Ukraine and its economy finds itself writing a new chapter for the novel 1984

A sad feature of recent times has been the war that is raking place in Ukraine. This gives us our first but by no means last reminder of the novel 1984 as of course we are told officially that there is a peace deal in operation. This was signed in Minsk in February. So war may indeed be peace and those involved in Ukraine may be forgiven for thinking that a type of perpetual war is being inflicted on them. Just to rub home a triumvirate of themes we have of course Ukraine being squeezed by two super-states with Europe manoeuvering on one side and Russia on the other. As it happens to the two super-states are using different means as the Russia effort is military and the European one is more financial. Indeed if we add in the United States we can wonder if the fall in the oil price last year (with consequent impact on oil-producing Russia) was part of the super-state clash.

The consequence of this for the economy of Ukraine is something that I have feared for a while. Back of the 20th of January 2014 I pointed out the problems being faced.

The economy of the Ukraine is extremely unbalanced as a resources rich country should not be running trade deficits of this size.

Back then I pointed out then the International Monetary Fund (IMF) had been in Ukraine for five years and it had been supposed to be dealing with this whereas instead it found itself issuing communiques like this below.

Weak external demand and impaired competitiveness kept the trailing 12-month current account deficit elevated at about 8 percent of GDP by end-September despite a significant reduction in natural gas imports.

You are in a shabby state when you have a bigger current account deficit than the UK! Also interest-rates were very high with the official one of 6.5% being not the half of it.

actual borrowing interest-rates in the Ukraine have varied between an eye-watering 14.9% and 20.2% so far in 2014. Savers are getting an equally extraordinary real yield as the latest guide to them shows an interest-rate of 13.2%.

If you were setting out to cause an economic contraction you would be hard-pressed to do better than this. But there was a third issue which has been an influence which was that Ukraine a country which has its own currency the Hryvnia  also saw use of the US Dollar too. Partly this was driven by the difference between actual and official exchange-rates as a black market arose in response.

What happened next?

Interest-rates blasted higher. It was only on Friday that I analysed the way that Sweden has moved into negative interest-rates whereas now we find ourselves looking at a National Bank of Ukraine which has raised rates from 6.5% to 9.5% to 12.5% to 14% and in February of this year to 19.5% and in March to 30%. The icy cold of a Swedish interest-rate winter has been replaced by a Ukrainian heat wave. Or as Matha & The Vandellas put it.

It’s like a heat wave
It’s burning in my heart
I can’t keep form burning
It’s tearing me apart

On a stand-alone basis such an interest-rate would drive a currency higher but in this instance it was an attempt to deal with a plummeting Hryvnia. Back on January 20th 2014 I noted that it took 11.18 Hryvnia to buy one Euro now it takes 23 to do so. Therefore it has halved in value and there have been times when it has been much worse as the peak or nadir was around 38 Hryvnia to the Euro in late February.

The consequences have been horrendous

If we think of the likely consequence of the first influence above it would be of a sharp recession and the latter of high inflation. The latest NBU economic review puts it thus.

The decline in economic activity notably deepened in April (the Index of Core Industries Output (IKSO) decreased by 23.4% yoy) due to a further deterioration of industrial production and a worsening wholesale trade performance.

That is simply horrible and even worse than the official Gross Domestic Product data. From the State Statistics service.

The GDP of Ukraine for Q I, 2015 as compared to Q I, 2014 (at the constant prices of 2010) comprised 82,4%, when compared to Q IV of 2014 and seasonally adjusted it comprised 93,5%.

The situation concerning inflation was dire too. From the NBU.

In April, consumer inflation surged further up to 60.9% yoy driven by a 5.5-fold increase in the natural gas tariffs for households. Excluding the administrative component, the price growth decelerated for the first time since February 2014 to 46.9% yoy.

