Ukraine’s Collapsing Economy

September 30, 2014
Anthony T. Salvia
Director, American Institute in Ukraine

With the ceasefire now in its fourth week, Ukraine commentators are shifting their attention from the military state of affairs to the economic. If the battlefield is largely quiescent, the same cannot be said for the economy, which is in a tailspin.

Leading member of the Ukrainian socialist movement Borotba (Struggle) and harsh critic of Viktor Yanukovich, Sergei Kirichuk does not mince words: “…the worsening economic crisis of the last number of days points to a convulsive, system-wide failure of the country’s financial system.”

The National Bank, which before Euromaidan routinely propped up the hryvnia, has been forbidden by the IMF from using foreign currency reserves and proceeds from gold sales for this purpose. As a result, the national currency has plummeted below the 1dollar/14 hryvnia threshold – alarmingly, with no discernible boost to exports, which are also plummeting.

With the collapse of production, unemployment is high (officially 8.5%), and yet, contrary to expectation, inflation is zooming along at 14.2% (up from a mere 0.5% at the time of Euromaidan.) Interest rates have more than doubled since Euromaidan (going from 6.5% to 12.5%), although lag behind the inflation rate. As a consequence, real earnings are declining precipitously while lending for business expansion is at a standstill.

Economic activity is “collapsing,” says Tim Ash, noted Ukraine-watcher for Standard Bank, London. Industrial production is down 20% year-on-year as of last month.

High-tech firms have been hit hard. Production at the Zaporozhye automotive plant has been curtailed. Kherson Shipyard, one of Ukraine’s largest ship manufacturers, has filed for bankruptcy.

Zaporozhye-based Motor Sich – one of the world’s largest manufacturers of engines for airplanes and helicopters -- has announced it is relocating its production to Russia. The Kremenchug auto assembly plant, which manufactures cars for the Chinese automotive conglomerate Geely and the South Korean automotive concern Ssangyong, has announced it is relocating operations to Kazakhstan.

The fractious debate over which has more to offer Ukraine – the European Union or the Eurasian Customs Union – set the stage for the February coup d’etat and the nation’s ensuing travails. It is telling and more than a little ironic that when Ukrainian firms feel compelled to decamp for more salubrious climes they choose Eurasia and not the EU.

Indeed, one has always had the feeling that Kiev’s Western-backed war to cleanse Donbass ethnically had an economic dimension as well – to put an end to east Ukrainian economic domination of the country by striking against its industrial base, which includes the critically important mining sector. In the course of the war, Donbass mines have been shelled, destroyed, or simply closed. They are incapable of meeting the fuel demands of the country’s energy sector, which is too bad because some 42% of Ukrainian electricity is derived from coal-fired thermal power plants.

Kirichuk notes the irony that the protagonists of the current “Revolution of Life” against the Soviet totalitarian past have declared those who disagree with them “superfluous,” and are doing battle against “the most fundamental elements of the economy and infrastructure [in Donbass] – all in the name of European integration.” Adding injury to insult, Kiev has eliminated all social benefits to residents of the Donetsk and Lugansk People’s Republics.

According to Kirichuk, the Kiev regime has no plan for coming to terms with Ukraine’s economic collapse beyond whipping up “patriotic hysteria,” “the confinement and pre-trial detention of hundreds of political prisoners arrested on formal, trumped-up charges”, and, if fighting resumes, to internationalize the conflict by drawing NATO into it.

Kirichuk may well be right, but the ceasefire is cause for hope. So too are on-going talks for a resolution to Ukraine’s stand-off with Russia over gas supply and transit. A negotiated settlement is what is called for – one that assures the autonomy of the Ukrainian regions. The fly in the ointment is the West, which seems incapable of thinking of Ukraine in any terms other than as a club with which to beat Russia. It is this approach that has proved so disastrous for the nation.

Does the Association Agreement with the E.U. (when it eventually enters into force) presage better times ahead for Ukraine? If Kirichuk is right – and he probably is – hardly. He is worth quoting at length:

“The experience of Bulgaria, Romania and the Baltic states has shown how European capitalist integration ends: rapid de-industrialization, reduction of energy facilities, and a complete re-orientation towards imports.

“For these countries, however, the onerous social consequences of such policies found partial compensation in the possibility of free movement of the labor force. The economically active and educated part of the population departed for the main European economies (Germany, Great Britain) and occupied the lowest paying positions in the job market. For example, a quarter of the Latvian population has already left the country in search of work.

“The Ukrainian economy, however, has no such compensatory opportunities – on the one hand, because of the lack of prospects in removing visa requirements in the near future, and, on the other hand, due to the reduction in the number of jobs in Europe…”

Kiev would be ill-advised to put all its eggs in the E.U. basket. There are no short cuts to peace and prosperity. No one will bale out the nation. Only Ukrainians can make Ukraine work. But first, Kiev needs to definitively suspend its war against its own people, and engage in serious talks in the interest of a viable, independent Ukraine.