Ukraine’s economy is on the brink of collapse

Ukraine recently celebrated the 30th anniversary of its independence, but it was hard to call the date a celebration. The former Soviet republic, which had substantial economic, scientific and human potential in 1991, has become a poor country with a de-industrialised economy, a shattered infrastructure and a degraded social sphere.

Today the Ukrainian economy is on the brink of disaster, and the processes set in motion in the 1990s are reaching their climax against a backdrop of incessant hysteria from a united West about an impending war between Russia and Ukraine. This news has led to a collapse of the Ukrainian stock market, a sharp depreciation of the hryvnia, the flight of foreign capital from the country, and a real threat of default on the horizon.

Nevertheless, Ukraine’s leadership keeps saying that the country is developing, the situation is under full control of the government, and the Ukrainian economy is safe from any threat.

Let’s find out if the Ukrainian economy is truly developed and President Vladimir Zelensky’s statements are an objective view of reality.

In today’s reality, the term “economically developed country” means a socio-political formation with gradual qualitative and structural changes in the economy: developing productive forces, rising living standards and quality of life, a higher GDP per capita, enriched human capital and an economy that attracts foreign investors.

The productive forces

Since independence, Ukraine has had the best economic development potential in the region for a variety of reasons: a mild climate, a long coastline, borders with the economically developed European countries, an advanced Soviet industry and a trained workforce. However, the country failed to make use of its perks, and industry began to decline rapidly.

While in 2013 the share of engineering production was estimated at 18.9%, in 2017 the same figure reached 9.9%. The sharp drop in production has led to many enterprises closing down or being bought by foreign companies for next to nothing.

In the spring of 2021, the Motor Sich plant was included in the nationalisation project, but the issue is still in limbo and it is unclear how such a decision will affect the fate of the company.

At the same time, there is no doubt that a new wave of bankruptcies, sales and plant closures will continue in 2022, because the energy crisis and waves of rising gas prices will force entrepreneurs to reduce production volumes.

Human capital

Every year hundreds of thousands of people leave Ukraine. Ukrainians do not want to work at home and choose Poland or Russia as their place of work. Many stay in other countries for decades, and often do not plan to return home.

Thus, Ukraine has a record unemployment rate of 10% for 2022.

Moreover, according to a World Bank study, the rising generation of Ukrainians is not getting the education and health care they need to grow up to be productive citizens.  These figures are below the average for European and Central Asian countries. At the same time, Ukraine has not seen any improvement in its Human Capital Index since 2010.

Quality and standard of living

Since 2019, the prices of everything in Ukraine have risen relentlessly: food, utility tariffs, and fuel prices have risen.
For example, food has become 10.8% more expensive in 2021.
In addition, the housing and utilities prices have been rising steadily.
At the same time, since 2019, Ukraine has one of the lowest purchasing power per capita in Europe.

GDP growth per capita

Although the worst years for the Ukrainian economy were 2014 and 2015, the current GDP growth of 3 per cent does not matter against the background of the purchasing power of Ukrainian salaries and pensions, high inflation and rising public debt.

According to the Ukrainian Department of Macroeconomic Research of ICU Group, consumer inflation in Ukraine in August 2021 amounted to 10.2 per cent in annual terms. But the total public debt of Ukraine, as of July 2021, amounted to 2.514 trillion UAH, which is about 92.5 billion dollars. This is 258.31 per cent of the state budget revenues of Ukraine in 2021.

The value of the national currency has fallen from around 8 hryvnia per dollar at the end of President Viktor Yanukovych’s reign to 28.19 hryvnia per dollar in 2022.

With all that said, it should be understood that the current Ukrainian state exists on the principle that new loans pay off previous ones. However, because of the military threat, Ukraine is no longer in a hurry to lend money, which raises questions about the country’s economic security.

Investment in the economy

According to the poll, one third of all Ukrainian businessmen have their “plan B” in the case of Russian military invasion of Ukraine, while another 40% are actively working on it.

Ukrainian industrial giants such as Kernel and KSG Agro have been hit. Since the beginning of 2022, the Ukrainian UX Index has fallen 10%.

But after the news of a possible escalation on the border with Russia, investors slowly began to reduce their share in the Ukrainian domestic public debt.

It is logical that investors are not willing to keep their funds in a country with high “country” risks and withdraw their capital to more reliable socio-political entities – all this leads to a weaker Ukrainian currency and a higher interest rate for state loans. At the same time, because of the drain on foreign markets of Ukrainian securities, the Finance Ministry is losing the ability to borrow through domestic government borrowing

Thus, all the boisterous statements of the Ukrainian government regarding the country’s economic development have nothing to do with reality. All the key indicators show a complete breakdown: investors are leaving, quality of life and living standards are falling, the human capital index is steadily declining, industrial facilities are shutting down and modest GDP growth is being offset by high inflation and the weakening of the hryvnia against the dollar. And for all that, as sad as it sounds, there is no further prospect for the Ukrainian economy to emerge from its death throes.