Friday, October 24, 2014

Financial Comment - Ukrainian economy takes a beating

The war of attrition continues 

Although the Russian economy is currently in the spotlight on the background of the ailing oil prices, it is time to revisit the state of the Ukrainian economy. Although the latter one has been out of the spotlight in the past couple of months, it has not gotten better, to put it softly. The rate of decline of Ukraine’s industrial output has gradually grown from 5.0% in the first half of this year to 8.6% in the first nine months. This compares to the 2.8% growth in Russia’s industrial output in September 2014 (year-over-year). The consumer inflation in the first nine months in Ukraine amounted to 16.2% on a year-over-year basis (8.3% in Russia), while in September 2014 over August 2014 it reached 2.9%. Ukraine’s GDP dropped by 4.6% in the second quarter of this year (year-over-year), while in 2014 as a whole it may drop by 6.5%-8% according to different estimates (Russia’s GDP should be flat).

On the background of growing military expenses, this kind of economic performance is making Ukraine’s position in the war vulnerable. The anticipated deepening of the decline of Ukraine’s GDP is not surprising given that virtually all industry in the occupied zone has stopped or is ruined, at least partially. Very few plants and factories are currently working in the cities of Donetsk, Luhansk, Makiivka, Horlivka, Enakieve, Ukraine’s former key industrial hubs. The cities are on the verge of a hungry and cold winter. It is becoming increasingly clear that even if Putin does not strike at Ukrainian defenses in the near future, he expects that the country will cripple under the weight of economic problems and natural gas shortages this winter. Experts are calling for increased Western economic help to Ukraine and saying that the IMF’s $17 stand-by loan will not be enough. The estimates for necessary additional funds are in the $20-30 billion range.

The coming parliamentary elections give hopes for increased economic activity in Ukraine as the new Rada is more likely to implement radical reforms. At the same time, it is difficult to expect an influx of investment in Ukraine’s economy on the background of the war. As we have repeatedly stated over the course of this year, Ukrainians will need all their resolve to overcome the enemy and economic hardships. They have come thus far and won against the odds numerous times, there is no reason why they can’t do that in the future.

By: Ukrainian Credit Union Limited

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