National finance

The Cabinet of Ministers will give Russia a reason for demanding premature repayment of debts

The Cabinet of Ministers will give Russia a reason for demanding premature repayment of debts
Photo: Yevgeniy Musiyenko

According to the results of the year Ukraine’s national debt will exceed 60% of its GDP. The Ministry of Finance proposed to the government to increase the ceiling of the national debt by 20% to UAH 968.4 bn. This is envisaged in the draft law proposing the corresponding changes to the budget. Yesterday, the document that Capital has a copy of was put up for consideration by the Cabinet of Ministers.

Beyond the outer limits

In the budget for 2014 the permissible size of the national debt was set at slightly lower than UAH 807 bn. This indicator was calculated based on the exchange rate of UAH 12/USD. The reason for «expanding the bounds of possibility» was partially the devaluation and the desperate need for new loans. Now, hard currency loans account for approximately 60% of the obligations in Ukraine’s portfolio. Indeed, while the national debt, including guaranteed loans, increased by US $1.1 bn, in hryvnia it soared to UAH 377.6 bn.

«Devaluation of the national currency from 8 hryvnia to the current level of approximately 16 hryvnia per U.S. dollar and its constant fluctuation makes it impossible to observe the ceiling of the national debt at the level set by the national budget,» it reads in the explanatory memorandum of the Ministry of Finance. Strictly speaking, the size of the debt hit the ceiling back in September at the level of UAH 803.4 bn. But taking into account the guaranteed debt the sum of obligations at the end of the third quarter was more than UAH 962 bn. According to data of the Value of a State project, this was equal to 64.8% of nominal GDP.

Russia as a lender was given a good reason to demand from Ukraine premature repayment of its debt obligations. The fact is that the Ukrainian leadership agreed at the end of 2013 to the sale of US $3 bn worth of Eurobonds to Russia’s Ministry of Finance and fixed them in the prospectus of emissions of bonds, according to which at the end of the budget period (December 31 every year) the state budget and guaranteed debt cannot exceed 60% of the nominal GDP.

Otherwise, Russia can demand premature repayment of these short-term 2-year Eurobonds. Analysts of the rating agencies Standard and Poor’s and Moody’s some time ago warned about such a potentially unpleasant situation for Ukraine.

A few days earlier Deputy Minister of Finance Denys Fudashkin said the Ministry of Finance is expecting that the nominal GDP in 2014 will be UAH 1.518 trillion. If the parliament approves the proposals of the Ministry of Finance to raise the threshold of the state debt to UAH 968.4 bn, then by January 1 the state debt of Ukraine will reach 63.7% of the GDP. Factoring in the guaranteed state debt this figure will be even higher. The Russian side stated that it has no intentions of exercising its right and will not demand premature repayment of the debt. By the way, the current mutual relations between Kyiv and Moscow allow for presuming that the latter could go back on its words at any moment.

Next destination is outer space

In any case, next year accounts with the Kremlin will have to be settled. One way or another, the time to settle for Eurobonds and a number of other bonds will come by the end of 2015. Furthermore, according to calculation of the Ministry of Finance, the payout for the state debt and the guaranteed debt will increase next year by 19.5% to UAH 207.086 bn.

The volume of debts will also grow as there are plans to accumulate a debt of UAH 196.3 bn, though it cannot be ruled out that this figure may be higher. In its bill the Ministry of Finance is asking not only to raise the ceiling of the national debt in 2014, but also to increase the permissible volume of loans to the end of the budget period.

In order to improve state financing, the Ministry of Finance proposed cutting more than UAH 3 bn from the program for the support of the coal mining and peat extraction industries. The argument is that at the moment these commodities are not bare necessities for industrial enterprises in the zone of the anti-terrorist operation. The Ministry of Finance proposes allocating the aforementioned sum to servicing the national debt and paying off loans received under state guarantees.

First and foremost, the funds should go towards paying off loans taken out for the Cyclone-4 rocket carrier project and the creation of the National Satellite Communications System. For this, UAH 746.4 mn are needed. Another UAH 164.4 mn will go to "implementing the tasks envisaged by the state targeted program for preparation and conducting of the final leg of the 2012 European football championship. The truth be told, the explanatory note of the Ministry of Finance does not specify which football tasks and events.

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