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. Last Updated: 07/27/2016

Paris Club Frightened by Kiev Gongadze Protests

KIEV — Ukraine's deepening political scandal over a murdered reporter has weakened the country's position in debt-restructuring talks with the Paris Club of lending nations, analysts said Wednesday.

They said the row, which has sparked street clashes, would force foreign creditors to delay an agreement on rescheduling $1 billion in debts to the Paris Club and Turkmenistan.

A deal is regarded as crucial to support Ukraine's fragile economic recovery and open the way for fresh loans. "Everything depends on the political situation. Nobody has any faith in Ukraine," said Olena Bereslavska, an economist at the Ukrainian Interbank Currency Exchange.

"Until there are some changes in the democratic process or until the president finds a common language with the opposition, nobody will give us new loans, and the Paris Club is unlikely to make concessions," said Bereslavska.

"For them [creditors], political stability and democratic changes are paramount," she said.

Thousands have taken to the streets in recent months to demand President Leonid Kuchma resign over allegations he was linked to the murder of reporter Georgy Gongadze, whose headless corpse was found last November.

Kuchma denies all involvement in the case and says unidentified political forces are trying to destabilize the country. Kuchma says he is determined to stay in office and has vowed to face down his opponents.

"It is clear the creditors have reservations: Anything can happen in such a country — a coup, establishment of totalitarism," said Bereslavska. "It is natural for people to try to stay away from such countries."

A Ukrainian government delegation was in Paris last week for talks with creditors, but the Paris Club has said more negotiations would be needed to work out an agreement.

The government also faces trouble in its talks with the International Monetary Fund. The IMF blocked a $190 million tranche of a three-year loan due in March, saying it wanted to see more reforms. Ukraine has failed to convince the Fund it has made enough progress.

The government said previously it wanted to bundle its debt into one parcel and has included about $700 million in debts to West European countries and about $300 million owed to Turkmenistan into the restructuring deal with the Paris Club.

Turkmenistan is not in the Paris Club, but Ukraine has said the terms of its debt to the Central Asian state mean it should be included in the talks.

A government source close to the Paris Club said the creditors decided not to refuse Ukraine openly, but simply set conditions that make the restructuring impossible.

He said the club offered Ukraine the chance to restructure its debts for eight years under interest payments of 16 percent annually. If the government agrees to the terms, then Ukraine's foreign debt will grow by around $1 billion, which would significantly increase pressure on the budget of the cash-strapped country.

"Creditors are looking for an excuse to postpone the issue because nobody wants to risk money," the source said.