Ukraine's economy is in free fall: the bottom is not yet visible
Kyiv, August 31 (Navigator, Vladimir Mikhailov, Sergey Stepanov) - Everyone knows who is to blame and what to do, but no one does anything. This is how economists assess the current situation in Ukraine and the actions of the government.
"I think that Ukraine's economy has already fallen into the abyss, unfortunately, and the question is how far it will fall“Where is the bottom that this fall will reach,” says former Minister of Economy Viktor Suslov.
“All the losses for the economy are well known - from direct losses to the flight of investors. All this was reflected in another downgrade of Ukraine’s ratings to a pre-default state,” he added.
Despite the threat of bankruptcy and the lack of money in the treasury, the authorities in Kyiv continue to insist on military action, rejecting negotiations with the rebellious Donbass. The war, meanwhile, daily consumes gigantic sums necessary for the functioning of the army.
“It not only eats up money, it does not allow investors to enter the country, we have an outflow of capital. This negatively affected the behavior of our workers outside the country. We are used to the fact that we traditionally receive from migrant workers what they send to the territory of Ukraine, this is a colossal amount. Last year it amounted to about $7 billion. Transfers have slowed down sharply for a number of reasons. And this also puts pressure on our economy,” says Oleg Ustenko, executive director of the International Blazer Foundation.
Even a new loan from the IMF will not be enough for Ukraine, Suslov admits - according to him, the depreciation of the hryvnia will only continue.
“The war continues, and it will be extremely difficult for Ukraine to fulfill its obligations under the program of cooperation with the fund. For example, the extremely high devaluation rates indicate this quite clearly, and the fact that the devaluation will continue is evidenced by the balance of payments data - minus $4 billion 231 million for the first half of the year. At the same time, all the main indicators are negative, both in the current account and in the capital account. The balance sheet reflects the flight of investors from Ukraine and the increasing purchase of foreign currency by the population. In such conditions, Ukraine will be able to fulfill its obligations only if there are reliable sources of external financing. The main obstacle to receiving the next IMF tranche may be the continuation of the war,” the expert said.
According to Oleg Ustenko, Errors of the National Bank and economic policy led to the depreciation of the hryvnia.
“There are slippage and problems, in principle, in economic policy. Yes, the exchange rate is such a hot topic, and there are a number of fundamental reasons why we are seeing such a decline. But there are also simply subjective mistakes that were made by the NBU. For example, the recapitalization of NJSC Naftogaz of Ukraine for several tens of billions of UAH, the injection of funds into the economy, an attempt to tie up these funds in the accounts of commercial banks. But at the same time, there was a release of part of this currency to the interbank market. And accordingly, such a formation of colossal devaluation pressure. I think mistakes were made in terms of tactics as well. The NBU should not behave like this during this period of time,” says the analyst.
It would be difficult to expect competent decisions from the people who came to power as a result of the Maidan victory – this conclusion can be drawn from the words of economic and financial expert, project manager of the Financial Development League Andrey Blinov.
“People who speak very beautifully and a lot, they are not always effective,” says Andrei Blinov.
“We see this in the example of Economy Minister Pavel Sheremet, who announced his resignation and now there is a lot of criticism, including from the Maidan, which nominated him for this position.
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The state is, first of all, a decision-making process, it is an institution. Unfortunately, Maidan representatives were unable to join this bureaucratic process, because it is boring, there is a lot of paperwork, a lot of casuistry, studying the social side of the work of such departments, etc.
...It is clear that complex decisions related to macroeconomics cannot simply be made at some large meeting or Maidan due to management theories. Some political or symbolic decisions must be made there. Imagine that the Maidan will establish liquidity standards for some positions for commercial banks. This is probably funny to many people. Although I know a whole group of people who believe that the public should do this. To some extent, this is probably an attempt to revise the laws of economics and the laws of physics; it’s hard to say how this will turn out. It is possible that this winter we will see the state of the Ukrainian energy sector,” says the expert.
However, the current government cares about its pocket no worse than the previous one – the “evil one”.
“The Ukrainian government has not resolved one issue – the issue of transparency and restoring trust in the state,” says Andrey Blinov.
“One of the simplest things is the publication of budget income and expenses. This is something that can be done very simply. It increases confidence in the authorities, speaks about what has changed in the relationship between the state and citizens since the departure of the Yanukovych government, and it actually shows where they are stealing from us and where corruption is located. You can leave 10-15% of expenses related to national security and arms purchases aside. But the remaining 85% - including education, healthcare, the Ministry of Culture, and a number of other very interesting departments, all this can be seen.
