Ukraine and its economy is being buffeted by the Currency Wars and China contagion

One of the features of human life is that over time what we consider to be a crisis fades as we require larger doses of bad news to have the same impact. Something of this sort has been happening in Ukraine as the situation rumbles on with fighting continuing. We are supposed to have the Minsk ceasefire but I note that some wag has described that as Ukraine with the “cease” and Russia with the “fire”. As I pointed out on the 1st of June Ukraine finds itself in an Orwellian style nightmare trapped between the super-states of Europe and Russia in a toxic mix. Quite how any sort of economy is functioning is a moot point. Back then even the IMF struggled to find any sort of optimism.

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

A grim forecast although somehow out of that the IMF managed briefly to say that things were perhaps “on track”.

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

How is that stability going?

Briefly yesterday’s industrial production data backed that up.

In July 2015, Ukraine has recorded growth in the industrial production of 3.4% compared with the previous month.

Not quite so good though was the annual comparison.

July has seen a slump of 13.4% in the rate of decline for industrial production year-over-year

Or for 2015 so far.

Industrial production indices for January-July 2015 were 80,5%as compared to the relevant period of 2014

If we factor in that production fell by 0.5% in 2012 and 4.3% in 2013 followed by 10.1% in 2014 we see that the situation certainly qualifies to be called a depression.

This was backed up by last weeks release on economic growth.

The GDP for Q II, 2015 as compared to the relevant quarter of 2014 (at the constant prices of 2010) comprised 85,3%

Putting this into context

It is important to realise that Ukraine is a relatively poor nation as somehow the economic boost that many ex-eastern bloc nations saw when the Berlin Wall fell by-passed the Ukraine. From Trading Economics.

The Gross Domestic Product per capita in Ukraine was last recorded at 2081.04 US dollars in 2014. The GDP per Capita in Ukraine is equivalent to 16 percent of the world’s average. GDP per capita in Ukraine averaged 1866.79 USD from 1987 until 2014, reaching an all time high of 2826.10 USD in 1989 and a record low of 1123.40 USD in 1998. GDP per capita in Ukraine is reported by the World Bank.

As you can see the 1990’s brought not economic prosperity but a dreadful depression from which there was a recovery but I note that in 2014 per capita GDP was 26% lower than the 1989 peak. Not many countries have 1989 as their peak and the country that makes me think of is Japan with its lost “decades” but of course Japan has done a lot better than this. Even worse we know that 2015 has been a lot worse than 2014.

Whilst the US Dollar is a type of ersatz currency in Ukraine there are dangers in using it for comparisons but these are swamped by the scale of the numerical decline here.

I am reminded by comments to this blog that at least some Ukrainians are able to get by due to its agricultural resources and undertake a type of subsistence farming. Let us hope so. The allotment debate in the UK has led to an estimate that 250 square meters of land is enough to feed a family of fours. The only problem is that it reminds us of life from past centuries.

What does the IMF think now?

Those who recall the early days of the Greek bailout will feel a winter chill down their spine as the read the bit below.

The authorities have made a strong start in implementing the program.

After all so supposedly did Greece and we know what happened next! Actually the 9% fall in GDP growth expected by the IMF for 2015 does mirror Greece although at least this time the IMF is not hiding it.

Amidst the analysis there is one factor which troubles me. I have written before that an agricultural and commodity nation should not have run the balance of payments deficits that it has and the news on that is not good.

The current account deficit is expected to widen to 1.7 percent of GDP in 2015, compared to 1.4 percent of GDP at program approval.

There are ameliorating factors such as the ongoing falls in commodity prices but it is also true that the economic depression seen should have cut imports considerably too. The IMF started a new program in March but it has been involved on and off in Ukraine for some time and the picture on what used to be its main stomping ground pre Euro involvement is not pretty.

What about inflation?

The IMF is sanguine on this front.

The 2015 inflation has been revised upwards to 46 percent at end-2015, compared to 27 percent at program approval….. Inflation is projected to recede quickly in 2016 to around 12 percent as the one-off effects subside and economic stabilization takes hold.

However with developments in China in recent weeks the situation has returned to potentially haunt Ukraine. The Ukrainian Hryvnia fell by over 4% against the US Dollar last week and it now takes just over 22 of them to buy one US Dollar. Sadly the weakest are always affected the most at times like this. Whilst this is a long way from the peak of 33+ in March it does reignite worries.

Also whilst the IMF uses the word “disinflation” I am not clear that is a valid way of describing a country which even next year is forecast to have 12% inflation in what is mostly otherwise a 0% inflation world.


Here is something else which is out of kilter with trends in the rest of the world. From the National Bank of Ukraine.

On June 24-25, 2015 meeting the members of the Monetary Policy Committee decided to keep the NBU discount rate

unchanged at 30%.

So the price of relative exchange-rate stability was an increase in official interest-rates to 30% which begs a point would they have preferred a 30% lower exchange-rate? Of course as to the stability point as issues emerge from China then that goes into the “Definitely Maybe” category.

What about the debt?

