Ukraine economy: How bad is the mess and can it be fixed?

Exchange counter in Kiev (file photo Feb 2014) The Ukrainian currency has reached historic lows against this dollar this year

Related Stories

The International Monetary Fund (IMF) has approved a $17.1bn (£10.1bn) bailout for Ukraine to help the country's struggling economy.

The money will be released over two years, with the first instalment of $3.2bn available straight away.

The IMF loan will also unlock further funds worth $15bn from other donors, including the World Bank, EU, Canada and Japan.

Months of turmoil have taken their toll. Interim Prime Minister Arseniy Yatsenyuk warned that the economy would shrink by at least 3% this year - and by as much as 10% without international assistance.

But the price of that help will come in the form of higher energy bills and wage freezes.

So why is the Ukrainian economy in such bad shape? And what is being done to fix it?

line break
What is the state of Ukraine's economy?

In a nutshell: heavily indebted.

Ukraine's new government has said it needs $35bn (£21bn) to pay its bills over the next two years, which the new loans should mostly cover. It owes the Russian gas company Gazprom $1.9bn.

The Ukrainian economy shrank 0.3% in 2013, the IMF estimates. And the months of street protests, when the barricades were up on the streets of the capital, Kiev, will also have had an effect.

Residence of ousted Ukrainian President Viktor Yanukovych (file photo Feb 2014) Ukrainians were stunned by the opulence in which Mr Yanukovych had been living

The new government has also accused ousted President Viktor Yanukovych and his government of stripping billions from state coffers.

The currency, the hryvnia, lost nearly a fifth of its value in February alone. It now stands at 11 to the US dollar, down from eight in January.

The economy is struggling to recover from a recession and has been shaken by capital flight, as worried investors move their money abroad.

Efforts to prop up the hryvnia have also depleted foreign currency reserves.

Ukraine's stormy economy has history

The Ukraine currency blame game

Ukrainian currency hits 10-year low

line break
What difference will international aid make?

A few months ago, a $15bn rescue package from Russia looked likely. But that was before street protests led to the removal of President Viktor Yanukovych, Moscow's man.

Now the IMF and other international donors are stumping up a total of $32.1bn, reducing the risk that Ukraine will default on its debts.

But the loan is dependent on strict economic reforms, including raising taxes and energy prices.

The government has already raised gas prices by 50% in an effort to secure the bailout. It has also agreed to freeze the minimum wage.

And Ukraine has a chequered history with the IMF: it failed to keep to the terms of previous assistance packages in 2008 and 2010.

Woman pays with Ukrainian hryvnia while shopping at the main market in Crimea (file photo March 2014)

What economic help for Ukraine?

line break
What kind of economy does Ukraine have?

Ukraine has a history of corruption and mismanagement that goes back to Soviet times.

Consider this: Ukraine's economy is smaller than it was in 1992, shortly after the collapse of the Soviet Union. At the time, Ukraine and Poland had similar-sized economies, but Poland's economy is now twice as big as Ukraine's.

The IMF estimates that the Ukrainian economy shrank 0.3% last year after barely growing in 2012.

Ukraine has a lot of coal mining, especially around the eastern city of Donetsk, as well as ageing heavy industry including shipbuilding, steel and arms. However, because many industries are so energy-inefficient, they are highly dependent on imports of Russian gas, which have been heavily subsidised.

Rundown farm in southern Ukraine (file photo 2006) Much of Ukraine remains grindingly poor

Farming is also important: Ukraine has more arable land than any other European country and is a major producer of grain and sunflower oil. Wheat prices have risen 20% on world markets, partly because of the fear of instability in Ukraine.

And then there is the shadow economy: everything from cash-in-hand labour to corruption to illegal activities. A 2012 study by two Ukrainian academics reckons the shadow economy is equivalent to 44% of Ukraine's economic output.

In 2013, Ukraine was ranked 144 out of 177 in Transparency International's Corruption Perceptions Index.

Business and politics are deeply intertwined: Ukraine's richest man, Rinat Akhmetov was until recently an MP and a supporter of ex-President Yanukovych. His companies have received an important share of state tenders.

