Gazprom waives fines, sets 2010 import volumes; Current account virtually balanced in October; FDI inflows narrow financial account gap; Foreclosure rules to limit foreign-currency lending, Moody’s affirms Ukrainian ratings.
Gazprom waives fines, sets 2010 import volumes
Naftogaz Ukrainy and Gazprom on Nov. 24 signed an addendum to their bilateral contract that canceled fines Ukraine incurred due to importing less gas than contracted for this year and authorized Naftogaz to reduce next year’s imports to 33.75 billion cubic meters (bcm) from 52 bcm required by the original agreement. Ukraine bought 18.9 bcm of gas from Russia in January-October, much lower than 31.7 bcm it was obliged to import. Potential fines Ukraine could have faced as a result were variously estimated at up to $7 billion. The deal came days after Ukrainian Prime Minister Yulia Tymoshenko and her Russian counterpart Vladimir Putin informally agreed during their meeting in Yalta to revise gas supply terms for this year and next. The agreement is clearly a relief for Ukraine, which reportedly had to tap its foreign reserves to pay for last month’s gas imports, and significantly reduces the risk of a new gas conflict with Russia in the coming winter.
Current account virtually balanced in October
Ukraine’s current account remained virtually balanced in October for the second straight month, leaving its year-to-date deficit at about $1 billion, much lower than a gap of $11.1 billion posted in January-October 2008. Merchandise exports rose by 12 percent month-on-month in October to $4.2 billion, led by steel and grain sales, while imports advanced at a slower pace (+8 percent to $4.4 billion), remaining subdued due to weak domestic demand and moderate gas imports. As foreign demand for Ukrainian steel remains unstable, the country’s exports may slip in the coming months, pulling its current account marginally into the red. However, the full-year current account gap is unlikely to exceed $1.4 billion, which equals a mere 1.2 percent of gross domestic product (down from 7.2 percent of GDP in 2008). In 2010, Ukraine’s current account is expected to be largely balanced as stronger exports on the back of expected global economic recovery should offset the increase in the price of imported gas to an expected $310 per 1,000 cubic meters from about $230 per 1,000 cubic meters on average this year.
FDI inflows narrow financial account gap
Ukraine’s financial account deficit narrowed to $0.8 billion in October from $1.4 billion in September thanks to foreign direct investment inflows and slower domestic flight to foreign cash. Net FDI stood at $700 million in October, as foreign banks continued to inject fresh capital into their Ukrainian subsidiaries, bringing year-to-date FDI to $4 billion (down 57 percent compared to the same period a year ago). Accumulation of foreign currency outside the banking system moderated somewhat, its volume increasing by $640 million compared to $890 million in September, but is set to continue at least until January presidential elections as public confidence in the hryvnia remains fragile.
Foreclosure rules to limit foreign-currency lending
President Victor Yushchenko signed into law a bill that imposes a temporary ban on foreclosures under retail mortgage loan agreements and forbids banks to disburse new foreign-currency loans to retail customers. The law prohibits banks from appropriating collateralized residential real estate in 2009 and 2010 if a borrower’s interest payments to the bank under a corresponding mortgage agreement are two months or less overdue. It also obliges banks to restructure outstanding retail loans so that a particular household’s regular debt payments do not exceed 35 percent of its income. With respect to lending, the law allows banks to disburse new loans in foreign currency only to individuals seeking education or medical treatment abroad and to private entrepreneurs who earn revenue in foreign currency. The new legislation is not expected to have a serious impact on the banking system as foreign currency lending to households has effectively been prohibited since last December due to very high reserve requirements on such loans set by the central bank.
Moody’s affirms Ukrainian ratings
Rating agency Moody’s Investors Service on Nov. 24 affirmed Ukraine’s sovereign credit rating at B2 despite the state-run railway monopoly Ukrzaliznytsya’s announcement several days before it was negotiating to restructure a $550 million foreign loan. The agency said the Ukrzaliznytsya loan had no sovereign guarantee and did not affect the government’s ability to pay its own debts. Additionally, Moody’s noted Ukraine as a state had no major debt repayments due until March 2010 and its foreign reserves were sufficient to cover all foreign currency debt payments through next year. However, the agency said the country’s macroeconomic fundamentals were “weak”, banking system remained “under strain” and coordination between fiscal and monetary policies was “distinctly poor.”
