Ukraine Economy Watch

Ukraine's 2010 presidential election: another power struggle to follow?

2010-02-17T09:06:00.000+01:00

by Manuel Alvarez-Rivera,

It's official now: Ukraine's former Prime Minister Viktor Yanukovych, the leader of the pro-Russian Party of Regions, was declared elected President by the former Soviet republic's Central Election Commission on Sunday. Yanukovych prevailed over Prime Minister Yulia Tymoshenko by a relatively narrow but nonetheless clear margin of just under three-and-a-half percentage points in a runoff election held last February 7; detailed results are available in Ukrainian at the Commission's website and in English at Presidential and Parliamentary Elections in Ukraine.

As previously noted on Ukraine holds an early parliamentary election, Yanukovych ran for the presidency in 2004, and was initially declared the winner over pro-Western candidate Viktor Yushchenko in a highly irregular runoff election. However, the attempted election fraud triggered massive protests in Kiev, which came to be known as the "Orange Revolution" (after Yushchenko's campaign color); in due course, the runoff election results were invalidated, and in a repeat runoff vote Yushchenko prevailed over Yanukovych.

Nevertheless, the past five years have been characterized by a seemingly endless power struggle between President Yushchenko and his successive prime ministers, most notably among them erstwhile Orange Revolution ally Yulia Tymoshenko (who served as Ukraine's head of government in 2005 and again since 2007) and Yanukovych himself (who held office from 2006 to 2007). Beyond free and fair elections and a free press, little else has been accomplished, and Ukrainian voters have become disenchanted with the Orange Revolution politicians - especially President Yushchenko, who ran for re-election but was eliminated in the first round of voting last January 17, coming in an ignominious fifth place with only 5.5% of the vote. To be certain, Mrs. Tymoshenko did much better than expected in both rounds of voting, but in the end the economic legacy of her government - which presided over a severe 15% contraction of the Ukrainian economy last year, in the wake of the global economic crisis - proved too much to overcome.

Although international election observers have praised the conduct of this year's presidential election, Yulia Tymoshenko stubbornly refuses to recognize Viktor Yanukovych as the legitimately elected president: to the dismay of the Western powers, she insists the election was rigged to the tune of million votes - a figure large enough to overturn the official result - and has challenged the election results in court. In fact, Mrs. Tymoshenko's eponymous political bloc has demanded recounts in several eastern regions, even though an analysis of the runoff vote results shows the election was decided not in the east, but in the west.

Since the attainment of independence in 1991, Ukrainian politics have been characterized by a sharp East-West divide: eastern and southern Ukraine are strongly pro-Russian, while the country's western and central regions are just as staunchly nationalist and pro-West. This was the case as well in the 2010 presidential election, as illustrated by the first round and runoff election maps, courtesy of Serhij Vasylchenko:

In the east and the south, Yanukovych swept with 76.9%, while in western and central Ukraine he polled just 23.8%. However, relative to the 2004 repeat runoff election, Yanukovych's share of the vote in the East rose by only 0.5%, whereas in the West he registered a sizable 8.2% increase. Likewise, Yulia Tymoshenko's 17.8% share of the vote in the eastern and southern regions was just slightly smaller than the 19.2% scored by Viktor Yushchenko five years earlier; in some regions where she is demanding a recount, such as Crimea, she actually had a better result than Yushchenko in the repeat runoff. However, the 70.4% of the vote she polled in western and central Ukraine stood well below the 81.1% won by Yushchenko in 2004.

Moreover, regional differences in voter turnout decline may have also helped Yanukovych, if only slightly. In eastern and southern Ukraine, turnout in the 2010 runoff election fell by 7.2%, to 69.4%, while in the western and central regions turnout declined by nine percentage points, to 69.6% (the overall turnout rate stood at 68.8% because only 10.3% of the expatriate voters - whose votes are tallied separately from those cast in Ukraine proper - bothered to take part in the runoff election).

In addition, a record 4.4% of voters cast ballots against all candidates in the runoff election - twice as many as in the first round, and nearly double the figure in the 2004 repeat runoff; as a result, Viktor Yanukovych will become the first president of Ukraine to win office without an absolute majority. Interestingly, the 2.2% increase between rounds in the number of votes against all candidates correlates strongly with the share of the vote for independent businessman Serhiy Tihipko, who came in third place in the first round; there is no significant correlation with the first round vote for President Yushchenko, who called for a vote against all in the recently-held runoff.

Beyond refusing to concede defeat, Yulia Tymoshenko has made it clear that she has no intention to comply with President-elect Yanukovych's request to submit her resignation as prime minister. While her refusal to step down will trigger a vote of no-confidence in Parliament - which she is expected to lose - Mrs. Tymoshenko will nonetheless remain as caretaker head of government until a parliamentary majority coalition nominates a replacement. No single party commands a majority in Ukraine's unicameral Parliament, the Supreme Council, and negotiations leading to the formation of a new government could take weeks, if not months - assuming a new government can be formed at all without having to call an early parliamentary election. As such, Ukraine - which is in desperate need of political stability to deal with its struggling economy - may be in for yet another protracted power struggle.

Ukraine's Problems Show No Sign Of Abating

2009-10-21T12:57:00.001+02:00

Despite the fact the Ukraine administration is resplendent with confidence that the International Monetary Fund is going to release the next $3.4 billion payment under the country's $16.4 billion lending program with the Fund, things are not so clear. In fact the International Monetary Fund only this week warned Ukraine (25 October) that they might freeze assistance ahead of the forthcoming presidential election if proposals to make populist wage and pension increases move forward.

In a statement issued after talks with Kiev’s officials, the IMF said its decision to go ahead with the next $3.8bn in aid would hang on “assurances that the wage and pension law approved by Ukraine’s parliament, which is at odds with the objectives of the authorities’ programme, will be vetoed”. The statement was a clear and explicit warning to President Viktor Yushchenko, who has not yet clarified whether he will sign or veto the law.

Still the Ukraine authorities are giving the impression that everything in the garden is rosy, or at least this is the impression Economy Minister Bohdan Danylyshyn is attempting to send out to the world.

“The payment will help sustain the economy and, to a certain extent, help cover the budget deficit,” Danylyshyn said last week in an interview at Ukraine’s New York Consulate. “It’s a pretty complicated situation in Ukraine, that’s why we expect a budget deficit this year and next.”

In fact he couldn't have put it better, the situation in Ukraine is pretty complicated, it really is. But behind the scences things don't seem to be anything like as clear as Danylyshyn is suggesting, and there is plenty of evidence of fund frustration with the administration and of a growing determination to tighten the screw somewhat. So is Ukraine assuming that, not being Latvia, they are too big too fail? And if they are doing so, are they right in their assessment, and if they are not, what might be the final outcome here.

Certainly Ukraine, for its part is now completely dependent on the IMF loan program - from which it has so far received $10.6 billion - to keep itself afloat following the impact of the credit crunch on the internal lending and construction boom and the fall in external demand for the raw material exports, and especially steel, on which it has allowed itself to become so dependent.

One thing which strikes the external observer immediately is the differential treatment Ukraine has been receiving when compared with other East European borrowers like Hungary and Latvia, since unlike the latter two the pressure on the administration to make swinging budget cuts has been fairly muted up to now. In fact the country did meet its end of May fiscal target, but since that time the underlying fiscal situation has worsened considerably. The general government deficit was 1.8 percent of GDP during the first five months of 2009, against an agreed program ceiling of 2.4 percent of GDP. However, according to the IMF this positive outcome largely reflects an increase in VAT refund arrears and advanced tax payments by large enterprises (0.5 percent of GDP).

At end-June, the government deficit stood at 3 percent of GDP, while expansionary fiscal measures are increasingly coming under consideration ahead of next years elections. The government has adopted a moratorium on tax audits and considered a tax amnesty, while parliament adopted modifications to the budget code implying additional transfers to local governments (which could exceed 1 percent of GDP in 2010). A draft law including large increases in public wages and pensions (2 percent of GDP in 2009, and 4 percent of GDP in 2010) has even been suggested by the opposition.

Not unsurprisingly an IMF team is now hard at work in Kiev, trying to assess whether Ukraine still meets the agreed terms of the loan prior to a final decision on the next payment.

And again, not everyone is in agreement that things are going as planned. Ukraine is at “serious risk” of veering off track ahead of the coming country review in November, according to a Fitch Ratings statement of October 14.

Fitch argue that Prime Minister Yulia Timoshenko's government has “abandoned” commitments made under the IMF's second review of the loan program, and the clearest evidence of this abandonment is the evident failure to increase prices for natural gas paid by households and utilities despite the massive subsidies the government is finding itself forced to pay.

In fact JuliaTimoshenko reiterated only last week there will be no increase in natural gas rates this year. Yet low gas prices simply add to the country’s budget deficit, which the IMF estimate will finally total 8.6 percent of gross domestic product this year, and that is excluding bank restructuring costs. Fitch themselves forecast a deficit of 8.5 percent of GDP, rising to 11.1 percent once the deficit of Nak Naftogaz Ukrainy is added in.

Danylyshyn for his part is much more optimistic, suggesting the deficit this year may fall to 6 percent, and then shrink to around 3.8 percent in 2010.

Naturally the IMF remain unconvinced by Danylyshyn's forecast, and argue that the outlook for public finances has worsened significantly, and that revised 2009 GDP growth projection implies that, without offsetting measures, the general government deficit is set to increase from 4 to 6.5 percent of GDP in 2009, to which needs to be added an anticipated extra 2.7 percent of GDP for Naftogaz which would send the total public sector deficit (inclusive of Naftogaz’ deficit but still excluding bank restructuring costs) up to 9.2 percent of GDP.

Ukraine’s economy is currently struggling to recover from an extremely severe recession which lead GDP fall by an annual 17.8 percent in the second quarter of this year, following a 20.3 percent decline in Q1. GDP may decline as much as 14 percent over the year as a whole (and grow 2.7 percent next year) according to the October IMF forecast, with everything really depending on the average prices of, and demand for, ferrous metals, which are Ukraine’s major export.

In line with the general outlook for the entire CEE region, anything in the way of vigorous recovery is not expected before the second half of 2010, and even then in many cases the vigour may be quite muted. If Ukraine's economy is to return to growth improvements in competitiveness (following the recent real exchange rate depreciation), a recovery of global steel prices, and increased public and private sector investment in infrastructure and energy projects with a clear external orientation will be the main drivers of the recovery.

Obviously all are agreed that a return of foreign investment to stimulate export activity is the key to recovery, and Danylyshyn expects Ukraine to receive $20 billion in foreign direct investment between next year and 2012 to help it diversify the economy away from exports of raw materials, such as steel and grains, and modernize existing facilities.

But again, at least in the short term, things are not so easy, given that while the current account has adjusted, net capital outflows continue to present an important source of balance of payment pressures.

In the first 8 months of 2009, the current account deficit amounted to USD 1.1 billion, USD 7 billion lower than a year ago. At the same time, external debt roll-over for banks and corporates was 76%, resulting in USD 7.1 billion net outflow over the same period. Additionally, ‘domestic capital outflows’ – flight to foreign cash by residents – drained out USD 5.7 billion. The recent IMF’s SDR quota allocation and the Special Borrowing Arrangement have helped to ease what otherwise would have been a major drop of forex reserves. The marginal weakening of the external accounts over the summer, higher demand for forex from corporates and households, on the back of heightened depreciation expectations have placed pressure on the currency since end-July. The depreciation trend also resulted in the leakage of Hryvnia deposits from the banking sector of around 7% during Q3. And indeed multiple exchange rates have once more reappeared following the return to selective National Bank of Ukraine forex interventions.

A Large Output Gap Remains

The economic contraction may have slowed, but a large output gap continues to exist. Industrial output was in fact up 1.9 percent month-on-month in September, with production resuming its upward trend following a 0.9 percent monthly fall in August. Steel output however continued to decline, raising more doubts about where the recovery is headed.

Industrial output fell 18.4 percent in September year-on-year and was down 28.4 percent between January and September when compared with the same period in 2008. Output in the steel sector fell 7.1 percent month-on-month after falling 0.3 percent in August. Year-on-year, it fell 14.9 percent in September. Steel production between January and September fell 36.9 percent against 39.0 percent in the January-August period and 41.2 percent in January-July.

The Industry Ministry forecast that raw steel production will fall to about 30 million tonnes this year from 37 million in 2008 and 42.8 million in 2007.

Economic activity plunged in the last months of 2008 and has continued to fall since. Real GDP fell 20.3 percent year-on-year in the first quarter of 2009, reflecting the deterioration of the global environment and further exacerbated by Ukraine’s pre-existing vulnerabilities. As in many other countries in the region, the recession was led by a drop in export volumes, followed by a very sharp contraction of domestic demand.

The pace of decline in private consumption was broadly unchanged in the second quarter at 11.6 percent year on year, while fixed investments sank by 57.8 percent. The contribution of net exports to growth became larger as real imports declined even faster (-53.5% y/y) than exports (-32.3% y/y). Output indicators point to stronger performance in Q3. In particular, as we have seen industrial production has started to recover gradually in recent months.

Ukraine's economy is following a typical boom/bust scenario, and following several years of evident overheating characterised by ever more rampant inflation the global crisis final brought the inevitable to pass. The IMF now expect real GDP to decline by 14 percent in 2009, against the 8 percent they expected at the time of their first programme review earlier this year. The downward revision reflects the larger than expected contraction in the first quarter of 2009. Given the pronounced recession in Ukraine’s main trading partners and the likely frail global demand for steel in the coming quarters, the forecast assumes only a very timid recovery in the second half of 2009, followed by a return to GDP growth in 2010, and there are, of course, evident downside risks to this scenario.

Beyond the export and industrial shock output has also been contracting fast in both the construction sector and in retail trade, reflecting the sharp impact of the credit crunch. Price adjusted retail sales were down 22% year on year in September, while construction activity has fallen by over 50% from 2008 levels.

Inflation The Large Fly In The Ointment

One of Ukraine's greatest headaches in recent years - as can be seen in the chart below - has been the high level of domestically produced inflation, and the total incapacity of fiscal and monetary policy to get to grips with this. Price pressures are, however, now easing fast in Ukraine as the output gap has its impact, and headline CPI inflation has now fallen to around 15 percent year-on-year, down from 22.3 percent in January. Inflation is expected to continue to decline, reflecting the massive excess capacity. However, base effects from the second half of 2008 will slow the decline in headline inflation, which the IMF expect to be still at 14 percent by end-2009.

Ukraine’s inflation rate is, however, still the highest in Europe, and even rose 0.8% month on month in September. This latest rise followed a 0.2% mom decrease in August. Annual inflation did however decelerate from 15.3% in August to 15.0% in September. The most significant contributor to this slowdown has been the slow rate of utility price increases, and this is a clear bone of contention with the IMF as the government refuses to change gas prices significantly given the scale of the recession and the looming elections. For the rest of the year, most observers expect inflationary pressures to remain muted, with annual inflation remaining around its current level of 15%.

