KIEV, Feb. 16 ??“ Ukraine??™s apparently ongoing massive outflow of foreign currency may accelerate inflation and hurt stability of the national currency, the hryvnia, President Viktor Yushchenko warned Friday.

Ukraine??™s domestic and foreign investors have been apparently persistently channeling money out of the country for the past five years, but the process has accelerated in early 2005.

???The outflow of capital was $12.9 billion between 2004 and September 2006,??? Yushchenko said at the National Security and Defense Council meeting citing the country??™s balance of payment statistics. ???This is one of the main threats to the national security.???

The figure shows that Ukraine has failed to significantly improve its investment climate to a point when most of domestic investors would seek to re-invest their profits in domestic projects. The money withdrawn also suggests that investors have been seeking to avoid taxation.

Creating a liberal economy that would be darling to investors throughout the world was one of Yushchenko??™s key commitments since winning dramatic presidential election in December 2004.

Some of Yushchenko??™s reforms, such as transparent selling of Ukraine??™s biggest steel mill, Kryvorizhstal, to Mittal Steel for about $5 billion in October 2005, did boost foreign direct investments in Ukraine.

The foreign direct investment, which also included a number of acquisitions in the banking sector, hit $13.2 billion between 2004 and September 2006 showing that interest in the Ukrainian economy has been growing.

But, the scale of the reported outflow of foreign cash suggests that the country??™s investment image has been suffering.

Meanwhile, the accelerating outflow of cash comes at a bad time as Ukraine has been running a major foreign trade deficit over the past 1.5 years, mostly due to skyrocketing increase in natural gas prices.

Ukraine reported $6.7 billion in foreign trade deficit in 2006, Yushchenko told the meeting. Ukraine reported $671 million foreign trade surplus in 2005, according to the National Bank of Ukraine.

The expanding trade deficit, coupled with an outflow of foreign currency, increases pressure on the national currency, the hryvnia, to lose value and may undermine financial stability.

???We may get a very strong challenge to the internal stability of [consumer] prices and [value of] money,??? Yushchenko said.

Yushchenko said the government must work hard to improve the investment climate, but also to employ special teams that would scrutinize the outflow transactions.

???We have to ask??¦ why the comfortable investment climate hasn??™t been formed, and why the shadow economy is flourishing???? Yushchenko said.

Prime Minister Viktor Yanukovych, who also attended the meeting, refused to issue any comments on the subject.

Yushchenko and Yanukovych are in a bitter dispute since September 2006 over powers enjoyed by both offices as both have appealed to the Constitutional Court to settle the dispute. (tl/ez)