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Ukraine Faces Debt Downgrade as Russia Puts Loan on Hold

  • Henry Ridgwell

As cities in Ukraine remain in the grip of protests and political crisis, a rating agency has downgraded the country’s sovereign debt. Russia, meanwhile, says it will put a loan deal with Ukraine on hold until a new government is formed. The crisis is exacerbating existing economic problems.

In Independence Square, old war movies stir the spirits of revolution. On a big screen, Ukrainian insurgent fighters take on Russian forces in World War II.

Protesters draw parallels with their bid to oust their Russian-backed leader.

President Viktor Yanukovych opted to sign a $15 billion loan deal with Moscow last November, instead of a trade deal with Europe - triggering the protests. Russian President Vladimir Putin this week said it would be wise to delay further loan payments.

“It's rational,” he told government ministers. “Let's wait for the formation of the new government in Ukraine."

Rating agency Standard and Poor's downgraded Ukraine’s sovereign debt Tuesday - citing “weakened political institutions.”

Despite the turmoil, the country can weather the storm, argues Oleh Soskin, professor of the National Academy of Management.

“We can’t say that political threats and civil clashes are influencing the economy that much,” he said. “We can’t say there’s a direct linear relationship between these events - political and civil clashes - and the stability of the economy."

Ukraine’s GDP plunged 15 percent from 2008 to 2009 due to falling demand for steel. Output remains below the level in 1989 at the breakup of the Soviet Union.

The IMF accuses President Yanukovych of failing to implement economic reforms while increasing state spending. Opposition lawmaker Lesya Orobets says the Maidan protest has its roots in the failing economy.

“We are in stagnation for years. We have our GDP falling; we have our salaries staying where they are, so we have had economic regression for years already. This is one of the reasons why those people [the protesters] stay," said Orobets.

Another reason is corruption. Ukraine ranks 144th out of 177 countries in Transparency International’s perceptions of corruption index, the worst in Europe.

The government denies accusations of corruption - but it permeates public life, according to economist Oleh Soskin.

“Corruption blossoms in Ukraine. Everywhere where we have state buildings, state construction or tenders, there is corruption. Fifty or 60 percent of the cost of anything goes to corruption," he said.

With economic problems mounting, President Yanukovych sees a more prosperous future alongside old ally Russia, but the protesters believe Europe would bring more trade and the rule of law.

These are two different visions of the future, and, as Ukraine teeters on the brink of civil conflict, its economy remains frozen.
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