The producer price index was however up by a monthly 3.6% in September, notably more than the 1.8% monthly increase registered in August, giving the highest monthly increase since July 2008. As a result the annual PPI turned positive again (up 1.6%) following a 3.7% year on year fall in August. So despite all the pressures inflation is proving extraordinarily resilient and continues to present a major problem for economic management.

Monetary Policy Caught in a Trap

All of which causes significant problems for the operation of monetary policy. The central bank realises the issue - and central bank Governor Volodymyr Stelmakh this summer described double figure interest rates as "far too high" (especially for an economy with a 14% annual contraction) - and has now cut its key discount rate twice since June to the current level of 10.25 percent. The bank justified the cuts by stating that price pressures have “eased” since inflation peaked at 31.1 percent last May, but on the other hand it is evident that inflation is still way to high. But the central bank is under continuous pressure from the government who want the central bank to lower rates further to make loans cheaper.

On the other hand, while base money has picked up significantly, largely on account of the government’s conversion of its share of the second IMF disbursement into hryvnia, broad money growth has continued to be weak, reflecting both a strong liquidity preference on the part of banks, and weak credit demand from consumers and companies.

Ukraine's exchange rate has depreciated by about 35 percent in effective terms (allowing for inflation) since early September 2008 and has been stable in recent months, allowing the NBU to scale back interventions since March 2009. More recently, since late June, however, moderate exchange rate pressures have reemerged.

The Ukraine banking system remains under strain, but deposits have stabilized, signaling some return of confidence. Non performing loans have increased since the onset of the crisis, but many banks are now reporting ongoing restructuring of their credit portfolios. After loosing some 20 percent of deposits between October 2008 and April 2009, aggregate deposits have stabilized in recent months, allowing the authorities to lift the ban on the early withdrawal of time deposits. The stabilization at the aggregate level conceals significant differences between banks, with the recently recapitalized state and foreign owned banks generally gaining deposits, while the domestic banks continue to experience significant outflows. Domestic currency lending has been picking up recently but this is almost entirely on account of lending by the state banks while other banks continue to reduce their credit portfolios.

As we can see, lending to households peaked at the end of last year, and continues to fall.

Household exposure to forex lending is significant in Ukraine, in this case the exposure is to dollars.

Closing Current Account Deficit Pressures Domestic Demand

As has been said, there has been a sharp fall in Ukraine exports since the crsisi began - 32.3% year on year in the second quarter. Q2 exports were up slightly from the first quarter, but nonetheless they remained at a very low level.

At the same time Ukraine's current account has continued to adjust, registering a small surplus in April-May. Import volumes declined sharply due to contraction of domestic demand offsetting the decline in exports due to continued weak external demand, especially for steel.

As a result of the drop in imports the goods trade deficit has been steadily falling towards zero.

As we can see in the chart below, a significant part of the current account adjustment has been due to the fact that imports have been falling significantly faster than exports.

The current account has continued to adjust, registering a small surplus in April-May. Import volumes declined sharply due to contraction of domestic demand offsetting the decline in exports due to continued weak external demand, especially for steel. The financial account has shown signs of stabilization, despite a sharp decline in FDI. External debt rollover rates for the first five months of the year held up well (about 70 percent for banks and 100 percent for corporations). In addition, outflows of foreign exchange from the banking system have receded in recent months.

The IMF expect the current account balance to swing into a small surplus in 2009 (0.5 percent of GDP). However the drop in both import and export volumes is expected to be larger than previously expected owing to the weaker domestic and external outlook. Lower FDI is broadly offset by lower net outflows of bonds and loans. The take the view that their program remains adequately financed, but they still see risks. Total financing requirements in 2009 are projected to amount to $41 billion, while total financing sources (excluding Fund resources but including $2.3 billion in prospective official financing) amount to $31 billion, leaving a financing need of about $10 billion, which could be fully met by Fund resources. Risks include lower-than expected official financing, renewed foreign currency cash outflows from the banking system, and reduced FDI inflows and rollover rates. If these risks materialize, the IMF suggest the use of reserves buffers and/or additional policy adjustment would be needed.

Ukraine's Looming Demographic Destiny

Ukraine has a serious demographic problem, raising longer term growth issues, and difficulties for the sustainability of public finance. Ukraine's population has fallen back from 51.5 million in 1989 to the current 46 million level. And, of course, the decline continues.

Behind the fall in Ukraine population lie two factors, very low fertility and the out migration of the younger population in search of better employment opportunities and higher living standards elsewhere. Ukraine's total fertility rate hit a low of 1.083 (according to the US Census Bureau) in 2001, and has subsequently rebounded to around 1.252 in 2008, in any event still well below the critical 2.1 tfr population replacement rate.

The “transition” in transition countries refers, of course, to the political and economic passage of these formerly communist, centrally planned states. But there is an equally profound demographic transition in progress: very low fertility levels and ongoing emigration virtually guarantees that these economies will age more rapidly than any other region. By 2025 more than one Bulgarian in five will be over the age of 65 -- up from just 13 percent in 1990. And while countries in other parts of the world are also aging at a phenomenal pace – think Japan, Korea, Germany and Italy -- no other region faces the challenge of building a modern, highly productive economy even as the portion of the population eligible for retirement explodes.

The dramatic declines in fertility in the teeth of post-1990 uncertainty are frequently interpreted as a temporary reaction to the uncertainties of economic and political transition. Yet, while there was a slight blip up in the prosperous years of the post-2000 boom, these economies seem to be past the point of demographic return: fertility would have to increase by more than one-third just to replace the existing population.

Ukraine suffers from a chronic problem of low fertility. A strong uptick in births had been noted in 2008 (see chart above), but the impact of the crisis is now evident, and the rate of increase in live births has now fallen back sharply.
Add a caption

Since the proximate cause of the crisis was to be found in global financial turmoil, it was perhaps only natural that the financial sectors of the countries most dependent on the international flow of funds would be hit first and hardest. In the autumn of 2008, as financial difficulties in the advanced economies led to a decline in global liquidity and a flight from risk, investors begin to differentiate among emerging markets. Ukraine’s high external debt and inflation levels led to a stampede for the exits in mid-October.

Ukraine's biggest single problem is still the persistent high levels of inflation which the economy produces. Given the application of coherent monetary policy the inflation problem could steadily work its way out of the system, but this is a big "if" given the known political risk factors. Inflation is currently projected by the IMF to hit single digits in 2010 and to remain in the 5–7 percent range thereafter.

The current account balance is now likely to remain at financeable levels, and the financial account deficit should narrow as capital inflows recover. Any recovery would be delayed, however, if there were an unexpected further decline in steel prices or another round of stress in global financial markets. On the other hand, a faster global recovery and a return of political stability after the January election could result in a more pronounced rebound of the economy. External and public debt remain sustainable in principal but doubts continue going forward especially in the context of financing constraints.

While Ukraine’s low level of public debt - 20 percent of GDP in 2008 - provides room for letting automatic stabilizers cushion the downturn and absorb part of the bank restructuring costs, fiscal sustainability would increasingly become a concern under unchanged policies, especially if the recession turned out more protracted than currently envisaged. Failure to implement the agreed measures in 2010 (pension-, tax-, and gas sector reform) or new expansionary measures could potentially jeopardize public debt sustainability in the longer run, and this is really what is preoccupying the IMF at the present time. The IMF baseline external scenario shows a rapidly declining external debt ratio but further deterioration in global economic and financial conditions, adverse current account developments, further shortfalls in FDI, or exchange rate overshooting would all negatively affect debt dynamics and create significant problems.

Not an easy picture, but then I guess no one ever thought it was.

Facebook Links

2009-06-20T12:28:00.000+02:00

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

Horrid Outlook in Ukraine

2009-05-25T22:13:00.000+02:00

By Claus Vistesen: Copenhagen

Not to beat a dead horse or anything, but it seems that Krugman, via Edward, was right after all. This does indeed seem to be a great depression if there ever was one.

(from Bloomberg)

Ukraine’s economy probably shrank as much as 23 percent in the first quarter of the year as the global financial crisis took its toll on the eastern European nation, President Viktor Yushchenko said. “The economic contraction is expected between 20 percent to 23 percent in the first three months of the year,” said Yushchenko today, according to a statement posted on his Web site. “The pace of the decline is one of the fastest in Europe.”

Yushchenko urged the government to review the state budget for this year, which still assumes the economy will expand 0.4 percent, according to the statement. A global recession is compounding problems in eastern European economies, which are being battered by a lack of credit, weakening currencies and plunging demand for their products. Ukraine was forced to turn to the International Monetary Fund with other emerging-market countries, including Hungary and Latvia, to boost its financial system in November.

Ukraine’s economy shrank 8 percent in the fourth quarter, the first contraction since 1999. The state statistics committee is expected to release gross domestic product figures for the first quarter in late June.

Of course, we need confirmation and I would not be surprised if the number reported by the government turned out to be wrong (in either direction!), but the the initial shot across the bow suggests a veritable collapse.

Ukraine Industry Continues Its Decline In March

2009-04-15T13:20:00.001+02:00

Ukrainian industrial production dropped by more than 30 percent for the third month in a row in March, with output falling an annual 30.4 percent, the eighth consecutive month of year on yeardecline, following a 31.6 percent drop in February.

Steel production fell 43.1 percent in March from the same month a year ago, while machine building was down 53 percent and chemical output dropped 29.8 percent. These three industries form the core of Ukraine’s key exports, which constitute some 56 percent of the country’s gross domestic product.

There were, however, some tentative signs of slight recovery, since month on month, production was up 8.3 percent, following a 5.4 percent increase in February, led by food and chemicals, according to the statistics office. Over the whole fisrt quarter output fell 31.9 percent compared with the same period a year ago.

Ukraine Economy Contracts 8% In Q4 2008

2009-04-06T22:51:00.000+02:00

Ukraine's gross domestic product fell year on year by 8% in the fourth quarter of 2008, following growth at of 6.4% in the third quarter, the State Statistics Committee said on Monday. The statistics committee also published revised data for earlier quarters showing GDP grew by 6.3% in the first quarter, and 6.2% in the second.

According to the latest data, the output in the construction sector fell by 32.4% in the fourth quarter, financial activities by 30.2%, the recycling industry by 23.9%, the extracting industry by 18.7%, trade by 15.6%, the production and distribution of electricity, gas and water by 14.3%, and transport and communications by 3.9%.

In fact the general GDP contraction would have been much worse if it had not been for the good showing of the agricultural sector, which grew by 23.5% due the record harvest.

The Statistics Committee also confirmed a 2.1% increase in real GDP in 2008, compared to 7.9% in 2007. The Ukraine government initially forecast last year's GDP growth at 6.8%, but lowered its forecast to 1.8-2.5% towards the end of the year.

This year, the Ukraine Council of Ministers expects a slowdown in Ukraine economic growth to 0.4%, while economists generally expect a decline of around 5-10%. The government has now stopped providing monthly GDP estimates, so the first detailed GDP statistics we will see for this year will only be released in late May.

Update: March Inflation and Revised World Bank Forecast

Ukraine’s inflation rate, the highest in Europe, fell for a seventh month in March as real wages fell, weakening domestic demand. The annual inflation rate declined to 18.1 percent, from 20.9 percent in the previous month. Month on month, prices rose 1.4 percent, after a 1.5 percent gain in February. Producer prices, often regarded as an early indicator of consumer prices, fell to 12.8 percent in March, the lowest rate of increase since September 2006. Month on month, producer- price growth slowed to 1.1 percent.

The hryvnia has lost about 9 percent against the euro in the past month as the government struggles to maintain its pledge to keep inflation within 9.5 percent this year, compared with 22.3 percent in 2008.

Ukraine’s economy will shrink as much as 9 percent this year, twice as much as previously estimated, according to a revised World Bank forecast citing a deterioration in the global outlook and government delays in addressing the crisis.

“We may lower the forecast further if the external environment worsens or the authorities delay anti-crisis measures,” World Bank economist Ruslan Piontkivskyi said at a press conference in Kiev today.

The WB had previously forecast Ukraine’s gross domestic product will contract 4 percent this year.

12% GDP Contraction Forecast For Ukraine Economy In 2009

2009-03-24T11:18:00.000+01:00

Ihor Burakovsky, the director and board chairman of the Institute for Economic Research and Policy Consulting says that "experts" have forecast a 12% drop in Ukraine's GDP in 2009 and an 18% inflation rate. I'm not sure who the experts in question are, but the number doesn't seem unrealistic at all to me, given the data we are seeing. First some information from the Ukraine Statistics website.

During January-February 2009, indices of industrial products were 67.2% as compared with January-February 2008. This means there was a 32.8% drop in output year on year over the two months. In fact output was up slightly month on month (by 5.4%) in February, in part as a result of the demand for steel exports produced by the sharp Hyrvnia devaluation, and February output was "only" down by 31.6%, following January's 34.1% annual fall, so you could say that things were getting better, but frankly, and at this stage of the game, such finesse is a little but lost on me.

Construction output in January-February 2009 was just 42.7% of the level hit in the same period last year

In the January-February period, cargo shipments were 97.4 mln. tons, that is to say they were just 66.5% of the volume of goods transported during January-February 2008.

In January 2009, Ukraine exports were 2439.6 million dollars while imports were 2041.8 million dollars. This means that exports were down 33.4% while imports were down 56% over January 2008.

In February 2009, the consumer price was up 1.5% over January, up 4.4% so far this year, and up 20.9% over February 2008.

In January 2009 real wages and salaries of employees were down by 19.4% when compared with December 2008. Also total wages in arrears stood at 1525.1 million UAH as 1 of February 2009, up from 1123.5 million UAH on 1 January 2009 (35% increase on the month)

The unemployment rate (using the ILO methodology) for January-September 2008, on average, was 6,5% of economically active working age population. Unfortunately this is the most recent labour force survey data we have. Undoubtedly these numbers have increased significantly over the last 5 months.

In 2008, the Ukraine GDP was up 2.1% when compared with 2007, which means, if the so-called "experts" prediction is anywhere near right (and it doesn't look that unrealistic) the GDP growth chart since 1993 will look something like this, which for a comparatively poor country struggling to catch up is little short of a disaster.

Ukrainian still has not received the second installment of a $16.4 billion loan from the International Monetary Fund although Ukrainian Prime Minister Yulia Timoshenko said last week that "she is confident" it will be agreed to.

One of the sticking points with the IMF had been the projected 2009 budget, but Ukraine’s Parliament last week changed the 2009 state budget law to strengthen the central bank’s independence, meeting one key IMF demand for getting the second installment of the loan (we will remember the Parliament was debating sending the governor to prison for allowing the currency to float, again another one of the key IMF demands). Lawmakers need to pass two more bills to qualify for the $1.9 billion installment of the IMF loan, which originally was expected on Feb. 15, according to Oleksandr Shlapak, the first deputy head of the president’s staff, with the central bone of contention being the 5% budget deficit projected for 2009, and on a lot lower contraction forecast than the current "most realistic case" scenario.

