Moody’s downgrades Ukraine to Caa2

Макроэкономика 03.02.2014 Moody’s Investors Service downgraded Ukraine’s sovereign bond rating to Caa2 from Caa1, with a negative outlook, the agency reported on January 31. The three factors cited for the downgrade were (1) an increased risk of an administrative crisis due to an escalation in social and political tensions, (2) a higher risk of a sharp rise in the need for external liquidity due to higher public demand for foreign cash, and (3) more uncertainty about the macroeconomic support from Russia. The agency warned it will consider a further downgrade of Ukraine’s rating in the case of a further escalation of the political crisis, should Russia withdraw its promised macro support, or in case central bank reserves decrease considerably. Alexander Paraschiy: The statements made by the Russian government last week that it will postpone providing the earlier promised loans (up to USD 12 bln), as well as the lack of consensus in the country on both a new Cabinet of Ministers and geopolitical vector, do indeed increase the risks of Ukraine’s insolvency or a currency shock. Ukraine’s economy can muddle through the current circumstances for two or three months, though we hope the crisis will be resolved earlier. The hopes of opposition leaders and protesters are riding on a new parliamentary session convening on Tuesday, at which MPs may consider approving constitutional reforms and appointing a new government. Much will depend on the ability and willingness of the “liberal” wing in the ruling Party of Regions faction to cooperate with the opposition. Yet more hope is being vested in pressure from Western governments on the key oligarch allies of the “liberal” MPs, such as Rinat Akhmetov, Victor Pinchuk and Dmytro Firtash. And the downgrade of Ukraine’s sovereign rating, which effectively increases the cost of borrowing for Ukrainian oligarchs, may become another argument for them to start cooperating with the opposition.