Ukrainian Economy Starts to Buckle Behind Cloak of Calm in Kyiv
(Bloomberg) — Ukrainians are seeing signs the economy is
cracking under the weight of war and the risk of default.
While restaurants and cafes are bustling and shelves are
full in Kyiv, a city of 3 million, a recession stretching into a
second year is igniting angst about the return of the disarray
unleashed by the Soviet Union’s collapse in 1991. Especially
outside the capital, that era of food shortages, hyperinflation
and mass unemployment doesn’t seem so far away.
“My business is about to close and there are many more
like it,” said Valentyna Lozova, a 65-year-old accountant in
Kyiv. “Salaries aren’t rising, inflation is galloping and the
hryvnia’s in freefall. I’m afraid of the future.”
It’s becoming harder for Ukrainians, mindful of the
thousands who’ve died in a 11-month insurgency near the nation’s
border with Russia, to put a brave face on their economic woes.
With much of the country’s industrial base in ruins and a
looming debt restructuring, the effect may be felt for years.
The economy is set to plunge 12 percent in 2014-15 and the
inflation rate jumped to 28.5 percent in January, the world’s
second-highest behind Venezuela.
As the economy deteriorated, the hryvnia has sunk 70
percent in the past year, the most in the world, sparking panic
in some towns.
“I see people every day in supermarkets buying sacks of
flour and cereals as prices grow,” said Iryna Lebiga, a 31-year-old mother of three who’s struggling to find a buyer for
her unprofitable sheep farm in Poltava, a 350-kilometer (220-mile) drive east of Kyiv. “People don’t have money. Someone
approached us last year but my husband thought he offered too
little. Now, nobody offers even half of that.”
Social Discontent
Even in Kyiv, some people were spooked into stocking up on
staples after the central bank banned foreign-currency trading
for one day last week and the hryvnia’s street price plunged.
The Silpo supermarket chain rearranged delivery to its outlets
to keep up with growing demand, its press office said in an e-mail.
While the recession isn’t yet as deep as the last one in
2009, this contraction is longer-lasting and Ukraine entered it
after two years of almost zero-growth. The scale of the malaise
risks triggering disquiet among some Ukrainians who helped
unseat their Russian-backed leader last year with the hope of
rebuilding the nation, according to Citibank Inc. in Moscow.
“There’s an increasing danger we see a significant
accumulation of social dissatisfaction,” Citibank economist
Ivan Tchakarov said by e-mail. “Economic life becomes ever
harder and some of the promises of the street revolution may be
perceived by the public as being unfulfilled.”
The hardship spans Ukraine, from the eastern conflict zone
near Russia to the western regions next to the European Union.
Panic Buying
Andriy Zalyeskyi, a 28-year-old taxi driver from the city
of Ivano-Frankivsk, about 200 kilometers (125 miles) from the
Polish border, plans to seek employment abroad as cab customers
dry up and his income shrivels. While one in three families have
a relative who works in countries such as Italy, Spain and
Portugal, people are nevertheless feeling the strain, he said.
“I went to the hypermarket yesterday and I’ve never seen
anything like it — the car park was totally full,” Zalyeskyi
said. “People are buying things like canned food, flour, sugar,
buckwheat, pasta and toilet paper.”
The devastation is on full display in Donetsk, the combat
zone’s biggest city, where billboards have vanished from
streets, replaced by banners for conscription to the rebel
forces that wield control. Fighting the United Nations estimates
has killed more than 5,600 people has ravaged the city, which
less than three years ago hosted matches including a semi-final
in the Euro 2012, Europe’s premier soccer contest.
Retailers Fled
Banks haven’t operated on Donetsk’s two main streets for
months and wooden boards obscure deserted shop windows as
foreign retailers such as U.K.-based Marks and Spencer Plc and
Inditex SA’s Spanish fashion brand Zara have fled. Store owners
let homeless people in to keep warm as pensioners beg for
medicine nearby.
Yana Ilyina, a translator in Donetsk, says prices have
surged as her salary stood still. She can no longer plan her
family’s budget as costs for products such as bread change too
quickly.
While the official inflation figure is 28.5 percent, annual
price growth may be as quick as 272 percent, with a monthly rate
of 64.5 percent that would be qualified as hyperinflation,
according to estimates based on the hryvnia’s black-market price
by Steve Hanke, a professor of applied economics at Johns
Hopkins University and director of the Troubled Currencies
Project at the Cato Institute.
‘Clothes, Toys’
“We’re trying not to skimp on food but we’ve stopped
buying clothes and toys for our child,” said Ilyina, 35.
“We’re paying for water and gas, but heating isn’t affordable.
The biggest problem is the feeling of uncertainty.”
That sentiment has proved too much for many Ukrainians.
About 600,000 people have fled the country, according to the UN,
headed for new lives in Russia in the east and in nations such
as Poland, Hungary and Romania in the west. Almost 1 million
have been displaced inside Ukraine, the government estimates.
The prospects for the future don’t look rosy. While the
government is racing to obtain emergency cash from a $17.5
billion International Monetary Fund, central bank reserves are
at the lowest in more than a decade and Russia is threatening to
cut energy supplies for the second time since the crisis began.
Officials suggest the economy may post small growth in 2016.
Back in Kyiv, those familiar with the city can spot
something is awry. The traffic jams that have dogged commuters
for years have dissipated in tandem with the spike in fuel
costs, with the hyrvnia’s drop more than offsetting weaker
global crude prices. Hoarding of imported food and drugs began
in some places Wednesday as the hryvnia hit a fresh low.
“It was difficult in the 1990s but we got independence and
we had hope,” said Lozova, the accountant. “Now I’m afraid of
full-scale war and I don’t see any prospects.”
To contact the reporters on this story:
Daryna Krasnolutska in Kyiv at
dkrasnolutsk@bloomberg.net;
Volodymyr Verbyany in Kyiv at
vverbyany1@bloomberg.net
To contact the editors responsible for this story:
Balazs Penz at
bpenz@bloomberg.net
Andrew Langley