In an article which I wrote about Ukraine on 13th December 2017 and in which I spoke of Ukraine’s continuing downward spiral I speculated that the situation might be even worse than it appeared since conditions in Ukraine meant that Ukraine’s already dismal statistics could no longer be relied upon.
This is of course always assuming that the statistics are being collected and collated properly, which in countries such as Russia was in the 1990s and such as Ukraine is now they never are.
That Ukraine’s statistics are not reliable has in fact been confirmed by studies of its population statistics, which show massive distortions intended to conceal how bad the country’s demographic situation has become. There is no reason to suppose that the same distortions do not affect the economic data.
This speculation has now been given weight by an article carried by the official Russian news agency TASS, which all but says that Ukraine’s already terrible inflation statistics are unreliable and are being manipulated
The year 2017 saw two basic tendencies in Ukraine, namely an economic slowdown (to two percent from 2.3% in 2016) and growing inflation. Thus, inflation stood at 14.4%, whereas the state budget had a figure of 8.1%
However, actual inflation, according to economics expert Viktor Skrashevsky, was likely to be still higher. “Most likely, it was 17-18%,” he said, adding that official statistics underreported inflation rates “by means of manipulating calculation methods” as they had been updated exactly in 2017.
According to Skrashevsky, the government is deliberately deceiving people by saying that living standards will be raised in 2018 as the state budget for 2018 provides for no indexation of pension allowances while price growth seems to be inevitable. “Social standards are showing no upward tendencies while inflation is skyrocketing. The government is not taking proper measures,” he added.
Another gap between the government’s statements and reality is situation with the living wage, said Yuri Gavrilechko, an expert from the Public Security Foundation. Whereas nominal living wage from January 1 is 3,723 hryvnias (132 US dollars under the current exchange rate), minus taxes people will actually have not more than 3,000 hryvnias (106.4 US dollars). “Inflation will be some 18%, however it is not ruled out that the government may underreport these figures through manipulation,” he said.
A year ago, I expressed my hope that “2017 should be the year when Ukraine’s economy takes off.” It should have been, but it was not. In the last quarter of 2016, Ukraine’s GDP grew by 4.8 percent. Alas, in each of the ensuing four quarters, the growth rate declined and GDP grew by only 2 percent in 2017, slightly less than the cautious official projections. Ukraine is actually growing more slowly than the EU economy, and certainly slower than the global economy. Therefore, it is difficult to be optimistic about Ukraine’s economic growth in 2018.After a combined GDP fall of 17 percent in 2014-15, which was caused by Russian aggression, a swift recovery to 6-7 percent growth should have been natural. Instead, Ukraine is competing with Moldova for the title of Europe’s poorest country. In 2007, Ukraine’s GDP per capita in current US dollars was 160 percent larger than Moldova’s. Now it is only 8 percent larger according to IMF statistics, and Moldova is growing by 4 percent a year.
The worst part is that Ukraine’s economic shortcomings in 2017 were preventable. The two dominant factors that aggravated Ukraine’s economic performance in 2017 were the trade blockade and botched judicial reform. Last February, leading politicians in Samopomich (Self-Reliance) instigated a blockade against trade with the occupied territories in the Donbas, which disrupted heavy industry leading to stagnation of industrial production. This act alone probably cost Ukraine 2 percent of its GDP in the first half of the year.
At the same time, exports, investment, and consumption rose nicely, but then gross investment slumped from a healthy ratio of 24 percent of GDP in the second quarter to a miserable 16 percent of GDP in the third quarter. Domestic and foreign investors lost their rising confidence in Ukraine. Investors began to realize that the complex judicial reform that was underway would not cleanse the judicial system and thus reliable property rights would not materialize.
These tendencies only got worse later in the year. Businessmen often complained that the Prosecutor General’s Office and the Security Service of Ukraine (SBU) engage in aggressive corporate raiding. The only Ukrainian institution that really fights corruption, the National Anticorruption Bureau (NABU), came under heavy attack from the ruling coalition in parliament and the Prosecutor General’s Office for that very reason, further undermining the credibility of the rule of law in Ukraine.
Far right groups and people who the Ukrainian and Western media euphemistically call “activists” have initiated a blockade of coal imports from the Donbass, claiming that such imports are “treasonous”. Since the Ukrainian energy system depends heavily on Donbass coal the result is to cause an energy emergency in Ukraine, risking another downward spiral in Ukraine’s economy. The government however appears too weak to do anything about it.
Gryzlov’s reference to “the Ukrainian authorities destroying their own banking system” refers to action Ukraine is now contemplating against Russian banksoperating on Ukrainian territory. This follows protests by Ukrainian ultra right radicals who since 13th March 2017 have blocking access to the central office in Kiev of the local branch of Sberbank, Russia’s biggest bank.
Gryzlov’s claim that the action Ukraine is contemplating against Russian banks operating in Ukraine would destroy Ukraine’s banking system may be overstated. Russian banks account for roughly 10% of Ukraine’s banking sector, supposedly holding $425 million in private customer deposits and a further $276 million in deposits held on behalf of business customers. Though these are large sums, they do not look large enough to cripple the Ukrainian economy as a whole, even if the money in the deposits were to disappear along with the banks, which of course is unlikely.
Having said this, launching an assault on Russian banks just 3 months after Ukraine nationalised PrivatBank, its own largely bank, hardly looks like a good idea, and at a time of economic crisis it is certainly not a move best calculated to inspire confidence in Ukraine’s banking system even if talk of it triggering a cascade effect may be overstated.
