Upheaval in Ukraine endangers economic prospects
KYIV – Ukraine’s crisis is endangering the prospect of a desperately needed economic recovery from recession and raising fears of a currency collapse, analysts said.
The struggle between President Viktor Yanukovych and the opposition comes after more than a year of recession during which the economy has remained afloat mainly thanks to a Russian bailout and grain exports.
“There are indications that business activity, investment activity is getting slower because people are quite uncertain on what will come next,” said Dmytro Sologub, an economist at Raiffeisen Bank Aval.
Ukraine came close to bankruptcy in 2013 before Russia stepped in with a controversial $15-billion credit that the opposition says will limit the country’s national sovereignty.
The protests were initially launched after Yanukovych rejected a European Union free trade agreement that had been in preparation for years, angering the many Ukrainians who want closer ties with Europe.
After five quarters of contraction, the government announced that the economy improved at the end of 2013, and Sologub said he was forecasting zero growth for 2014 — an improvement, but hardly the hoped-for upturn.
“The tendency has become positive for the economy in the last months. Our duty is to support this,” Prime Minister Mykola Azarov said earlier this month.
“All this disorder and appeals for chaos worsen the economic situation for our citizens,” he said.
The widening protest movement has brought the center of the capital, Kyiv, to a halt, with many businesses forced to shut and several ministries blockaded.
The movement has also fanned out from Kyiv and is now affecting a majority of regional governments, raising questions about the possibility of normal economic activity.
The agriculture ministry, which has been seized by radicals, said the occupation would have “destructive consequences” for the sector.
But experts say that the immediate effects of this type of demonstrative protest action on the real economy will actually be relatively limited.
Sologub predicted “short-term pain” but added: “The economy can still revive because fundamentally the Ukrainian economy still has long-term potential.”
Business circles are more nervous, however, particularly since the outcome of the standoff is so difficult to call — with predictions ranging wildly from political agreement to bloodbath.
“When my clients call from London to ask me for advice, I have trouble answering them, predicting the outcome,” one European investment banker said, speaking on condition of anonymity.
A fellow American banker said: “At this point, it is not so much about economics but about politics.”
In the short-term, the crisis has already had a disturbing effect on the currency, the hryvnia. In just a few days of deadly clashes in Kyiv, the dollar has risen to 8.5 hryvnias from 8.3 hryvnias — a fall of over 3 percent for Ukrainian money.
Depreciation in itself would not necessarily be bad news, as it could actually help stimulate exports.
But the drop was surprising since the central bank has been intervening massively on the market, showing it has decided to “loosen its grip,” said Capital Economics, a London-based research group.
“With the devaluation coming against the backdrop of violent political protests and thin foreign exchange reserve coverage, the biggest threat is that the devaluation spirals out of control,” it said.
What households will do is a concern as Ukrainians tend to convert their savings into dollars or euros in a crisis situation, particularly when they notice any major shifts in the exchange rates.
Demand for the two currencies is currently double what it would normally be and more falls could increase this trend, creating a vicious circle.
The other unknown for the economy will be Russia’s attitude should the pro-Russian Yanukovych make major concessions or even be forced to resign.
Moscow has so far sent only $3.0 billion of the $15 billion it has promised and major change could hinder the deal, plunging the economy in difficulties once more.