S&P cuts Ukraine’s Eurobond rating to CCC+

The Standard & Poor’s ratings agency downgraded Ukraine’s international bonds to CCC+ from B-, according to a January 28 report. The agency also downgraded the outlook for the rating to negative from stable. The core reason for the decline is the recent escalation of the political conflict, which limits the government’s ability to timely service its debt, according to S&P. The crisis also makes financial support from Russia less likely in case Ukrainian President Viktor Yanukovych loses power, according to the agency. A distressed civil society with weakened political institutions – as the agency’s analysts described Ukraine – also diminish the country’s capacity to timely service its debt, S&P claimed.

Alexander Paraschiy: Given that Ukraine’s solvency in 2014 indeed heavily depends on Russian money, we have to agree that with the current political situation the risk that Russia will withdraw its financial support is increasing (refer to our news of January 28).

At the same time, the S&P negative ratings move looks premature to us – Ukraine still has a lot of opportunities to replace the Russian support in case the political scenario changes radically (in the form of EU support or even IMF money). Moreover, the Russian money that can be provided in 2014 would only postpone Ukraine’s solvency issues to 2015-2016 and will only increase Ukraine’s default risks in these years.

In our view, the state of civil society in Ukraine looks a bit better than in B- rated countries like Belarus and Venezuela, while the political turmoil in Ukraine looks less severe than in B- rated Egypt or BBB+ rated Thailand.