How many years back will Ukraine be thrown by this crisis? This question, uppermost in the mind of every Ukrainian citizen, remains unanswered. In fact, this is perhaps the authorities' greatest attainment of the past several months. Unlike Russia which is already 5-10 years back, Ukraine still has a chance to prevent such setback in its history. Even so it will be very difficult.
Considering today's debt pyramid, it is clear that the government is showing a belated reaction. It should have thought of exacting money from the recovered economy, rather than collecting easy loans back in 1995. Instead, the Cabinet "became aware" of the danger only toward the end of 1998 when taking any serious steps had become a real problem. Actually, it dawned on the Ukrainian top-level bureaucrats only when investors had made the relevant conclusions. They doomed the "pyramid," saying it was not worth giving any further loans to a country which had not even started any structural reforms (against which all previous credits had supposedly been given).
Most of 1998 has been spent feverishly searching for new creditors and demonstrating dedication to the "course of reforms." The thing is that there was no time and nobody to carry out any reforms. As a result, the government managed to finance the election campaign and live through the critical July-August period (payments made amounted to $2.5 billion). So what is it going to do in September-October and next year?
In the next several months the Finance Ministry and National Bank are likely to make every effort to prevent default. Last week the Cabinet agreed with the eight largest banks on voluntary translation of internal government bonds maturing in 1998-99 into conversion bonds maturing in 2001-04, thus gaining in time and money. As of September 1, bonds worth Hr 550 million maturing in 1.5-5 years had been converted. Friday, August 4, the Finance Ministry had to begin converting the domestic government bonds held by foreign investors. Deferred payments are expected to amount to one billion dollars. Valeriya Hontareva, Treasury Chair, Societe Generale Ukraine, noted in an interview with the Ukrainski Novyny that investors may sell their bonds fearing the government's default in the face of a serious financial crisis. "It seems to me that nonresidents will do just that. If the investors do not want to repeat the Russian experience, and if Merill Lynch shows good income, they will have to exchange them. Two years is not too long. One must give the government time to get the situation under control," she said.
It should be noted that the Russian factor not only triggered the Ukrainian crisis. Fear of Russian chaos may without doubt pour cold water over many a hot head, for if the government goes bankrupt the whole country will follow suit. The administrative folding up of the Russian T-bill market led to unpredictable and dangerous economic consequences. The blow was dealt not only to the banking system, but also the Russian people's confidence in their government, the ruble, and financial institutions. Russia's default will have a long and painful effect on its prestige and the reputation of its banks and enterprises.
Even though the government continues to make timely payments under its liabilities (by the end of the year payments on bonds alone, without regard to conversion, amounted to over $1.5 billion), the stock market almost totally ignores this. Domestic bond yields of 200% on the secondary market shows that the holders of government securities are still trying to get out from that pyramid. Naturally, they are headed for the dollar. Even the primary bond placements stipulating 60% yields are evidence of vague financial prospects, but primary placement rates a separate story, because the National Bank has been the principal buyer of domestic bonds of late.
The Finance Ministry's inability to slow down the accumulation of state debt and the investors' growing distrust of the government are primarily shown in the cost of the national currency. While foreign loans were readily available, securing the hryvnia's convertibility, its rate was controllable and perhaps matched the corridor's parameters. However, since the end of last year the NBU had to expand its functions. Its reserves started being actively used to pay Ukraine's foreign debts and buy non-liquid domestic bonds. Simultaneously, the NBU had to continue currency intervention to maintain the hryvnia rate. In August NBU hard currency reserve dropped by approximately $600 million and was slightly less than $900 by the start of September. Since the beginning of the year NBU has lost over $1,450,000,000.
In other words, the preconditions of the hryvnia's devaluation were formed in the spring of 1998. Foreign capital outflow, the government's default, NBU currency reserve depletion — all added up to the obvious conclusion that the hryvnia was too healthy for the ailing national financial system. In all probability the IMF's extended loan will serve to somewhat improve the NBU's condition and its reserves, but it will not heal the disease. So when Viktor Pynzenyk, while praising NBU efforts, adds that they must be reinforced by a "serious tax reform," introducing simplified small-business-forming procedures, banning non-judiciary arrest of enterprises' bank accounts, straightening out budget income and expense items, instituting emergency budget spending rules, and announcing measures to improve the investment climate, he actually admits that the current political system can only defer the crisis. Other people in office are needed to cure the economy.






