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Ukraine calls for urgent aid after Yanukovich ousted

Source: Reuters - Mon, 24 Feb 2014 04:53 PM
Author: Reuters
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* Ukraine's new leaders want financial aid

* Acting president says Ukraine close to default

* Financial analysts see no imminent risk of default

* Europe, U.S. unlikely to offer large sums yet - officials

* Ukraine needs new government to negotiate IMF deal

By Timothy Heritage and Pavel Polityuk

KIEV, Feb 24 (Reuters) - Ukraine appealed for urgent international help to stop the economy "heading into the abyss" after the fall of Russian-backed president Viktor Yanukovich cast doubt on a bailout deal with Moscow.

Acting President Oleksander Turchinov raised the possibility of Kiev defaulting on its debt, and said the country needed $35 billion over the next two years.

In Brussels, officials said the European Union was discussing a range of options for short- and longer-term financial help, but any comprehensive package was likely to take shape only after elections in May and in coordination with the International Monetary Fund.

Ukraine has been caught in a geopolitical tug of war between Russia and the EU. With Yanukovich now a fugitive, its chances of receiving the remaining $12 billion of a $15-billion bailout package agreed with Moscow in December, after Kiev spurned an EU trade deal, seem to have receded.

Turchinov, appointed after Yanukovich was stripped of his powers by parliament on Saturday, sounded the alarm about the economy in an address to the nation on Sunday evening.

"Against the background of global economic recovery, the Ukrainian economy is heading into the abyss and is in a pre-default state," he said, calling for an international donors' conference and saying aid was needed in the next week or two.

Financial analysts said, however, that the economy was not about to collapse. Prices of its government bonds rallied and the cost of insuring its debt fell in a sign of investors' confidence that it would avoid default.

The European Commission confirmed a variety of options were being discussed. "The EU has been working on an international economic support package for Ukraine - short, medium and long-term support to address the challenges of the Ukrainian economy," said Commission spokesman Olivier Bailly.

EU officials said it was highly unlikely Europe, the United States or anyone else would put the kind of sums mentioned by Turchinov on the table right away. However, smaller bilateral loans, possibly coordinated by the EU, could be used to give short-term help, they added.

Discussions have already taken place with Japan, China, Canada, Turkey and the United States on possible help, a senior European Commission official said, and efforts are being made to keep Russia engaged in the process as well.

Elections scheduled for May 25 to elect Yanukovich's successor were crucial.

"Many of the proposals we're working on require an IMF deal to be in place, which means an operational government in Ukraine, so it can't happen until after the elections," said a separate official involved in efforts to help Ukraine.

In Washington, a U.S. official said Treasury Secretary Jack Lew and IMF Managing Director Christine Lagarde agree that Ukraine would need both bilateral and multilateral support for any reforms.

The IMF agreed a $15.5 billion loan for Ukraine in 2010, but suspended the deal last year after Kiev failed to implement the required reforms, which included removing gas price subsidies and freely floating the currency.

Three months ago, Brussels was hoping to sign Ukraine up to the far-reaching free trade and association agreement that would have brought the country of 46 million more closely into the EU's political and economic sphere of influence.

Yanukovich rejected that deal at the last minute, deciding instead to accept the aid and cheaper gas from Russia. That led to weeks of popular protests culminating in his fall.

MOSCOW HESITATES

Moscow says it will not release the next $2-billion instalment until it knows who will be in the government. It also says any extension of the deal cutting the price of Russian gas must be negotiated with Ukrainian companies and the government.

EU foreign affairs chief Catherine Ashton was meeting officials in Kiev to discuss the economy.

Ukraine has around $6.5 billion in foreign debt payments to make before the end of 2014 and needs a further $6.5 billion to cover its current account deficit, according to estimates from Commerzbank.

It has $17.5 billion foreign exchange reserves, which it is expected to continue using for external debt payments.

Kiev must repay a $1-billion eurobond in early June and the government has also guaranteed a $1.6 billion eurobond issued by state energy company Naftogaz, which falls due in September.

If Ukraine can strike a new agreement with the IMF, that would allow the EU to disburse around 2-3 billion euros of extra assistance, officials say, and could unlock further help from the World Bank, the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank.

The EBRD's president Suma Chakrabarti told Reuters that Ukraine's financing gap was likely to be large.

"What the IMF needs to do first of all... is to work out what the size of the gap is, what sort of reforms will help fill part of the gap, and what sort of additional finance is required as well," he said in an interview. "The European Union, ourselves and others will all play a part in that."

Economic growth was zero in 2013, and the hryvnia currency has lost more than 8 percent of its value in three months. The economy is dominated by steel, chemicals and grain exports. More than half of all exports go to Russia, which last year threatened heavy sanctions if Kiev joined the EU trade pact.

But in a sign of growing confidence in the country's economy, Ukraine's five-year credit default swaps, which give investors protection on its debt, fell sharply.

"In our view, Ukraine can afford to roll over its external payments this year at the extreme but an IMF loan program is definitely needed," said Simon Quijano-Evans, head of emerging markets research at Commerzbank AG in London.

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