An un­even re­cov­ery: How the econ­omy of re­gions has changed over the past three years

How eco­nomic in­di­ca­tors have shifted over the last three years in Ukraine

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

Ayear ago, The Ukrainian Week de­cided to an­a­lyze how the coun­try’s eco­nomic map had changed af­ter the 2008-2009 fi­nan­cial cri­sis and dis­cov­ered that dif­fer­ent re­gions had changed in dif­fer­ent ways. Whereas those re­gions that were af­fected by the sit­u­a­tion on world mar­kets and the struc­ture of the do­mes­tic econ­omy saw their in­di­ca­tors go up, com­pared to 2007, oth­ers suf­fered sig­nif­i­cant losses. This time, we will try to look at what has hap­pened to var­i­ous re­gional economies in Ukraine over the last three years and to com­pare this to the pre-war sit­u­a­tion.

This anal­y­sis made it pos­si­ble to draw a num­ber of in­trigu­ing con­clu­sions that change per­cep­tions of the coun­try’s devel­op­ment in the last few years. In­ter­est­ingly, al­though the broad-based num­bers sug­gest that its econ­omy is still in much worse shape than it was at the end of 2013 and be­gin­ning of 2014, this fact seems not very no­tice­able, be­cause more than a few re­gions are al­ready in much bet­ter shape, based on a slew of in­di­ca­tors, than they were prior to the col­lapse of the Yanukovych regime and the start of the Rus­sian war. What’s more, av­er­age wages in dif­fer­ent re­gions have not al­ways been in line with other eco­nomic in­di­ca­tors over the last three years. In some re­gions where the econ­omy has picked up sig­nif­i­cantly since 2014, the av­er­age real wage is now even lower than it used to be, while in oth­ers, where the econ­omy is do­ing worse than three years ago, real wages are at a level with 2014 or even higher.


Ac­cord­ing to fig­ures from DerzhS­tat, the state statis­tics agency, GDP in 2016 was 86.2% of GDP in 2013. How­ever, what has to be taken into ac­count is the fact that for a long time this in­di­ca­tor was be­ing cal­cu­lated against an in­flated base­line be­cause en­ter­prises op­er­at­ing in the oc­cu­pied coun­ties of Donetsk and Luhansk Oblasts, known as ORDiLO, were still be­ing in­cluded, which ar­ti­fi­cially de­flated this in­di­ca­tor. In ad­di­tion, com­pared to 2013, the pop­u­la­tion ac­tu­ally liv­ing on ter­ri­tory cur­rently un­der Kyiv’s con­trol is much smaller than it was in 2013, al­though DerzhS­tat still has not be­gun to cal­cu­late sep­a­rate statis­tics for ORDiLO. This com­pli­cates ef­forts to de­ter­mine the per capita dy­nam­ics of the coun­try’s eco­nomic devel­op­ment. By com­par­ing gross re­gional prod­uct or GRP, how­ever, it be­comes clear that most oblasts have im­proved, and those who have not have slipped only by a few per­cent­age points.

Two neigh­bor­ing oblasts, Vin­nyt­sia and Zhy­to­myr, are the growth lead­ers for the last three years. Their GRP was 6.5% and 6.3% higher in 2016 than it had been in 2013. On a per capita ba­sis, this rep­re­sents 8.3% and 8.1% growth. Volyn Oblast is close be­hind with 5.0% growth, or 4.9% per capita. In Kirovohrad Oblast, per capita GRP in 2016 was 2.6% higher than in 2013, while Odesa, Kher­son, Ch­erni­hiv, Cherkasy, Ternopil and Myko­layiv re­mained close to 2013 lev­els, rang­ing from +0.3% growth to -1.1% slip­page. This ac­counts for 10 of the 25 re­gions that re­main un­der Ukraine’s con­trol.

