Af­ter a year at war, Ukraine’s fi­nances at their break­ing point


Bruised and bat­tered af­ter a year of armed con­flict, Ukraine has been crip­pled by a com­bi­na­tion of mon­e­tary, bud­getary, industrial, bank­ing and en­ergy crises that could make it de­pen­dent on out­side help for decades.

The coun­try has suf­fered a se­ries of shocks that has oblit­er­ated its frag­ile econ­omy.

Its vi­tal heavy in­dus­try, in the east, has been com­pletely ham­strung, with pro­duc­tion plung­ing by a fifth — not helped by a sharp decline in steel prices.

In ad­di­tion, with for­eign in­vestors flee­ing the un­cer­tainty, the value of the lo­cal cur­rency, the hryv­nia, has fallen by around 50 per­cent since the be­gin­ning of the year.

“Like many emerg­ing mar­kets, this has a di­rect ef­fect on house­holds, busi­nesses and public fi­nances, be­cause both pri­vate and public debt is de­nom­i­nated in for­eign cur­rency,” said Julien Mar­cilly, chief econ­o­mist at in­sur­ance firm Co­face.

Gross do­mes­tic prod­uct con­tracted 6.8 per­cent last year, ac­cord­ing to of­fi­cial statis­tics and the cen­tral bank is brac­ing for a decline of as much as 7.5 per­cent in 2015.

Ukraine is also suf­fer­ing a debt cri­sis, with its pro­por­tion of public debt to gross do­mes­tic prod­uct (GDP) ex­pected to spi­ral to 94 per­cent this year, ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund — from a healthy 40 per­cent in 2013.

“There is a bank­ing cri­sis, a mon­e­tary cri­sis and an eco­nomic cri­sis that trans­lated into a strong con­trac­tion of GDP last year. This year, there will prob­a­bly also be an en­ergy cri­sis,” said Fran­cis Malige, Man­ag­ing Direc­tor for Eastern Europe and the Cau­ca­sus at the Euro­pean Bank for Re­con­struc­tion and Devel­op­ment.

‘Play-act­ing’ on Cor­rup­tion

The in­ter­na­tional com­mu­nity, des­per­ate to avoid a col­lapse in the Ukrainian econ­omy that could be a pro­pa­ganda coup for Rus­sia, has rushed to its aid.

In April 2014, the IMF sketched out a bailout plan worth some US$17.5 bil­lion to come in a se­ries of tranches — US$5 bil­lion of which has al­ready been paid out.

This is part of a pack­age of US$40 bil­lion pledged by the in­ter­na­tional com­mu­nity to help Ukraine back on its feet.

The Euro­pean Union has of­fered Ukraine about 1.6 bil­lion eu­ros (US$2 bil­lion) in short­term as­sis­tance and put to­gether a wider pack­age worth about 11 bil­lion eu­ros.

Ukraine has en­coun­tered huge dif­fi­cul­ties in bor­row­ing on the open mar­ket, rais­ing only small sums over short pe­ri­ods of time.

Pos­si­ble lenders are scared off by the po­ten­tial for de­fault — which the Moody’s rat­ings agency says is near 100 per­cent.

How­ever, oth­ers see it dif­fer­ently — bil­lion­aire in­vestor Ge­orge Soros has said he is will­ing to plough one bil­lion dol­lars into the coun­try.

One thing that par­tic­u­larly irks in­vestors is the per­ceived level of cor­rup­tion in Ukraine.

The au­thor­i­ties in Kiev say they are try­ing to stamp out cor­rup­tion and have fired a bil­lion­aire gover­nor and ar­rested some high-level of­fi­cials.

But Ta­tiana Jean, from the Paris-based IFRI think tank, said part of that was “play-act­ing”.

If au­thor­i­ties were se­ri­ous about clamp­ing down on cor­rup­tion, they could start with break­ing the mo­nop­oly of state gas firm Naftogaz, she says.

Malige, from the EBRD — the main in­vestor in the coun­try — said an­other pri­or­ity was to clean up the fi­nan­cial sys­tem.

“There are too many banks in Ukraine work­ing on a closed sys­tem. They are in the hands of a few pow­er­ful peo­ple and they tend to fi­nance the com­pa­nies held by those same peo­ple,” he said.

Nonethe­less, he pointed out some of Ukraine’s at­trac­tions: fer­tile agri­cul­tural land, “ul­tra­com­pet­i­tive” work­force and “the most re­form-minded gov­ern­ment since in­de­pen­dence.”

In a re­cent trip to Paris to drum up in­vest­ment sup­port, Econ­omy Min­is­ter Ai­varas Abro­mavi­cius played on the coun­try’s eco­nomic lib­er­al­ism, vow­ing a se­ries of pri­va­ti­za­tions and cuts in the public sec­tor.

“I agree with (for­mer U.S. Pres­i­dent Ron­ald Rea­gan), who said: ‘The most ter­ri­fy­ing words in the English lan­guage are: I’m from the gov­ern­ment and I’m here to help.’”

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