More economic pain for Ukraine is on its way

At the moment we live in a world where the trend to  zero interest-rates or ZIRP (P=Policy) just carried on in some places and moved to negative interest-rates. The Danish central bank made such a move yesterday as it cut the official interest-rate to -0.75% which amongst other things confirmed the analysis I had written on here the day before. I note discussions this morning that Switzerland which is involved in a similar race to the bottom may cut further from its existing -0.75%. According to a list compiled by Geneva Girl on Twitter five of the ten main Swiss banks already have plans to impose negative interest-rates on deposits.

Not in Ukraine

It was into such a world that the National Bank of Ukraine stepped yesterday.

At the same time, with a view to ensuring that the market will follow a projected path and the market situation will be kept under control, the National Bank of Ukraine will tighten the monetary policy stance. To this end, the regulator has adopted a decision (effective from February 6, 2015) to raise the discount rate from 14.0% to 19.5% per annum and adjust interest rates on NBU’s liquidity-providing and liquidity-absorbing operations.


One way of looking at the rise is that it is pretty much equivalent to what UK Base Rates were before any sign of the credit crunch! Indeed even in past times an interest-rate of 19.5% was considered to be a very unusual and extreme move. Right now it is high heat at a time of icy cold weather. Also there was another move aimed at monetary tightening.

making the discount rate more instrumental as the benchmark monetary policy rate. Interest rates on liquidity adjustment instruments will be set in line with the discount rate;


So not only is the official interest-rate shooting higher but they are trying to make sure that every other interest-rate goes with it.

Why did this happen?

The National Bank of Ukraine is a central bank which targets inflation and it summed up the situation as shown below.

The main reason behind this decision was stronger inflation risks, which are likely to remain heightened in the near term, reflecting primarily considerable uncertainty over the developments in the east of Ukraine. In December 2014, annual CPI inflation reached 24.9%. The core inflation rate picked up to 22.8%, having accelerated drastically in the past three months.


If you are wondering what the inflation target actually is well it feels the equivalent of light-years away.

Monetary policy is considered successful if it achieves and maintains a low stable inflation rate within 3-5% a year on the CPI measure in the mid term (from 3 to 5 years).


Or to use their own words then monetary policy must be very unsuccessful right now although I note that they have a least given themselves a relatively long time to get there as the usual policy horizon is more like two years. Also such a rate of inflation sticks out like a sore thumb at a time when even the UK is contemplating a negative annual inflation rate.

The Hryvnia

The driving force behind the rise in inflation has been the fall of the Ukrainian Hryvnia.

The main factor behind the higher inflation rate was the depreciation of the hryvnia exchange rate.


Up until yesterday the exchange rate of the Hryvnia had fallen from just under 9 to the US Dollar a year ago to more like 16. So we can see that inflationary pressure has built up from this source as the price of imported good and services will have risen. Even prices which have fallen in US Dollar terms such as the oil price will have been offset pretty much by such a move,everything else will have shot higher. And that is assuming that foreign companies will accept Hryvnia.


Yesterday was a frenetic and extraordinary day even for these times as the Hryvnia dropped like a stone. By the end of the day it took more than 24 Hryvnia to buy one US Dollar and as I type this it takes 24.25 of them. A factor in the fall of the Hryvnia was the fact that National Bank had indicated it was going to intervene less frequently. From Reuters.

The head of Ukraine’s central bank said on Thursday the bank’s decision not to intervene directly in the foreign exchange market does not mean a free float of the hryvnia currency.


What was that about never believing anything unless it is officially denied? A driving factor in all of this is the dwindling amount of foreign exchange reserves. From Dow Jones.

The National Bank of Ukraine said its foreign exchange and gold reserves stood at $6.42 billion as of Feb. 1, down from $7.53 billion in the previous month

Of course if we return to the inflation mandate such levels will only push the rate of consumer inflation even higher and there are dangers of what one might call a type of hyper-inflation especially in these times of general disinflation.