The national debt of Ukraine is not a problem on the scale of Greece but a feature of it poses worries.

 public debt will exceed 90 percent of GDP , partly due to exchange rate depreciation and bank recapitalization needs.

It owes money in foreign currencies and not only has the cost of servicing this ballooned with the fall in the Hryvnia but so has the capital owed. In total it looks as though Ukraine’s total debt in foreign currencies will reach 150% of GDP. If you are looking for the case for what is euphemistically called a “debt restructuring” that is it in a nutshell.However if you translate the IMF-Speak below it is still in the distance.

At the same time, restoring debt sustainability will require the completion of a debt operation consistent with program objectives.


Even in the world of sport it would appear that things are not going the way of Ukraine as Sergey Bubka lost the IAAF Presidential vote to Sebastian Coe. Also I note that Shakhtar Donetsk are being described as a football club in exile. As to the economy it has seen a sharp fall from levels which were already internationally low. So the stability that the IMF likes to talk and write about needs to be reviewed in that light. Once you have fallen to the bottom of a crevasse you may well then be stable but you may be in bad shape from the fall.

Added to this I have regularly warned about the danger to the finances of the IMF itself. It is seeing trouble in Greece and I think its review of Ukraine could easily go down a similar path.

Under the baseline, Ukraine’s capacity to repay the Fund remains adequate

Remind us,whatever happened to the baseline in Greece again?

Also one gets insight from all sorts of news including this from Carlsberg today.

The Ukrainian market worsened even further and declined by an estimated 17% as a result of the deteriorating macroeconomic climate as well as significant price increases to cover inflation.


14 thoughts on “Ukraine and its economy is being buffeted by the Currency Wars and China contagion

  1. The EU has serious blood on its hands in Ukraine.
    Having failed to secure Ukraine’s natural gas reserves via the Ukraine–European Union Association Agreement with the Yanukovich administration, (Germany has forsworn nuclear power) the EU then instituted a right-wing nationalist coup.
    Crimeans, many of them ethnic Russians,, fearing for their lives, decided firstly to secede from Ukraine, then to join Russia, whilst ethnic Russians elsewhere have rebelled against this government, and the result is this bloody civil war, which destroys the economy.
    Not content with repressing its own citizens in Greece, the EU is embarked on making the citizens of other countries’ lives harder.

    Anyone who tells it differently is deluded or lying.

  2. Hello Shaun,

    Ukraines problems will be better solved once there is peace there

    thats a political problem though

    As for the IMF , I think its more a political tool of the Western world ,than a independent economic body

    Not as if they have a good track record either , as you point out .

    Perhaps its best to ignore their “thoughts” and watch what they do ?


    • Regarding the IMF, this is part of what Richard Sakwa had to say about the initial April 2014 IMF bailout of Ukraine in “Frontline Ukraine” (p.141) : “…the decade-long pro-family programme that sought to counter the sharp demographic decline by awarding benefits for each child born (which had also sharply decreased the number of abortions) was drastically cut back. The loan opened Ukraine up to the use of genetically modified organisms (GMOs) in agriculture, something that had hitherto been banned. This only confirmed a little-known item in the Association Agreement (Article 404), which called on both parties to co-operate to extend the use of biotechnologies. Ukraine, long known as the breadbasket of Europe, was to be opened up to American agribusiness.”

  3. Great blog, Shaun, as usual.
    Concerning the Ukrainian inflation rate, the Ukrainian CPI excludes most homeownership costs. Work on creating an HICP started in September 2012, with a special EU mission to Kyiv, but the State Statistics Service of Ukraine (FSSU) still doesn’t calculate one, nor is there a Ukrainian housing price index.
    According to the new Knight Frank Global House Price Index:
    Ukraine showed a 15.5% annual drop in housing prices in 2015Q1, the very worst drop of any of the 56 countries in the index. (Cyprus was in 55th place at -8.6%). The quarterly drop in housing prices in 2015Q1 for Ukraine was -4.5%. The reliability of this estimate is open to question, but the direction seems reasonable. Would you want to invest in real estate in Ukraine right now?
    So it seems reasonable to believe that a Ukrainian HICP with an owner-occupied housing component based on the net acquisitions approach would show somewhat lower inflation than the current Ukrainian CPI targeted (but not very closely) by the National Bank of Ukraine.
    As early as March 2010, the Ukrainian government announced that it was making the development of an HPI a statistical priority. In February 2012, David Fenwick, who used to be responsible for price statistics at the ONS, visited Kyiv and filed a report under EU auspices: “Mission Report on House Price Indices and Indices in Construction”. From his report it is clear that the SSSU had already done a pilot of a house price index based on flats, obtaining prices from real estate agents. It was judged unsatisfactory due to the high non-response rate. David’s report contains this comment, which raises concerns about Ukraine that go beyond the statistical: “There is no potential in the alternative approach of looking at the legal ‘transfer of ownership’ documents – the ‘selling’ price given in the latter is under-reported in order to avoid tax.” David returned to Kyiv in February 2013 to give a presentation on calculation of HPIs that drew heavily on UK practice. If he filed a mission report on this trip, I haven’t seen it.
    So more than two years before the allegedly EU-oriented PM Yatsenyuk took office, the previous administration had already calculated a pilot Ukrainian HPI, but after more than a year and a half in office, the SSSU still hasn’t published its own HPI. Is PM Yatsenyuk aware that calculating an HPI is one of the responsibilities of an EU member? There are still a few laggards in the EU that haven’t provided Eurostat with quarterly OOH series based on the net acquisitions approach. There isn’t a single EU country that doesn’t provide Eurostat with quarterly HPI estimates.
    Just how much time does it take this so-called reform-oriented government to implement a reform that had already been started under the previous regime?

