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Ukraine Economy Battered by Political Turmoil


FILE - A man exchanges money at a currency exchange office in Kyiv April 10, 2014.
FILE - A man exchanges money at a currency exchange office in Kyiv April 10, 2014.
Squeezed by the current political unrest, Ukraine’s economy is deteriorating rapidly and Ukrainians are bracing for more hardship as the country’s new leaders fear a backlash over the introduction of austerity measures.

The economy was flailing even before the February ouster of president Viktor Yanukovych.

In the coming weeks, the removal of generous energy subsidies, tax hikes and severe cutbacks in government spending will start biting. Some 24,000 state workers and 80,000 police officers could lose their jobs, analysts say.

Partly to meet conditions imposed by the International Monetary Fund in exchange for an $18 billion emergency loan, the country’s post-Yanukovych leaders have had little option but to start introducing austerity measures. It’s their bid to haul Ukraine back from the “edge of economic and financial bankruptcy,” according to Ukraine’s prime minister, Arseniy Yatsenyuk.

He has urged Ukrainians to be patient, arguing that the scale of the mismanagement of the economy under Yanukovych and the widespread corruption of the ousted president and his circle are to blame for the country’s plight.

Massive theft charges

Ukrainian officials say more than $20 billion of gold reserves may have been embezzled during Yanukovych’s rule, with more than $37 billion in loans disappeared.

In the past three years, more than $70 billion was shifted to offshore accounts from Ukraine’s financial system, they say.

The country needs cash so it can recover as it labors with debts of $75 billion.

“The economic and political challenges that Ukraine faces are enormous,” Lubomir Mitov, chief economist for emerging Europe at the Institute of International Finance, told reporters recently.

The country’s currency – the hryvnia - has lost more than a third of its value against the dollar since last November, when anti-government protests in Ukraine began, and has been deemed the world’s worst performing currency so far this year. Ukraine’s central bank was forced this month to hike interest rates from 6.5 to 9.5 percent, adding to the economic pain.

Analysts say the IMF deal and loan packages from the U.S. and the European Union will bring in another $9 billion.

More aid needed

But even such an additional infusion may not be sufficient to prop up Ukraine, with analysts arguing that more assistance might be needed to avert economic collapse.

Nick Piazza, chief executive of Kyiv-based investment firm SP Advisors, told the Financial Times this week that despite the austerity measures already taken “the country’s financial plan is still not realistic and needs further revision, including cuts in expenditures, till the end of the year.

The danger is that Ukrainians won’t have patience with the economic hardship they are being asked to endure, analysts say.

Anger over the parlous state of the economy fanned the flames of the uprising against Yanukovych.

And pro-Russian separatist sentiments in the east of the country are being fueled now by the economic distress with locals claiming that the Donbas region, Ukraine’s industrial powerhouse, is enduring an unfair share of the hardship.

Mikhail, an unemployed 27-year-old father of a small boy, said he doesn’t trust the government in Kyiv to help the east.

“The new government in Kyiv is making everyone poorer and the people of eastern Ukraine can’t live with the politicians from the West anymore - they are out for themselves,” he said, inexplicably linking Ukraine’s new leaders to the ousted Yanukovych regime or referring to the West in general.

Mykhail joined the pro-Russian separatists early on and says the east must hold a referendum. “And then we can join Russia like Crimea,” he said.

The political unrest in the east is adding to obstacles on the road to economic recovery.

Economic headwinds

Even before the turmoil in the east erupted, the economy was forecast to shrink by three percent – an optimistic projection. If it contracts more than that, then even with the IMF package Ukraine could struggle to repay debts and could be forced by its biggest creditor, Russia, into technical default on its loans.

With hourly average wages likely to decline by at least 15 percent this year, Ukraine’s minister for economic development, Pavlo Sheremeta, is pushing for an expansion of the tax base which he hopes will make the tax system simple and efficient.

“We need to make it easy and simple for companies to complete their tax returns,” he said. “That way more money will come into government coffers.”

Speaking to reporters in Kyiv last week, the U.S.-educated Sheremeta said his priorities include deregulation, cutting burdensome bureaucracy and tackling corruption. He also hopes to make Ukraine a place where foreigners will want to invest and where they can rely on the rule of law.

He said that Ukraine is being handed a good opportunity by the European Union, which ahead of a formal economic association agreement slated for November, is lifting import barriers for many Ukrainian goods.

“This is a unique opportunity for Ukrainian companies,” he said.
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