Graham Stack in Kyiv -

The extent of the financial ruin that former Ukrainian president Viktor Yanukovych left his country in is revealed by the announcement from the finance ministry that it needs a breath-taking $35bn from the West through 2015 to stave off bankruptcy.

"Dear compatriots!... I want to inform you that in the course of the last two days, we have conducted consultations and meeting with the ambassadors of the EU, USA and other countries and financial organisations about extending emergency-macro financial help to Ukraine," the acting finance minister, Yuriy Kolobov, said in a statement. "The Ministry of Finance is doing everything in its power to ensure financial stability in Ukraine."

According to Kolobov, Ukraine is seeking an emergency loan within the next one-two weeks from Poland and the US, the first tranche in a total $35bn that the ministry says Ukraine needs through to the end of 2015 to avoid defaulting on its debts. To raise these funds, Ukraine is proposing to hold an international donor conference, "about financial assistance to support modernisation and reforms, and the signing of an Association Agreement with the EU," Kolobov said.

On February 24, Ukraine's parliament accepted the surprise resignation of Ihor Sorkin, the head of the National Bank of Ukraine, and approved a replacement, Stepan Kubiv, who said one of his top priorities would be to secure aid from the International Monetary Fund (IMF).

The headline $35bn figure caused a collective jaw drop in western capitals, and provoked an immediate denial from Polish Prime Minister Donald Tusk that Poland would itself stump up any cash for Ukraine - a country that only two years ago happily shelled out at least $7bn to co-host the Euro 2012 football championships with Poland. "It cannot be the case that Poland will be a key donor, in the sense of donating its own funds," Tusk said, as quoted by the UNIAN newswire. He also expressed fears that any funds given to Ukraine would be stolen by its corrupt elite. "Ukraine has to be changed by these funds," he said.

Analysts agree that Ukraine requires tens of billions of dollars in external financing through 2015, but regard $35bn as a "back of the envelope number," says Standard Bank's Tim Ash. "I always remember back to the 2008 crisis and a Ukrainian government official phoning me to ask, 'How much money should we ask for from the IMF?' My answer at the time was, 'as much as they will give you', and I think the $35bn falls into that camp," says Ash.

The only figure named by the West so far has come from Elmar Brok, chairman of the European Parliament's foreign affairs committee - and a close ally of Ukraine's opposition leader Yulia Tymoshenko - who breezily mentioned a figure of €20bn as part of an IMF-linked plan. But this is in fact not news - the figure is simply the IMF funding of $10bn-15bn on offer boosted by a few billion from the EU and the US, all of which is dependent on Ukraine implementing a series of painful reforms. "It might hence not be all new money but a restatement of existing commitments," says Ash, who puts Ukraine's real funding needs at around $25bn through the end of 2015.

Ukrainians are expecting no less from the West, according to Concorde Capital's top analyst Oleksandr Paraschiy, who calls this financial support "compensation from western governments for their insufficient support of protesters and the opposition, who were virtually left alone in dealing with a murderous president and entourage, leading to more than 100 deaths on the streets of Ukrainian cities."

Known unknowns

Any figures regarding financial assistance are largely guesswork, analysts argue, because of three major "known unknowns".

First is the reaction of Russia - Ukraine's current sponsor under the terms of an agreement signed in December, which calls for $15bn in financing through 2015 and a one-third reduction in gas prices, worth around an additional $7bn per year. Any deal with the West would likely replace the one agreed with Russia. But if the handover does not go smoothly, Ukraine could be left in the lurch. Russia drew up the gas agreement so that it could be reviewed every quarter, and the financing agreement to buy Ukrainian Eurobonds is also non-binding. Russia could revert to the old gas price as early as April and retract its offer to buy the next planned €2bn bond placement.

Russian Prime Minister Dmitry Medvedev was noticeably non-committal on the issue on February 24 in Sochi, commenting sarcastically that continuation of financial support would depend on the future Ukrainian government, "if it ever comes into being there." Most of the funding provided by Moscow since December has gone simply to cover the gas import bill, thus converting commercial debts of the Ukrainian gas distribution company Naftogaz into sovereign debt, and Moscow claims Ukraine is still around $1.5-2bn behind on its payments. The media are also reporting a return to snarl-ups on the Russian border that are slowing crucial exports eastwards, which points to a return of the Kremlin's truculence.

