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Ukraine - Economy

On April 4, 2017 Ukraine received a $1 billion installment of its $17.5 billion financial support for the reform program of the government, following the IMFs review of the state of the country's economy. While the economy is slowly recovering after a severe crisis in 2014-2015, the country must still break with a legacy of weak governance and stop-and-go reforms to generate the sustainable growth it needs for higher incomes and better social conditions.

The economic and social costs of the crisis have been high, said the IMF mission chief for Ukraine, Ron van Rooden. The government has undertaken important reforms under very difficult circumstances, but it has to do much more to recover the lost ground, to bring incomes closer to those in the neighboring states, to improve social conditions, and to build a modern market economy.

Ukrainian economy lost 20.4% of GDP due to war in Donbas in 2016. This is stated in the Global Peace Index report, published by the Institute for Economics and Peace in Sydney, Australia. According to the Institute, Ukraine lost 20.4% of GDP or USD 66.7 billion in purchasing power as a result of military hostilities in Donbas last year. Thus, Ukraine ranks 19th in economic losses as a result of the armed conflicts. Syria suffered the greatest losses from the war. Switzerland takes the last place. Russia ranks 31st. In addition, Ukraine took 154th place in the peacefulness ranking. Ukraine went up by two points but still remained among the low peace countries, including the Central African Republic, the Democratic Republic of the Congo, Pakistan, North Korea and Russia. Iceland was recognized to be the most peaceful country in the world.

The worst is over. An independent central bank has successfully brought down inflation from its peak of 60 percent and has allowed the local currency to move in line with market forces. Meanwhile, the government has made great strides to reduce the economic vulnerability of the country and has implemented some important structural measures. Growth has started to return thanks to a remarkable reduction in the fiscal deficit. Gas prices were significantly increased to close a loophole for corruption, while utility subsidies were hiked to limit the impact on the poor. The cleaning up of the banking system has started, including the nationalization of the largest but insolvent bank, to ensure public confidence in the banking sector, and to put banks in a better position to help the economy grow again. New anti-corruption institutions were set up, and transparency increased after all senior officials were required to disclose their wealth.

But inefficient state-owned enterprises still account for a large share of the economy, stifling growth and constituting a large drag on public finances. The agricultural land market remains underdeveloped due to a moratorium on the sale of land, limiting the expansion of this key sector and leaving the rural population poor. With an aging population and generous early retirement options, too few workers finance too many pensioners, compromising the stability of the pension system and forcing pensions to be low. A weak judicial system, still rampant corruption, strong influences from oligarchs, and excessive regulation, which deter foreign investment.

In the three years 2015-2017, Ukraines national currency, the hryvnya, devaluated more than threefold against the US dollar and the euro. Moreover, the Ukrainian economy has been plagued with corruption, repeated risks of default and stalled reforms. All of the above resulted in a significant decrease in living standards in Ukraine. Currently, the minimal wage in Ukraine is some 110 ($123) while the average wage is 230 ($258). Over 80 percent of the Ukrainian population is below the poverty line. Some 10 million people able to work are unemployed and 20 percent of the employed population lives in poverty.

For the majority of Ukrainians, opening borders with the EU is not a possibility to travel more, but to pack their bags and go to Europe in search of a better life. According to a 2017 Ukrainian survey, five million Ukrainian citizens work abroad, including 2.5 million in Russia. In 2016, migrant workers sent to Ukraine some 7 billion ($7.8 billion) while foreign investments reached only 3 billion ($3.4 billion).

Ukraines relatively weak economic performance is a legacy of an incomplete transition to a market economy after the break-up of the Soviet Union and a poor business climate. In addition, underlying macroeconomic problems, political upheaval, and the military conflict in the east led to a severe economic and financial downturn in 2014-2015, with output contracting by one quarter in a timeframe of twelve months. In April 2014, the IMF approved a two-year program, which was converted into a four-year program in March 2015, with a credit line totaling $17.5 billion, to help steer Ukraine back onto a sustainable and inclusive growth path. The government, on its part, took tough measures to stabilize the economy, but progress in structural reforms has been mixed.