In the month of April alone prices rose by 14% which was driven by the rising price of gas. The sub-component which includes water housing and electricity (which rose by 33.6% itself in the month) too more than doubled (209.7%) in April. Just as most of the world was getting used to lower prices for domestic fuel they blasted higher in Ukraine. As it is an obvious essential in the cold winters that happen there this is quite a change in the basic cost of living. The only thing to be grateful for is at least winter had at least pretty much passed by for now.

Sadly the situation for that other essential food is dire too.

Processed food prices rose by 6.6% mom (59.5% yoy) reflecting the lagged effects of hryvnia devaluation and the ongoing pass-through of growing energy and raw food prices……..Raw food inflation moderated to 2.6% mom. In particular, the growth of prices for fruits and vegetables slowed to 2.3% mom and 3.4% mom, respectively,

In a world where to use modern language inflation is apparently like so over, it provides not a little to consider when a place thinks of inflation of 2.6% for food as being evidence of a slow down.

Mind you care is needed as according to central bankers and their acolytes you only need to look at core inflation which ignores the cost of food and energy!

Meanwhile back in the real world I note this.

Amid growing inflation, real wages fell by 24.6% yoy in March.

What next?

Even the IMF seems to be struggling to claim this is all “on track” as we find from yesterday’s press release.

Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent.

Although the “on track” doublespeak does make a sort of appearance.

In recent months, signs that economic stability is gradually taking hold are steadily emerging.

Is forecasting year-end inflation of 46% a sign of stability? I know that official bodies are often inflation fans but even the most ardent fans of inflation usually aim for a number less than  tenth of that!

Oh and is Sunday the new day “to bury bad news?”


What stands out here is the similarity between Greece and Ukraine. Except the economic collapse which took half a decade or so in Greece has been managed in just over a year in Ukraine. There are familiar features as the IMF imposes austerity on an economy which was already shrinking.  Here is its view from March.

Policies to underpin the fiscal adjustment include improving the pension system’s sustainability, reforming public employment, and reforming the healthcare and education systems.

So the prize for euphemism of the day goes to “improving the pension system’s sustainabilty” as we know what that means. Meanwhile the IMF tries to tell us that the same price is in fact in a universe far,far,away…..

Despite the authorities’ policy efforts, the economy fell into a deep recession in 2014.

In a way the statement below is a type of ultimate irony or is it what passes for an in-joke at the IMF these days?

The planned debt operation would also help secure program financing and restore debt sustainability with high probability.

Just like Greece? Oh hang on…….


9 thoughts on “Ukraine and its economy finds itself writing a new chapter for the novel 1984

  1. Well Ukraine is more risky

    a war , corruption the markets seem to care less about ,see Greece

    the best for both east and west Ukraine is for peace and considering thats political I cant see it

    pity the people of Ukraine


    • Hi Forbin

      Unfortunately the situation in Ukraine already has more than a few features of what George Orwell called “perpetual war” about it. I would imagine that in some parts of Ukraine it felt like that a while ago.

      Meanwhile the economy has collapsed whilst the IMF worries about “debt sustainability” just like in Greece.

  2. Hi Shaun,

    Excellent economic insight into what is happening in Ukraine.

    Despite all of these problems there is actually a cautious optimism in Ukraine on economic growth and a recovery over the next few years.

    Optimism that providing the current reforms are delivered and the oligarchic and political class (largely one and the same) lose their overwhelming power and corruption is finally tamed, then the long term prospects for the economy are bright.

    The caution is that there are still many hurdles to cross including a successful negotiation of a soft default with sovereign bond holders, outside help and support for the economy, not only in the form of aid and loans, but also helping with economic reform. There are now several ministers and many officials from abroad, helping with the purge of corruption, corrupt officials and other crucial public sector reforms. The energy sector reforms are a vital part of this where they were the most corrupt industrial sector and heavily subsidised by the government in a way that could not be sustained. Higher energy prices means that where energy efficiency is the worst in Europe, that modernization and improved domestic insulation can only get better! If the Ukrainian energy sector was as efficient as the rest of Western Europe, they would be self-sufficient. So this is a very painful, where it has been put off for far too long, but necessary change. My wife’s family recently hedged their risk on gas prices, by buying 7m3 of seasoned oak at the right price where it is cheapest in spring, which should provide all the heating they need next winter where they have a dual solid fuel / gas central heating boiler.