Really looking at all this, what we have here is a country in total monetary, financial, and economic disarray, and this is before we even start to think about the demographic unwinding which lies ahead. No wonder Dominique Strauss Kahn recently warned of the catastrophe which looms before us. I seriously doubt any knows what to do about all this, I certainly don't. Tear my hair out perhaps. But I already have precious little left.

Ukraine Debt Ratings Cut to CCC+ by S&P

2009-02-25T14:02:00.000+01:00

Well in some countries it never rains but it pours, as they say. Following the news that Ukraine GDP contracted at an annual rate of 20% in January, today we learn that S&P have cut Ukraine's long-term foreign currency rating to CCC+, seven levels below investment grade. Ukraine’s rating is now the lowest in Europe and at the same level as Pakistan. S&P left the outlook negative, suggesting there may be more to come.

To give us all some idea of what this means contracts to protect Ukraine’s government bonds against default now cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps today. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide.

The extra yield investors demand to Ukrainian bonds instead of U.S. Treasuries has risen 10-fold in the past year and at about 32 percentage points is the highest of any country with dollar-denominated bonds except Ecuador, which defaulted in December, according to JPMorgan Chase & Co. EMBI+ indexes.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade only two weeks ago and kept the outlook “negative,”. Moody’s said yesterday that there is a good possibility they will cut their Ukraine ratings within three months.

The hryvnia tumbled yesterday, closing at a record low against the dollar, on all the talk about credit downgrades and Eastern Europe's economic problems. The currency dropped 3.4 percent to 9.26 per dollar at 6:10 p.m. in Kiev, below the previous lowest close of 9.10 reached on 18 December last. The hyrvnia has now lost more than 50 percent against the dollar in the past six months.

Ukraine started this crisis with comparatively little state debt, but as the costs of bailouts and recession fighting have mounted the debt has surged upwards. Total state debt increased in November by 33 percent to $22.1 billion from $16.6 billion the previous month, according to recent data from the Ukraine Finance Ministry. In December, the total debt increased by a further 9 percent - up to $24.1 billion. The government initially targeted a budget deficit of 18.8 billion hryvnias ($2.34 billion) or about 2 percent of gross domestic product in 2008. It later cut the gap below 1 percent of gross domestic product, meeting an agreement with the International Monetary Fund which approved a $16.4 billion loan to Ukraine to help stabilize the economy.

Thus Ukraine’s total state debt in 2008 increased by 37 percent to $24.1 billion from $17.6 billion in 2007. It is however still at a pretty low level, being estimated by the IMF in their last standby loan report to rise to some 17.4% of GDP in 2009. The real problem are the mounting liabilities in the private sector, and how these can fall inwards onto state finances.

Update: Wages Fall Rapidly

Average Ukrainian wages fell by 16.8% in January (to UAH 1,665 per month) over the level of December, according to the State Statistics Committee yesterday. The highest average wages were paid out in Kyiv (UAH 2,794 per month), down 21.3% over the level of December 2008. We need to treat this kind of data with some caution, since obviously seasonal factors are at work, and average wages were still up (by 9.4%) over January 2008.

However inflation is still very high in Ukraine, so even with a 10% annual increase in money wages real wages are falling sharply. Inflation was up again in January rising at a 2.9 percent rate over December, which compares with a 2.1 percent rise in December over November. the country's Economy Ministry said. Year on year inflation was running at 22.3% in January.

In addition to the drop in real wages (and the rise in unemployment), there is a problem with unpaid salaries. As of Feb. 1, 2009, the volume of unpaid salaries and wages was up by 35.7% compared to January 1, with the largest volume of wage arrears being observed (rather unsurprisingly) in Donetsk region.

Current Account Surplus

On the other hand Ukraine did have a current account surplus of $500 million in January, according to provisional data released by the acting head of the National Bank, Anatoly Shapovalov yesterday (Wednesday). Shapovalov said the first current account surplus in recent years was due to a steeper decline in imports than in exports. However, the overall balance of payments continues to be in deficit since the flow of capital is neagtive, with loan repayments far exceeding the volume of new loans raised. Thus the he financial account deficit was $2.3 billion in January.

Shapovalov estimated that the balance of payments deficit as coming in at $12 billion for 2009, with the National Bank hoping to receive $9.6 billion from the International Monetary Fund in 2009, which "would be a big help," he said.

Ukraine's current account deficit widened to $11.9 billion or 6.7% of GDP in 2008 from $5.3 billion or 3.7% of GDP in 2007, according to preliminary data from the National Bank. The current account deficit grew as the visible trade deficit rose to $16 billion.

Unsurprisingly, with all this going on, bank lending is reducing, and in January, the total consumer loans were down by an annual 1.8 percent compared to a 7.7 percent rise in December 2008.

Ukraine GDP Down 20% Year on Year In January

2009-02-18T14:53:00.003+01:00

Well, Paul Krugman certainly got it right on this one, the Great Depression may now reasonably be considered to have arrived in Ukraine. Ukraine's GDP declined 20 percent in January year-on-year, according to Valeriy Lytvytsky chief advisor to the chairman of the National Bank of Ukraine. "The decline in GDP in January was about 20 percent according to my reckoning. It's the biggest drop ever. It's a bad start," he said. According to Lytvytsky the construction and industry sectors have been the hardest hit by the economic crisis.

The Statistics Office don't produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening.

Industrial output fell in January for the sixth month in a row, with a 16.1 percent decline between January and December 2008. This was the biggest decrease since January 1994, when there was an 18.6 percent drop. Industrial production in January was 34.1 percent down on January 2008. The year-on-year decline in construction also increased ten-fold, hitting 57.6 percent, Lytvytsky said.

"At the start of last year there was one sector in recession - construction. All the rest were in positive territory. Now only one economic sector is growing - agriculture - with growth of 0.5 percent, within the margin of error. All the other basic industries, which account for about 80 percent of GDP, are contracting."
Valeriy Lytvytsky

Unfortunately this may well be the last month for which I can do this kind of calculation and comparison, since the State Statistics Committee will not be publishing monthly GDP results (as in the past), starting this January and (ironically) as a result of the move to harmonise Ukraine methodology with international-standard, quarterly reporting. I say ironically, since in this case we will be trading short term insight for longer term precision. However, the office will continue publishing monthly results for individual economic sectors like agriculture, industry, construction and transportation, so we maywell be able to invent some kind of "proxy", just to keep an eye on what is happening in more or less real time.

Industrial Output Continues Its Decline In December

2009-01-15T12:58:00.000+01:00

Ukraine’s industrial output continued its rapid decline in December, falling for a fifth consecutive month, led by steel, chemical and machine building. Output tumbled an annual 26.6 percent, following a 28.6 year on year decline in November, and a 19.8% one in October.

December steel production slumped 42.7 percent, chemical output fell 40 percent, and machine building dropped 37.1 percent. The annual contraction rate slowed slightly in December, but this may be a partly a statistical artefact due to what is know as the "low base effect" in December 2007, however output was up by 3.2% in December over November, which may be a result of the sharp drop in the value of the hryvnia. I would be surprised if we didn't see further falls in output, but we will need to wait and see what happens in the coming months.

For a full analysis of what is happening in Ukraine, see my As The Politicians Battle It Out Ukraine's Economy Tunnels South In Search Of Australia

As The Politicians Battle It Out Ukraine's Economy Tunnels South In Search Of Australia

2008-12-23T20:21:00.000+01:00

“In Ukraine, the evidence is still that policymakers do not quite understand the seriousness of the challenges they face,”. Timothy Ash, analyst at the Royal Bank of Scotland.
“There is a burgeoning economic crisis in the European periphery,” Krugman said on the ABC network Dec. 14. “The money has dried up. That’s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.”

Make no mistake about it. What is taking place right now in Ukraine is extraordinarily serious. The IMF have recently agreed a support loan to the country, but the politicians themselves still can't agree on whether or not they are actually going to abide by the conditions attached to it. Meantime, as we can all see on our TV screens, tensions with Russia continue to escalate, fuelled by the conflict-ridden negotiations over Ukraine's gas debt.

And just to add to the nighmare, Ukrain's economy made a dramatic entry into recession in Q4 2008. In fact, so severe has been the slowdown that nobody at this point can even muster enthusiasm for opening up one of those interminable discussions about whether or not what the country is going through really counts as a "technical recession" (in terms of two successive quarters of GDP contraction) or not, since the drop in national output has been enormous, and it it fairly obvious that isn't about to come bouncing back up again. At least not for the next several quarters it isn't, and - to give us an early glimpse of the terrain onto which we are now entering - the World Bank have just forecast a 4% contraction in GDP for 2009.

In a year when you would think little would surprise us the sharp change in real Ukraine GDP dynamics has been astonsihingly swift, with the growth rate moving from the 11% year on year expansion registered in August to the 14% year on year contraction reported in November (according to data put together by the World Bank). GDP for the whole January-November period is now down to 3.6% when compared with the equivalent months in 2007, and this is reall a sharp drop, since the average over the first nine months of the year was a growth rate of 6.9%. For his part the office of Ukraine President Viktor Yushchenko is suggesting that gross domestic product may contract at an annual rate of between 7 percent and 10 percent in the first quarter of next year, and by 5 percent over the whole year, according to Oleksandr Shlapak, deputy chief of staff to the president.

The contraction has been led by sharp falls in manufacturing and construction, while the financial system has been in serious trouble since late September, and the loss of UAH deposits from the banking system has amounted to 14% during October and November. But the real problems Ukraine is facing in confronting this most serious economic crisis, lieas in the political sphere, and the complete lack of the kind of political consensus which is so necessary to see through the measures which can it to an end.

Political Chaos Adds To The Problems

Ukraine’s government - which is laways a chaotic process at the best of times - is once more having a serious identity crisis about who it is and what it wants to do, with one of the exectutive's two visible hydra's heads (Prime Minister Yulia Timoshenko) seeking to respond by manipulating the currency downwards, by boosting social expenditure to an extent which will push next year’s budget deficit up to 2.96 percent of gross domestic product (from an agreed 1.4%) and well beyond the IMF pact level, and by attempting to resolve the trade deficit problem by imposing an administrative tax on imports. The other head of the hydra (President Viktor Yushchenko) is busy opposing all these moves on the grounds that they may jeopardize the second tranche of a $16.4 billion loan from the International Monetary Fund, and obviously, were this to be the case, the country would basically find itself bankrupt, and at the mercy of whatever sentiments the global financial markets wish to express when it comes to Ukraine.

Of course regular readers of this blog will not be surprised to find that this politically split personality crisis goes right into the heart of the central bank (see my Monetary Chaos Breaks Out At the Ukraine Central Bank post) and no one will be really that surprised to find that the two key characters in this round of the saga are (yet one more time, read the linked post, its all explained there) National Bank of Ukraine Governor (and board chairman) Volodymyr Stelmakh’s and Petro Poroshenko head of the central bank council.

Well things are really hotting up at the moment, with Viktor Yushchenko this week threatening to fire some central bank employees (presumeably those who were not implementing the decision to allow the Hryvnia to float), while Yulia Timoshenko was busy demanding the dismissal of National Bank Volodymyr Stelmakh himself - presumeably because he was trying to stop further currency intervention. In an official statement the central bank council responded by accusing Timoshenko of stirring up “chaos” and undermining the nation’s banking system, while Timoshenko, for her part has now taken the matter to the Ukrainian parliament (the Verkhovna Rada - where she may well carry a majority) which will now hold a full debate the role of the central bank next week. It seems not to matter too much here that the bank council is simply trying trying to implement a set of policies which were agreed to (or everyone thought they were agreed to) as part of the IMF loan agreement.

“A hryvnia level above 9 per dollar is unacceptable, it threatens the economy and banking system,” Petro Poroshenko, the head of the central bank council said. “The situation with the hryvnia rate demands urgent measures.”

Volodymyr Stelmakh, Central Bank Governor, the Yulia Tymoshenko Bloc is proposing his immediate arrest.

(Interfax-Ukraine) - Yulia Tymoshenko Bloc has proposed that, based on results of a report by an ad hoc parliamentary commission scrutinizing the National Bank of Ukraine's activities, an address should be sent to the Prosecutor General's Office and that National Bank Chairman Volodymyr Stelmakh should be arrested. "I think that, based on the report's findings, there will surely be an address to the Prosecutor General's Office of Ukraine and other law enforcement agencies, which, by the way, are already conducting inquiries," Volodymyr Pylypenko of the Yulia Tymoshenko Bloc said in an interview with Interfax on Wednesday. "The best gift in this situation can only be an order on taking [National Bank of Ukraine Chairman Stelmakh] into custody for all wrongdoings the National Bank has committed in the past months," Pylypenko said.

President Yushchenko did express the hope last Tuesday that Ukraine's currency market might be moving rightside up, with the hryvnia trading at about 7.8-8.0 to the dollar and level of "stabilising" dollar purchases by the central bankdeclining, but Prime Minister Tymoshenko remained unconvinced that this was a desireable level, and demanded more concerted intervention to move the currency up to a much higher level - around the 6-6.5 to the $ mark. She gave Yushchenko a week-and-a-half apparently, since otherwise she stated the country would face increasing problems with inflation, and in the banking and other sectors. It is not clear (at least to me) why these problems (which are, and will continue to be, serious) should suddenly deteriorate within the time scale of ten days, but presumeably there was another, more political, message behind this choice of words.

Adding to the confusion, Ukraine's parliament, has decided to impose an additional 13% temporary duty on all imported goods - and this despite the fact that Ukraine only recently entered the WTO. A total of 269 MPs from the ruling coalition and the Communist Party voted for the relevant law which amended existing Ukranian lefislation - with, it was said, the aim of improving the state of Ukraine's balance of payments. "Duties have been increased on all imported goods, apart from a [so-called] 'critical' [list of goods]," the head of the parliament's committee for tax and customs policies, Serhiy Teriokhin, is quoted as saying.

"I'm alarmed by the report of my legal department on parliament's decision to impose an additional temporary duty on all imported goods. Parliament's decision puts Ukraine's presence in international programs in jeopardy," President Yushchenko said at a press conference yesterday. "Similar decisions by Russia and Europe might be made against us in three days,".

IMF Taking Large Political Risk

Last month, a point in time which now seems so distant it feels like eternity, Ukraine received approval for a two-year IMF loan intended to help support its banking system and cover the country’s widening current-account gap during what was always seen as being a difficult adjustment process. Under the terms of its agreement with the IMF, Ukraine is expected to have a balanced budget next year. If the Cabinet fails to meet the target, then the Fund may withhold the second tranche of the loan, according to press statements by Balazs Horvath, IMF representative in Kiev. Ukraine received the first installment of $4.5 billion last month, and is due to get the second tranche in February. Obviously the IMF is by now well accustomed to playing the part of the "bad boy" in this type of situation, but what if the country they are trying to deal with should simply "implode", right in its face, I'm not sure even the hardened hand of the IMF are ready for this. So let's just hope I'm exaggerating, and that it won't happen (fingers tightly crossed everyone, please).