Gross domestic product in the first quarter of 2015 totaled 82.4% on year-on-year basis for 1Q 2014. This data was reported on the website of State Statistics Service of Ukraine. "Ukraine's GDP for the first quarter 2015 compared with 1Q 2014 based on the constant 2010 prices totaled 82.4%, while compared to 4Q 2014, and taking into account seasonal adjustment it stood at 93.5%," the statement noted. The National Bank of Ukraine projected GDP to plunge 15% on the annual basis in the first quarter 2015.

Ukraine's hryvnia currency plunged about 30 percent against the dollar on 05 February 2015, after the central bank abandoned the foreign currency auctions which had set an unofficial peg for banks to follow. Following the announcement, the hryvnia was trading at 24-25 against the dollar. The central bank also raised its main interest rate from 14 percent to 19.5 percent as it sought to avert a Ukrainian financial collapse, brought closer by fighting in the Donbas and a lack of foreign funding. Without a ceasefire, foreign financing would be difficult to secure. Putin was betting that no amount of Western financing would work unless the conflict was halted.

Moody's Investors Service cut Ukraine's credit rating to its second-lowest level 24 March 2015, while warning that creditors faced deep losses in debt-restructuring negotiations with bondholders. A statement from the credit rating agency said default on repayment of $40 billion in aid from the International Monetary Fund was "virtually" certain, as Kyiv continued preliminary talks on restructuring the majority of its outstanding eurobonds.

Ukraine's annual inflation rate reached nearly 25 percent during 2014, the highest rate seen there in 14 years. Ukraines State Statistic Service said on 06 January 2015 that consumer price inflation soared to 24.9 percent during 2014 compared to 0.5 percent in 2013.

Ukraine's central bank chief said on 30 December 2014 that inflation may rise in 2015 to 17-18 percent from an earlier forecast of 13-14 percent due to an increase in energy tariffs at home. Ukrainian economy shrank by 7.5 percent this year, which is a 0.5-percentage point more pessimistic figure than the forecast, said the National Bank governor Valeriya Gontareva during the 30 December news conference.

By the end of 2014, half of Ukraines banks were bankrupt. Ukraines hryvnia currency had dropped 80 percent in value against the dollar this year. Inflation had risen to 20 percent and showed no sign of slowing. Revolution, months of conflict with Russia on its southeastern border and pervasive corruption and staggering economic mismanagement by the Yanukovych regime had plunged the country into an existential crisis.

Ukraine's 45 million people live on rich agricultural land and the country has a large industrial base, yet the nation is considered the poorest in Eastern Europe. Ukraine has performed particularly badly even by the standards of ex-Soviet republics. Output by 1999 had fallen to less than 40% of the 1991 level. Ukraine is a mess, and its own politicians share much of the responsibility for that.

In 1990 the economies of Poland and Ukraine seemed similar. One a former a Soviet client state and the other a former Soviet state, both were populous, both shared a legacy of uncompetitive, inefficient Soviet heavy industry, environmental degradation and poor physical infrastructure. In 1990 the Polish economy was just 20 per cent larger than the Ukrainian one, but by 2012 it was three times bigger. Between 1990 and 2012, Ukraines economy shrank by over 30 per cent; Polands more than doubled in size, with the result that Polish per capita income is three times that of Ukraine [by some estimates, five times by another].

In 2013, Ukraine's GDP growth was zero, while in 2012 it slowed to 0.2%, from 5.2% in 2011. Ukraine's GDP fall in January-July 2014 tentatively fell by 3.3% year-over-year and it could accelerate to 6% by the end of the year, First Deputy Economic Development and Trade Ministry of Ukraine Anatoliy Maksiuta said 28 August 2014. "We expect that this year real GDP will be minus 6%. These are the indicators of the present situation," he said at a briefing.

An October 2014 Reuters poll showed analysts expect Ukraines economy to shrink 9.5 percent in the third quarter of 2014 compared to 2013, its biggest contraction in five years. An expected GDP drop of 7.8 percent this in 2014 exceeded previous estimates.

