Ukraine's new prime minister said on Thursday loans worth $37 billion had gone missing from state coffers during ousted President Viktor Yanukovich's rule, and he warned that unpopular measures were needed to salvage the economy.
With the hryvnia currency in freefall and growing concerns about the low level of foreign currency reserves, Arseny Yatseniuk said the country urgently needed loans from the International Monetary Fund, which is visiting Kyiv next week.
The scale of alleged theft implied by Yatseniuk in a speech to parliament was jaw-dropping, even for a population now used to tales of Yanukovich's extravagance and lavish lifestyle, including his luxury residence outside Kiev.
The average salary in Ukraine is about $500 a month.
◆ Capital Flight
In addition to the missing $37 billion, Yatseniuk said as much as $70 billion had been sent out of the country during Yanukovich's three-year rule, although he did not make clear how much of this capital flight was illegal.
"I want to report to you - the state treasury has been robbed and is empty," he said before the national assembly voted him in as head of a national unity government.
"Thirty-seven billion dollars of credit received have disappeared in an unknown direction... [and] the sum of $70 billion was paid out of Ukraine's financial system into off-shore accounts," said Yatseniuk.
At today's rate, $70 billion is equal to about half of Ukraine's gross domestic product in 2013. Only 4.3 billion hryvnia -- $430 million -- was left in government accounts, Yatseniuk said, although the central bank's foreign currency reserves stand at $15 billion.
◆ Tough Medicine
Shortly after Yatseniuk spoke, the Swiss government said it would order banks in the country to freeze any funds found to be linked to Yanukovich. In Ukraine, the situation was so grave that there was no choice but to take "extraordinarily unpopular measures," Yatseniuk said, looking around the solemn faces in parliament as he listed the depth to which the economy has sunk.
With prospects for foreign aid growing, Ukraine's dollar bond maturing in 2017 rose 1.5 points on Thursday to trade at 91.65 cents on the dollar, while bonds issued by state energy company Naftogaz maturing this September rose one point.
The cost of insuring Ukraine's debt also slid as approval of the interim government opened the possibility of negotiating a deal with the IMF. An IMF fact-finding team is to visit Ukraine in the coming days, in response to Ukraine's request for help, said Managing Director Christine Lagarde.
◆ Worried Investors
The June 2014 government bond weakened, however, signaling the possibility of a short-term default, which has been worrying investors. The hyrvnia traded as low as 11.0 to the dollar and markets were signaling more depreciation, with six-month currency forwards pricing it at about 12 per dollar.
A former economy and foreign minister, and ex-deputy head of the central bank, Yatseniuk's immediate task is to draw up an anti-crisis plan and secure international aid to prevent a default and shore up the hyrvnia.
Finance Minister Oleksander Shlapak suggested Ukraine wanted a $15 billion aid package from the IMF. Acting President Oleksander Turchinov had said during the weekend that the country of 46 million people needs more than $30 billion over two years. The previous government had said last year that $20 billion was needed.
◆ Uncertain Funding
The fate of a $15 billion bailout package agreed upon with Russia in December is not clear, with Moscow having so far released only $3 billion of the sum promised. Uncertainty also hangs over an agreement that reduced the amount Ukraine pays Russia for gas.
A previous IMF financial package, worth $15.5 billion, was frozen in 2011 after the Ukrainian government reneged on the terms, balking at putting up energy prices, a move that would have been unpopular with voters.
Shlapak and Yatseniuk said IMF money would help to stabilize the hyrvnia. The currency has been falling for weeks -- losing more than a fifth of its value -- but the drop has accelerated since parliament stripped Yanukovich of his powers and he fled the capital. His whereabouts now are not known.
Tatyana Orlova, a strategist at RBS in London, said the hryvnia could weaken to 16 per dollar if nothing is done, and he added: "A big devaluation is not unjustified for the economy."
Investment management firm Neuberger Berman said in a research note that many hurdles lay ahead for the Ukrainian economy. "We are also unsettled by the seemingly endless increases in headline figures needed for Ukraine to avoid default in two years," it said. "To us, this trend fosters doubt as to the commitment of future leadership to undertake much-needed reforms."