Discrepant GDP Forecasts

So Ukraine faces a crisis on three fronts, financial, economic and political. On the real economy side, the Ukraine cabinet currently expects growth in the country’s economy to slow to 0.4 percent next year, compared with a final rate which turn out to be somewhere between 1.8 percent and 2.5 percent this year. As I say the World Bank now expects a 4% contraction in GDP next year, and thus a 0.4% expansion in the budget is potentially a very serious problem indeed for the deficit, if the economy underperforms, as it surely will.

“The draft budget, prepared by the Cabinet, is not realistic,” Yushchenko said today in a statement on his Web site. “The 2009 budget is a tragedy; it is the most irresponsible document worked out by the government. Professionals should plan a realistic budget, not optimistic.”

The government plans to cover the budget deficit by selling bonds in domestic and foreign markets, and is to receive a $500 million loan from the World Bank to cover the budget deficit. Under the terms of the IMF agreement with the Inernational Monetary Fund Ukraine has pledged to keep its 2009 budget deficit under 1 percent of gross domestic product, below the 2 percent initially planned by the government. In October, the government reduced its planned 2008 budget revenue from the sale of state assets to 401 million hryvnia ($59.4 million) from 8.6 billion hryvnia, citing the unfavourability of the moment for selling.

Pressure On The Hryvnia

The Hyrvnia has been falling for a number of weeks, but the rate of decline has really accelerated in the last ten days, and we are really now talking about one of those famous currency crises. The national currency has fallen 50 percent against the dollar since June, and according to Michael Ganske, head of emerging markets in London for Commerzbank, it may well drop another 24 percent in the next few weeks given market sentiment and that the International Monetary Fund package effectively limits central bank intervention to halt the slide. The terms of the IMF $16.4 billion bailout package, agreed to last month, require Ukraine to move toward a flexible exchange rate and place a maximum limit of 4 percent for any reserves reduction during the remainder of 2008 (from the base of around $32.8 billion). Thus while the agreement does allow intervention to stem “disorderly” swings, it places a tight limit on what this means. And this now is just the problem, although before we jump to our guns, we should bear in mind that what is provoking the fall is not the IMF and the bailout, but confidence in the ability of the political system to implement a workable recovery plan. Trying to run a currency corridor, and accepting the inflation that went with it, is how we got here in the first place.

The only real remedy Ukraine’s central bank has at its disposal at this point is to raise its base refinancing rate, and this it duly did last week, taking it up from 18 percent to 22 percent in an attempt to arrest the hryvnia’s decline To give us some idea where we are at this point, at the start of 2008 the dollar bought 5.04 hryvnia, while right now it can purchase around 8.25 hryvnia.

The central bank is currently offering to sell dollars at 8.0 hryvnias and to buy them at 7.8788 on the interbank market. Yushchenko told a news conference last week that the central bank had bought $270 million on Monday and Tuesday, but had been required to sell only $30 million on Tuesday. He informed the assembled journalists, however, that complete stabilisation would need to wait until after the debts for Russian gas and other expenditures had been paid (you should be able to start to smell just how complicated all this is by this point, just who exactly is batting for who here?). "Until debts are paid for gas, and settling the debts of (the national road network) Ukravtodor, it would be madness to talk about steps aimed at a fundamental, professional stabilisation". "Everything is earmarked", he claimed, "$3 billion (for intervention from reserves), more than $2 billion set aside for gas arrears, $1 billion for repayment of a loan to Ukravtodorom, $200 million to (rocket maker) Yuzhmazh, leaves only an additional $400 million to defend the hryvnia."

As a result of the $7.5 billion the Ukraine central bank spent supporting the hryvnia in October and November foreign reserves fell to $32.7 billion as of Nov. 30. At the same time the hryvnia has declined 21 percent against the dollar over the last month alone . Under the terms of the agreement with the IMF, the reserves should not fall below $31.4 billion by the end of this year, so we are talking about a very close call on this front too.

Equities Down And Credit Default Swaps Up

Ukraine’s stocks have also been falling, and the benchmark PFTS stock index is down 74 percent this year, the third-steepest decline among the 22 so-called frontier markets tracked by MSCI Barra. Mariupolsky Metallurgical Plant, Ukraine’s largest steel company by revenue, has fallen 92 percent on the Kiev stock market. On the other hand the extra yield investors demand to own Ukrainian government bonds instead of U.S. Treasuries has increased more than nine times this year to 25.86 percentage points, according to JPMorgan Chase’s EMBI+ indexes, which compares with an average three-fold increase in the main emerging-market index to 7.09 percentage points.

Loan Defaults Coming

And as the currency slides, so too does the ability of the average Ukrainian to pay his or her debts. Another Yushchenko aide, Roman Zhukovskyi, recently estimated that up to 60 percent of foreign-currency loans and mortgages could default given the extent of the decline. Ukraine, which has around $105 billion in corporate and state debt, has the fourth-highest credit risk worldwide, according to credit-default swap data. The cost of insuring Ukraine bonds against default is up more than thirteenfold this year, to an astonishing 31 percent of the amount of debt protected. This puts the country behind only Ecuador, which defaulted last week (59 percent), Argentina, which defaulted on $95 billion in bonds in 2001 (46 percent), and Venezuala ( 33) percent, according to the data from CMA Datavision.

Ukrainian companies need to repay as much as $4.1 billion this month while lenders refuse to refinance debt, according to Dmitry Gourov, an economist at UniCredit in Vienna (oh, no, not Unicredit again, see this post). Dollar denominated loans made up 53 percent of credit issued by Ukrainian banks as of 30 September, according to central bank data.

Thus, with just over half of all bank loans denominated in US dollars, they obviously become vastly more expensive for borrowers who are paid in the national currency.

Aggressive lending by banks that borrowed heavily from abroad has obviously contributed to Ukraine’s ballooning private sector external debt (currently estimated at $85 billion). Official figures indicate that only some 2.5 percent of loans are currently problematic, but this situation is obviously about to worsen considerably next year as the currency is down and the economy contracting.

Earlier this month, Finance Minister Victor Pynzenyk called on banks to refinance loans amid a weakening hryvnia and rising interest rates. Some banks in recent days said they would seek compromises with clients, rather than hike interest rates further. Pynzenyk’s proposal called on the NBU to amend its rules to allow borrowers either partially or in whole to pay back loans in the national currency at the exchange rate which was operative when the loan agreement was signed. The banks, in turn, would be allowed to lower their capital/asset ratios and write off their losses, thus paying lower taxes, which would also require amendments to the tax legislation. Obviously some such solution will need to be found for this problem. (There has already been some move in this direction in Hungary, another of the countries which is strongly affected by the forex loans problem).

Other measures under consideration at the present time include extending loan periods, and the temporary reductions in loan payment installments. If the hryvnia-dollar exchange rate further widens, mass loan defaults are inevitable, according to Yuriy Belinsky, head analyst at Astrum Investment Management. At the current Hr 8 to the $1 rate, “40 percent won’t be able to pay their loans,” Belinsky told Korrespondent, a Russian-language Ukraine newspaper.

And the situation is deteriorating fast, a quick visit to the foreclosure sections on the websites of banks like Finance and Credit Bank or Alfa will turn up plenty of property and cars already listed for sale or soon to be auctioned. But given the slump in the real estate market and falling house prices it isn't clear that banks will find it any too easy unloading any property they do repossess. We are back to the "you owe them a little money and you have a problem, and you owe them a lot of money and they have a problem" situation. Last weekend, the NBU also recommended that banks lower interest rates on foreign-currency denominated loans, but the problem is going to be, as ever, who is actually going to fund these measures?

Industrial Output Plummets

Meantime in the world of the real economy things simply get worse and worse. Industrial production shrank by a record 28.6 percent in November as steel, machine building and oil refining slumped, after a 19.8 percent decline in October.

And as output falls, prices come tumbling behind. Steel production dropped 48.8 percent in November, while the price of the benckmark European hot rolled coil has fallen 47 percent since August and is now at around $425 a metric ton, according to data from U.K. industry publication Metal Bulletin.

World Bank Forecast

The World Bank have predicted a sharp recession for Ukraine in 2009, with GDP being expected to fall by some 4.0 percent. This compares with their July forecast of 4.5 percent growth. The Bank also cut back its forecast for 2008 growth to 2.3 percent from a previously forecast 6.0 percent. It raised its inflation forecast for this year to 22.8 percent from 21.5 percent previously predicted, up from 16.6 percent in 2007. It cut its forecast for inflation next year to 13.6 percent from 15.3 percent.

(please click on image for better viewing)

The Bank take the view that the Ukraine government - in agreeing to the terms of the IMF loan package - have initiated an important programme of macroeconomic adjustment measures, but (with a wary eye on what is actually going on in the Parliament) stress that consistent implementation is essential to avoid a further erosion of market confidence. In their latest report the Bank highlight the shift towards a flexible exchange rate policy, financial sector stabilisation measures , and a more conservative fiscal policy, but as we have seen, these are just the measures which seem to be being challenged by some of the political participants .

So What Does The Future Look Like?

Obviously Ukraine is heading into a major recession in 2009 fuelled by the nasty cocktail of a credit crunch, a terms of trade deterioration, and a consequent massive slowdown in both internal and export demand. Given the damage to competitiveness caused by two years of double digit inflation, macroeconomic stabilization will require a very large and significant correction, and this will mean a significant tightening of aggregate demand and a shift in its composition away from domestic consumption and towards net exports. The government debt stock is currently low at 10 percent of GDP, and will undoubtedly remain sustainable throughout and after the adjustment, even allowing for the potential costs of bank recapitalization. But the ability of the Ukraine administration to carry out the necessary adjustment hinges critically on the willingness of external creditors to refinance the banking and corporate sector debts, and this willingness in its turn depends on the perception those creditors have of the level of political coherence and stability the country has. And as we are seeing such perceptions must be reasonably near an all time low at the present time.

But even with the best political system in the world, the economic correction facing Ukraine is going to be large and the stresses enormous. The World Bank more or less spell this out in the paragraph I extract below. A 200% contraction in real imports (ie not due to cheaper energy prices or something) is massive, and we are talking about a basically balanced budget (ie very little fiscal stimulus) and monetary policy where interest rates are at the current giddy heights of 22%.

The basic macroeconomic parameters in our forecast are broadly consistent with those of the IMF program. Balance of payments pressures will lead the economy to adjust the composition of growth through 2009. As a result, the current account deficit is expected to improve from over 6 percent of GDP in 2008 to 1-2 percent of GDP in 2009-11. To achieve this adjustment, an over 20 percent real import contraction will be needed in 2009 in order to counter the 7 percent forecast terms of trade deterioration. Real wages and employment are forecast to decline in 2009 to restore price competitiveness of Ukrainian exports in the wake of declining export prices and to support the adjustment in aggregate demand. With this current account adjustment and with the support of the IMF Stand-By, the external financing gap would be closed under our baseline assumptions. Declining commodity prices, tightening liquidity and the forecast decline in domestic demand will contribute to disinflation. However, offsetting this, the exchange rate correction and the adjustment of energy and utilities tariffs will make disinflation a more prolonged process. We assume that the government will maintain a balanced budget in 2009 (not accounting for bank recapitalization costs) and have a small deficit thereafter.

So I think we need to be very clear at this point. The Ukraine position is very difficult, and everything is very delicate. The danger of total financial meltdown (which would be in this case in the private banking sector, not sovereign debt) is real and significant. The economic downturn has only just started and further downside risks are large and depend critically on the size of external shocks and the limitations imposed by inadequate policy responses.

Any further deterioration in the terms of trade (unlikely at this point given how far steel prices have already fallen, but these prices may stay lower for longer than many in the sector can sustain) or further decline in export demand would certainly put almost unsustainable pressure on the real sector. Banking sector vulnerabilities may be further exacerbated by further overshooting of the exchange rate and external debt refinancing difficulties as corporate balance sheets weaken further and household incomes come under strain from rising debt service costs.

Prudent fiscal, monetary, and financial policies (many of them anchored in the program supported by the IMF), accompanied with renewed efforts to deepen structural reforms, can help Ukraine to stabilize its situation and move the economy towards recovery. Conversely, a continuation of the current disorderly response and poor implementation of the agrred policies may easily trigger further financial chaos leading to an even shaper downturn and a postponement of any recovery off into the distant sunset.

But Beyond The Recovery, What About The Demography?

One of the reasons why I think the IMF and the World Bank are taking such a big risk with their credibility in Eastern Europe at the moment, is that I don't think they are getting through to the heart of the problem. One way of thinking about this is to take Paul Krugman's favourite Keynes quote - "we've got magneto trouble" - and ask ourselves whether all we have before us in the CEE countires right now are magneto problems, or whether, to continue with the metaphor, we may not have issues with the cylinder head gasket. And it gets worse, because the cylinder head gasket does seem to have blown (and it will keep blowing) because we have leakage problems in the sump, and the main oil pump isn't working - and who knows, maybe the crankshaft even needs replacing. As they always tell you when you take the car into a garage for "fixing", we won't know till we take the thing apart. What do I mean?

Well take a look at the chart showing the relative size of annual births and deaths in Ukraine over the last twenty years.

I mean to the normal and untrained eye stands the problem stands out a mile, population dynamics went underwater in the Ukraine in the early 1990s, and they aren't coming back to the surface again (not now, not in thirty years, not...... well maybe never is too much of a long time, but certainly not over a time horizon which is going to make any essential difference to anyone who is already alive today.)

And this is without taking any outward labour migration into account, so just think about the negative labour market dynamics that this implies, and already has implied. Can anyone really be surprised that Ukraine has been suffering from acute inflation as its number one problem?

To some extent it is worth stressing here that what really matters is the actual numbers of annual live births, rather than any more complex measure of fertility. In 1989 for example there were nearly 700,000 children born in Ukraine. By 1998 this number was near to 400,000 (ie there was a drop of 40% or so in a decade). In practical terms (and if we take 18 as an average age for labour market entry in a country like Ukraine) next year there are potentially 650,000 people to enter the labour force, but by 2016 this number will be only 400,000. So it isn't simply a question of pushing the fertility rate up towards the replacement rate (a difficult, but not impossible task), we also need to think about what economists term the "base effect" here, that is that with each passing year and cohort you have less and less women in the childbearing ages, so even if those women replace themselves, the base of the pyramid is still much narrower than the top, and it is the people at the top who need caring for and financing.

And even if some of this loss can be offset at the workforce level by increasing labour force participation at the older ages, we would still be talking about a very sharp rise in the average age of the workforce. And productivity improvement alone cannot possibly hope to compensate for the kind of labour force contraction we should reasonably expect, at least not over such a short period of time it can't. So this is just one more reason why, against all expectation, fertility really does matter.