What is the economy doing?

Here is the official view.

A GDP fall estimated by NBU experts at 6.7% in 2014 was of structural nature and was driven by supply-side factors.


Unofficial estimates would of course be higher. If we look forwards we see this.

Ukraine’s Economy Ministry estimates that the economy may contract by around 4.3 percent this year, RIA news agency reported.


The problem here is likely to be one of understatement and this is in principle illustrated by this from the Kyiv Post.

Due to hryvnia devaluation the volume of online sales in Ukraine rose from Hr 16 billion in 2013 to Hr 21.7 billion in 2014, but in dollar terms it actually dropped from $2 billion to $1.4 billion, according to


Surely if anything can cope with this situation it is the online world? You may be less surprised to read that the situation for the hotels of the Radisson Group looks dire.

The hotel’s 4-5-star segment in Kyiv alone lost about 45 percent of occupancy in 2014. Overall, the hotel chain lost about 35 percent throughout the country’s branches.


Oh and if you think that people are turning to drink and alcohol well apparently not.

Ukraine’s beer market fell by 9.3 percent in 2014.



There is of course an elephant in the room or rather two elephants as the West and Russia struggle to gain control over Ukraine in a fashion described in 1984. That will continue to play out but if we look at the economics there are two clear trends in play. Firstly this exchange-rate level if it is sustained will push annual inflation higher and higher and also lengthen the period which is out of control. The average Ukrainian is in danger of a large fall in living-standards from this alone. Indeed they are seeing one know which looks set to get larger. Secondly the economic resources will decline too as the economy continues its period of contraction. Again the ordinary Ukrainian will be hurt financially and we are talking of the Greek scale here and sadly maybe even worse.

A further deep sadness is raised by the fact that Ukraine has many natural resources such as its fertile land and its metal reserves/deposits. Yet somehow the economy only amounted to around 180 billion US Dollars in 2013 and is shrinking. Even worse on some estimates (Credit Suisse) it is already the most unequal country in the world.


19 thoughts on “More economic pain for Ukraine is on its way

  1. Hello Shaun ,

    Ukraine need to end the war with the separatists in the east , how, I’m not sure of , perhaps a federal system?

    As it is they ‘ll be a economic draw on the EU as and when they join fully – I hope Germany’s coffers are full , or is this why ECB has QE guns ready ?

    Interesting times


    PS: Baltic dry continues to drop – more woes to come ?

    • Hi Forbin

      The shipping position depends on what index you look at. How often do we end up saying that?! The Baltic Dry Index or BDI looks very weak but the Harpex index whilst not historically that high has picked up in 2015.

      Europe seems to be biting off more than it can chew with Ukraine and as you suggest is in something of a halfway house. Whilt they dither Putin pounces….

  2. Hi Shaun,

    I never thought that I would learn so much about Ukraine. Indeed their economic situation must be dire and not un-expected in a civil war situation. I do not understand about any direct link to Europe, perhaps we haev promised them entry but what with a basket case like Greece surely this would be an un-helpful way to rescure the united states of Europe?


    • Hi Paul C and thank you

      As to Europe’s strategy its establishment seems to think that in its various off-balance sheet financing vehicles it has discovered some sort of money tree which is free. The European Investment Bank or EIB seems to be ever expanding.

      The rub will come when such vehicles face losses and these have to be explained to taxpayers. For example the head of the ESM Klaus Regling was boasting yesterday about its loans to Greece and their size. Should there be another haircut for Greek debt it will have to involve the ESM on a similarly large scale whilst Klaus will be trying to retract his speeches and boasts!

