Ukraine economy

“It is time to unite.”

The slogan ambushes Ukrainians from all sides these days as Petro Poroshenko, the president, deploys it to win votes ahead of parliamentary elections on October 26 that will determine whether he can secure a mandate for important but stalled reforms.

Appeals to unity are easy to understand. Since the popular protests in Kiev against the rule of ousted former president Victor Yanukovich a year ago, Ukraine has lost Crimea while big parts of the Donbas, an industrial region in the south-east, have fallen to separatists. 

By Taras Kuzio of the University of Alberta

Petro Poroshenko, Ukraine’s president, has returned home after making emotional pleas for support to the Canadian and US legislatures, where he received sympathy and cash but no military assistance. Poroshenko faces deep-seated scepticism among western governments and experts over whether Ukraine’s leaders can overcome their differences, fight corruption and move beyond rhetoric to action in implementing long-overdue reforms. 

By Dmytro Shymkiv of the Ukrainian Presidential Administration

In cooperation with the European Union, Ukraine is pushing ahead with a reform package designed to modernise the economy and prepare our country for eventual EU membership. The reforms require tough choices and will encounter obstacles along the way but commitment to change by the Ukrainian government and civil society alike instil the hope that we can transform our country’s economy and political system. 

Following the ceasefire between Ukrainian and pro-Russian separatist forces in the Donbas and an announcement by Kiev that it will grant self-rule status to the rebellious territories, the chances are increasing that Ukraine’s industrial heartland will find itself locked in a frozen conflict.

If so, what will happen to the Donbas economy, the source of 16 per cent of Ukraine’s GDP and 23 per cent of its industrial output? 

Cold bathroom showers are compounding the misery felt by millions of Ukrainians oppressed by the combined effects of Gazprom’s stoppage of natural gas supplies, an economy in free fall and protracted battles between the national army and Russian-backed separatists in breakaway eastern regions.

Vitali Klitschko, the heavyweight boxing champion turned mayor of Kiev, announced on Monday that all hot water provided by municipal boilers to Soviet-built apartment buildings would be shut off through “September, the end of September.”

Though hot water in older apartment buildings is typically shut off for a week or two during summer periods for pipe cleaning purposes, the drastic measure taken by authorities now is necessary – officials say – to ensure that a country without Russian imports can maintain enough natural gas in underground storage facilities to heat homes during the winter. 

Getting caught up in a war zone ranks among the worst-case scenarios for an oil company. This has happened to Royal Dutch Shell in eastern Ukraine, where heavy fighting between pro-Russian separatists and Ukrainian military forces continues.

Shell has a hydrocarbons production-sharing agreement at the 8,000 sq km Yuzivska field, which lies across Donetsk and Kharkiv regions. A map of the field shows it covers Slovyansk, the heart of the pro-Russian military uprising.

Such proximity has affected Shell’s Ukraine operations, but only up to a point, according to the company. Simon Henry, Chief Financial Officer said on Bloomberg TV in early June that the oil giant is taking “time out on the actual drilling activity on the ground”, for security reasons. 

By Dalibor Rohac of the Cato Institute

Can the European Union help Ukrainians get their country back on track? Notwithstanding the threat the country faces from the east, the bulk of Ukraine’s problems are domestic: lack of economic growth and employment opportunities, rampant corruption, mismanagement of public funds and burdensome regulation.

In the late 1990s and early 2000s the prospect of EU membership served as an impetus for radical reforms across central and eastern Europe. A credible timeline for joining the Union would certainly improve the prospects for similar reforms in Ukraine. On the other hand, given the EU’s internal problems and the current state of disarray in Ukraine, European leaders are not keen to rush into accession talks. 

While the government in Kiev tries in vain to pacify the pro-Russian military uprising in the eastern regions of Ukraine, new challenges are arising in the far west of the country. The 150,000-strong Hungarian minority of Transcarpathia region is demanding more rights – including greater autonomy and dual citizenship – and Budapest is supporting them against Kiev.

On Friday, Viktor Orban, the Hungarian prime minister, said that ethnic Hungarians in neighbouring Ukraine should be given political autonomy. “Ukraine can be neither stable nor democratic if it does not give its minorities, including Hungarians, their due. That is, dual citizenship, collective rights and autonomy,” Orban said. 

Welcome to Ukraine. You’re running a rickety business, mainly cash-in-hand, that has a big gas bill and is losing money. Your shady Uncle Vlad says he will give you cheaper gas, lend you money on suspiciously favourable terms, and perhaps see his way to giving your workers an extra something in their pay packets. In return, all you have to do is back him up in family disputes in perpetuity. Meanwhile Christine, your steely-eyed bank manager, wants you to turn down the thermostat in your offices, lay off half your staff and stop fiddling the books.

 

Rinat Akhmetov, Ukraine’s richest oligarch, claimed to the Financial Times on Monday that he pleaded with Viktor Yanukovich to resign when he last saw him on February 22, two days after nearly 100 anti-government protestors in Kiev were killed amid sniper fire and clashes with riot police. 

What price an invasion? Rising alarm at the stand-off between Russia and the west over Ukraine is feeding straight through to Russian assets including the rouble, equities, bonds and CDS spreads.

So it was little surprise that Russia’s central bank decided on Friday that its “temporary” sharp hike in interest rates this month was not so temporary after all. 

By Dalibor Rohac, of the Cato Institute, in Kiev

Beside the professional security in front of the building of Ukraine’s Cabinet of Ministers, a small group of volunteers from the Maidan is holding guard, a reminder that the political elite is there to serve the people, not the other way round. Inside, in a quintessentially post-Soviet boardroom with heavily draped windows and photographs of stern-looking former Ministers, a senior government official tells our group that they are “a government of kamikazes.” 

The authorities in Kiev are not only in danger of losing control of the political and military situation in the Crimea; they may also lose the major state-owned companies based on the peninsula.

On Wednesday, Rustam Temirgaliyev, Crimean first deputy prime minister, told Interfax that the Crimean authorities were planning to take over state-owned giant, Chornomornaftogaz, which implements offshore oil and gas projects in the Black Sea and Azov Sea, “in the near future”. 

By Christopher Granville, Director of Russia Research, Trusted Sources

For investors exposed to Russia and the wider market fall-out from Russia’s military move in the Crimea, it may be helpful to recall the lessons of a previous shock that threatened to undermine the investment case for Russia. The analogy I have in mind is the Yukos affair.

Then, as now, President Putin perceived a paramount interest that he decided to pursue regardless of the high costs to business and financial market confidence. 

While the focus in Ukraine has turned to government formation, Russia’s response, and chase-the-president, it’s worth keeping an eye on some of the economic charts.

Here’s a run down.