DESPERATE MEASURES

It’s hard for Ukraine to fight back when it’s basically broke

April 16, 2014
April 16, 2014

Ukraine, and its military, is running out of money. Ukrainian officials estimate that they need up to $30 billion in loans from the International Monetary Fund and western allies over the next two years. Ukraine hopes to sign a deal this month to unlock $7 billion from the IMF.

The funds can’t come soon enough. Even before its ongoing clash with Russia, Ukraine was an economic basket case. Now, having lost Crimea and facing the prospect of losing swaths of land in its industrial east, Ukraine’s new government faces Russian gas debts of more than $2 billion, among other expenses. The economy will shrink by at least 3% this year, according to official sources, although some analysts think that it could contract by as much as 5%.

As Ukrainian and pro-Russian troops edge closer to all-out war, there is increasing desperation in Kiev. Today, the defense ministry trumpeted its 100-million-hryvnia ($8.9 million) fundraising drive, a big chunk of which came from mobile users donating 5 hryvnia at a time via a special text number. Meanwhile, the finance ministry also announced the issue of 1.1 billion hryvnia ($97 million) in war bonds to help finance the cash-strapped military.

The two-year bonds, which carry a 7% coupon, will attract only the most patriotic investors. After all, last week Ukraine’s government issued three-month bills with a yield of nearly 10%. Of course, this also implies that investors are keen to hold hryvnia-denominated assets at all. “You’ll find more liquidity in the Sahara,” an analyst told the Wall Street Journal.

To conserve its rapidly dwindling reserves and satisfy the IMF’s conditions for a loan, Ukraine gave up on pegging its currency to the dollar earlier this year. As cash floods out of the country, the hryvnia has plunged in value. Earlier this week the central bank hiked its benchmark interest rate to 9.5%, from 6.5%, and blocked 14 banks from the foreign-exchange market. This reversed the rout, but the hryvnia has still lost nearly 30% of its value against the dollar so far this year.

Year-to-date-change-in-value-of-hryvnia-versus-the-dollar-rate_chartbuilder

The foreign-currency reserves at Ukraine’s central bank are only enough to cover around two months of imports, according to the local unit of BNP Paribas. Traders of credit default swaps, a type of insurance against bond issuers missing payments, reckon that Ukraine is the second-riskiest sovereign borrower in the world, after Argentina. The longer that it takes for the IMF and others to agree to a comprehensive financial rescue package, the more dire the situation becomes.

On the ground, Ukraine’s military is badly outmatched by Russian forces. That was true even before Russia seized a number of ships in Crimea and, it was reported today, pro-Russian forces commandeered armored personnel carriers in eastern Ukraine. If the military escalation continues, it will take more than phone-in fundraisers and novelty bond issues for Ukraine to mount much of a defense.

Scarce resources are weakening the Ukrainian military in other ways, too. Reuters reported today on soldiers who claimed to have defected from Ukraine, citing a lack of resources and support from Kiev. “They haven’t fed us for three days on our base,” one said. “They’re feeding us here. Who do you think we are going to fight for?”

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