Ukraine, economics: Russia's recognises "People's Republics", Feb 2022

What will be the economic fallout for Ukraine?

(Feb 2022, for the EIU)

On February 21st the Russian president, Vladimir Putin, signed a decree recognising the independence of the “People's Republics” in Ukraine’s Donetsk and Luhansk regions. The following day, he ordered regular Russia troops into these areas, on “peacekeeping duties”.

Even before Russia’s latest move, heightened geo-political tensions were costing Ukraine US$4bn-5bn per month, according to the estimates of officials from the presidential administration, reported in Ekonomichna Pravda, a Ukrainian business news outlet. They cite the dampening effect on investment, the impact on tourism and air traffic, as well as of higher inflation and the cost of supporting the exchange rate. To scale this figure, Ukraine’s GDP last year came in just below US$200bn.

Following an earlier rally, the hryvnia had already begun to depreciate again from the middle of February, perhaps in line with the failure of Russia to withdraw its military forces from positions close to the Ukrainian border, at least on the scale it had said. On February 23rd the Ukrainian currency was trading at close to HRN29:US1, down from HRN27.9:US1 mid-month, according to the National Bank of Ukraine (NBU, the central bank).

Otherwise—and short of another large-scale military attack by Russia, the chances of which have risen sharply—the economic effects on Ukraine will be similar to, but perhaps stronger than, those experienced over the past two months. Some of the key channels through which the increased geo-political risk may be felt include:
  • increased uncertainty, undermining business and consumer confidence, deterring investment and household spending;
  • higher than usual capital outflows undercutting the Ukrainian currency, adding to inflationary pressure by pushing up import prices, while depleting reserves;
  • a further rise in energy import costs;
  • a slowdown in the pace of real wage growth, owing to higher inflation, undercutting the recovery in consumer demand; and
  • a reduction in tourism spending.
Although some of the impact of these effects may be offset to some degree by higher than planned public spending linked to war preparations, in combination, in 2022 Ukraine’s GDP growth rate is likely to be lower, its inflation higher, and its fiscal deficit and trade gap wider than would otherwise have been the case. (The net effect on external trade will depend in part on whether the crisis also pushes up global prices for key Ukrainian export goods, such as grain and iron ore, so offsetting the impact of higher energy costs).

At the same time, the rising threat to Ukraine’s financial stability is likely to elicit further offers of external financing, alongside existing offers of bilateral and multilateral assistance. For example, on February 23rd, Liz Truss, the UK’s foreign secretary, announced that the UK government would offer Ukraine US$500m in loan guarantees, following in the steps of the US and Canada [link to previous article]. One the one hand, the announcement by the German Chancellor, Olaf Sholz, in response to Russian actions of a halt in certification of Nord Stream 2—the pipeline by which Russia would have been able to supply gas directly to German, bypassing Ukraine—means that Russian gas may keep flowing through the Ukrainian pipeline system, contributing to government revenue through transit fees. On the other hand, over the medium term, Germany, and the EU more widely, are now likely to aim to reduce reliance on Russia energy supplies in order to bolster their energy security.

With geo-political tensions between Russia and Ukraine now at their highest level since early 2015, realising even the not very favourable short-term economic prospects sketched above depends on whether the Russian leadership decides to escalate further. The launch by Russia of another large-scale military attack, leading to the loss of more people and territory, alongside the destruction of infrastructure and productive facilities, would push Ukraine back into deep recession, as in 2014-15.

Comments

Post a Comment

Popular posts from this blog

Ukraine: Authorities commandeer major companies for the war effort, Nov 2022

In early November, under the auspices of martial law, the Ukrainian authorities commandeered privately held stakes in five prominent companies, handing responsibility for wartime management of the businesses to the Ministry of Defence. Of the five, significant shares in Ukrnafta (the country’s largest oil-producer) and in Ukrtatnafta (oil refining) were held by Ihor Kolomoyskyi, who heads the Private Group. For Zaporizhzhia’s Motor Sich, which makes aircraft engines, Vyacheslav Bohuslayev was the main shareholder. The vehicle producer, AvtoKrAz, was linked to Kostyantyn Zhevaho of the Finance and Credit group, while Zaporizhtransformator, which makes parts for electricity plants, was owned by Kostyantyn Hrihorishin. All of these figures may be described as “oligarchs”—that is, business leaders who, over a lengthy period, have been able to use their wealth and business networks to tilt political and economic rules and outcomes in their favour. Oleksiy Danilov, the secretary of Ukraine’s
Read more

Dr David Dalton: Course syllabus proposal: Political economy of the Ukrainian oligarchy

The course I propose provides an overview of the modern Ukrainian oligarchy as the country’s dominant post-communist political economy institution. Starting from an outline of how the institution was formed from a developing relation between political elites and regional business networks in the 1990s, students will examine what the oligarchy is, how it operates, and how it has managed to reproduce itself across crises, despite the country’s perennially poor economic performance. The course is comprised of 3 lectures and seminars which introduce political economy and a subject, focusing on a comparison between neo-classical and institutional economics. It is followed by 7 lectures/ seminars on key empirical themes concerning the modern Ukrainian oligarchy, based on a book-length monograph of my PhD dissertation, The Ukrainian Oligarchy After the Euromaidan , as well as key readings on the political economy of modern Ukraine on which it draws. It will, however, include more of an extern
Read more

Ukraine: NBU governor resigns amid scandal, Oct 2022

On October 4th, Kyrylo Shevchenko, the governor of the National Bank of Ukraine (NBU, the central bank), announced his resignation, which was formalised by the finance committee of the Verkhovna Rada (parliament) shortly after. Mr Shevchenko has been in the post since July 2020. Volodymyr Zelenskyi, the Ukrainian president, proposed Andriy Pishnyi, another career banker, to replace him, and this was confirmed by the Rada on October 7th. The consolidation and strengthening of the banking system in 2014-16 under the leadership of Valeriya Hontareva was one of the main policy achievements of the immediate post-Euromaidan era. Since then, however, as in many other areas of reform, there has been some back-tracking, with both Hontareva and her successor, Yakiv Smoliy, subjected to political pressure by vested business-political interests, raising concerns about the bank’s independence. In his resignation statement, Mr Shevchenko, 49, said that he was stepping down as NBU governor owing
Read more