Ukraine economy

By Matthew Duhan, Global Counsel

Despite the economic and currency crisis engulfing Ukraine, by 7 o’clock in the evening the National Bank of Ukraine (NBU) is virtually empty. But as the majority of its 12,000 employees head home, lights remain on in a few offices and footsteps echo through dark hallways as a small group of reform-minded individuals arrive for their unofficial night shift. To paraphrase the old line about the Indian economy, at the National Bank of Ukraine reform happens in the night while the government sleeps. Read more

Ukraine’s billionaires are losing their cash, especially those with significant assets in the Donbas, an area that has become a battlefield between pro-Russian rebels and units loyal to Kiev. According to Forbes’ 2015 billionaires list, Rinat Akhmetov, Ukraine’s richest man, has lost as much as $5.8bn over the past year.

The mining, steel-making, energy and heavy engineering units of Akhmetov’s SCM Group have been forced to halt operations or reduce their capacity in territories controlled by separatists or near the front line. The Group’s media, telecommunications and banking businesses are also feeling the effects of the rebellion. Read more

By Vitalii Kravchuk, Institute for Economic Research and Policy Consulting

Mat O’Brien’s recent contribution to the Washington Post’s Wonkblog on hyperinflation in Ukraine has had a huge impact. Drawing on work by Johns Hopkins professor Steve Hanke, O’Brien argues that, although the official rate of inflation from the Ukrainian State Committee on Statistics (Ukrstat) is 28.5 per cent, in reality it is more like 272 per cent.

Hanke is famous for his research on Zimbabwean hyperinflation, where the government was unable to calculate inflation and an alternative method had to be used. The main argument of Hanke’s article and of O’Brien’s blog post is that when a country’s currency collapses, it pushes up the prices of imports, which spill over to other prices. In this situation, Hanke argues, the true inflation rate can be calculated using “a rather straightforward application of a standard, time-tested economic theory” in the form of purchasing power parity, based on the free-market exchange rate (often the black market rate). This formula has been bluntly used in the case of Ukraine. Read more

By Alex Clackson, Global Political Insight

The peace agreement signed in Minsk, Belarus, last week regarding eastern Ukraine is undoubtedly welcome. Though fragile, the ceasefire provides some longed-for relief for the population of Donbass. A moment of relative tranquility on its territory is certainly something Ukraine needed desperately for two main reasons. The conflict was a huge drain on the Ukrainian economy. The currency is collapsing and inflation is growing rapidly. Secondly, President Petro Poroshenko’s popularity is diminishing.

According to a survey conducted by Kiev-based R&B Group, Poroshenko’s approval rating has fallen below 50 per cent for the first time. But despite the ceasefire, the Ukrainian leader will be left less satisfied with the final agreement than his Russian counterpart, President Vladimir Putin. Read more

Fighting between pro-Russian separatists and Kiev’s military units in south-eastern Ukraine has inflicted a painful blow upon Ukraine’s steel industry, which contributed about 15 per cent of economic output in the pre-crisis period.

Many factories in the Donbas, the industrial heartland of the country, have been closed or have been running with diminished production capacity. China’s aggressive export policy and Russia’s measures to defend its steel producers have exacerbated the disappointment for Ukraine’s steelmakers. Read more

Two foreign-born investment fund managers and a reform-minded former official from the Caucasus republic of Georgia were on Tuesday appointed to top ministerial posts in Ukraine’s newly-formed, pro-EU integration coalition government.

The three “foreigners” were swiftly granted Ukrainian citizenship on Tuesday hours before being approved as ministers by lawmakers.

Their unorthodox appointment is seen as a desperate attempt by the war-torn and recession-battered country to jumpstart reforms, crack corruption and avert default by unlocking billions of dollars in bailout funds from the International Monetary Fund (IMF). Read more

Ukraine’s international reserves are drying out rapidly. According to the central bank, in October they plunged by 23.2 per cent to $12.6bn, the lowest level since 2005. Even greater decline is expected by the end of the year. Kiev must pay a $3.1bn gas bill to Russia’s Gazprom alone. The situation could get even worse, should the central bank find itself forced to sell foreign currency to support the hryvnia, and with further hefty gas payments likely over the forthcoming winter.

Emergency funding from international donors, primarily the IMF, could provide a lifeline. But experts believe any such measures would depend on the authorities in Kiev showing a real commitment to fast and effective economic reform. Yet three weeks have passed since snap parliamentary elections last month, and the indication is that the pro-western camp in Kiev is far from taking such steps. Read more

A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.

After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more

Timothy AshBy Timoty Ash of Standard Bank

Ukraine is a fast-moving target, making any appraisal something of a work in progress. But taking the country on a stand-alone basis, I see a number of positives:

First, parliamentary elections held last weekend produced a strong majority for reform and even the prospect of a constitutional majority. Pro-EU reform parties took 70 per cent plus of the votes and could have 275 seats in parliament, and even over 300 with independents and some of the more populist/nationalist elements. As with the presidential elections, Ukrainians voted firmly in favour of a pro-western reform agenda. Extreme nationalists performed poorly, as did supporters of the former Regions regime. Read more

The results of Sunday’s parliamentary elections in Ukraine give president Petro Poroshenko and the potential members of a future pro-Western ruling coalition a rare chance to start economic reforms and launch an effective fight against corruption. However, some experts are not concealing their incredulity.

Last week, Poroshenko signed a package of anti-corruption bills which had been approved earlier this month by the old parliament. These documents include, in particular, a law on a new bureau to investigate corruption among Ukraine’s elites. One of the first goals of the new parliament is to approve financing for the newly-created body. Read more

By Taras Kuzio, University of Alberta

Ukraine’s political map was recast on Sunday as the country elected its first pro-European parliament. The new political geography took shape after support for pro-Russian parties was decimated following the kleptocracy of ex-President Viktor Yanukovich and Russian President Vladimir Putin’s military incursions.

The pro-EU political forces that won 63 per cent of seats in parliament were those of President Petro Poroshenko, Prime Minister Arseniy Yatseniuk, Lviv Mayor Andriy Sadovyy and Yulia Timoshenko’s Fatherland party. There is little doubt that Yatseniuk will remain head of government after his hastily created new Popular Front received only two per cent less than the Poroshenko bloc. Read more

“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. Read more

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. Read more

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. Read more

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? Read more

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. Read more

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. Read more

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. Read more

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. Read more

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.

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