Ukraine economy under threat amid massive street protests

KIEV, Ukraine - Hidden behind the tug of war over whether Ukraine will cast its lot with Europe or Russia is the prospect of bankruptcy. Someone will need to chip in at least $10 billion in the coming months, if Ukraine wants to keep its economy afloat.

Analysts say that if President Vladimir Putin offers anything to Ukraine, one of Europe's poorest countries, it could be a mix of credit, investment pledges, and a discount on energy prices, particularly natural gas.

But the Russian leader may not be generous, given the crisis being endured by Yanukovych and his ruling party and the flip-flopping by Ukraine's leadership about whether its allegiance lies with Moscow or Brussels.

Putin's aim "will be to keep Ukraine on the edge and dependent on Russian credits, to continue to pressurize Ukraine to eventually sign" the Moscow-led Customs Union, an organization that now includes Belarus and Kazakhstan, said Timothy Ash, an emerging markets analyst with Standard Bank in London.

"This is still Putin's No. 1 strategic objective, as part of his grand neo-imperial design to rebuild Russia's great power status," said Ash.

But a large part of Ukraine's 46-million population opposes this.

Massive crowds have protested in the center of Kiev for weeks against Yanukovych's decision last month to shun closer ties with the EU and to push his country toward Moscow. The demonstrations were galvanized after dozens of activists were injured when riot police violently broke up a small rally on Nov. 30.

Yanukovych is hoping he will find some sort of redemption when he meets his potential savior, Putin.

Without cash and cheaper natural gas, Ukraine's public finances will be increasingly untenable and could lead the country toward a default next year.

First Deputy Prime Minister Serhiy Arbuzov said earlier this month that Ukraine needs a loan of some $10 billion to meet its payment obligations. However, the central bank has been burning through its reserves and only had $18.8 billion as of Dec. 1, down a quarter from the same period last year.

One of the greatest drains on Ukraine's economy is its energy sector, which the World Bank has described as one of the most energy inefficient in Europe.

In a country with 7.5 percent unemployment, the price of electricity for households is kept artificially low. That forces industry to carry the load and results in higher prices for its goods.

Coal is subsidized since Yanukovych is keen to maintain his support base in eastern Ukraine, where the coal industry is located.

Yanukovich inherited these problems when he became president in 2010, but during his two tenures as prime minister over the past decade he also has failed to address such structural flaws.

Ukraine was hoping to get a loan facility with the IMF for as much as $15 billion by March to finance its external debt. But in return the Washington-based bank's demands would include Ukraine weakening the local currency to boost export industries, balancing its budget, and raising household energy prices.

Many of these stipulations require time to have any positive impact on the economy and Ukraine's deplorable business environment - and time is a luxury Yanukovych doesn't have.

The political crisis is causing a downward spiral as investment freezes up, capital flight increases, and tax collection becomes increasingly difficult.

"The longer the standoff goes on, the greater the risk that political uncertainty will raise demand for foreign currency, cause inward investment to dry up, or trigger capital flight, causing additional reserve losses and increasing the risk of disorderly currency moves," Fitch Ratings wrote Monday.

Seeing Yanukovych's precarious predicament, Putin is likely to drive a hard bargain. Yet any deal the two might reach could backfire on Yanukovych since pro-Western Ukrainians regard Moscow with distrust and the Customs Union as a modern embodiment of the Soviet Union.

"If the agreement is signed, he (Yanukovych) can remain in Moscow and not return to Kiev," opposition leader Arseniy Yatsenyuk told about 200,000 anti-government protesters in the capital's Independence Square on Sunday.

"At the core of Ukraine's problems isn't public finance or a current account deficit ... it is an extremely dysfunctional political system," said Lars Christensen, head of emerging market research at Danske Bank in Denmark.

"The government and the opposition over the past decade turned out to be exactly the same in terms of inability to reform the country and do anything long term," he said.

In Brussels, EU foreign ministers said the door remains open for Ukraine to belatedly sign a political and economic cooperation agreement - a key demand of protesters - even though consultations with Ukraine on how to get pen to paper were put on hold over the weekend.

EU Enlargement Commissioner Stefan Fuele shelved those consultations Sunday, saying Yanukovych had failed to guarantee that Ukraine would sign that deal soon.