by Alona Liashenko
KIEV, Dec. 12 (Xinhua) -- Massive demonstrations that paralyzed Ukraine's social life in the past three weeks appear to have peaked after clashes between riot police and protesters in central Kiev, leaving dozens injured.
Local experts believe the demonstrations, if they continue, may tip the country's already faltering economy into recession.
PROTESTING INSTEAD OF WORKING
The protests, which saw hundreds of thousands of demonstrators in cities across the country, are unlikely to go away soon.
In addition to students and retired people, a lot of workers have temporarily left their jobs to take to the streets of Kiev. Factory workers, doctors, teachers and even leaders of regional governments have shelved their professional activities to fight for the country's European future.
Prime Minister Mykola Azarov has warned the public the shutdown of business and administrative entities could affect Ukraine's economic situation.
"Any destabilization of the political situation affects primarily our economic indicators," Azarov said.
For the third consecutive week, demonstrators who erected blockades in the government district in Kiev are taking over some administrative buildings, disrupting the functioning of government agencies.
Economic expert Vladislav Starinetz believes the seizure of administrative buildings has a negative impact on the investment climate in the country.
"Investors look with great caution on the country where there is the possibility of occupancy of the presidential building, the cabinet of ministers or the central bank," Starinetz said.
Ruslan Zyplakov, a top executive at the financial institution Pivdenkombank, said the escalation of political conflict posed substantial risks to the economy.
"The main political forces should reach a compromise as soon as possible so that the economy resumes growth and banks expand lending," Zyplakov said.
Credit rating agencies also offered pessimistic assessments.
Standard & Poor's, which cut Ukraine's credit rating by one notch from B to B- in November, warned further political crisis could bring another downgrade.
Moody's suggested protests could trigger a sharp rise in demand for foreign currency, thereby worsening Ukraine's already precarious external liquidity situation.
RECESSION STROKED BY PROTESTS
Unsure about the political and economic environment in their country, Ukrainians have already begun buying foreign currency massively, which significantly reduced the rate of the local currency, the hryvnya.
Ukrainian banks on Dec. 12 offered to sell U.S. dollars at 8.23 hryvnya per dollar, compared with 8.19 hryvnya on Nov. 12.
However, the Ukrainian Central Bank has pegged the official rate at about eight to the U.S. dollar since early 2010 and continued to use its already poor foreign exchange reserves to support the official exchange rate.
Ukraine's foreign exchange reserves dropped in November for the seventh consecutive month to 18.791 billion dollars, the lowest level in eight years.
Despite the fact the reserves are dwindling -- to nearly half the December 2011 level -- the central bank does not consider the situation critical.
"In recent years, our reserves were fueled by foreign loans, but now we are forming net reserves without borrowing money," said Valery Litvitsky, adviser to the Chairman of the National Bank.
Ukraine's trade gap, which stood at 5.84 billion dollars or roughly 8 percent of GDP, in the January-September period, is another threat to the country's economy, analysts say.
If the government meets protesters' demand to forge economic ties with the EU, it may harm Ukraine's trade with Russia -- its biggest export destination. This would likely widen of its trade deficit.
"Ukraine should ensure the normal access of their goods to the markets of the Customs Union countries," suggests Oleg Ustenko, an economist and Executive Director of the Kiev-based Bleyzer Foundation.
The demonstrators, who oppose joining the Russian-led bloc, seem not to be entirely politically motivated.
They are angry about a range of issues, including income inequality -- low wages and welfare benefits, which are several times lower than the average in the EU.
The Ukrainian government cannot significantly increase the payments due to the poor state of the economy, which slipped into its third recession since 2008 this year, contracting three quarters in a row.
Ukraine's gross domestic product shrank 1.3 percent year-on-year in July-September 2013, after contracting 1.1 percent and 1.3 percent in the first and second quarters, respectively.
WAYS OUT OF RECESSION
The economic slowdown may even deepen next year, as Kiev has to raise about 17 billion dollars to serve its state debt and meet gas bills.
To find a way out of its looming economic crisis, the government should urgently seek fresh financial injections to stir the economy, experts say.
"The probability of default increases. To avoid it in the short term, the government should find funds," Pavlo Sheremeta, head of Kiev School of Economics, said.
As talks between Ukraine and the International Monetary Fund have stalled over Kiev's unwillingness to fulfill the requirements to raise gas prices for households and to set up a floating exchange rate, Ukraine is likely to search for other lenders.
Analysts see the EU, Russia and China as potential creditors.
The Ukrainian government has already asked the EU to allocate 27.5 billion dollars in financial aid.
However, the 28-member bloc is going slow in responding to Kiev's request. While the top EU officials remained silent on this issue, the German government spokesperson said the loan request "was meant to distract from Ukraine's responsibility in the current political situation."
As for Russia, it certainly can afford to help the Ukrainian economy, but Moscow will probably require some concessions from the Ukrainian side in return.
Experts suggest the Kremlin will try to persuade Kiev to join the Russian-led Customs Union. However, authorities are unlikely to do that in the face of the growing pro-European movement.
Analysts said there were good reasons for Ukraine to turn to China to avoid a cash crunch. Such cooperation, experts suggest, may be beneficial for both sides, as Ukraine always repays its debts and China has established itself in the world market as a reliable creditor.
"China is a cautious country that does not use a speculative approach, and adheres to strategic and long-term cooperation," economist Borys Kushnyruk said.
The analysts agree the country's future growth will depend on the policy chosen by the government. On the whole, it is necessary for the Ukrainian authorities to find mutual understanding with pro-European part of society to end the protests and focus on economic policy to put the country on the path to sustainable growth.