The new Ukrainian authorities claimed that the states treasury was almost empty and announced widespread austerity in a bid to stave off mounting debt. Ukraines Finance Ministry forecast the countrys economy to slump by 6 to 6.5 percent in 2014, and inflation to reach 19 percent. The state budget of Ukraine adopted in January 2014 was based on growth expected to reach 3 percent and inflation to stand at 4.3 percent. In late March 2014, the document was amended as the countrys economic situation deteriorated. In late February 2014, Ukrainian Prime Minister Arseniy Yatsenyuk announced the implementation of severe austerity measures in the country. To receive a loan from the IMF, Ukraine agreed to an austerity program that included shedding 24,000 government jobs, raising taxes, selling off state assets and withdrawing subsidies on natural gas.

Ukrainian officials said in 2014 that more than $20 billion of gold reserves may have been embezzled during Yanukovychs rule, with more than $37 billion in loans disappeared. In the previous three years, more than $70 billion was shifted to offshore accounts from Ukraines financial system. Hourly average wages likely to decline by at least 15 percent in 2014.

The International Monetary Fund (IMF) reached a working-level agreement 27 March 2014 with the Ukrainian leadership on opening a two-year credit worth from $14 billion to $18 billion. The International Monetary Fund has agreed to grant Ukraine between $14 billion and $18 billion to help the country avoid a default. The package is vital for securing further help from other international lenders like the World Bank and the EU. the rescue would form the central part of a broader package released by other governments and agencies amounting to $27 billion (19.6 billion euros) over the next two years. The Fund made an immediate end to Ukraine's costly gas subsidies one of its main conditions for the program's approval. It also wanted the central bank to stop propping up the Ukrainian currency and for the government to cut down on corruption and red tape. Ukraine's central bank had already limited its currency interventions - a decision that has seen the hryvnia lose more than a quarter of its value against the dollar since the start of 2014.

Ukraines macroeconomic imbalances became unsustainable during 2013. The (until recently) pegged and overvalued exchange rate drove the current account deficit to over 9 percent of GDP, and a lack of competitiveness led to the stagnation of exports and GDP. With significant external payments and limited access to international debt markets, international reserves fell to a critically low level of two months of import in early 2014. The 2013 fiscal deficit was 4 percent of GDP, and the government accumulated sizeable expenditure arrears. The 2013 deficit of the state-owned gas company Naftogaz reached nearly 2 percent of GDP, driven by the sharp increase in sales at below-cost prices. Without policy action, the combined budget/Naftogaz deficit would widen to over 10 percent of GDP in 2014.

Following the intense economic and political turbulence of recent months, Ukraine has achieved some stability, but faces difficult challenges. To safeguard reserves and address currency overvaluation, the National Bank of Ukraine (NBU) floated the exchange rate in February. Measures implemented in February and March helped stabilize financial markets and ensured that critical budget payments have been met. Nonetheless, the economic outlook remains difficult, with the economy falling back into recession. With no market access at present, large foreign debt repayments loom in 2014-15.

The goal of the authorities economic reform program is to restore macroeconomic stability and put the country on the path of sound governance and sustainable economic growth while protecting the vulnerable in the society. The program will focus on reforms in the following key areas: monetary and exchange rate policies; the financial sector; fiscal policies; the energy sector; and governance, transparency, and the business climate.

Ukraines interim finance minister said 24 February 2014 that the country was seeking at least $35 billion in urgent aid from Western powers, including the EU and the United States. Ukraine's economy plunged sharply in the world economic downturn in 2009, dropping 15 percent. The CIA said it was "among the worst economic performances in the world." In early February 2014 the Fitch financial services firm downgraded the country's credit rating. Fitch said the political uncertainty in Kyiv had contributed to weakening confidence in the country's currency, the hryvnia, and noted that its value had fallen 7 percent against the US dollar since the first of the year.

Ukrainian joint external debt amounted to $140 billion at the end of 2013, or about 80% of GDP, according to Interfax-Ukraine. Ukraines short term debt is put at $65 billion, according to government figures. The short term debt is four times more than the country's entire gold reserves, which stand at $15 billion. The National Bank of Ukraine said that at the end of the third quarter of 2013, gross external debt amounted to $137 billion, equivalent to 77.3 % of GDP.