In five more oblasts, per capita GRP was 3-5% lower in 2016 than it had been in 2013: Kh­mel­nyt­skiy at -3.0%, Sumy at -3.2%, Lviv at -4.4%, Za­por­izhzhia at -4.9%, and Kyiv Oblast at -5.4%. The next seven oblasts saw GRP shrink by 6-9%: Rivne at -6.0%, Kharkiv and Ch­er­nivtsi at -6.7%, Zakarpat­tia and Poltava at -7.8%, IvanoFrankivsk at -9.0% and the City of Kyiv at -9.3%. The only dou­ble-digit de­cline in GRP was reg­is­tered in Dnipropetro­vsk at -13.1%, Luhansk at -36.5%, and Donetsk at -41.9%. In the case of the last two oblasts, how­ever, this de­cline is nom­i­nal for the rea­sons of­fered ear­lier. For real num­bers re­gard­ing the eastern ter­ri­to­ries out­side ORDiLO, a dif­fer­ent cal­cu­la­tion is needed and it would likely show mar­ginal per capita GRP growth.

When looked at in terms of ex­ports, the sit­u­a­tion be­comes even more strik­ing at the re­gional level. At this time, DerzhS­tat fig­ures tend to dis­tort the dy­nam­ics con­sid­er­ably, among oth­ers be­cause num­bers are cal­cu­lated in dol­lar terms only, and the dol­lar strength­ened in the last few years rel­a­tive to most world cur­ren­cies. For in­stance,


if cal­cu­late the ex­ports of the EU eco­nomic “lo­co­mo­tive,” Ger­many, in dol­lars for QIV of 2016, then it comes out 11.6% less than it was three years ear­lier, whereas cal­cu­lated in euro, on the con­trary, it grew al­most the same, 11.5%. In France, ap­ply­ing the dol­lar to ex­ports for the same pe­riod, they shrank by 17.4%, whereas in euro terms they grew 5.4%. Yet nei­ther of these coun­tries con­sid­ers that its ex­ports have gone down. So given its ge­o­graph­i­cal lo­ca­tion and the vol­ume of Ukraine-EU trade as an equiv­a­lent for mea­sur­ing for­eign trade vol­umes, it seems rea­son­able to use the euro.

So, com­par­ing the vol­ume of Ukrainian ex­ports of goods in eu­ros for QI 2017 and 2014, if Donetsk and Luhansk Oblasts are left out, it grew from €7.92bn to €8.72bn or about 10.1%. Most re­gions suc­cess­fully adapted to the sit­u­a­tion on world mar­kets. Ex­ports of goods from Vin­nyt­sia Oblast grew by 125%, Ivano-Frankivsk by 83.4%, Ternopil by 54.1%, Ch­er­nivtsi by 40.5%, Lviv by 37.3%, Kyiv by 32.4%, Volyn by 30.2%, and Zakarpat­tia by 25.9%. In six more re­gions—Kh­mel­nytsk, Zhy­to­myr, Cherkasy, Poltava and Myko­layiv, and the City of Kyiv— ex­ports grew 10-20%. In Dnipropetro­vsk, Sumy and

Ch­erni­hiv Oblasts, ex­ports grew 5-9%. Two southerly oblasts, Kher­son and Za­por­izhzhia, showed a mod­er­ate re­duc­tion in ex­ports, as did Rivne, the only oblast out­side the south­ern belt: it was af­fected by a sharp fall in world ni­trate fer­til­izer prices and a loss of com­pet­i­tive edge among Ukrainian pro­duc­ers, which led to a de­cline in ex­ports of 5.3%. Only four oblasts from the south­east­ern belt showed a de­cline in ex­ports of over 10% be­tween QI 2014 and QI 2017: Odesa at 12.9%, Kharkiv at 23.9%, Donetsk at 49.0%, and Luhansk at 85.7%. Again, the de­cline for the last two was mainly the re­sult of a re­duc­tion in de­liv­er­ies from the oc­cu­pied parts of these oblasts.


Be­tween 2008 and 2015, Ukraine saw a steady de­cline in in­dus­trial out­put that was only briefly halted in 20102011 while oth­er­wise some­times even go­ing into freefall. By 2015, ac­cord­ing to DerzhS­tat, out­put was only 66.6% of 2007 lev­els and dein­dus­tri­al­iza­tion could be seen across the coun­try.

