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In the first installment of a series on Ukraine, Stratfor examines Ukraine's economy in light of the current global financial crisis and the ongoing political chaos in Kiev. (With Stratfor map)

Editor’s Note: This is the first part of a series on Ukraine.

Of all the countries being hit by the global financial crisis, Ukraine is one of the most profoundly affected because it is already coping with failing financial institutions, a collapsing economy and a domestic political scene too shattered to handle much of anything. On top of that, it is unfortunate enough to be the centerpiece of the geopolitical turf war between Russia and the West. In short, Ukraine is so deeply troubled that it cannot exist or remain united as a state unless an outside power enables it. And right now, outside powers are doing just the opposite.

The Current Financial Crisis

Ukraine is fundamentally unprepared to weather the global financial crisis. The country’s budget deficit is 2.8 percent of gross domestic product (GDP) and is likely to increase before it decreases, as declining industrial output triggered by the global recession will inevitably reduce expected tax receipts. Confounding the budget deficit is the parliament’s promise to increase minimum wages in 2009 — a promise that no party will want to back out of publicly when parliamentary and presidential elections could be held soon.

Ukrainian currency problems are also quite severe. Foreign investment has been leaving Ukraine’s equity markets (it declined almost 80 percent so far in 2008; only Iceland experienced a larger drop) and speculators have been attacking the currency, the hryvnia. The hryvnia has lost 20 percent of its value in the last month alone, and there are fears that a devaluation is on the way. As confidence inside Ukraine slides, bank runs are taking place; Ukraine’s Central Bank President Vladimir Stelmakh estimated that customers withdrew almost $3 billion — approximately 4 percent of the country’s total deposits — from accounts within a week.

As the hryvnia’s decline continues, all loans — both business and private — taken out in foreign currencies (whether Swiss franc, euro or dollar) will begin appreciating, creating a very real possibility of defaults that domestic banks will not be able to cover.

This brings up the issue of total public and private sector debt. Ukraine’s debt is not exorbitant (private sector debt is at $80 billion and public is $20 billion; combined, it is a moderately high 66 percent of GDP), but it is the speed with which it has accumulated over the past two years that is worrying. With the decline in the hryvnia and upcoming debt service payments (around $46 billion due next year for private sector and $1.6 billion for public), Ukrainian total foreign currency reserves — totaling $37 billion — could begin drying up fast, particularly if the government continues to try to use the reserves to prop up the hryvnia.