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The Ukrainian economy. The trap of recession 

The Ukrainian economy. The trap of recession 
Article by: Bohdan Danylyshyn
Translated by: Mariya Shcherbinina

For the most part, the things that happened in Donbas in the past months somewhat overshadowed the problems of the Ukrainian economy. The only thing which is being actively discussed is the lasting devaluation of the Hryvnia. Even the information published by the State Statistics Service about two weeks ago, which claims that annual inflation (month to month) in October is already close to 20% (19,8%), having sped up since September’s 17,5%, and since the beginning of the current year inflation constitutes 19% (January to September – 16,2%), has not evoked a strong reaction from the public, experts, domestic media. Meanwhile, the inflation prognoses for 2014 from the IMF, the World Bank, the National Bank, constitute 19%, the prognosis of the Ministry for Economic Development is 19,5%. So we ‘executed the plan early,’ however this negative result was expected. Everyone, it seems, are used to the fact that Ukraine’s economy is in recession and have even made peace with it. As Japanese writer Isuna Hasekura wrote in one of her novellas, “if a person sees the edge of a void, it is not too difficult to walk beside it.” And we continue to walk. Meanwhile, metaphorically speaking, the ground is sinking more and more beneath our feet.

In this context I remember the consensual prognosis of the main macro measures for economic and social development in Ukraine in 2014-2015, which was based on a survey of Ukrainian economists and scholars and published by the Ministry for Economic Development this year. Back then the fall of the GDP in 2014 in Ukraine was calculated at 4,6%. ‘Optimists’ talked about ‘negative’ 2,9%, the ‘pessimists’ – about ‘negative’ 8%. And the latter, unfortunately, turned out to have been right. At the moment the GDP fall is speeding up, which, according to the calculations of the State Statistics Service, constituted 5,1% in the third quarter of 2014, compared to the third quarter of 2013. So by the end of the second quarter of 2014, the GDP fell 4,6% compared to the same period the year before. As such, the GDP has been falling for nine consecutive quarters – from the third quarter of 2012, excluding the fourth quarter of 2013, when the atypical and simultaneously stimulating situation in agriculture allowed Ukrainian economics to break even.

We shouldn’t have expected anything other than this, taking into account the difficulty of Ukraine’s situation. In the current year, the domestic economy has been entrapped in recession, as all three potential sources of economic growth (consumption, investments, export) are falling. To wit, the Ministry of Economic Development, which includes well-educated and professional experts, has warned about this threat a long time ago, and numerous times. However, some Cabinet of Ministers members who, it seems, ‘got lost’ in the government web, decided not to listen to the warnings. And this is very bad.

Ukraine’s further development is impeded by low external demand, a bad price conjuncture at the global market for domestic export (first and foremost black metals and mineral fertilizers), together with external trade limitations from the Customs Union member states and Russia in particular. On the other hand, we have increasing economic problems which arose due to the escalation of the military conflict in the east of the country, the annexation of the Crimean peninsula and lack of macro economical clarity. Because of the escalation of the conflict in Donetsk and Luhansk oblasts, practically all production facilities in the ATO zone have stopped (particularly mining and metallurgy, chemicals and mechanical engineering). This, because of productive cooperation, left its mark on the productive activities of adjacent businesses in other regions of the country, which lad to significant difficulties in the technological process and the emergence of very serious logistical problems.

By the end of nine months of 2014, Ukraine’s industry has demonstrated very bad results: the fall of industrial production constituted 8,6% compared to the same period the year before, including mechanical engineering – ‘minus’ 20,3% (Ukrainian automobile production fell 34,8%), construction – ‘minus’ 17,2%, coke and oil products – ‘minus’ 14,9%, chemical industry – ‘minus’ 14,7%, metallurgy – ‘minus’ 13,7%. By the way, according to the Industrial Union Metalurhprom, in January-September this year the losses of our metallurgists grew by 5 billion UAH. Today practically the only thing keeping Ukraine’s economy afloat somehow is agriculture, which managed to increase productivity by 16%. However, it is also starting to slow down: throughout ten months in 2014, the growth of the agricultural industrial complex constituted 7,5%.

The increasing geopolitical and economic threats also condition outflow of investment and credit resources from the national economy, which provokes further decrease of international reserves and cash accumulation outside the bank system. As such, in the current year, for the first time since 2009, we had negative numbers in the financial account of the payment balance at a sum of 1,6 billion USD. This formed a negative payment balance at 4,9 billion dollars, as opposed to the positive one of 1,5 billion USD lass year.

We cannot forego mentioning the decrease of Ukrainian export by 7,7% in January–September of 2014, compared to the same period the year before. In the cash equivalent, this constitutes over 3,5 billion USD. While the volume of export to EU countries in this period increased by 12,3% (or 1,46 billion USD), which is definitely a good thing, export to Russia fell by 27,3% (or 3,269 billion USD). We did not manage to compensate for such huge losses.

Internal consumption is also suffering a lot. The volume of retail, which is a key indicator of consumption, grew somewhat in the first half of 2014, however, starting with July, this number went below zero. In ten months we have -6,8%, which has to do with the devaluation of revenues from labor: in January-October salaries fell by 4%. The military conflict and the crisis in Ukrainian economics from high inflation and devaluation expectations on part of both the population and the businesses. This makes businesses raise prices, with the goal to negate their risks, and the population to reorient consumer needs towards cheaper goods, which, accordingly, additionally narrows down demand.

They say there is no prophet on the motherland. I do not want to become one, however, I will predict some macro economic measures by the end of 2014:

  • GDP decrease of over 10%;
  • inflation at 22% (December to December);
  • industry decrease by 11%;
  • average monthly salaries decrease by 7,3%.

This is not very optimistic, but this is the reality of today, the size of the recession Ukraine has been entrapped in.

Translated by: Mariya Shcherbinina
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