Ukraine's stormy economy has history

UOligarchs are Ukraine's weakest link

line break
What is the new Ukrainian government doing?

Before the latest household gas price rise, consumers paid only a quarter of the cost of imported gas. The price increase was one of the conditions demanded by the IMF, but it was an unpopular measure that President Yanukovych refused to take.

As well as the minimum wage freeze, taxes will go up and 10% of civil servants will be made redundant. There are also plans to cut corruption and red tape.

And the IMF wants the hryvnia to float more freely against the dollar.

But the government faces a dilemma: if its reforms inflict too much pain, protesters could - having removed one government - take to the streets again. Just ask the Egyptians.

Protester on Kiev's Maidan (1 March) Protesters could return to the barricades if they are disappointed by the new government
line break
What effect will the dispute with Russia have?

The dispute with Russia has already cost Ukraine the Crimea region. It also means higher energy prices.

In return for the lease of the naval base at Sevastopol for the Black Sea fleet, Russia agreed to subsidise energy exports to Ukraine.

Now Crimea has been annexed by Russia and the Russian state-controlled producer Gazprom is ending Ukraine's one-third discount.

Gas pipeline valves at a station not far from Kiev (file photo March 2014) Under pressure: Ukraine is to raise gas prices, one of the conditions for a loan package from the IMF

However, the loss of Crimea at least takes it off the books of the government in Kiev, which was paying for about two-thirds of its budget.

The government in Kiev says if Russia goes ahead with trade restrictions, those could lower economic growth by up to 1%.

Meanwhile, thousands of Russian troops have been deployed to the areas near Ukraine's eastern border, raising tensions.

Even if Russia decides not to invade, the prospect of further instability will not do the Ukrainian economy any good.

Worker in Crimean vineyard (March 2014) The 2014 vintage from Crimea's vineyards will be labelled Product of Russia, rather than Product of Ukraine

More on This Story

Related Stories

From other news sites

More Business stories

RSS

BBC Business Live

  1.  
    09:30: UK GDP

    The UK economy grew by 0.7% in the three months to September, in line with City forecasts, official figures show. In the previous three months the economy grew by 0.9%. The first three months of the year were initially estimated to have seen growth of 0.8% but that was recently revised back down to 0.7%.

     
  2.  
    09:21: TSB EARNINGS

    TSB shares are up 1.8% in London to 263.70p. Numis analyst Mike Trippitt says the bank's profit beat his estimates in a note to clients. Impairments were lower than the market thought and costs were better.

     
  3.  
    09:07: SPIRIT PUBS TAKEOVER
    pub

    More analysis on Greene King and C&C's offers for the Spirit pub chain. "The really interesting development, in our view, would be for all three businesses to combine. The result would be a leading pubco and a brewer, cider maker and distributor with a much stronger portfolio of brands," say analysts at City broker Canaccord Genuity this morning. "C&C also own Tennents, the leading Scottish lager. Belhaven (Greene King's Scottish estate) is a leading customer."

     
  4.  
    08:51: BANK OF DAVE Radio 5 live

    Dave Fishwick, the minibus salesman who founded the "Bank of Dave" is on Radio 5 live. What does the banking market need? "What we desperately need out there is challenger banks," he says. What's also needed is "tighter control of the bigger banks to prevent greed and corruption," he adds.

     
  5.  
    08:36: MARKET REPORT

    The fallout from Tesco's results yesterday continues today. The supermarket is the biggest faller on the FTSE 100 Index so far this morning down 2.3% to 167.05p. European markets are down generally. The FTSE 100 is down 0.45% to 6390.17, Germany's Dax is down 0.40% to 9011.29 and France's Cac-40 has fallen 050% to 4136.95.

     
  6.  
    08:23: PEARSON EARNINGS
    penguin

    Pearson's chief executive John Fallon says the firm's £50m cost-cutting programme is on track and "momentum in digital, services and emerging market education is building, which will drive a leaner, more cash generative, faster growing business from 2015."