While many continue to believe that falling populations don't actually have any tangible impact on economic performance, it is very striking to notice that when it comes to ageing and declining populations we really lack ANY evidence to substantiate that claim in the affirmative. On the other hand we do have plenty of evidence from countries where the population is either falling or gathering negative momentum to suggest that these countries face some very special kinds of economic problems. The example of Eastern Europe is clear enough I would have thought, but people really do need to take a closer look at what has been happening in recent years in countries like Japan, Germany, Italy and Portugal. And if falling population does produce its own kind of economic problems, well then we should be expecting to see plenty of them in Ukraine, since as we can see in the chart below Ukraine's population peaked in 1993, and has been in some sort of free-fall ever since.

Evidently there are a number of factors which lie behind this dramatic decline in the Ukrainian population, fertility is just one of these (with poor health and net emigration being the others). Ukraine fertility is currently in the 1.1 to 1.2 Tfr range, and, as we can see in the chart below, it actually dropped below the 2.1 replacement level back in the 1980s.

Another major influence on demographic dynamics is health, and one good measure of this is the level of life expectancy, which in the Ukraine case has shown a most preoccupying evolution, since it has been falling rather than rising. The chart below shows life expectancy at birth for both men and women, the male life expectancy is evidently significantly below the combined figure.

This life expectancy situation is, as well as being preoccupying, highly unusual (it is however paralleled to some extent in Russia itself, and some other CIS countries). Apart from the obvious, the deteriorating health outlook which this data reflect places considerable constraints on the ability of a society like Ukraine to increase labour force participation rates in the older age groups, and this is a big problem since this is normally though to be one of the princple ways of compensating for a shortage of people in the younger age groups.

So what about the future? Well, two issues are really starting to worry me at present, the first of these is the short term fertility shock Ukraine will undoubtedly receive on the back of the current crisis. If young people were already rather reluctant to have children, then then will now almost certainly be much more so, given the downward pressure on living standards we are about to see.

The second worry concerns the future of the country itself. A recent study carried out jointly by the Kiev based Democratic Initiatives Foundation and Nova Doba History and Social Sciences Teachers Association found that while more than 93 percent of the Ukrainian seventeen year olds they inteviewed considered themselves Ukraine citizens, only 45 percent said they planned to live and work only in Ukraine, citing Western Europe, Russia and the United States as possible future destinations. When 55% of your potential future labour force are thinking of working elsewhere you have a problem, and one which needs a solution. Simply putting a strip of band-aid over a festering wound won't work, I'm afraid, however much the Ukrainian people may struggle and sacrifice. With or without Keynes, we've got more than magneto problems on our hands here.

Postcript

A much fuller analysis of the problems presented by Ukraine's long term population implosion (including the issue of out-migration patterns and trends) can be found in this post here.

Ukraine's Industrial Output Drops An Annual 28.6% In November

2008-12-14T18:30:00.000+01:00

Ukrainian industrial production fell at the fastest pace registered anywhere in Europe in November, falling for a fourth consecutive month, led by steel, machine building and oil refining. Output shot dopwn an annual 28.6 percent, following a 19.8 decline in October, according to the Ukrainian Statistics Office last Friday. Steel production slumped 48.8 percent, oil refining and chemical output fell 35.2 percent and machine building by 38.8 percent.

The Ukrainian economy, which has been expanding at an average annual pace of 7 percent since 2000, is now “in recession,” according to Finance Minister Viktor Pynzenyk speaking on December 10. Econoic growth will probably slow to between 3.5 percent and 4 percent this year from 7.6 percent in 2007, First Deputy Economy Minister Serhiy Romanyuk said on December 3, while the economy may contract by 5 percent next year, according to Oleksandr Shlapak, the president’s deputy chief of staff, at the end of November.

Ukraine’s national currency, the hryvnia, is heading to its worse year since 1999. It lost 34 percent in October and November and has been sliding further this month. The government of the nation of a 46 million people relies on a weakening hryvnia to boost exports, said Finance Minister Viktor Pynzenyk yesterday.

Industrial output grew 10.2 percent in 2007, boosting economic growth to 7.3 percent. Piontkivska expects industrial production to contract by 3 percent in 2008, while economic growth slows to “around 4 percent.” Production increased 2.2 percent in the first 11 months of the year, compared with 10.7 in the same period a year ago, according to the statistics data.

Ukraine Inflation Continues To Drop Back In October

2008-11-07T11:49:00.000+01:00

Ukraine's inflation rate, which is still the highest in Europe, fell back again in October - for the fifth month, following falls in food and commodity prices. The annual rate was at 23.2 percent, down from 24.6 percent in September, and considerably down from the May peak of 31.2, according to data released this morning (Friday) by the state statistics committee. Month on month, prices were up 1.7 percent.

The Ukranian government is struggling desperately to bring inflation back under control and to stabilize the economy as part of a pledge to the International Monetary Fund who agreed this week to lend Ukraine $16.5 billion.

It is hard to say how quickly disinflation operates in Uklraine, since in part this depends on what happens to the hyrvnia, although the Ukraine president's office do not expect it to fall below 18 percent this year, compared with 16.6 percent in 2007.

I am sorry I have not found the time to make much comment on the Ukraine situation in recent days. I will try and find time to say something "useful" over the weekend.

Hryvnia Falls To Record Low On Monday

2008-10-27T11:47:00.000+01:00

Ukraine's hryvnia fell to near a record low against the dollar this morning as the $16.5 billion International Monetary Fund loan failed to restore confidence in the country's ability to weather the global financial crisis. The hryvnia slid 1.3 percent to 5.9500 per dollar by 9:48 a.m. in Kiev, from 5.8750 on Oct. 24. It traded as low as 6.0812 last week, according to Bloomberg this is the hryvnia's weakest level since at least 1994, when they began tracking Ukraine's currency.

The IMF said yesterday the loan is conditional on Ukraine balancing its budget, reining in social spending and narrowing its current-account deficit, which was $7.7 billion in the first seven months of the year. The hryvnia lost 12 percent versus the dollar last week, its biggest weekly drop on record, as investors sold emerging- market assets from Brazil to Korea on concern emerging-market countries will have difficulty servicing their foreign debt.

$16.5 Billion IMF Loan Agreed For Ulkraine

2008-10-26T20:36:00.001+01:00

The International Monetary Fund has reached an agreement with Ukraine on a $16.5 billion loan to help the country confront the ongoing financial and economic crisis. IMF managing director Dominique Strauss-Kahn said on Sunday that agreement had been reached between the IMF staff mission to Ukraine and the government, although it still needed to be formally ratified by the IMF board.

The 24-month stand-by loan will be conditional on parliamentary approval of legislation to support the country's banks. Ukraine will also need to balance its budget and address the current-account deficit problem, according to a separate statement from the Kiev-based central bank.

It is hoped that the loan will provide a framework within which it will be possible to try to increase financial stability and rebuild confidence among investors, although there does seem to be a long hard road to go down here.

The Ukraine central bank has pledged to support the country's banks and has injected more than 16.25 billion hryvnia ($3.13 billion) into the banking system over the last month. It also took control of Prominvestbank (one of the country's larger lenders) and promised an injection of 5 billion hryvnia into the bank to help the lender "renew its financial stability'' after a run by depositors.

Really there does seem to be a very severe credit crisis raging in Ukraine (and across Eastern Europe) at the present time, and the macroeconomic consequences are hard to forsee, although recession does seem imminent.

Ukraine's Credit Rating Cut Again By S&P

2008-10-24T14:11:00.000+02:00

Ukraine's credit ratings were lowered for the second time since June by Standard & Poor's on concern about the country's banks, its weakening currency and slowing economic growth. The foreign-currency debt is now rated B, five steps below investment grade, down from B+, according to a statement from the Ratings Agency earlier today (Friday). Ukraine local currency debt was lowered to B+ from BB-. S&P have thus joined Fitch and Moody's, which downgraded Ukraine's ratings earlier this month.

``The downgrade reflects the rising cost to the Ukrainian government of a necessary recapitalization of the banking sector against a backdrop of declining growth and heightened exchange rate risk,'' said S&P in the statement. ``Low confidence in Ukraine's financial and monetary institutions increases the associated risks to the real economy and inflation.''

The outlook for Ukraine is negative, S&P said, indicating the agency may cut the rating further.

``Conversely, the outlook on the ratings could change to stable if the government is successful in implementing effective financial stabilization measures that lay the foundation for economic recovery over the next two years,'' said S&P.

Meanwhile Ukraine parliament chairman Arseniy Yatsenyuk told a packed chamber that Ukraine's talks to secure credit from the International Monetary Fund could collapse unless the parliament acts to pass the measures needed to ease the effects of the global financial crisis.

"It is very important for us to achieve results in a vote on the financial crisis," Arseniy Yatsenyuk told the chamber, which was deadlocked for the fourth day, after adjourning debate on the issue until next week.

"Bang, Boing, Crash" I think must be the sort of background noises they can detect rudely inter-rupting them from the street outside as one peice of financial scaffolding after another falls away from the building it had been momentarily holding up while they trundle on with their interminable debate about their endangered country's short term future.

An International Monetary Fund mission has been holding talks for more than a week in Kiev on extending credit that Ukrainian officials say could amount to up to $14 billion. Yatsenyuk said no consensus could be reached on six draft laws to tackle the crisis, including a package proposed by Prime Minister Yulia Tymoshenko's government.

A working group was set up to draft a document able to command a majority. Debate would resume next Tuesday. Tymoshenko, speaking later outside the chamber, said: "If we pass this package of bills to combat the crisis, we could secure the vitally necessary substantial help Ukraine needs and we could get it next week."

The government's package calls for amendments to the 2008 budget, borrowing of $2 billion from unnamed international financial institutions, sovereign guarantees to firms seeking foreign credit and creation of a stabilisation fund.

Parliament has been thrown into disarray over proposals to combine debate on the crisis with measures to finance an early election called by President Viktor Yushchenko.Tymoshenko, at odds for months with the president, opposes the election and members of her bloc have milled about the chairman's rostrum to curtail debate.

The president dissolved parliament this month and called a Dec. 7 election to the assembly after the collapse of a government team linked to the 2004 "Orange Revolution".He lifted the dissolution order this week and said he was putting the election back for a week to Dec. 14. It remains unclear when the poll will take place.

Deal Near On $15 Billion IMF Loan For Ulraine

2008-10-21T18:40:00.000+02:00

Ukraine seems to be on the point of signing a loan worth as much as $15 billion with the International Monetary Fund. Agreement could be reached as early as next week as the government urgently seeks to inject cash into domestic banks and avoid an economic meltdown, Prime Minister Yulia Timoshenko said.

Talks about the loan are "90 percent" completed, Timoshenko said at a press conference in the Ukrainian capital Kiev today. Talks with the IMF may be completed tomorrow. Once signed, the pact will need to be approved by lawmakers, who are expected to vote on it by the end of the week, the premier said. "The talks are almost finished with the IMF and we've almost agreed on what necessary changes to laws we have to make to get the loan,'' Timoshenko said.

Tymoshenko said the loan would be used to bolster central bank reserves of $35-38 billion and prop up the banking system. "The financial resources, which will be received from the IMF, will be directed first of all towards making central bank reserves stronger and, secondly, to supporting the national banking system," she told a briefing.

Hyrvnia Falls Again

Ukraine's hryvnia weakened for a fifth straight day against the dollar today as the government continued to negotiate with the IMF and Fitch Ratings extended its cut of Ukraine's credit rating to 10 of the former Soviet republic's banks. The currency dropped 0.4 percent to 5.5200 per dollar by 11:18 a.m. in Kiev, from 5.4975 late yesterday, after earlier falling to 5.5500, the lowest level against the dollar since Oct. 9.

Fitch Downgrades Banks

Fitch Ratings today downgraded the Long-term Issuer Default ratings (IDRs) of 10 Ukrainian banks and their Support ratings, and revised downwards the Support Rating Floors of four of these banks. The Outlooks on the Long-term IDRs remain Negative. This follows the downgrade of Ukraine`s Long-term foreign and local currency IDRs to `B+` from `BB-` (BB minus) with Negative Outlook (see the announcement on `www.fitchratings.com`).

According To Th Statement

The downgrade of the IDRs and Support ratings of Swedbank, Forum, ProCredit Ukraine, VTBU, UkrSib, Ukrsots and Pravex reflects the downgrade on Ukraine`s Country Ceiling to `B+` from `BB-` (BB minus). The Country Ceiling of Ukraine limits the extent to which support from the shareholders of these banks can be factored into their Long-term foreign currency IDRs, and their Long-term local currency IDRs also take into account Ukrainian country risks.

Swedbank is 100%-owned by Swedbank AB (`A+`/Negative), Forum is majority (60%+one share)-owned by German Commerzbank AG (`A`/Rating Watch Negative), ProCredit Ukraine is 60%-owned by Germany`s ProCredit Holding AG (`BBB-` (BBB minus)/Stable), VTBU is more than 99%-owned by Russia`s JSC Bank VTB (`BBB+`/Stable), UkrSib is 51%-owned by France`s BNP Paribas (`AA`/Stable), Ukrsots is 94%-owned by Italy-based UniCredit (`A+`/Negative) and Pravex is 100%-owned by Italy`s Intesa Sanpaolo (`AA-` (AA minus)/Stable). The Long- and Short-term IDRs and Support ratings of these banks reflect the limited probability of support being forthcoming from their majority shareholders, in case of need.

The downgrade of the Long-term IDRs and Support ratings of Oschadny and Ukreximbank reflect the reduced ability of the government to provide support in case of need as reflected in the downgrade of Ukraine`s Long-term IDRs. Oschadny`s and Ukreximbank`s Long- and Short-term IDRs and Support ratings reflect Fitch`s view of the strong propensity of the Ukrainian authorities to provide support for these banks in case of need, although the ability to provide that support is less certain now. Both Oschadny and Ukreximbank are 100%-owned by the state (represented by the Cabinet of Ministers of Ukraine). Non-binding letters of support from the government have been provided in the offering circulars of Ukreximbank`s international debt issues (the most recent dated March 2007).

The downgrade of the Privat bank`s Support rating and revision of its Support Rating Floor reflects Fitch`s view that the Ukrainian authorities now have limited ability to provide support if required, as reflected in the `B+` sovereign Long-term IDRs, although there is a propensity to support the bank in case of need, based on Privat`s size and importance to the Ukrainian banking sector: it is the country`s largest bank (privately owned) with a share of approximately 10% in sector assets and 15% in retail deposits.

The downgrade of the Long-term and Short-term IDRs and revision of the Support Rating Floor of Nadra Bank reflect the reduced ability of the government to provide support in case of need, despite the propensity of the latter to provide such support to a bank of Nadra`s size. Nadra is the seventh-largest Ukrainian bank by asset size, with a presence in the retail segment and about 3.4% of system assets at end-H108.

