Ukraine was the bread-basket of the Soviet Union but 17 years after gaining its independence, the country became an economic basket case as a result of the credit crisis – ranking in the hall of economic ignominy alongside the likes of Iceland, Ireland and Dubai.
After growing by 2.1% in 2008, the country’s economy fell off a cliff in 2009, tumbling by 15%, according to official statistics, the worst performance since 1994. The collapse was attributed to the global collapse in demand for steel, one of Ukraine’s biggest exports.
Now that the former Soviet republic has agreed to a second rescue package from the International Monetary Fund, things are beginning to look up. The country's GDP rebounded strongly in the first half of 2010, growing 6%.
With the IMF deal in the bag, bond investors are looking more favourably on buying Ukrainian private and sovereign debt. As a recent post on the Financial Times’s beyondbrics blog put it:
International debt markets, virtually closed since Ukraine plunged into recession in 2008-9 and the last IMF agreement was suspended, have opened up a little to the recession-battered nation’s oligarchs. Companies controlled by Rinat Akhmetov, Ukraine’s richest man, have raised nearly $2bn through Eurobond placements and syndicated loans. Akhmetov, who is close to president, Viktor Yanukovich, hopes to use the money to expand his dominant position in Ukrainian steel.
However, there is no such thing as a free lunch, and the IMF’s decision to grant its $15.1 billion loan package at the end of the July - which coincided with a $2bn loan from Russia’s VTB bank - came with numerous conditions attached. One is that Ukrainian gas company, NAK Naftogaz Ukrainy, must sort out its finances.
At the height of the crisis, Ukraine was unable to pay its gas bills to Russia. Moscow’s response was to cut off all gas supplies to and through Ukraine. The stoppage was harmful, not least to the country's reputation as a “gas transit nation” that could be relied upon, according to a recent UPI report. Eighty percent of Europe-bound Russian gas travels through Ukraine’s delapidated pipeline system.
The IMF wants Naftogaz to clear its debts to Russia by the end of 2011, which will require higher tariffs at home (something that will be painful for local consumers) and a pricing system that "depoliticizes price setting of public utilities." Meanwhile, the Ukrainian energy ministry intends to raise $6.5bn to pump into redeveloping the country’s gas transit network.
The Kiev government has also pledged to cut the country's deficit to 5.5% of GDP by the end of 2010 to 3.5% of GDP in 2011. The Kiev government intends to achieve this through tax and social security reforms, structural reforms, spending cuts and improved tax collection. John Lipsky, the IMF’s first deputy managing director, said:
"Sustained implementation of these reforms will help Ukraine entrench macroeconomic stability, boost confidence, facilitate access to capital markets, and emerge with more balanced and robust growth."
The IMF loan followed a $10.6bn loan from the New York-based fund at the end of 2008. However this was curtailed in November 2009 after Ukraine’s previous government failed to slash spending as agreed ahead of January’s presidential elections, which caused the budget deficit to soar to 8.8% of GDP.
The second IMF package also has the advantage of reducing the interest on Eurobonds that the Ukrainian government intends to issue. But the country is by no means out of the woods and has similar issues to Britain with its banks, which remain reluctant to lend to Ukrainian business.
Martin Raiser, head of the World Bank office in Kiev, recently told FT beyondbrics:
“The banking sector in Ukraine remains fragile. For Ukraine, the recovery of the banking sector will play a critical role in recovery. Without the flow of credit, investment will remain subdued and this would impact the pace of post-crisis GDP growth."
In a state of the nation speech in June, Ukrainian president Viktor Yanukovych said:
"The key measure of successful reform is a high economy growth rate at a level of 6-7% per year. The crisis showed that the existing export and raw materials model has been exhausted. At the same time it has become a catalyst for new modern reforms.”
Further reading on the economy of Ukraine and other post-Soviet Republics
- Viewpoint: Bruce Misamore, Lessons From Russia
- Corporate Strategies in Central and Eastern Europe (CEE) from 2009 to 2011, by Nenad Pacek
- Ukraine [QFINANCE country profile]
Tags: Central and Eastern Europe , financial crisis , GDP growth , IMF , sovereign debt , Ukraine