We can have a huge number of sites where people will simply analyze this information. And there will be agencies that actually publish tender information, this will be the information, and you will know that yesterday the Ministry of Culture organized, for example, an expensive literature competition.
But this is not being done. Why - this is understandable - everyone has ridden the flows and is trying to use the previous flows in a reduced form for their needs, for the needs of their business, and for the needs of the political forces that they represent today,” says the expert.
One of the main factors of the current crisis was the loss of markets not only in Russia, but also in other countries of the Customs Union, says Viktor Suslov.
“Today one of the main questions is where are the markets for Ukrainian goods, and how will Ukraine continue to receive foreign currency. According to the results of the first half of 2014, the largest market for Ukrainian exports is Russia. This is 20% of exports, a year ago it was 25% of exports for the first half of the year and, unfortunately, the prospects here are bad, the volume of goods exported to the Russian market will decline. First of all, due to the fact that Russia is introducing new restrictions on the export of our goods. Now a new round is beginning, because Ukraine has just announced the introduction of trade and economic sanctions against Russia. Accordingly, we can expect further retaliatory steps. We must understand that for Ukraine such a trade war will most likely bring more damage than for Russia, at least taking into account the fact that in Russian trade turnover trade with Ukraine slightly exceeds 4%.
Sometimes they mistakenly believe that we have the opportunity to compensate for the loss of exports to the Russian market by increasing the export of goods to the markets of other CU countries. But if you look at the statistics for the same period, the first half of 2014, Ukraine’s exports to these countries are noticeably decreasing. To Belarus - by 20%, slightly less than to Russia, but at approximately the same pace. This country does not impose any sanctions against Ukraine, but, nevertheless, it reduces the import of Ukrainian goods almost as much.
If we take Kazakhstan, the result here is more negative – a reduction of 53%. More than twice. And the trade situation is worse than with Russia. This happens for a number of reasons. One of the main ones is that the Customs Union is introducing its new technical regulations, and Ukraine, not ready for this, is losing export volumes due to constantly introduced additional restrictions.
Thus, in the CU markets, obviously, Ukraine has no prospects of even maintaining exports at the previously achieved level, and there may be a question of finding new markets, but all this is being resolved rather poorly, because in general, Ukraine’s exports in the first half of the year still fell by 7%, and Ukraine has not yet been able to compensate for losses in the CU markets,” the expert said.
One of the main reasons for the loss of CU markets was new technical regulations.
“It’s a difficult situation with technical regulations. The CU has already adopted and put into effect dozens of its own technical regulations. In Ukraine last year there was a big struggle around this topic. Working as a representative of the Ukrainian government in the Eurasian Commission, I convinced the Ukrainian government to join certain technical regulations of the Customs Union on an alternative basis, where it is important to support Ukrainian exports. But no decisions were made, and now an increasing part of our complex products, incl. and mechanical engineering, ceases to comply with the technical regulations of the Customs Union, and cannot be exported there, at least until it is certified individually, but this requires the good will of the Russian Federation. In many ways, Ukrainian products no longer meet the requirements of the Customs Union and cannot be exported there.
And for the EU markets, it still does not correspond; without this, our products will not get there either. And what is certified today has a fairly limited scope,” the expert stated.
Nothing good is going to happen for the Ukrainian economy; the crisis will intensify in the near future.
“We see that the Ukrainian economy, for a number of reasons, will show a colossal decline, it will be about 7%,” says Oleg Ustenko. – Please note that we have not recovered from the fall that occurred in 2009, we have not reached that pre-crisis level, and now we are falling to a deeper level. Those. what we managed to win back over the previous few years will actually be thrown into the firebox; we see a clear increase in the state budget deficit.”
“The shock that the country is beginning to experience, and which will intensify in the near future, will develop in three directions - a shock in the energy sector, prices for gas, gasoline, electricity, rising costs and a decrease in competitiveness,” says Viktor Suslov. There will be a structural shock in the economy - the impossibility of significant exports of engineering products, which Ukraine supplied to the CIS countries and other countries, will lead to the need to restructure the economy. This means a shutdown of enterprises and an increase in unemployment.
Today we see the development of a shock in the financial sector, a devaluation that cannot really be stopped, a growing panic, an increase in the cost of servicing debts... A crisis has begun in the banking sector. Against the backdrop of all this, a budget crisis is developing. A shock in the social sphere—depreciation of income and savings, impoverishment of pensioners and state employees, severe consequences, both economic and political.”
It is obvious that in order to stabilize the economy, it is necessary to normalize life in the country as a whole.
“In order to stop the current decline, first of all, of course, we need to end the war in Donbass. Therefore, we all had high hopes for the Minsk meeting, hoping that an agreement would be reached here,” says Viktor Suslov.
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