Unfortunately, even the weather isn't brightening things up at the moment:

Ukraine to see cold weather and fogs this week

No precipitation expected in Ukraine tomorrow. The country will see fogs at night and in the morning. According to the National Weather Center, the night temperature will make 0-5 C degrees above zero. The temperature during the day will make 11-16 C degrees above zero.

Moody's Cuts Ukraine Outlook

2008-10-20T19:16:00.000+02:00

Moody's Investors Service lowered Ukraine's outlook as the global liquidity crunch adds pressure to an economy already beset by racing inflation and political instability. The outlook for the former Soviet republic's foreign- and local-currency debt ratings was cut from positive to stable. Moody's downgrade follows similar moves by Fitch Ratings and Standard & Poor's.

The worldwide financial turmoil is prompting investors to shun riskier assets in emerging markets. Ukraine has the worst creditworthiness of Europe's emerging markets, based on the cost of credit-default swaps, which protect bondholders against default. The country is also heading for early elections on Dec. 7 after the second collapse of a ruling alliance between President Viktor Yushchenko and Prime Minister Yulia Timoshenko.

``Although Ukraine's government balance sheet remains strong at the moment, the current global market turmoil heightens the existing vulnerabilities,'' said Moody's Vice President Jonathan Schiffer said in the statement.

The hryvnia fell 3.7 percent 5.4400 to the dollar, its weakest level in more than a week, as of 2:25 p.m. in Kiev. The hryvnia has slumped 16 percent against the dollar since early September.

Fitch cut Ukraine's credit rating to B+ on Oct. 17 and Standard & Poor's put it on review for downgrades on Oct. 15.

Ukraine's foreign-currency denominated bonds are currently rated Ba3 by Moody's, a high-yield, or ``junk,'' level three steps below investment grade. The local-currency debt is rated a step lower at B1.

Fitch Cuts Ukraine Debt Rating

2008-10-19T16:35:00.000+02:00

Fitch Ratings cut Ukraine's credit ratings as risks about the hryvnia, the bank system and the economy increased. Fitch lowered the credit rating to B+ from BB- and left the outlook negative, indicating it may cut the rating further.

``The downgrade reflects Fitch's concern that the risk of a financial crisis in Ukraine involving a large depreciation of the currency, further stress in the banking system and significant damage to Ukraine's real economy is significant and rising,'' according to Andrew Colquhoun, the director of Fitch's Sovereigns Group.

The global financial crisis is hitting more vulnerable emerging markets as investors shun riskier assets in countries with big current-account deficits in a flight to safety. Ukraine has the worst creditworthiness of Europe's emerging markets, based on the cost of credit-default swaps, which protect bondholders against default.

Contracts on Ukraine's debt are traded at 2000 basis points, compared with 458 for Hungary, according to CMA Datavision in London.

``Fitch is unconvinced that the raft of emergency support measures announced by the central bank will be adequate to shore up depositor confidence and forestall further banking-system stress,'' said Colquhoun. ``New central bank rules restricting loan growth threaten to exacerbate a slowdown in the economy, which could hit banks' asset quality relatively soon.''

Ukraine Set To Receive IMF Help: Details Only Await Agreement Between Yushchenko and Tymoshenko

2008-10-17T08:36:00.000+02:00

The global credit crisis continued to extend its reach on Thursday as Hungary and Ukraine both approached international institutions for support in an effort to avoid following Iceland into financial turmoil.

The European Central Bank also announced yesterday that it will support the Hungarian central bank's money market operations with as much as 5 billion euros ($6.7 billion) to help it ease the present financial tensions. The agreement will provide the central bank with a facility to borrow up to 5 billion euros in order to provide additional support to the central bank's operations, the ECB said in a statement this morning. The move will support the Hungarian central bank's "instruments of euro liquidity provision.'' This move is an important "first", since Hungary isn't a member of the 15-nation euro region, a may well set a precedent which will need to be followed as more and more of the walking wounded limp over and present themselves at the Kaiserstrasse front door, before being politely shown round the back to the overnight lending window.

And today we learn that Ukraine may borrow between $10 billion and $15 billion from the International Monetary Fund to "strengthen its position'' during the global financial crisis, according to Deputy Central Bank Governor Oleksandr Savchenko. The cost of insuring Ukrainian debt in the credit default swaps market also increased today (Friday) by 200 basis points to reach an all-time high of 2000 bps (or 20%), meaning it will now cost $2 million a year to insure $10 million of five-year debt.

Emerging Markets Take a Bashing

Emerging equity markets sank for a third consecutive day on Friday, setting new three-year lows as more positive sentiment in developed markets was unable to lift deepening gloom.Iceland's highly indebted banking system has already driven the country and currency to collapse, while worries over banking stability in Ukraine, Serbia and Hungary have forced these three countries to seek outside help and in so doing sparked investor nerves.

Standard & Poor's has announced that it placed its 'BBB+/A-2' sovereign credit rating on Hungary on CreditWatch with negative implications. S&P has also placed the following ratings on Ukraine on CreditWatch with negative implications: its 'B+/B' foreign currency and 'BB-/B' local currency sovereign credit ratings on its global scale; and its 'uaAA' ratings on its national scale.

“The CreditWatch placement reflects our concerns over mounting financial-sector
funding pressures and their potential to raise general government debt
materially from its current level of 67% of GDP," explained Standard &
Poor's credit analyst Kai Stukenbrock. S&P said the weakened funding profile
of these institutions stems not only from the current turmoil in credit markets
throughout the industrialized world but also from domestic issues.

“Much of this credit growth has been denominated in foreign currencies and was - to a large extent - financed by rising external debt, which for the financial sector alone reached a high 34% of GDP in 2007. Some domestic banks have ownership concentrations that make raising equity capital more difficult."

The International Monetary Fund is prepared to give Ukraine credit of $14 billion in a bid to help stabilise the country's financial system, a spokeswoman for President Viktor Yushchenko stated on Friday. An IMF mission is currently in Ukraine to see how it can help cushion the effects of the global financial crisis. It began its day meeting Prime Minister Yulia Tymoshenko and was holding talks later with Yushchenko. The process is not helped by the fact that the two former allies from Ukraine's pro-Western "Orange Revolution" of 2004 are now openly at loggerheads.

Tymoshenko, for example, stated on Thursday said the Fund was considering granting a credit ranging from $3-14 billion, contingent on the postponement of an early election called by President Yushchenko. The Fund subsequently denied it had made any such link.

On Friday morning, a UKraine government spokeswoman said the IMF mission's head, Ceyla Pazarbasioglu, had told the prime minister the Fund was "ready to provide help to IMF member-states."We are working very hard and are prepared to do everything within our power to help you in working out economic policy," Pazarbasioglu was quoted as saying.

Ukraine's hryvnia fell for a third day against the dollar on Friday. The hryvnia, which Ukraine's central bank currently aims to keep within a trading band 8 percent either side of 4.95 per dollar, slid as much as 1.4 percent to 5.3100 per dollar, and was at 5.2800 by 10:36 a.m. in Kiev. It has now lost 2.3 percent this week. The currency also fell against the euro, slipping 1.1 percent to 7.0892, leaving it 2.5 percent lower since Oct. 10. Ukraine's currency has slumped 13 percent versus the dollar since early September as the collapse of its governing coalition and the financial concerns reignited by Lehman Brothers Holdings Inc.'s failure deterred investors from emerging markets and nations reliant on external funding.

"The CreditWatch placements reflect our concerns over the impact of a
deteriorating economic situation and associated exchange-rate depreciation on
the country's financial sector asset quality, especially in light of its high
level of private sector foreign currency borrowing, equivalent to 35% of GDP,"
said Standard & Poor's credit analyst Frank Gill.

Ukraine's current account gap soared sixfold in US dollar terms during the first half of 2008 to USD 6.8 billion (an estimated 7% of GDP), but S&P believes this figure is likely to shrink markedly during the remainder of 2008 and into 2009 “as Ukraine faces a sudden stop in external financing." These last words should send a shiver down the spine of anyone who has any idea of what a "sudden stop" implies.

S&P consider that high short-term financing needs will remain, noting that Ukraine's gross external financing requirements (current account balance, amortization of long-term external debt, and stock of short-term external debt) will be 147% of international reserves over the next 12 months.

Carefully Made Property Investments?

When Lev Partskhaladze, a Ukrainian property developer, was preparing to float his company on the London stock market three years ago, he saw no end to his country’s home and office construction boom. Today, with cranes standing idle over Kiev building sites and property sales evaporating, he admits the global credit crunch is bringing the boom to a halt. “We are seeing a financial crisis transforming into an economic crisis in the world. It has not fully hit Ukraine yet but it’s close,” says the chairman of XXI Century Investments. With its shares down 97 per cent from their peak, the company is trying to raise cash by offloading projects to other developers.

In Ukraine, banks have also borrowed heavily overseas to finance credit growth and are struggling to refinance themselves. At the same time, the current account deficit is widening as prices for steel, Ukraine’s main export, plummet. So Kiev’s external financing needs are growing just as credit is short and foreign direct investment, a big source of finance in recent years, is slowing.

The Bankruptcies Start

Industrial Carriers, based in the Marshall Islands and operating from Odessa in Ukraine, has today sought protection from creditors. The company's debts reported to be related to trading of ships and derivatives.

The Baltic Dry Index, a gauge of shipping costs, has fallen 87 percent since May 20 on a slowing world economy. Steelmakers are curbing production as prices decline, cutting demand for iron ore, the biggest single source of demand for commodity carriers. Usage has also fallen because traders can't obtain credit to purchase consignments.

Daily rental income for coal and iron-ore transporters, called capesizes, tumbled to $11,580 a day yesterday, taking the decline in the past four months to 95 percent, according to the London-based Baltic Exchange. Companies that lease ships out in the single-voyage, or spot, market would lose money on ships that they have hired at higher, fixed daily rates.

Industrial Carriers hires vessels on so-called time charters, meaning it commits to paying a fixed daily rental fee for them for a period of several months or years. According to information provided on Industrial Carriers website the company generated sales of about $1 billion last year from leasing out vessels.

Postscript

The contents of this post are largely narrative of ongoing events, a full economic analysis of the present crisis can be found in my Ukraine Wobbles As The Financial Ground Beneath It Trembles post.

Ukraine Joins The Swooning Bout And Heads For The IMF

2008-10-14T22:32:00.000+02:00

Ukraine has joined the growing list of Eastern European countries who have now entered some form of "consultation" process with the IMF and today formally requested "systemic support'' and "active cooperation'' from the fund. The government will meet with IMF representatives in the ``coming days,'' according to a statement from First Deputy Prime Minister Oleksandr Turchynov. He declined to give further details about Ukraine's request.

``Now, the IMF is coming and the Finance Ministry is starting to work with them actively,'' Turchynov said. The IMF will meet the Prime Minister Yulia Timoshenko ``to discuss the financial system's stability.''

Contracts on Ukraine's debt were today being traded at 1,500 basis points,as compared with 440 on Russia and 337.5 on Hungary, according to CMA Datavision in London.

Even as late as yesterday central bank Governor Volodymyr Stelmakh had been saying IMF help wasn't needed. The banking system is "normal and reliable,'' he said in an interview.

The Icelandic authorities were really the first to bite the dreaded bullet, and after some coming and going agreed to accept assistance from the IMF. An IMF mission is now on the island preparing a plan which will then be put to the Icelandic government (protocols here are important). Under negotiation are the terms of any possible loan. According to Einar Karl Haraldsson (a political adviser to the Icelandic government) the plan is expected to be finalized in the next few days, after which the government will have to decide whether to accept the aid and the terms under which it is being offered.

Then it was Hungary who announced on Monday they had enetered into consultations with the fund.

And now the list is growing by the day as more and more Eastern European countries seem to be at risk of following Iceland and Hungary into the arms of the IMF, with the Baltic republics of Estonia, Latvia and Lithuania looking particularly vulnerable at this point, according to a warning from the International Monetary Fund itself yesterday.

Dominique Strauss-Kahn, managing director of the IMF, which was formally approached yesterday for assistance by Hungary as well as Iceland, said: "The fallout for most banking systems in emerging and developing economies has been limited so far but signs of stress are growing, " Strauss-Kahn said some banks in eastern Europe have become increasingly exposed to struggling property markets, having raised funds on international money markets in the same way as the ill-fated Icelandic banks.

For the time being the various national governments are denying the possibility, with Edgars Vaikulis, spokesman for Prime Minister Ivars Godmanis, being quoted in Bloomberg as saying "There is no reason to speak of threats to the Latvian financial system......Latvia's situation is different from some of the eurozone members.''

I'm sure that the latter statement is true, even if not in the sense that Vaikulis meant. Nonetheless the Latvian government has taken the step of raising guarantees on all bank deposits to 50,000 euros ($68,225), in line with an earlier decision by European Union finance ministers.

In my view the threat to the Baltic financial systems is real, as is the threat to the Bulgarian and Romanian ones. Action, of some form or another needs to be taken, and soon. Latvia and Estonia are now in deep recessions, and Lithuania, while still clinging on to growth, can't be far behind. Basically it is hard to see any revival in domestic demand in the immediate future, which means these countries now need to live from exports. But with the very high inflation they have had it is hard to see how they can restore competitiveness while retaining their currency pegs to the euro. The IMF will almost certainly insist on a currency float as a condition of rescue, and if you look at the speeches of Lorenzo Bini Smaghi and Jürgen Stark over the last year, it is clear that thinking at the ECB runs along pretty much the same lines. So better get it over and done with now I would say, and take advantage of the shelter offered in the arms of the IMF. Indeed the more I look at what is happening, the more it would appear that a division of labour was agreed to in Paris last weekend, with the EU institutional structure sorting out the mess in Ireland and the South of Europe, and the IMF taking care of all that broken crockery out there in the EU10.

In what is likely to become a sign of the times Hungary's MKB Bank announced that yesterday that it is going to stop providing euro- and Swiss franc-denominated loans until further notice. In defence of its decision MKB said the huge volatility registered in the value of forint in recent weeks, and especially the strong depreciation at the end of last week, make the outlook on the currency extermely uncertain. Most other Hungarian banks are expected to follow MKB's lead. This practice of bringing an end to the extremely dangerous practice of offering foreign exchange denominated loans in countries running large external deficits is now likely to come to a screeching halt all across the CEE and CIS economies, and bit by bit the IMF will have to be brought in to offer support during the transition back to reality.

For a full and thorough analysis of the current threat to the Baltic economies, see this whopping post this morning from Claus Vistesen.

All the relevant background and analysis to the economic situation in the Ukraine can be found in this post which I put up on on this blog on Sunday.

Update

According to the Ukrainian news source Delo the Ukrainian central bank injected almost 11 billion hryvnia ($2.2 billion) into the banking system in the first 13 days of October because of the credit crisis. The Natsionalnyi Bank Ukrainy were reported to have approved more than 6 billion hryvnia of one-year loans and another 4.7 billion hryvnia of overnight loans. In September, the Kiev-based central bank gave 2.5 billion hryvnia to banks as overnight loans.

