Ukraine risks financial meltdown after break with EU

Nov. 22, 2013 at 7:32 PM   |   Comments

KIEV, Ukraine, Nov. 22 (UPI) -- Ukraine is risking a financial crisis of monumental scale by ditching the EU as it faces a cash crunch before imminent debt repayments, analysts said Friday.

Ukraine received warnings from senior EU officials and the United States after it dropped its EU membership bid, European Observer said.

U.S. officials cited difficulties Ukraine could face obtaining credit from the International Monetary Fund after it snubbed the EU, EUObserver.com said.

Ukraine's ties with the IMF are already fraught over recent mishaps, including a $15 billion line of credit that fell through. Renewed Ukrainian attempts to obtain IMF cash are aimed at securing a line of credit for $10 billion or more to enable Kiev to head off default on loan repayments.

Ukraine needs to make regular repayments on more than $60 billion of external debt.

Thousands of protesters in Kiev and other Ukrainian streets Friday pushed the argument Ukraine belongs in the EU, not in a Russian sphere. But the question of how Ukraine will make its debt repayments is more pressing than emotional pronouncements about the country's future outside the EU, analysts said.

If Ukraine fails to make loan repayments due it will face the risk of default and will be solely at the mercy of Russia for a financial bailout, analysts said.

The suspension of EU-Ukraine talks on an association deal -- a step toward full membership -- also means that a European loan, worth about $830 million, is likely to be put on hold, European Observer said.

Continuing street protests across Ukraine renewed risks of confrontation between demonstrators and police.

EU foreign relations chief Catherine Ashton said Ukraine's EU membership would have given the country international credibility and prepared it for international capital markets. It would also have helped Ukraine's negotiations with the IMF on a new standby credit arrangement, Ashton said.

U.S. State Department spokeswoman Jen Psaki echoed the view that EU association would have reassured international financial institutions about the country's commitment to democratic reform.

An EU-Ukraine pact in preparation for EU membership for the country was due to be signed in Vilnius, Lithuania, next week.

Analysts said support still exists in Brussels for continuing to give Ukraine a lifeline to discourage it from signing a deal with Russia it could ill afford to reverse.

Political and trade links between Russia and Ukraine remain uneasy, mainly over delays in Ukrainian payments for gas. In 2009 Russia cut gas supplies to Ukraine in a dispute over prices. The stoppage also affected supplies to EU member countries, causing fuel shortages across Europe in the middle of winter.

Protesters opposed to the suspension of links with Europe shouted "President Viktor Yanukovych -- enemy of the country." Opposition critics have accused Yanukovych of treason for going back on an EU deal.

Ukraine Prime Minister Nikolai Azarov said the decision was the result of economic pressures.

"The decision the government has made is based on economic reasons," he said. "It is of a tactical character and does not change our strategic objectives."

Under the EU association deal, Ukraine would have been required to release imprisoned former Prime Minister Yulia Tymoshenko, an arch rival of Yanukovych and consistent critic of Moscow.

In a letter released from captivity, Tymoshenko warned Yanukovych "you are making the mistake of your life... You will remain one-on-one with Russia and you will have to live according to her road map. Later Russia will give you a choice: either it will save you from the social and economic collapse at the expense of the loss of independence or will not react at all."

EU diplomats interviewed by European media said Ukraine's move did not secure its position within the Russian sphere and made its future more uncertain. Ukrainian opposition says the country is ripe for another revolution, this time driven by social media, especially Twitter.

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