Emerging Markets, Featured Work, Money, Ukraine - Fri May 18, 2012

Ukraine risks pariah status, EBRD warns

Ukraine could find itself permanently shunned by foreign investment without concrete moves towards the rule of law and governance reform, the EBRD has warned

Ukraine risks becoming a pariah state after being assailed by the International Monetary Fund over debt repayments, and humiliated by European politicians appalled at the treatment of a former prime minister, the EBRD warned yesterday.

“Most investors will say that the situation in the Ukraine is getting worse,” said André Küüsvek, Ukraine country head at the EBRD. “The lack of a rule of law and the lack of independent courts is leaving the Ukraine in a situation where laws are implemented in a speculative way. And that is affecting the security of investments.”

He said vested interests were becoming more powerful, while cases of abuses of power from the top down were also on the rise. Nowhere is this more publicly and visually acute than in the case of the jailing and alleged beating of former premier Yulia Tymoshenko, who many see as a political victim of her successor in the prime minister’s office, Viktor Yanukovych.

European legislators, including EU chief Jose Manuel Barroso, have chosen to boycott the Euro 2012 soccer tournament, co-hosted by Poland and the Ukraine, unless Tymoshenko is freed.

The European Union has also postponed the signing of an association agreement and free-trade pact with Ukraine so long as the former premier languishes in jail.

This is a serious issue for the Ukraine, which is already nervous about the fallout from a repeat recession in the eurozone, currently tearing itself apart over Greece and the future of its single currency.

However Kiev is showing no desire to extricate itself from its economic and political malaise, analysts say. The Ukraine government, EBRD’s Küüsvek says, “do not care” about Tymoshenko. “The damage has been done. In the short-term they will ignore the problem, and then after the elections, we will see” what happens.

Analysts said Ukraine appeared more focused on upcoming elections in October, in part by spending $3 billion on subsidies to soften the rising price of gas – widely seen as a move by the ruling administration to curry favour among voters.

The country owes $5.3 billion in debt repayments this year, including $3 billion to the IMF alone, which has punished the country by essentially freezing it out of the international capital markets.

Timothy Ash, an analyst at RBS, said Tymoshenko was “unlikely to be released any time soon”. Kiev’s recalcitrance has thrust a wedge between it and its potential European Union benefactors, he said.

“Ukraine appears to have undermined its own negotiating position, burning its bridges with the EU, and leaving it now wholly dependent on Moscow for financial support,” Ash said.

“Moscow seems eager now to exploit this new potential dependency. Thus from a policy of ‘milking both cows’, the new strategy appeared to be one rather of ‘putting all its eggs in one basket’.

More worrying is the overall investment picture, both for investors inside the country, and those peering in from outside. Many if not most dislike what they see. “The reality [of foreign direct investment into the country] is far worse than the picture you see,” said Küüsvek. “The quality is also falling. If you look at the real picture, there are very very few big names willing to invest in Ukraine over the past 12 to 18 months.”

Read the article online: www.emergingmarkets.org/Article/3032842/Search/Results/Ukraine-risks-pariah-status-EBRD-warns.html

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