Ukraine Wobbles As The Financial Ground Beneath It Trembles

2008-10-07T17:43:00.000+02:00

The medium-term outlook is sensitive to external developments and policy responses. A benign external environment, featuring even higher steel prices and FDI, could produce growth in excess of 7 percent, but inflation could prove hard to control under a peg. Under an adverse external outlook, by contrast, the peg could lead to external sustainability problems.
IMF 2006 Article IV Consultation Staff Report (February 2007)

Ukraine's economy is in trouble, there is no doubt about it. The cost of protecting debt against a sovereign default by Ukraine's government soared to a record on Friday, following the arrival of a twin storm of both political and financial uncertaintly. The Ukraine president Viktor Yushchenko announced earlier in the week (only to be challenged on Saturday by his perpetual rival Julia Tymoshenko) that he was going to call what would be the country's third parliamentary elections in as many years just as the central bank found itslef forced to step in and take control of the country's sixth-largest bank while the country's currency - the hyrvnia - went for a nose-dive. With the benefit of hindsight the IMF forecast cited in the paragraph above has been extremely prescient. During the "benign external environment stage" Ukraine's economic growth has been substantial, steel prices have been high, and FDI flows (especially into the banking sector) strong. As a result inflation went through the roof. Now we have entered the "adverse external environment" stage, and steel prices are falling while bank and other external finance flows reverse direction. The sustainability issues are evident, and the coming days are going to be critical.

Ukraine is not alone in having problems at this point (but here there is no strength or consolation to be found in company), and stock markets around the globe fell dramatically last week. Ukraine's PFTS bourse was, thus, only one among several that found themselves complelled to suspend rading. Ukraine's stockmarket was closed for the second time in the week on Wednesday (trading had previously been suspended on Monday) following an 11 per cent drop in shares on Tuesday (with banks plummeting between 22 and 26 per cent, and metal producers slumping from 13 to 16 per cent). Trading did recommence again on Thursday, only to see an additional 14 percent in value wiped out, and the doors firmly barred again on Friday. Markets will now remain closed until Monday, when, at the time of writing, they are scheduled to open once more. The PFTS index has now lost 41 percent since the start of September, when the large scale investor pull-out from Russia really got underway, and is down 73 percent since the start of the year, a rollercoaster performance following the 130 percent rise last year.

Credit Default Swaps Soar

Credit-default swaps on Ukraine's $14.9 billion state debt jumped by 473 basis points to 1,700, the biggest one-day advance, according to CMA Datavision prices in London. Ukraine now is priced as having the highest risk of default among Europe's emerging markets.

Ukraine is highly dependent on foreign investment at a time when credit markets around the world are frozen. Ukraine's current account deficit has surged strongly this year to a projected $7.7 billion (up from about $2 billion). At the same time annual inflation soared to a record 31 percent in May and was still stuck at 25 percent in September.

The central bank has already spent an estimated $1 billion supporting the hyrvnia after it fell as much as 12 percent against the dollar during September and early October. The intervention reduced foreign reserves to $36.5 billion yesterday and pared the decline in the hryvnia, which strengthened by 6.6 percent on Friday to reach 4.9987 per dollar. This followed a drop to 5.9 to the dollar on Wednesday (or a cummulative 20% devaluation since early the start of September). All these numbers are large, whichever way you look at them. And this kind of intervention is expensive, and while Ukraine is not on the brink of bankruptcy (yet) it cannot continue for that long. Reserves already fell in terms of months of next period imports from 4 months to 3.7 between Q1 and Q2 2008 according to central bank data. At the same time Ukraine's external financing requirements have risen sharply in recent years (see chart below).

Banks Take A Beating

The National Bank of Ukraine also took over the management of Prominvestbank during the week, and imposed a moratorium on payments to creditors for six months, triggering generalised credit rating downgrades.

The move came after nearly a week of local media reports, which were followed by queues outside banks and in front of ATMs, that Prominvestbank was in difficulties due to heavy involvement in Ukraine metal and real estate industries - both good earners until as late as last month, but now sectors which face massive losses due to falling international commodity prices and more costly credit.

Moody's investor services expressed concern about the ability of Kiev-based Prominvestbank - which had a reported 27.6 billion hryvnia ($5.1 billion) of assets as of Sept. 30 " to continue its operations as a viable stand-alone entity". In a report written by analyst Yaroslav Sovgyra, and was published Thursday, the ratings agency said "Prominvestbank's franchise and the overall credit profile have been significantly impaired in light of the recently experienced run on deposits by the bank.'' Moody's cut its foreign-currency deposit grade for Prominvestbank to Caa2, the fourth-lowest ranking, and down from B2.

Fitch Ratings cut Ukraine's credit outlook to ``negative'' from ``stable'' on Sept. 25.

Ukraine's banks owed a total of $38.4 billion as of July 2008, according to central bank data. To put things in perspective, this could be compared with the estimated $61 billion owed by Iceland's three collapsed banks. But the foreign indebtedness of Ukrainian banks has grown rapidly in recent years, doubling in 2006 to $13.87 billion, from $6.75 million in 2005. Much of the lending (around 50%) is forex denominated, and although the total private debt to GDP ratio (65%) is comparatively low, lending has been rising at a very fast rate (75% per annum).

Around 30% of Ukraine's total foreign debt ($128 billion or around 65 percent of GDP in 2008 according to IMF estimates) is owed by commercial banks.

In an attempt to address the crisis, the Ukraine central bank has injected 7.795 billion hryvnia into the banking system since the beginning of October, following 5.96 billion lent to banks during September. The problem is much more extensive than Prominvestbank itself, with shares in Raiffeisen Bank Aval, Ukraine's second-biggest bank by assets, also down 74 percent this year. Shares in AKB Ukrsotsbank, the country's fourth-biggest bank, have slumped 79 percent.

Ukraine's banking sector appeared even more shaky following the Prominvest decision than they did before it, with multiple banks applying formally for government assistance. Acoording to intefax a total of 25 loan institutions have filed requests for low- interest credits or other state financing.

Local newspaper Kommersant-Ukraina named Narda bank (another in the top ten) as one of the banks seeking government financing. Narda are set to receive a 290 million dollar bail-out package to cover approximately 230 million dollars of external debt, according to the report.

Other Ukrainian banks reported to be asking for help on Thursday were Rodovidbank, Alfa-Bank, Kreditprombank, and Finansi i Kredit bank, according to an article in Economicheskie Izvestia. The article said that the central bank had already approved 23 of 25 assistance package requests - and that they were worth in total around 620 million dollars,. Banks applying for cash injections account for something like 25 per cent Ukraine's banking sector.

Apart from Kazakhstan, Ukraine is currently the only government among Europe's emerging markets with credit-default swaps currently trading above the 1,000 basis points level. But even Kazakhstan debt is way below the UKraine equivalent, with contracts on Kazakhstan jumping to 1,050 basis points from 759 basis points on Friday as the government increased sevenfold the limit on retail bank deposits guaranteed.

The problem is most certainly becoming a regional one, and extending across Eastern Europe, with contracts on Russian government debt up 179 basis points (to 559), their highest level since at least 2004. Credit-default swaps on Turkey rose 138 points to 552 points, while those on Hungary increased 116 points to 458.

As I have argued in a number of previous posts (here, here, here and here) Ukraine is evidently suffering from a wide variety of problems, including institutional chaos and ongoing population decline, and it is not really surprising that it should be singled out as the country destined to lie at the heart of the forthcoming CEE "correction".

Strong GDP Growth

“The growth forecast for 2008 reflects strong performance during the first half of the year, terms-of-trade gains, and indications of a bumper harvest,” the October 2008 IMF World Economic Outlook report stated. “Going forward, growth is projected to decelerate markedly, reflecting weaker export market growth, slowing real wage increases, moderating terms-of-trade gains, and higher financing costs.”

The current events in Ukraine may well take some observers by surprise, since the general impression has been that the economic performance has been solid and GDP growth has been strong in recent years, and this has given the impression that the underlying reality was sound, which it basically hasn't been. The country has been bedevilled by constant infighting, while at the same time a combination of strong migration of Ukraine workers to external destinations and very long term low fertility has meant that the country endemically suffers from acute labour shortages as the population both ages and declines comparatively rapidly. Hence, in my view, the absurdly high levels of inflation we have been seeing.

Nevertheless, real GDP has grown by 7.5 percent a year on average since 2000, in line with other CIS countries, and indeed that rate has been higher than in most other transition economies: whether or not this growth was built on sand is what we are now all about to find out.

GDP was up at a 7.1% y-o-y rate in the January to August period, and in fact the expansion has even been accelerating in recent months largely, due to the good harvest and the increase in agricultural output - up 24.4% January to August. Manufacturing output has also been doing well, driven by a seemingly unquenchable thirst for steel in Russia, and was up 7.3% y-o-y in the January-August period. Construction, on the other hand, has now been in recession for some time, with output down 5.3% y-o-y in the first eight months of the year. The decline in construction is a reflection of the growing credit difficulties the economy has been having, and the slowdown has been making its presence felt in domestic consumption generally, with the rate of retail sales increase (while remaining strong) starting to taper off, falling from 10.4% y-o-y in Q1 to 8.2% in Q2. And as we know, the recent Russian tank excursion through the Roki tunnnel has meant that Russia is now nothing like so thirsty for steel (see below), and as a result, we should expect to see headline Ukraine GDP growth dropping fairly rapidly (we could be down to a 3 or 3.5% annual rate by the end of Q4, with more downward movement to follow as we move into 2009), as the country gets caught in the twin pincer of an internal credit crunch (sudden stop) and a sharp drop in external demand for its key product.

Overheating and The Inflation Problem

Evidently the Ukraine economy was pushed well beyond its short term capacity limits by a combination of expansionary fiscal and incomes policies (real, inflation adjusted, income was up 13.4% y-o-y in January-August) and high steel prices (both of which fuelled very strong domestic demand growth), and these were simply reinforced by very rapid money and credit growth. These factors, together with rising food and energy prices, lifted CPI inflation to a peak of 31% percent in May (see chart below), since which time the rate has fallen back, but only as far as the 24.6% rate registered in September.

Core inflation has also risen - with producer prices still rising at an annual rate of 42.7% in September (having peaked at 46.3% in July, see chart below), while real wage growth continues to be substantial, and inflation expectations remain at a very high level.

Current Account Deterioration

The Ukraine current account deficit has deteriorated sharply because of the very strong domestic demand growth and, more recently, the eroding competitiveness of Ukraine manufacturing industry. This has loss of competitiveness has occurred despite significant improvements in the terms of trade. This favourable situation is now coming to an end and in all probability even reversing as steel prices drop substantially. Capital inflows, and especially FDI, which have been strong, may now well reverse. Private external debt and debt rollover have risen sharply, leaving the economy more sensitive to balance-sheet risks and deteriorating global liquidity conditions, according to the most recent staff report by IMF economists.

The IMF estimate (October 2008, WEO) that this years current account deficit will rise from 3.7% of GDP in 2007 to 7.2%.

Fiscal policy has been dangerously expansionary in the face of the rising inflationary pressures and the deteriorating current account position. Nominal spending has risen by an average over 30 percent a year since 2003, stimulating domestic demand and increasing the size of the government sector. This growth reflected rapidly rising public-sector wages and social transfers and, in 2008, partial restitution of Soviet-era bank deposits that had been wiped out by hyperinflation.

Deficits have been moderate, as spending growth has been paid for by inflationary revenue windfalls that fiscal policy itself has helped bring about. Nevertheless, the fiscal stance has been procyclical and Ukraine is one of the few countries in Eastern Europe to have increased its fiscal deficit as capital inflows have surged.

Steel Dependent Economy

In what is now a sign of the times Ukraine's biggest steel mill, owned by the ArcelorMittal group, reduced steel output by 10.5 percent to 5.471 million tonnes in January-September 2008, according to Ukraine news agency reports last week. The reports suggested the ArcelorMittal mill had decreased rolled steel output by 12.4 percent to 4.663 million tonnes so far this year, while pig iron output fell by 9.3 percent to 4.935 million. The company had previously increased steel output to 8.103 million tonnes in 2007 from 7.6 million in 2006.

Just over the border, OAO Severstal, Russia's largest steelmaker, also announced last week plans to slash output in Russia, the U.S. and Europe by as much as 30 percent in October and review full-year forecasts. Production is to be cut 30 percent in the U.S. and Italy, and 25 percent in Severstal's home town of Cherepovets in Russia.

Steelmakers from China and South Korea to Austria and Russia are curbing output as demand for cars and buildings weakens, and as banks withdraw funding for new plants. OAO Magnitogorsk Iron & Steel, Russia's third-largest producer, Posco, Asia's biggest stainless steel maker, and Voestalpine AG, Austria's top steel company, all signaled cuts in production plans this week.

The production and export of steel is an important pillar of the Ukrainian
economy, and steel production accounts for more than a third of total goods exports (equivalent to some 12 percent of GDP). Thus real GDP growth in Ukraine is closely linked to steel prices. During the global economic upswing of the past few years, along with a wider surge in metals valuations, steel prices have risen dramatically, thus underpinning Ukraine’s mostly favorable export performance and impressive GDP growth ever. Although steel prices had been holding up till very recently, the current global financial turmoil is having a dramatic impact on car, construction and investment activity, all of which impact steel prices and we may therefore expect significant adverse effects on Ukraine growth and export receipts. A key issue for the future is, of course, how Ukraine’s economy can be made less dependent on such global price volatility in one key product.

Sharp Steel Downturn

As recently as Sept. 4 OAO Severstal had been suggesting that output would rise 31 percent to 23 million metric tons this year, so the slowdown has been very rapid indeed. Goldman Sachs Group Inc. yesterday cut its 2009 steel price forecast by 29 percent. Global export prices for hot-rolled coil steel, a benchmark, have declined 19 percent since July, according to Bloomberg Metal Bulletin data.

And the slump doesn't only affect current output, investment is also affected. Thus Austrian steelmaker Voestalpine announced during last week that it is considering delaying a decision on building a new steel plant on the Black Sea due in part to the financial crisis. Voestalpine had been planning to build a plant with a 5.5 million tonne capacity in either Bulgaria, Romania, Turkey or Ukraine, with a cost which investment analysts estimate to be in the 5 to 6 billion euros ($6.7-8.2 billion) region.

Hyrvnia Under Pressure

While the official exchange rate is set as Hr 4.95 – plus or minus eight percent – to the U.S. dollar, some exchange booths were offering Hr. 5.5 to Hr 6 for $1.
Kiev Post Report

The hyrvnia - Ukraine's national currency fell to an eight-year low last Wednesday, following the decision of the National Bank of Ukraine to widen the currency's trading band.

The National Bank, which has $38 billion in foreign exchange reserves, is now engaged in a delicate balancing act since while on the one hand officials are promising “strong interventions” to keep the hryvnia at roughly five to the dollar, international financing sources are drying up and Ukraine is running a growing current account deficit, which hit nearly $8 billion in July.