  3. Hi Shaun,

    Thanks for your tweet it was very much appreciated. My wife’s family are fortunately in West Ukraine and have a small holding and where my mother-in-law worked on a collective until she retired she gets about 2 tonnes of wheat every year from the land she owns there, so there is no risk of starvation. My mother-in-law also gets a small pension and my wife’s sister works as a teacher, but is only getting a small percentage of her wages on good months and nothing on bad ones. I also send a small amount every month which is cushioned by them getting more UAH as the currency falls which compensates for inflation. It is not uncommon for people to be working for no wages or very small amounts at the moment, just to keep their job for better times. Many in the cities have got it much worse than those in the villages with their land and smallholdings. Strong family links and strong communities means that they work, share and pull together to survive. They are a very tough people and when it comes to hardship, their softest part is their teeth!

    Times are tough, but the Ukrainian people have been here before economically and worse. Stalin’s 1932/33 Holodomor (artificial famine) which he imposed for a 1930 ‘Maiden’ independence movement and resistance to collectivisation killed 5 to 8m Ukrainians and was centred on the area where my wife’s family live and they survived where they kept bees on a diet of honey and cherry tree leaves.

    As long as the West does enough to financially keep Ukraine afloat and the Government carries out its planned anti-corruption measures and massive cuts and reforms to all branches of administration to turn Ukraine into a modern European economy, they will do very well, like other Eastern European countries under the EU umbrella. They have one of the best educated workforces in the world and a large and growing IT sector. Having a successful democratic reformed county on Russia’s doorstep is what scares Putin, where he had unrest over his election in 2010 and he fears a Moscow maiden. This is why he annexed Crimea and stated the war in the East. Where he was losing against a revived Ukrainian army in August 2014 he launched a direct invasion. There are currently about 6 to 9,000 Russian troops in East Ukraine, with about 50 to 100 being killed per day. From day one it has not been a civil war but a Russian invasion, initially using their Siloviki, special forces and recruited Russian mercenaries. The big fear is the current build up at the moment will lead to a Russian military surge before the end of February, which is why the US and other NATO countries are considering increased non-lethal military support and probably supplying light anti-armour and anti-aircraft defensive weapons.

    Anyway back to economics: Exports to Russian have been largely blocked but in return the Ukrainian people have been boycotting all Russian goods with more and more shops not stocking anything made in Russia. This is a mnit-trade war in its own right, with Russian manufacturers changing to other countries barcode and setting up front companies in EU countries. Austria seems to be a popular choice. So the trade with Russia is dropping but it is increasing with the EU with a 21% y-o-y increase in the second half of 2014. The war in the East is discouraging tourism and investment due to uncertainty and I’m sure this will continue while the war is ongoing. Don’t be surprised if the war last years rather than months, where Putin and Russia apart from Crimea has failed with all its other objectives, many of which are now further out of reach than ever.

    The Ukrainian People have never been more united in their drive to become a modern successful West looking, Western style economy and they accept there is going to be much pain from Russia and the changes required to get there. I’m confident that they will prevail.

  4. Hi rods2,

    Anyway back to economics:

    With all due respect to Shaun’s stated policy of “no politics” there are times when the politics and the economics are simply inseparable. Thanks for the personal insight.

    • I agree and I’m glad you appreciated that the economy is being so dominated by the battle of geopolitics and the Ukrainian people’s right to self-determination that it has to be viewed within this context.

      I think what is happen to the Russian economy is now also so dependent upon politics, that to understand what is happening economically you have to view it in the correct political context.

      In Yanukovych’s Ukraine and Putin’s Russia if you were / are a business person, who has grown the business to a reasonable size, then to get on you are basically back to feudal times where you need the approval and patronage of the people higher up that goes all the way to the president. Otherwise you will be made an offer you can’t refuse as the alternative is a tax ‘investigation’ and probably jail. Putin made this clear from day one as president. As long as the olighais support him and reigned in their worst excesses they would be well rewarded which is why 110 of them own 35% of Russia’s wealth and we have seen some of the big oligarchies fall spectacularly, normally on tax evasion charges, by not towing the line.

