Ukraine's woes were mounting even before Russia turned off gas supplies, writes Daniel McLaughlin
DEALINGS IN an obscure financial instrument highlighted the depth of Ukraine's plight yesterday.
The cost of insuring Ukrainian debt against restructuring or default rose to 54.75 per cent on an upfront basis, meaning an investor buying protection for $10 million of Ukrainian debt must pay $5.475 million in advance, plus $500,000 a year for five years.
Iceland's credit default swaps (CDS) went to being quoted on an upfront basis just before its economy collapsed last year, and the CDS is a gauge of a country's perceived ability to service its debts.
With its stock market and currency crawling along near all-time lows, industrial production down by some 30 per cent, and a deep recession beckoning, Ukraine's financial outlook was bleak even before Russia turned off the gas because of a dispute over allegedly unpaid fuel bills. A recent $16.4 billion international loan now looks modest compared to the scale of Ukraine's problems, as demand for major exports such as metals, chemicals and oil products shrivels in the face of the global economic slowdown, and it becomes more costly to get new credit and service existing debts.
Now, in the grip of an energy war with Russia, factories that are still working are confronted by the possibility that gas shortages could curtail production.
Kiev insists that it now owes nothing to Russia for the gas it used last year, and rejects Moscow's suggested price for gas in 2009 of $450 per 1,000 cubic metres - up from $179.50 in 2008.
Such a price hike would cripple Ukrainian industry and force the government to spend huge amounts subsidising fuel for commercial and household consumers who could not afford a sharp rise in fuel bills.
People in major cities across Ukraine have started to protest against growing unemployment, inflation and the ugly infighting that killed the hopes of the 2004 Orange Revolution.
President Viktor Yushchenko and prime minister Yulia Tymoshenko led the huge demonstrations that overturned the fraudulent election "victory" of Moscow-backed Viktor Yanukovich and swept a new generation of pro-western politicians into power, with a dream of leading Ukraine towards the EU and Nato.
Just over four years on, Yanukovich's party is Ukraine's most popular, and Yushchenko and Tymoshenko are perpetually at odds, trading accusations of greed, corruption and incompetence, as the country stumbles on in a state of constant crisis and under the omnipresent threat of snap elections.
Tymoshenko is expected to challenge Yushchenko for the presidency next year, so 2009 is unlikely to see an improvement in their relationship, or a willingness from either of them to push through unpopular, but essential, cost-cutting reforms.
The dangers posed by Russia have failed to reunite the old allies, despite warnings that Kremlin hawks could destabilise Ukraine's strongly ethnic-Russian Crimea region following their successful military campaign in Georgia last August.
Clashes between Ukrainian and Russian nationalists are common, and Ukraine's mounting economic woes will only fuel the dissatisfaction of its large Russian-speaking minority.