Ukraine's economy relied on cheap natural gas supplies from Russia. Russias state gas giant Gazprom agreed with Ukraines Naftogaz in December 2013 to slash the price that Ukraine had paid since 2009 by about a third, from about $400 per 1,000 cubic meters to $268.50. We hope the price will be stable, acting Energy Minister Eduard Stavytsky said 24 February 2014. More than half of the 55 billion cubic meters of natural gas consumed by Ukraine each year comes from Russia. Ukraine is a major re-exporter of Russian gas to Europe, and political wrangling between the former Soviet states has led to serious disruptions in supplies in the past, especially in January 2006 and January 2009 when deliveries were temporarily halted over payment disputes.

Ukraines President Yanukovych had prioritized investment in his Economic Reform Plan and had repeated publicly that he wanted to make Ukraine more attractive to foreign investors. However, conditions for doing business remained very difficult. Complex tax and customs codes, byzantine laws and regulations, poor corporate governance, weak enforcement of contract law by courts which allow and sometimes protect corporate raiding, and official corruption made Ukraine a difficult place in which to invest. In fact, although the Government of Ukraine (GOU) has listed improving the investment climate as a top economic policy goal since 2004, the country still had a low ranking -- 137 out of 183 economies -- in the Bank's Doing Business Report for 2013.

Negotiations with the European Union (EU) on the Deep and Comprehensive Free Trade Agreement (DCFTA) that could move Ukraine toward a more open and transparent trade regime and improve the investment climate were finalized in 2011, and the broader EU Association Agreement was initialed in March 2012. However, formal signature, ratification, and implementation of the agreement has foundered on broader non-economic criteria.

2012 GDP growth appears to have been flat, with the economy contracting in the third quarter, reflecting soft global demand for steel. Ukraine received no disbursements in 2011 or 2012 from its 2010 Stand-By Agreement (SBA) with the International Monetary Fund (IMF), due to the GOUs failure to implement several key requirements, including reducing subsidies for domestic gas prices. The 2010 SBA (which followed a 2008 IMF loan that went off track in 2009) envisioned USD15.2 billion in financing to improve Ukraines macroeconomic situation and facilitate structural reforms, but lapsed in 2012.

In the five years 2005-2010, the only major economic reform Ukraine had undertaken is adopting legislation for its accession to the World Trade Organization in May 2008. Per capita income had more than doubled since 1991 (to over $3,210 in 2008), despite economic decline throughout all of the 1990s. But in terms of purchasing power parity, which reflects living standards, Ukraine's GDP still ranked only 99th in the world: just 22% of the European Union level and 40% of Russia's level.

One of the most disastrous consequences of the collapse of the Ukrainian communist system was the wide-spread increase of economic crime. This phenomenon is self-sustaining, penetrating all levels of Ukraine's economy and administrative sectors. Criminal activity helps to sustain the shadow economy in Ukraine, which has been estimated by various sources to constitute 50-60% of the economy. Law enforcement and administrative efforts have been largely futile in curbing this corruption.

The loss of state organizational control over the economy, spurred by Ukraine's transitional period, has made it difficult for the government to implement effective measures to counteract the rise in economic crime. During the early stages of reform, the state's previously held monopoly on Ukraine's economic activities provided an environment in which economic crime could thrive. State assets became attractive to criminal groups because bureaucratic economic reforms of this period were carried out without supervision. As a result, organized crime groups aligned themselves with the few who controlled both political and economic power, forging close ties that would allow organized crime to both grow and receive bureaucratic protection.

Economic reform in Ukraine has not served to deter economic crime, but rather has encouraged the conditions under which it can thrive. Failed economic reform resulted in many undesirable activities and outcomes, including the unequal allocation of areas of the economy that yield superprofits. For example, public officials are gaining access to financing and crediting privileges in super-profitable economic areas - - areas that possess the highest level of liquidity and recoupment of capital investment such as distillery and tobacco production, foodstuff and oil-processing industry and etc.