Given that Russia remains the biggest investor in Ukraine’s economy it is completely understandable why action against Russian banks would have had a chilling effect on investment.
That after all is what was predicted, so it should not be surprising that it happened.
Aslund does claim some economic successes for Ukraine
These negative factors overshadowed the positive developments. Ukraine’s macroeconomic performance has been stellar. Finance Minister Oleksandr Danyliuk has kept the budget deficit below 3 percent of GDP. The National Bank’s leadership has nurtured the international gold and currency reserves that have increased to $18 billion, corresponding to four months of imports. Naftogaz won its gigantic arbitration case against Gazprom in Stockholm and made a substantial profit. The parliament adopted Acting Health Care Minister Ulana Suprun’s impressive health care reform.
Most of this however is simply wrong.
The budget deficit may in reality be greater than 3% of GDP if GDP in reality is smaller than is being reported (see above).
The $18 billion of foreign currency reserves is less than the $20 billion Ukraine must pay to its creditors between 2017 and 2020, and with reserves only sufficient to cover four months imports and with Ukraine’s trade deficit widening the margin of safety is dangerously small.
To the $20 billion Ukraine must pay its creditors between 2017 and 2020 must now be added the $3 billion the High Court has recently ordered Ukraine to pay to Russia and the $2 billion the Stockholm Arbitration Tribunal has ordered Ukraine’s Naftogaz to pay to Gazprom.
As to Naftogaz supposedly “winning” the case against Gazprom in the Stockholm Arbitration Tribunal, Aslund’s extreme antipathy to President Putin, Gazprom and to Russia blinds him to the reality that it was Ukraine which lost the case (see my discussion of the Stockholm Arbitration Court’s award and this discussion of the award by Gazprom’s Vice President Alexander Medvedev and by Paul Goncharoff on RT).
Even the sum of $18 billion Ukraine has managed to put away in its reserves is less impressive than it looks.
The reserves have been boosted this year by a payment of $1 billion from the IMF, and a further $3 billion Ukraine borrowed in the international money markets at very high interest.
However the $1 billion payment from the IMF was supposed to be just one tranche out of $4 billion which the IMF was supposed to give to Ukraine over the course of the year.
Here is what Anders Aslund has to say about why the extra $3 billion was not paid
Thanks to its improved macroeconomic situation, Ukraine’s government sold $3 billion of Eurobonds in September. Unfortunately, this sign of economic health tipped the political balance against reform. The International Monetary Fund (IMF) was supposed to give Ukraine credits of $4 billion in 2017. But since the government did not fulfill the IMF conditions, the country received only $1 billion, while it had to pay back $1.3 billion. The European Union canceled its last tranche of €600 million after Ukraine failed to fulfill four conditions.
At present, it looks doubtful whether either of these institutions will provide Ukraine with any funding in 2018, as their compassion has been replaced with distrust. The IMF is currently demanding five prior actions for further funding, namely the establishment of an independent anticorruption court, the legalization of private sales of agricultural land, the adoption of a privatization law, an improved pension reform, and adjustment of gas prices to market prices. The focal demand of all international creditors is an independent anticorruption court, since the court system has proved incapable of sentencing corrupt senior officials.
In reality the IMF almost certainly refused to provide Ukraine with the additional $3 billion not because Ukraine failed to perform its ‘reform’ obligations but because of the chilling effect of the High Court Judgment in London.
That threatens to declare Ukraine in a state of formal default, placing institutions like the IMF and the European Commission in unknown and potentially highly dangerous legal territory if they continue lending to Ukraine despite it. I have discussed this previously at length for example here.
Since admitting this would be politically highly embarrassing given how much the IMF and the European Commission have loaned to Ukraine already, the IMF and the European Commission are hiding behind the fiction that it is Ukraine’s supposed failure to carry out its ‘reform’ programme which is causing them to stop lending.
The years 2016 and 2017 ought to have been economically favourable for Ukraine.
The weather was good, allowing for good harvests, the worst of the fighting in the Donbass was over, the country had restructured its debts and was obtaining support from the IMF and the European Union, and – most important of all – the oil price had more than halved, drastically reducing the country’s import bill and taking pressure off its budget.
Anders Aslund was not completely misguided when he predicted on 3rd January 2017 that 2017 would be Ukraine’s breakthrough year.
In truth 2016 and 2017 were for Ukraine as good as it is ever likely to get.
The favourable conditions of those years are now ending.
The situation in the Donbass is unresolved, the weight of debt repayment is once again increasing, and $5 billion of payments to Russia will shortly fall due. Meanwhile IMF and EU lending has stopped. Most serious of all, the oil price is rising again, and has now reached $70 a barrel.
As the TASS article I quoted at the beginning of this article says, Ukraine’s already very high inflation rate is likely to increase still further in 2018, putting even greater pressure on living standards and on the country’s economy and budget.
Even Anders Aslund is no longer optimistic about the future.
For once Anders Aslund puts his finger on the problem: Ukraine’s hopelessly dysfunctional political system, which makes rational decision making impossible
Sadly, the ruling coalition does not seem to be interested in a real independent anticorruption court or electoral reform even if legislation is under way. Absurdly, Ukraine’s politicians seem to be absorbed by the presidential election scheduled for May 2019. Instead, they should focus on securing real property rights so that Ukraine can boost its investment ratio to 25-30 percent of GDP and grow by 6-8 percent a year.
To which all I can say is that given Ukraine’s realities it is baffling Aslund ever expected otherwise.