This article originally appeared in Business New Europe
Ukrainian sovereign bond yields rose sharply on December 10 after reports that a $15bn fiscal gap in Ukraine had been found by the IMF.
"The news prompted a massive selloff of Ukrainian sovereign bonds, which fell more than 6% in price along the whole yield curve," writes Kyiv brokerage Concorde Capital.
The Financial Times report on December 10 said the IMF believes Ukraine needs as much as 30% of GDP worth of financial support - the $17bn committed by the IMF and an additional $15bn, and that the IMF is not prepared to provide this sort of cash itself.
This passes the buck to the EU, say analysts, but the EU has no facilities for massive lending to non-members. It has already lent Ukraine €1.61bn in 2014, with a further €2bn planned for 2015, which already counts as an extraordinary support measure for an external country.
It is also unlikely that any individual nations will go it alone on loans to Ukraine, due to domestic political pressures. Even the US also only managed with difficulty to reach domestic political agreement on a $1bn loan guarantee for Ukraine.
Finance ministry officials from G-7 countries are reported to be considering providing $4bn in funding for Ukraine, according to the Wall Street Journal on December 9, which would not be sufficient to ward off disaster, according to the FT report.
However, some analysts disputed the figures provided in the FT report.
"Ukraine will still have nearly $19bn in pre-committed funds for 2015, including $12.4bn from the IMF and $6.4bn from other donors, out of a total program of $27bn as outlined by the IMF for 2014-2015," write Concorde Capital analysts.
But rumours of Ukraine's huge hidden financing gap have been abundant recently, with veteran financiere George Soros recently calling on the West to provide massive additional financing for Ukraine to stave off disaster.
A big negative factor for Ukraine in getting more money from international donors is the relationship to Russia, says Tim Ash's Standard Bank, since a large part of any funds committed to Ukraine would go to pay back a $3bn Ukrainian eurobond held by Russia, and also pay Ukraine's energy bills to Russia - Russia is currently not only exporting gas, but coal and electric power to Ukrainian state companies, because of loss of supplies from the East Ukraine's Donbass region, held by Russian-backed rebels.
According to the FT report, Germany has already appealed to Russia to roll over the Ukraine eurobond despite the sanctions currently imposed on Moscow by the West.
While Russia is certainly part of the problem, the West may ultimately find Moscow is part of the solution to the Ukrainian financial crisis: the first sign that Ukraine has reached the end of its financial resources would be failure to pay energy bills to Russia for gas, leading to the prospect of Russia cutting off supplies in mid-winter, say energy experts.
Such a move could force Ukraine to take gas from the transit pipeline to Europe, imperiling EU gas supplies. But the EU is seen as holding an important carrot to induce Russia to bailout Ukraine via continuing energy supplies despite non-payments: lifting of the crippling Western sanctions imposed on Russia, a move that is also supported by a strong business lobby in the EU.
Either way, Ukraine is sure to leverage geopolitics in its search for an expanded bailout, says Olena Bilan, chief economist at Kyiv brokerage Dragon Capital.
"Without additional aid, Ukraine will hardy be able to avoid a financial meltdown and a new wave of social unrest. This would give Russia another ideal opportunity to regain its grip on Ukraine and ultimately win its geopolitical showdown with the west," Bilan wrote in a column in the FT.