Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Ukraine Benefits From Neighbor's Jitters

KIEV -- Ukraine has become the surprise beneficiary of uncertainty in advance of Russia's presidential elections because of an influx of foreign capital and its stabilizing currency, a presidential adviser said Wednesday.

"The Ukrainian economy is feeling the breeze from the Russian election campaign," Valery Lytvytski, economic adviser to President Leonid Kuchma, told a news conference.

"In part, extra trade volumes from Russia are responsible for recent stabilization of the karbovanets," he said.

Ukraine's interim karbovanets currency is trading at 182,200 to the dollar, having strengthened from its March record low of 191,100.

"This extra interest in Ukraine will last for as long as the prospects for Russia's economic and political course are being thrown into question," Lytvytsky said.

Mykola Melnychuk, chief of the central bank's hard currency department, said nervous Russian investors were buying up Ukrainian treasury bills.

"Ukraine has never experienced such a large influx of capital," he said in an interview. "The influx is from money leaving Russia, and that to a large degree is tied to political instability on the eve of presidential elections."

Both Russian business interests and Western investors are pinning their hopes for continued market reforms on Boris Yeltsin winning a second term. His communist challenger, Gennady Zyuganov, seeks a mixed private and state-owned economy with support for "strategic" enterprises.

An official for Ukreximbank, Ukraine's main bank for foreign trade, said the number of foreign inquiries about the former Soviet republic's treasury bill market had increased during Russia's election campaign.

He also said high average yields of 100 percent or more accounted for investor interest in Ukrainian T-bills, issued for up to 12 months. Russian T-bill yields have risen to almost 200 percent on political risk and a massive issue of paper to fund pre-election spending.

Melnychuk said even "favorable" election results -- a Yeltsin victory -- could prompt more capital outflows from Russia.

But Lytvytski said flows into Ukraine were temporary.

"If Yeltsin wins on June 16 or in the run-[off], hard currency would once again return to Russia because the state of our neighbor's economic policy would be clear," he said.

Both agreed the influx carried inflationary risks for Ukraine, which reported a record low monthly inflation rate of 0.7 percent in May.

"We are watching this influx of capital into Ukraine, but for us the chief question is where this capital will remain, in the currency exchange or in the capital market, the capital market being the more important," Lytvytski said.

He said currency stabilization could also hurt exporters as rising prices made their goods less competitive. Ukraine had a $404 million trade deficit in January to April of this year.