In its borrowing program, the Finance Ministry focuses on the domestic market, where the state plans to raise UAH61 bln versus UAH34 bln in 2011. Given high devaluation expectations, the cost of funding in local currency is elevated (more than 13% for short-term bonds). The Finance Ministry has started placing dollar-denominated local bonds, but yields on them are still near the double digits.

On the Eurobond market, the Sovereign yield curve is still flat and close to double digits, as well. We think this is too expensive for new long-term bond placements.

Combining existing funding sources (without external lending) would give the government enough money to execute all payments on time and in full until mid-year (assuming local bond issuance at $500 mln per month). In any case, these funds are not sufficient for the full year.

We see several steps (or a combination thereof) that the local authorities could take to ease funding problems: devaluate the currency, ink an "energy" deal with Russia or unlock IMF financing.

A potential deal with the IMF or with Russia may have a dual effect. On the one hand, it would directly ease the borrowing program. On the other, investor sentiment toward Ukraine would likely become more positive, the yield curve could return to its normal shape and the cost of borrowing will decline as well.

We believe that Sovereigns may become more attractive in 2Q12, closer to any potential deal with the IMF or Russia being concluded. If this happens, we see good value in the long end of the curve.

Alexander Kudrin, Troika analyst