Where things seemed to be pick­ing up pace was in a new in­dus­trial belt cen­tered on the Right Bank that emerged af­ter the 2008-2009 fi­nan­cial cri­sis. The last three years have only con­firmed that its pres­ence, ex­pan­sion and clear shape. And so the in­dus­trial growth lead­ers of re­cent years, Zhy­to­myr, Vin­nyt­sia and Ternopil Oblast—whose out­put grew by 17.3-27.4% over Jan­uary– May 2017 com­pared to the same pe­riod of 2016—were joined by neigh­bor­ing Kyiv Oblast, with 13.2% growth, Kh­mel­nytsk Oblast with 9.2% growth, Odesa with 12.5%, Kirovohrad with 4.3%, Rivne with 4.8%, and Volyn with 7.9%. The only oblast that prevents these nine from form­ing a solid ter­ri­to­rial belt is Cherkasy, where in­dus­trial out­put was 5.0% down on last year. Mean­while, Lviv and Kher­son Oblasts are slowly pulling up to the “growth belt” with mar­ginal but nev­er­the­less pos­i­tive growth in­di­ca­tors com­pared to the first half of 2014.

The oblasts that bor­der on this in­dus­trial growth belt from the south and east—Myko­layiv, Za­por­izhzhia, Cherkasy, Poltava and Kharkiv Oblasts—are only 4-5% down on three years ago. The re­main­ing oblasts are gen­er­ally still down in the 7-14% range. The rea­sons for these deep de­clines vary greatly, just as their ge­og­ra­phy does. For that rea­son, they en­com­pass both heav­ily in­dus­trial, cen­trally lo­cated Dnipropetro­vsk Oblast with -13.2% out­put, agri­cul­tur­ally ori­ented far western Zakarpat­tia with -13.5%, and north­east­ern Sumy with -11.9%. All the coun­try’s re­gions de­vel­oped un­der pretty much the same con­di­tions over the last three years, yet some saw in­dus­trial re­cov­ery while oth­ers con­tin­ued to de­cline sig­nif­i­cantly. In part, this was due to the ex­ces­sive num­ber of en­ter­prises in spe­cific sec­tors that were hav­ing a hard time adapt­ing to changes on world mar­kets.

Look­ing at changes in the vol­ume of in­dus­trial out­put for the en­tire coun­try mi­nus Donetsk and Luhansk Oblasts, where its dy­nam­ics over the last three years are dis­torted by the oc­cu­pied ter­ri­to­ries, then it also turns out that out­put is not that much lower now than it was in 2014. For in­stance, over Jan­uary-May 2014, Donetsk Oblast’s share of do­mes­tic in­dus­trial out­put was 17.5%, while Luhansk’s was 6.3%. So the loss of 79.4% of Luhansk out­put amounted to a 5.0% loss for the na­tion, while the 53.6%

loss of Donetsk out­put rep­re­sented 9.4% na­tion­ally. And so, of the 18.6% re­duc­tion of in­dus­trial out­put over Jan­uary-May 2017 com­pared to 2014, 14.4% rep­re­sented the losses in Luhansk and Donetsk Oblasts. In this way, the de­cline in in­dus­trial out­put for the na­tion as a whole, less these two oblasts in the last three years, amounts to only 4.9%. The steep de­cline in Donetsk and Luhansk in­dus­try is not re­lated to the non-oc­cu­pied por­tions of these oblasts and is only reg­is­tered sta­tis­ti­cally be­cause the base­line for pre­vi­ous years con­tin­ued to—un­rea­son­ably—in­clude prod­ucts that were made by a larger or smaller num­ber of en­ter­prises that have long been oc­cu­pied, sim­ply be­cause the com­pa­nies con­tin­ued to be reg­is­tered in Ukraine for awhile. In fact, in­dus­trial out­put has ac­tu­ally been grow­ing in the non-oc­cu­pied por­tions of these oblasts.