     
  7.  
    08:06: SPIRIT PUBS TAKEOVER

    Could this be the beginning of a bidding war? The pub chain has said it has rejected a takeover proposal from Irish cider maker C&C Group today. Spirit is already in talks with brewer and pub owner Greene King about its proposed £723m takeover offer. C&C, the maker of Magners and Bulmers, has until 20 November to announce a firm takeover offer.

     
  8.  
    07:51: PEARSON EARNINGS

    Pearson has reported flat underlying revenue for nine months to the end of September and a 1% fall in in what it calls headline growth for the period. It blames the strength of sterling against key emerging market currencies for the fall. Penguin Random House has performed well in the third quarter, it adds without giving detail. It says the integration of its businesses is "progressing well and is on track to deliver benefits in 2015 and beyond".

     
  9.  
    07:38: HIKMA WARNING

    Hikma Pharmaceuticals says it has received a warning letter US Food and Drug Administration after an inspection at its manufacturing plant in Portugal. "In the letter, the agency raised issues related to investigations and environmental monitoring at the facility," said the firm, which is taking the letter "very seriously."

     
  10.  
    07:26: TSB EARNINGS
    The TSB logo

    Impairments - that is, bad loans - fell to £23m from £32.2m, said TSB. Loans rose 7.7% to £22bn compared to a year ago, but fell from a peak of £23bn six months ago. TSB won 9.7% of all new or switched bank accounts, it said, adding £500m of deposits.

     
  11.  
    07:18: PEARSON FINANCE CHIEF STEPS DOWN

    Robin Freestone, chief financial officer of Financial Times and Penguin Random House owner Pearson has announced he is standing down after 10 years with the firm, including eight in his current role. He will probably leave the firm in 2015 after a successor has been found, said the firm.

     
  12.  
    07:08: TSB EARNINGS

    TSB third-quarter profit before tax fell 14% to £33.1m compared with the same time a year ago, after operating expenses rose. But revenue swelled 18% to £199m

     
  13.  
    06:54: EU PAYMENT Radio 5 live

    Sarah Hewin of Standard Chartered on 5 live says the payment has to be made in the next few months. That could mean more borrowing, she says.

     
  14.  
    06:41: EU PAYMENT Radio 5 live
    British Prime Minister David Cameron

    Sarah Hewin of Standard Chartered is explaining why the UK has to pay an extra £1.7bn to the EU on 5 live. "The UK has been doing better since 1997 than we thought and that's resulted in this extra payment. The Netherlands will pay more, while France and Germany get a rebate."

     
  15.  
    06:29: AMAZON RESULTS Radio 5 live

    Paul Kavanagh of wealth manager Killik is talking about Amazon's loss-making results last night. "It begs the question about what is happening here with this strategy. The shares fell 11% in after hours [in the US]." Investors may be growing tired of ever-more sales expansion with little profit to show for it, he tells 5 live.

     
  16.  
    06:20: CHALLENGER BANKS Radio 5 live

    Paul Kavanagh of wealth manager Killik says it's difficult for banks to persuade customers they offer something new. When a challenger bank succeeds, the larger banks often take the best ideas, he says on 5 live.

     
  17.  
    06:12: CHALLENGER BANKS Radio 5 live

    Steve Davies is still on 5 live. He says challenger banks are forcing their larger competitors to think more about the customer and service - think Metro bank opening on Sundays. Competing on rates is more difficult, he says. TSB results coming up later.

     
  18.  
    06:03: CHALLENGER BANKS Radio 5 live

    Steve Davies of accountants PwC is on 5 live talking about so-called challenger banks. Can they challenge the largest high street banks? "They have to be able to offer something a little bit different," he says. "The challenge is around innovation," he says. Customer is key, he adds.

     
  19.  
    06:00: Howard Mustoe Business reporter

    Good morning. Get in touch via email blizlivepage@bbc.co.uk and twitter @BBCBusiness.

     
  20.  
    06:00: Matthew West Business reporter

    Morning folks. It's Friday, we're nearly at the weekend. But before that, TSB kicks off bank earnings season and Shire has financials out as well. There's also some service sector data but the big bit of data is the first estimate of third quarter GDP. We'll bring you it all as it happens as always.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.