On Transparency International's Year 2000 Corruption Perception Index, Ukraine ranked 87 (tied with Azerbaijan) out of 90 countries. Only Yugoslavia and Nigeria ranked worse. Corruption permeates much of Ukraine's court system, police, civil service and regulatory system. Conflict of interests abound as many public servants continue to own businesses while serving. Corruption is sometimes institutional, to the extent that certain government entities own or have close ties to businesses that compete with those they regulate. Government entities also use means that are off the balance sheet to pay for operations and expenses not funded by the state budget. A complicated, opaque, and unaccountable regulatory system has facilitated corruption.

The pervasiveness of corruption, connections between government officials and organized crime, and the political activities of organized crime figures often blurred the distinction between political and criminal acts. Politicians, politically connected businessmen, and journalists were the victims of attacks that sometimes were fatal and may have been politically motivated. According to officials, there were 12 contract killings as of May 2003; police had solved 25 of the 41 contract killings in 2002.

Perhaps no other country in the former Soviet Union (FSU) region has experienced such a large gap between economic performance and potential as Ukraine. Endowed with good natural resources, superb agricultural land, a well-educated population, ethnic peace, and a strategic location in Europe, Ukraine was positioned to be one of the most successful of the former Soviet states in attracting the foreign investment needed to restructure its economy. Yet with an annual GDP of $645 per capita as of the year 2000, Ukraine has one of the lowest levels of income in the FSU.

Ukraine has many of the components of a major European economy -- rich farmlands, a well-developed industrial base, highly trained labor, and a good education system. After eight straight years of sharp economic decline from the early to late 1990s, the standard of living for most citizens declined more than 50%, leading to widespread poverty. Beginning in 2000 economic growth has averaged 5-6% per year reaching 9.4 percent in 2003. Personal incomes are rising.

The economy is burdened by wage nonpayment and arrears, and the shadow economy (defined as activity deliberately unreported for purposes of tax evasion) accounted for a significant proportion of real income. Wage arrears increased by approximately 1.3 percent in the first 6 months of the year, as compared with the same period in 2002. Wealth was concentrated in the political elite and among directors of the state-dominated sectors such as metals, oil, and gas. The macro economy is stable, with the hyperinflation of the early post-Soviet period having been tamed. Ukraine's currency, the hryvnia, was introduced in September 1996 and has remained stable until quite recently. While economic growth continues, Ukraine's long-term economic prospects depend on acceleration of market reforms. The economy remains burdened by excessive government regulation, corruption, and lack of law enforcement, and while small and medium enterprises have been largely privatized, much remains to be done to restructure and privatize key sectors such as energy and telecommunications.

Ukraine is rich in natural resources. It has a major ferrous metal industry, producing cast iron, steel, and steel pipe, and its chemical industry produces coke, mineral fertilizers, and sulfuric acid. Manufactured goods include airplanes, turbines, metallurgical equipment, diesel locomotives, and tractors. It also is a major producer of grain, sunflower seeds, and sugar and has a broad industrial base, including much of the former USSR's space and rocket industry. Although oil and natural gas reserves are small, it has important energy sources, such as coal, and large mineral deposits, and is one of the worlds leading energy transit countries, providing transportation of Russian and Caspian oil and gas across its territory.

Ukraine encourages foreign trade and investment. The foreign investment law allows Westerners to purchase businesses and property, to repatriate revenue and profits, and to receive compensation in the event that property were to be nationalized by a future government. However, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts and corruption stymie large-scale foreign direct investment in Ukraine. While there is a functioning stock market, the lack of protection for minority shareholder rights severely restricts portfolio investment activities. Total foreign direct investment in Ukraine is approximately $7.32 billion as of July 1, 2004, which, at $154 per capita, is still one of the lowest figures in the region.