The faster pace of devel­op­ment of those oblasts in the growth belt cen­tered on the Right Bank does not ac­tu­ally mean greater wealth or a more highly de­vel­oped econ­omy just yet. It is pri­mar­ily re­duc­ing the gap be­tween these gen­er­ally de­pressed re­gions and those that were once more pros­per­ous. In ad­di­tion, dif­fer­ent lev­els of eco­nomic devel­op­ment and growth dy­nam­ics don’t al­ways fully con­vert into the level of in­comes for lo­cal res­i­dents in a given oblast. Com­par­ing real av­er­age in­comes, ad­justed for in­fla­tion. What’s more, the pace and level of growth of the lo­cal econ­omy does not al­ways to equate the in­come level of those liv­ing there. A com­par­i­son be­tween real av­er­age wages, ad­justed for in­fla­tion, be­tween Jan­uary-May 2017 and the same pe­riod of 2014 shows that wages are gen­er­ally around 6.2% lower than they were. Nom­i­nally, how­ever, the of­fi­cial av­er­age wage in Ukraine has grown from UAH 3,400 to UAH 6,800. Still, the sit­u­a­tion is very dif­fer­ent in dif­fer­ent re­gions. In 13 of them, the av­er­age wage, even ad­just­ing for in­fla­tion, has al­ready re­cov­ered to 2014 lev­els—in seven re­gions, this in­di­ca­tor is be­tween -0.8% and +0.6%—or even sur­passed them—in an­other six oblasts, the av­er­age wage has grown 2.0%-9.0%. In the other seven oblasts, av­er­age wages are cur­rently 2.9-5.5% lower than they were three years ago. In Kharkiv, how­ever, av­er­age wages lost 8.6% over this pe­riod, in Donetsk and Dnipropetro­vsk they lost 10.6-10.9%, and in Luhansk, they plunged 18.3%. How­ever, in the case of Donetsk and es­pe­cially Luhansk Oblasts, the num­bers have to be ad­justed for the fact that most of the ma­jor ur­ban and in­dus­trial cen­ters where wages were far higher be­fore the con­flict started are now on oc­cu­pied ter­ri­tory.

What is par­tic­u­larly strik­ing is that among the trio of lead­ers for pace of growth in av­er­age wages over the last three years, only in one case does it re­flect the pace of eco­nomic growth, whereas in the other two they grew against a de­clin­ing eco­nomic sit­u­a­tion. For in­stance, in Vin­nyt­sia, real av­er­age wages ad­justed for in­fla­tion over Jan­uary-May 2017 were up 9.0% over the same pe­riod of 2014, in Zakarpat­tia they were up 8.2% and in Ch­er­nivtsi they were up 3.8%. But whereas Vin­nyt­sia was the fron­trun­ner for pace of growth with its Gross Re­gional Prod­uct gen­uinely grow­ing 8.3%, GRP for Zakarpat­tia and Ch­er­nivtsi Oblasts not only did not show growth but ac­tu­ally suf­fered a per capita loss of 7.8% and 6.7% over this pe­riod. But that did not stop them from be­ing lead­ers for av­er­age wage growth. There are also op­po­site ex­am­ples. For in­stance, Zhy­to­myr Oblast, which posted per capita 8.1% GRP growth and placed among the top growth fig­ures, next to Vin­nyt­sia, the av­er­age real wage, ad­justed for in­fla­tion, was ac­tu­ally 0.7% less over Jan­uary-May 2017 than it had been three years ear­lier. Of course, the dif­fer­ence in av­er­age real wages among re­gions is con­sid­er­ably less than the dif­fer­ence in per capita GRP. For in­stance, ig­nor­ing Kyiv, the av­er­age re­gional wage in the low­est re­gion is 68.3% of that in the high­est re­gion, a dif­fer­ence of less than a third, whereas the dif­fer­ence in per capita GRP, again leav­ing out Kyiv, is more than dou­ble that. This is very ob­vi­ous look­ing at two neigh­bor­ing oblasts. In Vin­nyt­sia, per capita GRP is nearly dou­ble that of Ch­er­nivtsi, whereas the dif­fer­ence in av­er­age real wages is only 10.9%: UAH 5,860 vs UAH 5,240.

Why this is so is prob­a­bly be­cause the pub­lic sec­tor tends to have sim­i­lar wages across the board, re­gard­less of eco­nomic in­di­ca­tors or eco­nomic trends in a given oblast. Nor is there any dif­fer­en­ti­a­tion when set­ting the min­i­mum wage for the pri­vate sec­tor. In short, pub­lic pol­icy re­gard­ing wages does not take into ac­count the eco­nomic sit­u­a­tion in dif­fer­ent ar­eas. The other side of this coin is that av­er­age and min­i­mum wages in the oblasts that are eco­nom­i­cally de­pressed rel­a­tive to other oblasts be­gin to con­verge, lead­ing to greater un­em­ploy­ment and slowed growth or fur­ther eco­nomic de­pres­sion.

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