Yanukovych's Support Base Crumbling

Ukraine's parliament passed new concessions to anti-government protestors on January 29, providing amnesty to protestors detained in the recent period of civil unrest. While the laws ostensibly appear designed to placate anti-government protests, opposition party members abstained from voting due to a condition in the bill which required protestors to surrender control of seized government buildings in order for the amnesty to take effect. Perhaps more importantly, President Viktor Yanukovych encountered substantial opposition to the law from his own Party of Regions, with local sources reporting Yanukovych was forced to use the threat of early elections in order to enforce the party line, indicating that the president may be struggling to maintain party discipline.

These developments do not bode well for near-term economic and political stability. One of Yanukovych's main strengths has been the stranglehold he maintains over parliament and the security services. If Yanukovych is losing support from within his own party, it implies the potential for a major government upheaval over the next few weeks and uncertainty over the situation is not helped by recent official announcement that Yanukovych is taking sick leave during such a crucial period of his premiership. Adding to the pressure are indications that Moscow is getting increasingly frustrated with Yanukovych's inability to regain control of the situation, with Russia recently threatening to withhold the remaining US$12bn of bailout cash until it forms a new government. Russia's reluctance may also indicate growing doubts in the Kremlin over the survival of Yanukovych's administration. Were Yanukovych to be ousted, we think there would be considerable doubt over the repayment of the recent tranches of Russian credit to Ukraine which a successor government might attempt to nullify as odious debt.

If further tranches of Russian aid are frozen, Ukraine would remain at extremely high risk of a currency crisis and credit event. Government finances are already at breaking point, with the bulk of Russian loans being spent servicing existing debts and defending the currency peg. Ukraine has reportedly requested a deferral on historic gas debt and current gas payments - despite the 30% discount that Russia provided Ukraine as part of the bailout package. Local sources suggest that the National Bank of Ukraine has begun intervening in the currency again to stabilise the recent devaluation, but without additional external financing, this will be unsustainable for more than several months at most. A combination of household dollar purchases, external debt repayments and a large trade deficit could see reserve erosion accelerate to US$1-2bn over January and February. We maintain our view that the situation will get worse before it gets better, and reiterate our aversion to all Ukrainian asset classes.

NBU Interventions Can't Hold Up For Long
Exchange Rate - UAH/US$ Spot

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This article is tagged to:
Sector: Country Risk
Geography: Ukraine, Russia

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