In addition, according to Ash, the Kremlin has built a poison pill into the Eurobond agreement with Ukraine, which forbids Ukraine from running sovereign debt at more than 60% of GDP. This could mean paradoxically that a large-scale western support package could trigger a Ukraine default, if it pushed Ukraine's total debt burden over the 60% mark. The current figure for Ukraine's sovereign debt is a fairly moderate 40.5%, but ongoing devaluation plus accounting for factors such as promissory notes, $3bn gas debts to Gazprom and VAT arrears could move the real figure towards 50%, says Ash.

The second "known unknown" is the true state of Ukraine's finances, after four years of being robbed by the Yanukovych family and assorted cronies, and weeks of political instability giving them time to prepare an exit. "The budget is pretty opaque, and it is unclear what hidden liabilities might be out there - including VAT arrears and promissory notes," says Standard Bank's Ash. "It is also unclear what the state of the banking sector is, and whether banks close to the Yanukovych family are sitting on large balance sheet holes which will need filling."

The economy has been in freefall since the start of the year due to the political violence, with a run on the banks accelerating over the last weeks, with punters left empty handed at ATM machines and the ongoing devaluation of the currency despite the imposition of capital controls. Business empires directly connected to the Yanukovych clan - such as that of Oleksandr Yanukovych, younger son of the deposed president, the sprawling business empire of Yanuovych's hardline head of staff, Andriy Klyuyev, as well as those of 28-year-old oligarch Serhiy Kurchenko and 55-year old Yanukovych friend Yury Ivanyuschenko - have largely collapsed, as their owners have fled the country or gone into hiding. With tight intertwining of political authority and business a hallmark of the ousted Yanukovych regime, many other Party of Regions-linked business empires could follow suit.

Worryingly, in an apparent sign of the state treasury simply running out of cash, on February 24 the acting deputy prime minister for infrastructure, Oleksandr Vilkul, ordered all structures subordinate to him - regional infrastructure ministries, state railways and road-building monopolies - to suspend all payments except salary payments, according to newswires.

And the third known unknown is politics: Old-new actors, such as interim-President Oleksandr Turchynov - who first came to power nine years ago after the Orange Revolution of 2004 - are now confronted with the street power of actors such as militants Pravyi Sektor, with the nationalist party Svoboda and with the collapse of Ukraine's formerly monolithic largest party, Yanukovych's Party of Regions, which has dominated politics in the south and east of the country. "The longer the political turmoil persists, the higher the risk that the worst case scenario of a full-blown balance of payments and sovereign debt crisis materializes," says UBS analyst Anna Zadornova.

The presidential election, campaigning for which has already started, will be a tightly contested affair and is likely to spark calls for policies such as the renationalization of assets privatized under Yanukovych allegedly at fire-sale prices, or of assets held by politicians and oligarchs perceived to have supported Yanukovych's bloody crackdown.

Could Ukraine default?

Luckily, Ukraine has no large sovereign payments pending immediately. Ukraine's next big sovereign payment appears to be $650m to the IMF in April. Ukraine then has until early June to make a $1bn Eurobond redemption, followed in September by payment of a $1.6bn debt to Russia's Gazprombank.

The danger for Ukraine comes from its shrinking hard currency reserves, which are down to around $16bn, or two months' import cover, set against $15.6bn of sovereign debt to roll over through end-2015. At the same time, Ukraine is running a current account deficit of $16.1bn, or 9.1% GDP, according to UBS calculations, and a budget deficit of 7.7% of GDP, or $13.5bn.

Of these, the most threatening is probably the current account deficit. "I would assume a bulk of budget financing needs can be covered by local debt issuance and NBU financing - given inflation has hitherto been close to zero," argues Ash.

The time-honoured solution for a current account deficit is devaluation, and devaluation is ongoing, with the dollar reaching UAH9.35 on February 24, its lowest point since introduction in 1996. "Given a distinct possibility that the NBU won't be able to top up its shrinking foreign exchange reserves for a few months, we expect it to continue prioritising the facilitation of public debt service and gas payments over the hyrvnia support," says UBS' Zadornova.

However, even devaluation won't solve Ukraine's funding problems. An uncontrolled fall in the currency would degrade sovereign creditworthiness due to the large share of hard currency debt, put at around 56.7% of public debt. And even a controlled devaluation is unlikely to help fix Ukraine's current account deficit, since a huge whack of imports derive from the gas import bill - around $21.2bn a year - which is inelastic. Since pricing of much of Ukraine's exports in chemicals and metallurgy largely depend on the price of imported gas, devaluation may also not significantly boost exports.

Further reducing the benefit of devaluation is that competitor currencies are also devaluing due to tightening global liquidity - the Russian ruble is down against the dollar by 9.3% this year, further pressuring Ukrainian exports.