    The pensions sector has changed and will continue to change where again it could not continue on the current basis, where in many public sector jobs it was possible to ‘retire’ at 45, carry on with the same job and get your pension as well as your wages and there were also many other retirement age concessions from the number of children a women has had to designated areas ‘affected’ by Chernobyl. Many areas are designated as ‘affected’ as Soviet officials applied for that status at the time of the accident. The fact that the radiation levels were and are no higher than normal background was neither here nor there in Soviet times, as there were budgets to be spent and favours to be bought! With the changes all workers are going to have to work until they are 65, which is tough on the male population with an average life expectancy of 66 (but this is in part to a high youngster accident, suicide rates and male alcoholism). The other side of the coin is that employer social taxes have been simplified and reduced, where depending upon the industrial sector they used as high as 46%!

    The number of other income taxes has also been simplified and VAT submission and prepayment is now all handled electronically online. These and other tax reforms are meant to help reduce tax evasion but with at least 50% (and probably much higher) of the economy being outside of official figures where most transactions are in cash! I think much of this will be in hope rather than reality! The USD and EUR have always been unofficial currencies and the USD has always been used to price many capital items including property and cars. In times of economic stress (Ukraine has had many over the last 25 years) then these hard currencies have always been more popular in such times as a holder of value against the fluctuating UAH.

    Finally, I had better mention elephant in the room: Russia. It looks like they are going to try and play hardball over the $3bn they are owed this year and this may affect the IMF bailout. There is very much an economic war going on between the two countries, although Ukraine is trying to compensate for this through more exports to the EU and also through increasing arms exports, where this is a big and important industrial sector.

    Until we have seen when and what the objectives are for the next round of the Russian invasion (it is immanent) in the east of the country and maybe well beyond, then this is affecting the investment climate with overseas investors, sensibly waiting and seeing before making investment decisions.

    • Great comment rods and a good article Shaun. Nice to get more detail on a subject about which I know so little.

    • Hi Rods

      I am pleased to read that there is some hope for economic reform in Ukraine. If it gets that then there is a good chance for things to turn for the better. As I type this there is yet another claim from Europe that this is the final countdown for Greece as if they are determined to give that song from a German group some publicity. How many “final countdowns” have there now been?

      The problem for Greece is that underneath the hype the reform has been lacking.

      I hope that your wife’s family are doing okay as many of the economic numbers for Ukraine are simply grim.

  3. Thank you for column, Shaun. I am reading “Ukraine Crisis” now by Andrew Wilson, a Reader in Ukrainian Studies at University College, London. I have mixed feelings about his book, but there is this on p.17: “There is a common joke in Eastern Europe that ‘Russia makes you an offer you can’t refuse; the EU makes you an offer you can’t understand.'”

    It is good to hear from Rods that some real reforms actually are being made by the Chocolate King and his acolytes. I am still waiting for them to introduced a Harmonised Index of Consumer Prices (HICP) and a residential property price index (RPPI). Work had started on both in 2012 when Viktor Yanukovych was still in power. The new Kyiv regime sure talks about the EU a lot. Are they not aware that if they join the EU, they are expected to calculate an HICP, a constant-tax HICP, an RPPI and a quarterly owner-occupied housing index based on the net acquisitions approach? I know they have a lot of other issues on their plate now, but if they plan to get all this done within the next decade or so, when are they going to make a start?

  4. There is a subtle difference between Ukraine and Greece: whilst the heavy hand of the EU is all over both, and the cause of much of the troubles in both countries, it isn’t actually telling the govt. of Ukraine to starve its own people.

    • The EU is massively popular this side of Europe, with good reason. They’re less corrupt and better run. They only use carrot incentives, except for bad debtors. Bigger problems than the EC come in the lack of federal accountability and mafia controlled governments using thuggish extortion of their own, and in 1 case their neighbors countries.

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