FACTBOX-Key political risks to watch in Ukraine

LONDON, March 3 (Reuters) - Post-election infighting, the difficult battle to get an International Monetary Fund rescue package back on track, worries over default and relations with Russia are the key investor worries in Ukraine.

Below is an overview of each risk:

POLITICAL INSTABILITY

The swearing in of President Viktor Yanukovich last week in a low-key ceremony reflecting a bitterly fought and disputed election and will not bring an end to political infighting that has dogged Ukraine and hurt its ability to respond to its deep financial crisis. [ID:nLDE61N1VK]

Pro-Yanukovich parties ousted Prime Minister Yulia Tymoshenko, a defeated presidential contender, in a no-confidence vote on Wednesday. Her coalition had already collapsed on Tuesday as her majority fell away. [ID:nLDE62214I]

Yanukovich now has the chance to form a new government and avoid calling a snap parliamentary election.

Investors had worried that the election might produce an even more confused outcome or a repeat of the mass protests of five years ago. The cost of insuring Ukraine's debt in the credit default swap market has fallen from $1.2 million a year for $10 million of five-year debt at the start of the year to under $900,000 now.

What to watch:

-- Having ousted Tymoshenko, can Yanukovich put together a government quickly? That would be positive for Ukrainian assets, making it possible to pass the badly delayed 2010 budget and get the IMF deal back on track. Parliamentary factions have 30 days to create a new coalition; the coalition has another 60 days to form a new government. [ID:nLDE6210WG] [ID:nLDE6200W5]

-- Who becomes prime minister? Yanukovich has already mooted three candidates: businessman and former central bank chief Sergey Tigipko, who has said he is ready to take on the premiership if the president agrees to "unpopular" reforms; 35-year-old former foreign minister and parliament speaker Arseniy Yatsenyuk, whose anti-oligarch rhetoric is seen weighing against his candidacy; and former finance minister Mykola Azarov, who favours closer ties with Russia. [ID:nLDE61K0CA]

-- If pro-Yanukovich forces cannot muster a parliamentary majority, he should call a snap parliamentary election. Analysts say one could take place anywhere between May and October. For markets, the earlier, the better. But instability could persist for weeks or months afterwards, particularly if the results proved inconclusive or go against Yanukovich. -- If Ukraine cannot pass the budget and get the IMF deal back on track by April or attract external financing, it is hard to see how it can meet a series of local currency treasury bill repayments that fall due then (see below).

RETURN OF IMF?

Analysts say restoring a $16.4 billion International Monetary Fund (IMF) bailout programme is vital to stabilising the economy. A $3.8 billion tranche was suspended in November because of failure to keep to spending targets.

The IMF has been particularly flexible with Ukraine and sensitive to its domestic political difficulties. But passing the budget, and scrapping wage increases that were initiated by Yanukovich's supporters in parliament, are non-negotiable requirements for giving further aid.

Few expect the IMF to return without political stability. Deputy Finance Minister Oleksander Savchenko said on Tuesday the fund would be unlikely to return until the second half of 2010 [ID:nLDE62124J].

The IMF also wants consumer gas prices increased, easing the load on the state budget, which still subsidises them. [ID:nLDE6181S2].

What to watch:

-- Talks with the IMF. Yanukovich has said he will stick to the wage increases that were passed by parliament last year -- and were the last straw for the IMF -- and wants to renegotiate Ukraine's agreement with the fund.

-- The 2010 budget, which should not include the minimum wage rises, is key. Passing it would be positive for all Ukrainian assets, probably leading to resumption of the IMF deal. It might also allow Ukraine to issue a Eurobond.

-- In the absence of additional money, will the IMF again allow a reduction in Ukrainian reserve requirements, as it did in December, freeing up $2 billion for gas payments? Ukraine is now only some $500 million above the IMF's new minimum reserve of $25.5 billion.

-- How long will it take? Every month, the government faces hefty bills for Russian gas, state wages and pensions, and must repay at sky-high yields domestic debt that it has been issuing to fund its spending. The hryvnia currency UAH=, whose rate against the dollar is controlled by the central bank, may also depreciate.

DANGERS OF DEFAULT

Credit default swaps have long priced Ukraine's debt as the riskiest in the region. Policy makers have always pledged to continue to honour Ukraine's sovereign foreign currency debt, but the deputy finance minister has warned of difficulties with domestic debt. [ID:nLDE61E1YN].

Total external and domestic repayment and servicing requirements this year are just over $3 billion [ID:nLDE618251]. The most difficult period is likely to be April, when $463 million worth of local currency treasury bill payments are spread across the month.

Ukraine says it wants to borrow externally to fund that payment, but it is unlikely to be able to issue a Eurobond without passing the budget and restructuring the state railway firm's debts. A bilateral loan, potentially from Russia, might be its only hope.

Deputy Finance Minister Savchenko warned on Tuesday Ukraine would need $3-5 billion a quarter to cover budget spending until the IMF returned [ID:nLDE62124J].

What to watch:

-- Further policy-maker comments on debt payments. Yanukovich has said some of Ukraine's debt needs restructuring, but it is unclear which debt he was talking about.

-- The return of the IMF is key. Otherwise, Yanukovich is likely to have to dig around for a bilateral lender. Any external support would be positive for Ukrainian markets, otherwise credit default swap prices might rise in the run-up to April. The credit rating could also come under pressure.

-- Will Yanukovich try to appoint a central bank chief willing to print money to pay for T-bill issues? The ratings agency Standard and Poor's warned last month that this could lead to hyperinflation. [ID:nLDE61F2BA]

-- More restructuring of state company debts. Telecoms company Ukrtelekom has become the latest state-controlled firm to restructure its debt. Energy firm Naftogaz restructured a $500 million Eurobond last year and the state railway operator is in talks over its syndicated loan. [ID:nLDE61M1QI]

None of those were covered by a sovereign guarantee, and so did not trigger a sovereign default, but investors are likely to demand cast-iron guarantees on future lending.

RELATIONS WITH MOSCOW AND THE WEST

Yanukovich's election and the defeat of his more Westward-leaning predecessor Viktor Yushchenko is likely to help relations with powerful neighbour Russia and push Ukraine away from significantly closer ties to NATO.

Ukraine itself remains deeply divided between Russian-speaking voters in the industrial east and south who backed Yanukovich and Ukrainian-speakers in the west and centre who voted primarily for Tymoshenko. However, the extremely poor first round showing by Yushchenko suggests little public appetite in either community for outright clashes with Moscow.

Previous tensions with Moscow have been bad for Ukrainian assets. Ukrainian credit default swap prices and bond yields increased during both the 2008 Georgia war and the 2008-9 gas dispute with Russia.

What to watch:

-- Possible concessions to Moscow over the future of Russia's Black Sea fleet base at Sevastopol on Ukraine's Crimea peninsula, as well as the proposed creation of a consortium including Russia to run Ukraine's gas pipelines.

-- Yanukovich says he wants to amend a 10-year-old agreement on supplies of Russian gas negotiated by Tymoshenko and Prime Minister Vladimir Putin, something that could theoretically cause problems with Moscow.

-- Ukraine desperately needs a bilateral loan to help it make its April debt payments. Russia might seem the obvious choice but Yanukovich could turn elsewhere. News of any bilateral support would be positive for Ukrainian markets, further reducing CDS prices and bond yields and easing any pressure on the currency. (Editing by Kevin Liffey)