      • “As long as the olighais support him and reigned in their worst excesses they would be well rewarded which is why 110 of them own 35% of Russia’s wealth” – Has strong similarities with the UK! What was that about the UK being a democracy?Should the Ukranian people really be trying to emulate western countries like the UK? If they areit sounds more like they want to water down their corruption rather than remove it.

  5. Brilliant column, Shaun. With so much Schadenfreude over the dismal economic statistics from Russia, we are lucky that at least you are looking at the even more dismal statistics coming out of Ukraine.
    I hope that Rod’s family gets through this difficult time as well. At least, living in West Ukraine, they are far away from the combat.
    If Ukraine does wish to enter the EU, as PM Yatsenyuk says, then it will have to have its own Harmonised Index of Consumer Prices. After 2018, this is likely to include an owner-occupied housing component based on the net acquisitions approach.
    In September 2012, the EU sent Martin Larsen of Statistics Denmark and Olga Kosseyova of the Statistical Office of the Slovak Republic to Kyiv and in November they produced a mission report on developing a Ukrainian HICP. The Ukrainian CPI is already close to the HICP standard in one important sense. It already has annual basket updates. (The US HICPs, by the way, only have biennial basket updates, since they are based on a US CPI which, like the Canadian CPI, still hasn’t moved to annual updates.) However, the Ukrainian CPI was calculated with the new basket update taking effect with the June release, not the December release as is HICP custom (and, of course, is much better.)
    The EU report didn’t recommend one way or another whether the Ukrainian HICP should replace or supplement the Ukrainian CPI. To my mind, that was a mistake, as Ukrainians should have their CPI as an index for upratings and their HICP as an inflation indicator.
    An earlier May 2010 paper from the State Statistical Service of Ukraine, written in Russian but available in English, “Ukrainian practice of calculating house price indices” announced the intention to develop house price indices, indispensable to the development of an OOH(NA) series. That document indicates that the current Ukrainian CPI takes a user cost approach to OOH, but it really seems more like an exclusion approach along the lines of the UK CPI. There is an undefined payment for OOH with 1% of the 2008 basket as opposed to household maintenance and repairs with 2.5% of the basket.
    David Fenwick, who used to run the ONS price statistics program, gave a presentation in Kyiv in February 2013 on the calculation of a house price index that was part of a ‟seminar on organization of a statistical survey on house price changes and the calculation of the HICP”. However, at least the slides used made no direct link between such a series and an OOH(NA) index.
    That’s all I could find on Ukrainian progress towards an HICP and an HPI; if you have found something else I would appreciate knowing about it. At the risk of taking your blog into politics it is notable that all of these developments to bring Ukraine closer to EU statistical standards occurred under President Yanukovych, that alleged Moscow stooge. Nothing seems to have happened during the Orange Revolution under Viktor Yushchenko. Now we are to believe that the Chocolate King, President Poroshenko, is leading the most reform-minded reformers ever to reform anything in the history of reform. But the progress on this important statistical development has fizzled out. I wonder if the big civil service cuts that were part of the IMF bailout package the unelected Ukrainian President Oleksandr Turchynov negotiated hit the Ukrainian national statistical institute so hard that they are incapable of doing anything more on this file for the moment?

  6. Hi Shaun,

    To foresee what most Ukrainians want for their economy, it is useful to compare median income, gini co-efficient and transparency’s ratings for similar countries. In a nutshell, do Ukrainians wish for a rich, relatively clean economy like Poland or do they wish for an economy like Belarus ?

    Belarus is inside Putin’s block, rates awfully for corruption and is very poor. Poland is inside the European Union and is a beacon of shining light to the unreformed bankrupt and despotic formerly communist states to it’s east.

    In the 1990s, mafia/political assassination was common in Bulgaria. The EU made it very clear that this had to stop and the judiciary had to start solving some of these murders. Today the situation is much improved – and I hope they can keep making more progress. I’ll repeat – the EU has insisted on and achieved improvements.

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