Protest strains Ukraine economy

As the political crisis continues to deepen here, worries are mounting that the battle over the flawed presidential election could bring Ukraine to the brink of financial collapse - a sharp turnaround for a young democracy that has shown promising economic growth.

Wednesday, opposition candidate Viktor Yushchenko won a symbolic victory when Ukraine's parliament voted to dismiss the government of Prime Minister Viktor Yanukovich, the declared winner in the election. Mr. Yanukovich and Mr. Yushchenko - who both claim the presidency - sat down for talks Wednesday in the presence of European mediators and outgoing President Leonid Kuchma.

The Supreme Court has yet to decide whether the disputed Nov. 21 vote will be declared fraudulent. And while the nation waits for a decision from the court, the effect of the high-stakes political drama on the economy is coming under increasing scrutiny.

Monday, President Kuchma spoke darkly of the consequences of continued turmoil. "In a few more days, the financial system will fall apart like a house of sand and neither the president nor the government can be held responsible for that," he said.

An international economic analyst, speaking off the record, said panic must be nipped in the bud. "Unfortunately, Mr. Kuchma may have generated a self-fulfilling prophecy," he said.

"When the president of a country speaks of financial collapse, people run for the exits, and a run on the banks can be provoked," he continued. "Things are now on a knife edge. There could be a self-perpetuating downward economic spiral whose initial spark was political. There is a real danger that Kuchma might have provoked the very thing he was warning against."

Indeed, there were reports of people in industrial regions of the east lining up to make withdrawals from cash machines, fearing a collapse of Ukraine's banking system similar to the great crash and national default in Russia in 1998. There was no such panic in Kiev, but the US dollar was becoming harder to obtain in some downtown currency-exchange kiosks.

"I am afraid this peaceful revolution is going to hit working people very hard," says one driver, who gave his name as Viktor. "There is Viktor Yushchenko, Viktor Yanukovich, and I am Viktor the working man. I do not like what I see. We are facing an economic disaster, like in Russia in '98."

"No, no, no, no, no," says Tomas Fiala, the Managing Director of Dragon Capital, a brokerage firm in Ukraine, in soft and reassuring tones. "There is no reason to think so negatively, just because Kuchma has made a political threat. Of course, it was not a sensible thing to say. But he's in agony now, trying to hang onto power and blame the opposition."

Many factories and businesses across Ukraine are at a standstill as employees join demonstrations in support of their preferred candidates.

"Now is not the time to work," says Yulia Tymoshenko, Mr. Yushchenko's radical running mate. "It's time to defend Ukraine. How can you study and work in a country the authorities want to rape?"

"Where will all these kids be in 10 years time?" asks businessman Yuri Gavrilyuk, looking wearily out of the window of his car at the crowds of Yushchenko supporters, many of them young people. "They should be getting their qualifications instead of partying on the streets. Every day of these protests is costing us money."

Indeed, according to Mr. Fiala of Dragon Capital, even the run-up to the elections on Nov. 21 was expensive as Yanukovich's government increased pensions to the detriment of the budget in the hope of attracting votes.

"And of course, the present uncertainly doesn't help," he said. "But if the political crisis is resolved soon, in a matter of weeks, there won't be any lasting effects. If it takes months, then there will be an effect, but even then it won't be on such a scale as in Russia in 1998."

Fiala says Ukraine had low debt and growing GDP, albeit from a low base. That growth might slow but would not turn negative, he says. And on the markets, demand remained healthy for Ukrainian stocks because most foreign investors predicted a peaceful outcome to the crisis.

If there were a revote and the Western-leaning Yushchenko won, the markets would welcome him as giving "the best chance of economic transparency and European values in the economy as well as society," Fiala says. "Even Yanukovich wouldn't be bad if, ultimately, he was elected legitimately."

Other economic analysts said that while some of Ukraine's banks were undercapitalized and weak, they were generally stronger than those of Russia in 1998. Indeed, before the present crisis, Ukraine's banks were stronger than those in Russia today. The role of the Central Bank would be crucial in preventing the situation from spinning out of control, they said.

They noted that growth had been strong at 10 percent from January to October this year, although it was bound to plummet when the figures came in for November. Inflation, which was just above 10 percent in October, is predicted to rise to between 12 and 15 percent by the end of the year.

The average monthly wage in Ukraine is the equivalent of $75. Officially, unemployment stands at 3.3 percent but international analysts put it at 9 percent for the second quarter of 2004. Many Ukrainians felt excluded when the European Union expanded eastward but stopped at their border earlier this year, and they still travel in large numbers as guest workers to Russia where they usually earn between $400 and $500 monthly.