UPDATE 2-Ukraine economy shrinks faster as conflict takes its toll


(Adds more detail, analysts)

By Natalia Zinets and Gabriela Baczynska

KYIV, July 30 (Reuters) – Ukraine’s economic decline has
accelerated as fighting between the army and pro-Russian
separatists in the east took a heavy toll on industry and other
economic activity in the last three months.

The national statistics office said on Wednesday the economy
contracted by 4.7 percent in the second quarter compared with
the same period last year and shrank by 2.3 percent in the three
months from April, when the separatist rebellion began, to June.

That followed a 1.1 percent fall in gross domestic product
in the first three months of the year and reflected the impact
of the conflict on industry in two eastern regions that usually
contribute almost 16 percent of Ukraine’s GDP.

“The main reason (for the drop) is that we have military
activity in which people get killed, are displaced and leave
their homes,” said Oleksandr Valchishen of InvestCapital
Ukraine. “We’re in a state of a shock.”

Ukraine’s economy went into recession in the second half of
2012 and there was no growth in 2013.

Kyiv initially expected a 3 percent contraction in the whole
of 2014 but the conflict has put additional strains on the state
budget and deepened Ukraine’s economic turmoil.

Timothy Ash, head emerging markets analyst at Standard Bank
in London, said the data “suggested a much sharper hit to
economic activity” from the fighting in the Donbass coal mining
region of east Ukraine.

“This … likely takes H1 real GDP down by 3 percent, which
was the government’s earlier full-year assumption. Since then
the government/IMF have been busily revising down growth
assumptions for the year as the conflict in the Donbass has
panned out,” he said.

INTERNATIONAL AID

The International Monetary Fund now sees Ukraine’s GDP
falling by 6.5 percent this year despite the lender’s $17
billion bailout, of which the first tranche of $3.2 billion has
already been disbursed.

The funding was agreed after Ukraine ousted a president
sympathetic to Russia, which responded by annexing the Crimea
peninsula and, according to the West, supporting the rebellion
in the mainly Russian-speaking east. Moscow denies arming the
rebels.

The IMF deal effectively replaced a Russian bailout deal
that Moscow halted after Ukraine’s former, Russia-friendly
president Viktor Yanukovich was ousted in February.

“The deterioration will continue in the coming quarters,
especially in the third quarter,” said Oleksandr Pecherystyn of
Credit Agricole in Kyiv. “The same negative factors will have an
effect in the coming quarters.”

He also said a decline in the value of the hryvnia national
unit had also had an impact on the wider economy.

The economy may also take a hit from Western sanctions being
imposed on Russia, which remains Kyiv’s largest single foreign
trade partner, even though its goods exports to Russia have
fallen from about a quarter of all exports before the crisis to
less than 20 percent.

Ukraine’s parliament is due to consider amendments to the
budget requested by Prime Minister Arseny Yatseniuk which the
government says are needed to fund the army fighting in the
east, among others.

It has urged the IMF to take into account the extra spending
from the strained budget that is going on the military campaign.

Yatseniuk, who tendered his resignation in protest last week
after lawmakers rejected the laws at the first attempt, said
they were also needed to protect deals with international
lenders including the IMF, and that Ukraine would default
without them.

(Editing by Timothy Heritage and Hugh Lawson)