    • Hi Andrew and thank you

      Your analysis on that particular reform goes against the headlines of the IMF report but does fit with the detail that discusses delays. I do recall that one of the Nordic nations was involved in the project but can’t find it right now.

      Whatever the number I agree that it is a case of “down down” for house prices in Ukraine right now with some places seeing very large falls. Frankly I do not envy those trying to measure it, we think we have trouble in the UK!

      I wonder if any foreign buyers have appeared and I do not mean Russian? It is not for widows and orphans but vulture funds might sense an opportunity.

  4. Hi Shaun,

    An excellent summary on Ukraine’s woes.

    They are actually currently fighting four wars at the moment.

    1. Is the obvious one against the Russian invasion in the East of the country. It is currently costing Ukraine about $5m a day to defend their country against Russian aggression. It is also estimated that it’s costing Russian at least $15m a day to sustain the war. This is obviously currently more affordable for Russia with their bigger economy.

    2. This is the economic war that Russia is fighting against Ukraine that takes the form of selective import bans and confiscation of goods and Ukrainian assets that don’t meet their ‘standards’. Traditionally the majority of Ukrainian exports have been to Russia. There is also the ongoing energy wars primarily based on gas. In return Ukraine consumers have been boycotting Russian goods on a large scale and the Government has been orientating the economy and exports towards the EU which got off to a good start but has currently stalled. Exports are currently about evenly split between Russia and the EU. The government have been heavily promoting their strong military equipment sector abroad with sales and production up which accounts for some of the 3.2% increase in industrial production. Increasingly Ukraine has been getting its gas with reverse flows from EU countries and especially from Norway which is one of the reasons Norway’s gas exports are at an all time high. Where Gazprom is a primary FP tool for Russia their sales and market capitalization have both tanked with a market cap drop of $300bn from over $350bn to just over $50bn! The Western pipeline plans that Putin has committed Gazprom to make little economic sense.

    3. The next war is against the old system, oligarchs and anti-reform vested interests for the privileged few at the top. This is actually the most important of the wars as winning this will open the way for a modern economy, external investment, where Ukraine has a well educated workforce and very cheap labour costs and cost base. Especially so with their current exchange rate!

    4. The final war is against endemic corruption which has little changed in the majority of public services of health, education, police, judiciary, taxation and border guards to date. There are some bright spots here with the new Police force in Kyiv, soon to be joined by a new one in Odessa along with other radical reforms where the reforming ex-Georgian President has been appointed Odessa’s governor. The black spot here is the lack of reform with the prosecutor’s office, who are fighting a rearguard action.

    The progress and outcomes for each of these will all have a bearing on Ukraine’s future but some much more than others.

    1. What happens with the war in the East will be decided by Russia, but the Ukrainian armed forces are much stronger than 12 months ago, so it is unlikely there will be much territorial change. Both side are playing pass the Donbas territory costs, which Russia are currently lumbered with. Yes, there has been much output lost for the Ukrainian economy from this heavy industrial heartland, but the old Soviet factories use inefficient outdated equipment and production methods which means that they are not competitive with global prices and have relied on heavy subsidies (in the form of gas and coal prices) from Kyiv. So the reality is that none of this is likely to be make or break for Ukraine and they have now endured what are likely to be the worst of the short term losses.

    2. The economic war is a much more serious one and Ukraine is steadily weaning itself off Russian exports. There is much more the Government and Ukrainian people can do to increase exports to the rest of the world and there are some good initiatives going on at the moment. The West is doing just about enough to stop the Ukrainian economy collapsing and using tough-love with payments (quite rightly) linked to reforms. There will be some form of voluntary or mandatory default in the next few months, with talks ongoing. Importantly, the IMF have stated that any default will not affect their $17bn aid program to Ukraine.

    3 & 4. These are actually the most important wars for winning the battle to reorient Ukraine to the West and transform the economy from a failed post-Soviet one to a modern East-European one. Patchy progress has been made, but the jury is still out here. If they win these two wars, this will result in much more Western investment and rapid economic growth in Ukraine.

    With y-o-y losses decreasing the consensus is that Ukraine’s depression is bottoming out and if they grasp the current opportunities being afforded by the West and their reform programs then they, the free Ukrainian people, will have a bright future in their vibrant democracy.

      • rods2.
        I would echo Shaun’s wishes for your family in such a dangerous environment.
        That we disagree on the causes of Ukraine’s plight does not, in any way, impinge on my sympathy for the people on both sides who have to live under this black cloud.

  5. Pingback: Why are banks still being bailed out in 2016? | Notayesmanseconomics's Blog

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