Ukraine economy in 'free fall,' banking group says

As the United Nations Security Council gets set to meet about an unstable situation in Ukraine, a leading banking organization said Wednesday that the country's financial situation is "really desperate" and its economy is "in free fall."

Donetsk, Ukraine
John MacDougall | AFP | Getty Images
Donetsk, Ukraine

"Unless actions are taken pretty soon, the odds of Ukraine falling into financial and economic collapse are very, very large," said Lubo Mitov, chief economist of the Institute of International Finance.

Over the next six months, Ukraine needs $10 billion to $15 billion more than what has been promised by international organizations such as the International Monetary Fund, the IIF said. Without an injection of cash soon, "people will start freezing in the winter," because the country won't have the cash to pay for natural gas.

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Between this year and next, the IIF expects the Ukrainian economy to decline by at least 20 percent, causing a huge drop in tax revenue. The steep decline is expected in part due to the loss of eastern Ukraine to militant separatists that are widely believed to receive support from Russia.

Mitov dismissed Ukraine's better-than-expected 5.1 percent economic contraction in the third quarter of this year, saying that hard data related to industrial production, exports, tax revenue and real incomes are registering "double-digit declines."

But Mitov said an even bigger problem is that Ukraine's financial markets are frozen. He estimated that $5 billion is needed to recapitalize the system.

Capital has been fleeing the country, causing Ukraine's currency, the Hryvnia, to fall 30 percent against the dollar last week alone. Ukraine's central bank has only $9.5 billion in reserves, but has big gas bills and import bills to pay in the coming year. The "financing gap," as it's called, stands at between $10 billion and $15 billion, Mitov said.

While agreeing that Ukraine's economic situation is problematic, Doug Rediker, the chairman of International Capital Strategies and a former member of the board of the IMF, said economic support for Ukraine from outside is likely.

"While the economic situation is clearly off track from expectations and hopes earlier this year, the political will to provide economic support for Ukraine is as firm or greater than it was earlier this year," Rediker said. "A key question: Will the political will to support Ukraine be reflected in financial commitments from governments and institutions to fill those gaps?"

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Mitov added that the country's dire situation has led to speculation that sovereign bond holders may be forced to take losses on money they lent to Ukraine. Mitov said that's unlikely, however, because it wouldn't help Ukraine's immediate financial problems.

Most of Ukraine's foreign debt repayments aren't due for another couple of years, but they have a "serious, acute, lack of cash now," he said.

"You can restructure as much as you want, this won't help in terms of cash flow," he said.

The UN Security Council announced it will meet at 2:30 p.m. Wednesday after NATO said that Russian combat troops entered Ukraine along with tanks, artillery and air defense systems.