Who's Afraid Of Financial Collapse In Ukraine?

KIEV, Ukraine -- Ukraine is dangerously close to a sovereign default, the analysts are telling us. The currency has already dived to nearly half of its value of last summer, along with traded stocks. Worse yet, many of the nation's banks are expected to fail, taking down with them the hopes and savings of a fledgling consumer society.

Ukraine's National Bank

However, you don't see people jumping out of their windows from the glass business towers that have sprung up across downtown Kyiv over the last several years.

Many have lost their jobs, and there have been a few anti-government protests, but these are not uncommon occurrences in Ukraine in and of themselves.

Retail sales are down, but shopping malls and supermarkets in the capital are still bustling with buyers.

Optimists point to Ukraine's low debt relative to gross domestic product, and respectable currency reserves held by the country's much-embattled National Bank.

Pessimists raise the specter of unpaid pensions and the large state workforce in redundancy.

Meanwhile, the cavalry has not arrived as expected, although the horns are blowing from the West.

The European Bank for Reconstruction and Development has pledged 500 million euros to re-capitalize troubled Ukrainian banks.

The World Bank says it is ready to provide banks with up to $750 million, plus another $1 billion to rebuild the country's infrastructure.

Then there is the International Monetary Fund's much touted $16.4bn package. But that one has been cut off at the pass over disagreements with the government about this year's controversial budget deficit.

Nevertheless, Prime Minister Yulia Tymoshenko remains defiantly confident.

"There is currently nothing in the public sector to suggest raising the issue of default, or even uttering this word," she told journalists.

Her finance minister, Viktor Pynzenyk, didn't share her optimism, and hightailed it off into the sunset on a horse with no name.

Now, Ms. Tymoshenko is sending smoke signals to the indians, in the form of a five-billion-dollar loan request to the Kremlin.

Purportedly, Western lenders were also supposed to see those smoke signals, but one never knows who will respond to such a request, or what they will want as collateral.

Despite all the rumors of European bankers shaking in their boots, it's a bit premature to forecast a full retreat.

Many foreign banks have made a pretty penny lending to their eastern neighbors. Packing up and leaving now would make it a lot harder to come back later.

They paid top price for their entry on to the market and have every reason to expect a return on their investment later on down the road - barring another communist revolution (!).

And besides the expected help from international financial institutions such as the EBRD, WB and IMF, many of the Western banks that set up shop in Ukraine over the last few years can count on their parents back in Europe.

As for stock prices, what goes down eventually goes back up. In the mean time, it's a great time for bottom fishing.

World prices for the steel and chemicals that Ukraine exports will also eventually rise - along with producers' profits if long overdue investment into energy-saving technology is carried out.

Of course, some banks will go under, and small companies with no money will get swallowed up by big firms with plenty of liquidity.

But that's the way capitalism works.

Many a Ukrainian entrepreneur has been living like a character from the American soap opera ‘Dynasty’. Business is about risk taking, and the risks are a lot bigger when you put off the kind of legislative and regulatory reforms that make the market more rational.

Much of this is the fault of Ukraine's short-sighted and self-centered politicians. And many of them are the same business people now trying to claw their way out of the current mess.

Ordinary citizens who may lose their bank deposits, as well as the cars and apartments they recently bought on credit, deserve more sympathy.

If things get really bad, they may take to the streets, or at least vote their corrupt leaders out of office.

In this situation, they wouldn't differ much from the disillusioned citizens of other countries across the world who have also lost their homes and jobs over the last year.

For the many Ukrainians who never really had a chance to benefit from the short-lived prosperity that their country has undergone, life will continue as usual.

In fact, life may even get better, if the right laws are passed, the tax system is straightened out and the most vulgar forms of corruption are removed from officialdom.

For some Ukrainians, there is amusement if not justice in watching their country's new rich take a spill. President Viktor Yushchenko has certainly been knocked down a peg or two. Once heralded by his supporters as the country's messiah, he is almost certain to lose the upcoming elections.

His departure from politics may also be accompanied by a shift in Ukraine's foreign policy, from solidly pro-Western to a more middle-of-the-road approach.

In any case, the country may end up better off. It certainly has more pressing problems at the moment. If there is one certainty in Ukraine's current financial crisis, it's that change is long over due.

And that is nothing to be afraid of.

Source: Eurasian Home