While countries of the former Soviet Union remain important trading partners, especially Russia and Turkmenistan for energy imports, Ukraine's trade is becoming more diversified. Europe is now the destination of over one third of Ukraine's exports, while around one quarter of Ukraine's exports go to Russia and the CIS. Exports of machinery and machine tools are on the rise relative to steel, which constitutes over 30% of exports. Ukraine imports 90% of its oil and most of its natural gas. Russia ranks as Ukraine's principal supplier of oil and Russian firms now own and/or operate the majority of Ukraine's refining capacity. Natural gas imports come from Russia, which delivers natural gas as a barter payment for Ukraine's role in transporting Russian gas to Western Europe.

The Government of Ukraine signed a 12-month $605 million precautionary standby agreement with the International Monetary Fund (IMF) in March 2004. The IMF, however, failed to complete its review of the agreement in July-August, raising concerns about inflationary aspects of an increasing budget deficit at a time when revenues are growing (i.e. a pre-election spending surge), the accumulation of arrears of VAT refunds to exporters and ongoing structural problems, especially in the financial sector. Ukraine received just $75 million of the $250 million Programmatic Adjustment Loan, second tranche, in 2003. The World Bank may grant the remaining $175 million to the Government of Ukraine this year, subject to energy sector financial reforms. European Bank for Reconstruction and Development (EBRD) project outlays, which often are tied to nuclear safety, totaled $120 million in 2003 and $206 million in 2002.

In 1992, Ukraine became a member of the International Monetary Fund and the World Bank. It is a member of the EBRD but not a member of the World Trade Organization (WTO). Ukraine applied for membership in the WTO in 1995. Progress on its application has been slow, but picked up momentum in 2003 and early 2004. The government's stated goal is to accede by the end of 2005.

Despite a lack of economic reforms in early part of 2000's Ukraine's macroeconomic indicators had become quite stable, creating a good environment for further economic expansion. Ukraine had achieved high rates of economic growth with a relatively stable national currency (unofficially pegged to the U.S. dollar at different rates close to 5.0 Hryvnas(UAH)/$) and sustained a gradual increase in per capita income. Most of the economic growth (especially in 2006-2008) came with foreign direct investments (FDI) inflow and led to significant growth in personal consumption and imports growth.

Due to delayed tax, judicialand state governance reforms as well as widespread corruption, foreign and domestic investments in many real economy sectors were limited. Investments arrived predominately in banking, insurance, trade and service sectors. Availability of cheap credit from abroad facilitated further consumption and import growth. Inflow of foreign currency through the banking system created upward pressure on UAH (vis--vis US $ and EUR) provoking further import growth and sending wrong signals about the alleged health of the Ukrainian economy.

Exhausted by prudent consumption in th 1990's the population was happy to use loans and saw no risks in the future, observing slowly appreciating local currency. Consumption of many high value added agricultural products increased dramatically. The need for economic reforms was masked by high world prices for major Ukrainian exports in 2003-2008: ferrous metals and chemical products. Agricultural commodities joined this list inearly 2008 with a surge of the world's prices for grains and oil seeds.

All governments in recent Ukrainian history avoided unpopular reforms and preferred to use increased budget revenues for populist social programs instead of cushioning the negative aspects of much needed structural changes. Economic inefficiencies, corruption and hostile business environment exaggerated the world economic crisis consequences for the Ukrainian economy in 2008 and 2009. Although in 2008 the Ukrainian economy showed 2.1% GDP growth, most of it came in the first half of 2008 - the pre-crisis period of the year. A significant chunk of the outdated industrial sector did not survive the commodity price drop and contracted by 28-30% in late 2008 - early 2009. If in 2006 and 2007 Ukraine's GDP grew by 7.9% and 7.3% respectively, in 2009 it was expected to fall by 14-17% setting a regional record.

By 2010 Ukraine remained in a severe economic crisis - the Ukrainian Hryvna had depreciated almost 50 percent against the U.S. dollar since 2008, with GDP contracting 14% in 2009. In 2010, GDP is expected to grow by 2-3% only; unemployment and inflation rates remain high. These economic conditions continue to create conditions favorable to the criminal element, and despite the decrease in reported criminal incidents to the embassy in 2009, crime remains the most significant day-to-day threat facing American citizens resident in or visiting Ukraine. The root causes of the Ukrainian economiccrisis remain largely unaddressed




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