Euro 2012 could harm Ukraine’s ability to repay debts

The jailing of opposition leader Yulia Tymoshenko, sentenced to seven years in
October for abuse of office, has hurt confidence in Ukraine’s
creditworthiness and led to a boycott of the sporting event by some of top
European politicians.

“Ukraine will not receive any financial income or significant economic
impact from co-hosting the Euro 2012 championship,” Andriy Kolpakov,
managing partner at analytical group Da Vinci AG, said. “And any
possible improvement in image has run up against internal politics and the
European Union’s reaction to it.”

Ukraine’s high level of corruption has scared off some foreign investors,
while skyrocketing hotel prices have made many soccer fans either cut short
their stay or skip it altogether and opt to follow their team’s fortunes on
television.

Based on the government’s program, the state has spent some $6.6bn from its
budget on Euro 2012 preparations – a total which rises to $13.4bn once input
from state companies and private investors are included.

“In effect, the [state] budget took on the additional debt burden and
taxpayers for many years to come will be paying for the Euro soccer holiday,”
said Erik Nayman at brokerage Capital Times.

Analysts at Da Vinci forecast financial losses suffered from hosting the
championship could total between $6bn and $8bn.

The National Bank of Ukraine sees $1bn in capital flowing into the country
from visitors who will spend on restaurants, hotels and souvenirs during the
month-long championship in Kyiv, Donetsk, Kharkiv and Lviv.

But some see lesser benefits and Da Vinci estimates the influx at no more than
$800m.

Ukraine’s authorities argue much of the spending was necessary anyway.

“Without international airports and transport infrastructure the country
will not receive any foreign investment,” Deputy Prime Minister Borys
Kolesnikov, charged with preparing for the championship, said.

But not all agree.

“There is no direct correlation – foreign direct investment (FDI) will
increase only by improving the investment climate, that is, with less
bureaucracy,” said Alexander Valchishen at brokerage Investment Capital
Ukraine.

Whether the money has been well spent is also a moot point.

“Despite years of preparation, a decent tourist infrastructure and
facilities have not been created to entice the majority of the fans to
return to Ukraine,” Kolpakov said. “You can forget about a serious
surge of interest in Ukraine from Western tourists.”

So far there seems little evidence that FDI is following the government’s
spending.

According to the State Statistics Service, FDI into Ukraine was down last year
at $4.6bn, down from $4.7bn in 2010 and significantly less than the $8bn
that Ukraine attracted in 2005 in the wake of the pro-Western Orange
Revolution.

Nayman at Capital Times expects a huge debt burden on the budget.

“If we assume a 12pc interest per annum, that means that about 10bn
hryvnias (£790m) from the budget each year goes just to pay for interest
payments. And then, there is still the need to refinance the debt,” he
said.

Nayman added that around half of the state’s current domestic debt issued in
bonds, or some 80bn to 90bn hryvnias, can be directly linked to government
spending on Euro 2012.

Some analysts say mounting state debt payments along with unclear prospects
for government borrowing on world capital markets increase the risk of
hryvnia instability.

“The government will be making every effort to prevent the collapse of
the hryvnia before the parliamentary elections,” said Vasily Yurchishin
at non-governmental think-tank Razumkov Centre.