Ukrainian companies have a big appetite for debt after seven years of strong economic growth. Gross external debt swelled by 56 per cent last year to $84.5bn, with much of the acceleration attributed to the banking sector.

Borrowing costs are expected to rise this year in connection with the global credit crunch. But bankers and analysts in the country are upbeat, showing little concern for potential shocks that may follow if banks tighten their lending criteria and hedge funds pull back from investments in the Ukrainian stock market.

The fear is that borrowers in some East European countries could be next to fall victim to the credit squeeze - particularly those where foreign bank credits account for 50-70 per cent of gross domestic product such as Ukraine, Hungary and Romania.

Ukrainians are borrowing in record numbers but the ratio of total loans to gross domestic product stood at 61 per cent at the end of 2007, which Oleg Pronin, analyst at Kiev-based investment bank Dragon Capital, describes as a "quite comfortable level for a country posting rather high GDP and disposable income growth".

The Ukrainian banking sector has "zero exposure to any derivative instruments and, in particular, those relating to the subprime bubble in the US," he adds. "Consequently, Ukrainian banks have nothing to do with the heavy losses being widely posted by financial services industry in the US and EU countries."

A flurry of acquisitions in recent years has tripled the presence of foreign players in Ukraine such as Raiffeisen, Intesa Sanpaolo, Unicredit, Swedbank and PNB Paribas.

Currently, foreign banks control about a third of the banking sector in terms of net assets having purchased the largest and most solvent of the 170 registered banks. Their financial muscle is expected to cushion any shocks as they fight for valuable market share, says Mr Pronin.

Less certain is how many Ukrainian-owned banks will survive. With access to borrowing tightening, owners may sell out to larger foreign rivals.

Delta Bank, a fast-growing consumer lending group founded in 2006 by 35-year old entrepreneur Mykola Lagun, is not panicking. He sees the need for a strategic partner to help fund Delta's expansion, but he does not expect the credit crunch to influence his decision.

"The market doubled last year and the trend should continue this year even if access to foreign borrowing is limited," he says.

Peter Vanhecke, head of Investment Banking for Renaissance Capital in Ukraine, says the credit crunch will "undoubtedly" affect Ukraine, but that the "impact is expected to be more tangible for debt instruments than for equity products."

Last year, net foreign direct investment surged by 61 per cent to an all-time high of $9.2bn, bringing total foreign direct investment to $38.5bn. Net inflows of portfolio investments reached $5.8bn. Spiralling inflation, which reached 17.6 per cent last year, is a major point of concern. But GDP growth rates have remained high for the past eight years, enough to keep wages and consumption on the rise. Dragon Capital expects 6.9 per cent year-on-year GDP growth this year.

"We have seen some recent instances of capital switching from mature markets to emerging markets - including Ukraine - and all indicators are that 2008 will be another record year for direct foreign investment in Ukraine," Vanhecke adds.

Anton Khmelnitski, director of Eastern European Equities at UK-based Polar Capital Holdings, is very upbeat. This year, Polar moved its regional office from Russia to Ukraine, where it sees more upside. Currently, the firm has about $100m invested in Ukrainian equity, and plans to boost this to about $500m in the next few years.

"If you look at the first credit crunch shock from August, both the petro-dollar driven Russian and Kazakhstan economies lost capital, but the fast growing economy of Ukraine actually attracted additional foreign direct investment," he says. "If the investment inflows into Ukraine continue, the credit crunch will not affect Ukraine's growth that much. The bigger concern is the possibility that world prices sink for steel, Ukraine's top export and source of foreign currency."

"Ukraine is no different from Poland in the mid-1990s," says Mr Khmelnitski. "I'm looking for a repeat of what happened in Poland but on a much larger scale because the country is much larger. If the cost of borrowing does become more expensive for Ukrainian companies due to the credit crunch as everyone expects, then this will only open up opportunities for us to fill the gap by investing into these companies. It is probably the best opportunity for those companies like ours offering to provide capital," he adds.

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