statehood and Democracy, said the banks have not only not failed to use cash infusions from the government to help their customers, but they have also misused the money by buying dollars. That drives down the Ukrainian currency, the hryvnia. As confidence in the currency sags, people attempt to unload it.

Many people are withdrawing money from banks that are still healthy, which weakens the banks. And people who get money are changing it into dollars and hoarding them.

Last May, a dollar traded for about five hryvnia. In recent weeks, the dollar has been worth almost 10 hryvnia. And because 70 to 80 percent of consumer loans are in dollars or other foreign currencies, the amount of hryvnia that borrowers must scrape together each month to repay loans has ballooned.

The banks find themselves pinched between depositors who want out and borrowers who can't repay their loans. A dozen banks are in some form of receivership.

"The blow to the Ukrainian economy has been horrendous," Anders Aslund, a former economic adviser to the Ukrainian government and a senior fellow at the Peterson Institute for International Economics in Washington, wrote in an article recently published by the institute. Construction has all but stopped, gross domestic product could drop 40 percent, the steel industry has been decimated by falling world demand and millions are being laid off. "No other country," Aslund concluded, "has been hit as hard as Ukraine."

Meanwhile, he wrote, the outlook for international assistance is clouded by the public acrimony between Yushchenko and Prime Minister Yulia Tymoshenko, "who accuse each other of treason and corruption."

The president and prime minister were allies in the Orange Revolution but have become bitter enemies. There had been signs of cooperation in the face of the crisis recently, but on Wednesday, security forces who report to Yushchenko raided the national gas company, which reports to Tymoshenko. The exchange that followed included accusations of "corruption" and "evil."

The IMF approved a $16.5 billion loan program to rescue Ukraine in October, but suspended it last month after the first $4.5 billion installment because the government failed to make politically unpopular spending cuts.

Despite the severity of the problems and the infighting, Aslund argued that this Western-oriented nation of 46 million people is too important strategically and politically to write off. "Such a country needs support when in peril," he wrote.

The World Bank's Raiser said government and financial institutions must bolster their credibility with the public, which has proved difficult, but he added that Ukraine's natural resources, as well as its relatively cheap land and labor, give it many long-term advantages.

In Raiser's analysis, the most hopeful scenario is that after a deep recession this year, the country will stabilize and bounce back with a reshaped economy. And, he said, the harsh economic environment could put an end to the infighting, having "the effect of concentrating minds."

But Lozowy said the country's messy politics are not such a bad thing. "Look, we have competitiveness in the political arena. At least there's vocal opposition," he said. Because the ruling coalition is so fractured, when one faction does something questionable, another side tells the public.

Much of the former Soviet Union may appear more stable, he said, but political opposition is almost nonexistent. "I've never seen the logic that political chaos is terrible," Lozowy said.

For the people on Artema Street, though, questions are often personal, not political. One man said he needed money to send to Ohio. It's for his son, he said, who is stuck with an apartment there he can't afford.

Source: Washington Post