Ukraine’s finance ministry says it will sell a further two billion dollars worth of government bonds to Russia this month.
It is the second tranche of a 15 billion dollar bailout agreement. The first – for three billion dollars – was in December.
Russia said it would buy the bonds after a sharp foreign policy U-turn by Kyiv which shelved plans for political association and free trade deals with the European Union.
Investors’ concerns about political stability following violence at anti-government protests have pushed up Ukraine’s cost of borrowing and the hryvnia currency hit its lowest level against the dollar since October 2009.
In a statement the Fitch rating agency said: “Clashes between anti-government protestors and police in Ukraine could weaken confidence and push up demand for foreign currency, although Russia’s provision of external financing has significantly reduced the risk of a sovereign external liquidity crisis in 2014.
“Political uncertainty will continue to weigh on Ukraine’s credit profile heading into presidential elections due in February 2015, notwithstanding the Russian agreement.
“By providing an alternative to IMF funding, Russian support may enable the authorities to delay fiscal adjustment and structural reforms until after the elections. The revised 2014 budget, passed last week, raised the consolidated budget deficit target by 1.6pp of GDP to 4.3%.”
In December ratings agency Standard and Poor’s said it revised the outlook on Ukraine’s long-term sovereign ‘B-’ rating to stable from negative, citing reduced external and fiscal funding challenges thanks to the recent financial aid from Moscow.
“The stable outlook reflects our view that the $15 billion in direct financing, which Russia announced… should cover (Ukraine’s) government’s external financing needs over the next 12 months.”