The strategy appears to be not to waste foreign exchange reserves, defending an arguably un-defendable exchange rate, but to conserve reserves to support banks and corporates to meet external debt service payments falling due and, also, to more generally prop up the banking sector. The problem is that the NBU can either support the currency, or support the banks and corporates but it does not really have enough foreign exchange reserves to do both at once.

Ukraine's central bank has weakened the currency's official rate against the dollar and widened its trading limits on October 7. The currency's new official rate until the end of the year was weakened to 4.95 per dollar from 4.85 and it will be allowed to rise or fall 8 percent from that level, compared with the previous 4 percent.

The hryvnia has slumped 18 percent against the dollar since Sept. 2, when President Viktor Yushchenko's party broke from its coalition with Prime Minister Yulia Timoshenko. Yushchenko dissolved the parliament yesterday, calling for new elections.

The managed currency is also being pushed down by demand for dollars from local banks and companies who need to pay down debt which they can't refinance so they have to buy dollars and pay back now. Exporters seeing this situation are also postponing selling dollars hoping for more local weakness down the road.

Nationalnyi Bank Ukrainy, which kept the hryvnia little changed against the dollar throughout 2007 and 2006, allowed it to trade more freely this year to help combat inflation, now at 26 percent. The bank strengthened the hryvnia's official rate by 4 percent to 4.854 per dollar in June, after leaving it at 5.05 per dollar since April 2005.

Declining Population The Root Of All Evil?

One of the things we should all now be learning as we look out across what is currently happening right across Eastern Europe (and I do mean right across) is that what we have is an environment where a number of long term underlying problems persist. These range from a lingering and heavy state presence in the economy, high and enduring inflation which steadily eats into the export competitiveness of manufactured goods and services, wage pressures which stem from labour supply shortages produced by out-migration and long term low fertility, and heavy balance sheet exposure due to an extensive euro- or dollarization of the banking sector (the later being the Ukraine case). The large current account deficits which follow from the above, and the consequent ongoing dependence on the arrival of substantial capital inflows can create a vulnerability to short term shocks which puts the entire macroeconomic framework at risk. The current credit crunch is, of course, almost a text book example of just such a short term shock.

This danger of a strong correction in adverse times becomes even greater (as we are now seeing) if measures are not taken (which they weren't in Ukraine's case, see this post) to drain excess liquidity from the system (by running a fiscal surplus for example), to loosen labour supply constraints by facilitating inward migration of unskilled workers, and to accelerate the pace structural reforms - and particularly those which facilitate the development of "greenfield" investment sites which help channel capital flows towards productivity-enhancing uses and in so doing raise exports. Unfortunately, at least this time round, it would seem it is a little late in the day for this kind of advice.

So to answer the question I somewhat provocatively inserted at the head of this section, Ukraine's declining population is not 100% of the problem, not by a long stretch it isn't, but it is an important component, and does form a context in which the other parameters need to be situated, and this dimension of the current crisis in Ukraine is all the more important since it is one which is normally ignored, and even more to the point, has been left unattended for so long that it has become an issue which it is very hard to address.

A Declining and Ageing Population

According to data from the State Statistics Committee , Ukraine's population fell by 290,220 in 2007. That is a rate of only just short of a million people less every 3 years. Simply there are more people dying every year than are being born, with 472,657 births being registered (up 12,000 from 460,368 for 2006) and 762,877 deaths (down slightly from 758,093 in 2006). What this means is that Ukraine's population is now falling very fast, at an annual rate of 0.675%. And remember this is the natural decline, not counting out migration. As we can see in the chart below the Ukraine population peaked in 1993, and has been in some sort of free-fall ever since.

There are a number of factors which lie behind this dramatic decline in the Ukrainian population. One of these is fertility, which is currently in the 1.1 to 1.2 Tfr range. In fact Ukraine's fertility actually dropped below the 2.1 replacement level all the way back in the 1980s, but somehow people haven't seen fixing this "bust" as being in any way particularly important.

A second factor which is also important is life expectancy, and in the Ukraine case the trend in male life expectancy has been most preoccupying, since it has been falling rather than rising in recent years. In particular male life expectancy which is currently running at around 64. Apart from stating the obvious here, we should note that the deteriorating health outlook which this low level of life expectancy reflects places considerable constraints on the ability of a society like Ukraine to increase labour force participation rates in the older age groups, and this presents a big problem since increasing later life employment participation is normally though to be one of the princple ways in which a society can compensate for a shortage of people in the younger age groups.

The third factor influencing population dynamics is obviously migration. Ukranian out-migration since the turn of the century is distinguished by two key tends: a) a reduction in intensity when compared with the very dramatic population movements which were so characteristic of the 1990s, and b) a significant change in destinations. From migrating East the Ukranians are now moving West. There is little in the way of systematic data here, but there is national level data on the numbers of Ukranians who now live and work in Portugal, Spain and Italy, together with plenty of anecdotal information about Ukranian migrant workers in Latvia, the Czech Republic, Poland and elsewhere in the EU 10.

According to information provided by Ukrainian diplomatic missions, 300,000 Ukrainian migrants may be working in Poland, 200,000 each in Italy and the Czech Republic, 150,000 in Portugal, 100,000 in Spain, 35,000 in Turkey, and another 20,000 in the US. According to official information based on the number of permits issued by the Russian Federal Migration Service, some 100,000 Ukrainian citizens currently work in Russia, although the real number of Ukrainians working there is often estimated to be more in the region of 1million.

With Fewer and Fewer People Available For Work

This out migration is very significant from the economic point of view, since the majority of those working abroad send money back on a regular basis (see chart below which shows World Bank estimates for Ukraine remittance flows) while at the same time are not present in the country to offer themselves for the work which this extra money creates. So out migration and the accompanying remittances are one thing in a high fertility, growing population like that which is to be found in Ecuador or the Philipinnes, and quite another in the long term low fertility, declining population environment of Central and Eastern Europe. Hence all that demand driven wage inflation. As we can see from the data in the chart below (which the World Bank Economists themselves recognise if surely a substantial underestimation) the flow of remittances into Ukraine has increased steadily in recent years. According to the World Bank remittances amounted to approximately 1% of Ukraine GDP in 2007, a number which seems rather small given the number of migrants involved, and one may suspect here that the data is rather underestimating the scale of the flows, but even as it is this amounts to a fiscal stimulus of 1% of GDP as a minimum.

As a result unemployment has been falling steadily over the last two years:

According to data from the Ukraine statistics office the official rate of unemplyment stood at 1.8% of the economically active population in August 2008 (down from 2.4% in January). Now these numbers are undoubtedly an underestimate of the true levels of unemplyment (the ILO compatible rate is the much higher 6.2%, but given the very special health situation in Ukraine we need to ask ourselves just how many of those who are formally included in the ILO classification are actually fit for work in a modern economy) but they do give an indication of the trend, and it is clear that some parts of the Ukraine labour market have been suffering from acute labour shortages, and hence the wage-push inflation the country has been experiencing. Wages have been rising (see chart below) at a rate which has been way above the combined inflation and productivity increase levels for many years now, and although wages did start from a very low level, and some degree of "catch up" was not only inevitable but also desireable, the complacency of the relevant authorities (both nationallly and interbationally, IMF, World Bank etc) in the face of such levels AFTER inflation really started to take off really does strike the external observer as quite extraordinary.

In many ways Ukraine could be considered to be a rather important strategic component in the whole Eastern labour supply and demographic puzzle, as we are no about to see, since many have been hoping against hope that as the recent expansion steadily drained labour supply resources across the whole region, then Ukraine would simply be able to step up to the plate and offer countries as diverse as the Baltics, Poland, Hungary, the Czech Republic and Russia the labour they needed to keep their own inflation in check. This view implied, in my opinion, that Ukraine was to become some kind of "fish farm" for the rest of Eastern Europe, and that view as we are seeing was always based on a huge misunderstanding, since a low fertility society simply cannot export labour indefinitely, and if it does try to do so, then internal wages simply explode.

In Conclusion

Of course, such demographic considerations may well seem to be rather distant from the very real and pressing drama which is breaking out in Ukraine. Obviously there are a great many lessons to be learned from the current "undoing" of the Ukraine economy. One of these is undoubtedly the desireability of moving away from dependence on one or two key commodities (steel, agriculture) whose prices are known to be very volatile and tied-in intimately with the global business cycle. Another would be the belated recognition that while FDI inflows are vital, such flows into the banking and financial sectors are not the same as inflows to fund greenfield industrial site development, and that an economy which is dependent on one or two primary commodities on the one hand, and construction associated business and financial services on the other simply is not a balanced or a stable one.

It is also clear that, whatever the well-wishing we would all like to make towards a rise in living standards for the Ukranian people, it is now abundantly clear that this cannot be achieved via a lack of vigilance towards the dangerous impact of spiraling wage-cost inflationary pressure, not can policy be adequately conducted under such circumstances by a central bank whose main priority is steering the value of a currency. Laxity and tolerance towards the inflation menace ultimately comes at a very high price, especially when it is allowed to get out of control in the way it has been in the Ukraine.

Finally, even if in fighting the short-term battle for survival which is now going to confront the Ukraine economy and its banking sector longer term demographic concerns are inevitably going to take a back seat, I think we need constantly to keep in mind that a failure to come to grips with this key ingredient in Ukraine's problem set will surely only lead to more of the same at some point in the future. So if you don't especially like suffering - and who does - then act, and act now.

Ukraine's August Inflation Drops Back Slightly While Stocks Fall Sharply

2008-09-06T08:40:00.000+02:00

Ukraine's inflation rate declined in August for a third consecutive month as increased supplies of fresh fruit and vegetables from local farms put a brake on the rise in food prices. Annual inflation slowed to 26 percent, still the fastest in Europe, but down from 26.8 percent in July, and significantly down on May's 31.1% peak, according to the latest data from the Kiev-based state statistics office.

Food prices were up 37.2 percent in August, compared with 39 percent in July. Although headline CPI seems now to have peaked, as external energy prices start to ease and food supply improves, inflation and interest rates will probably stay relatively high. The government’s main core index, excluding unprocessed food, fuel and controlled prices, was up 13.1% in the first seven months of the year, not far behind the food-dominated 14.9% of the headline index, and even the Ukraine President's Office now expects it to exceed 18 percent this year, compared with 16.6 percent in 2007.

Further supply-side rises will be increasingly hard to avoid. Kiev’s subsidized bread prices have finally been increased, and household gas prices are due to rise 13-14% in the coming month. Municipal heating companies still buy imported gas at around 25% below the current border price, building losses for Naftogaz that the government acknowledges will require a combination of continuing subsidy and price hikes. Rail freight tariffs are set to be raised 40% by end-2008.

In fact Ukraine's Producer Price Index was up at a 46.9 y-o-y rate in July, so inflation pressures within the price system are evidently still running very high.

At the same time wage growth pressure looks unlikely to slow significantly, especially given the growing demographic squeeze and strong regional demand for Ukraine’s still-cheap labour force. It is not unreasonable, therefore, to project that CPI will still be running above 20% by the end of 2008.

Stocks Slump and Trading Suspended

Ukraine's stocks continue to remain under pressure. One indication of this is that stock market trading had to be suspended for 2 hours on Friday following a 7 percent slump in values. According to Andriy Kolomiets, spokesman for the PFTS Stock Exchange, "We decided to halt trading after quotes for more than 75 percent of the PFTS stocks fell in today's session." Ukraine's PFTS Index has been the world's second worst-performing stock index so far this quarter - only behind Russia - falling by 29.1 percent, as the invasion of Georgia and the feud between President Viktor Yushchenko and Prime Minister Yulia Timoshenko gave a hefty shake to investor confidence.

Credit-default swaps on Ukraine's government debt rose 26 basis points to 501 on Friday, according to CMA Datavision prices, after earlier climbing to a record earlier in the day.

Growth Outlook Positive In The Short Term

In the short term Ukraine's growth outlook looks solid enough, and the FX reserve build-up continues apace. Preliminary real monthly GDP growth dropped slightly to 5.4%Y in June but rebounded to 7.3%Y in July – the strongest level yet seen in 2008. Agricultural output has a lot to do with this rebound, and bath agriculture and exports are likely to surge further in the next few months. The government’s grain harvest forecast is currently for a 53% increase on last year. While oil import prices are falling, steel export prices have so far been firm (steel has accounted for 38% of exports in the year to date), and Russian demand for machinery exports has been strong up to now. At the same time FX inflows have remained very robust, with FX reserves were up US$2.5 billion in July, an all-time record.

In the mid-term, however, the outlook is clearly becoming more difficult. Despite continuing terms-of-trade gains and unusually low gas imports in the first few months of the year, the current account deficit is widening rapidly, reaching 7.2% of GDP in January to July. Imports in Q1 were up 20.2% year on year in real terms, against just 0.9% year on year real export growth. Real household consumption was up 22.0% year on year. Real fixed investment growth, on the other hand, slowed to a 14.7% year on year rate. Vehicle imports were up 81% year on year in the first half. However, the consumer boom which lies behind all this looks set to become increasingly difficult to sustain. Nominal wage growth remains very strong, up 36%Y in July, reflecting a shrinking and increasingly internationally mobile labor force. Real retail sales growth was up 27% year on year in July.

By way of contrast, domestic industrial production growth in July was at its slowest level in two years, while industrial output was up by 7.3% year on year in the January July period.

At the same time there is now increasing evidence that Russia's economy is starting to slow, and as it does Ukraine's all important steel sector will be among those worst hit.

Ukraine’s overall external financing capacity is clearly still very high, but the risks of deterioration are growing. The financial account surplus in January-July was an impressive US$12.6 billion, or 11.6% of GDP, 80% up on the same period a year earlier (which was before the credit crunch set in) and 50% above the current account deficit so far this year. Medium-term loans to the banking sector account for 44% of this and are so far holding up better than we had expected. Net foreign liabilities of commercial banks are up an average UAH 7.6 billion in the past three months, still above the 2007 average. However the combination of tighter European funding conditions, a closure of foreign markets to smaller banks and slower credit demand in Ukraine itself may well slow these inflows.

Net inward FDI, which has ammonuted to US$6.9 billion so far this year, is likely to weaken without progress on privatization or further major bank sales. While FDI may slow, it is unlikely to come to a halt. The interest of companies like Evraz in Ukrainian steel, coal and transport assets underlines the scope for private sector non-bank inflows, as property rights in the industrial sector settle and investment needs grow. However, in the context of a widening current account deficit, such inflows may prove less supportive.

At 61.1%Y in July, bank credit growth is slowing but remains relatively strong, and it us importabt to bear in mind that recent growth rates are biased downwards by UAH strength. Half of total credit outstanding, and 62% of household credit, is FX-denominated. Bank credit as a share of GDP, at 60%, is high by regional standards, and smaller domestic banks are facing significant funding constraints.

Ukraine Anticipates Largest Harvest In 10 Years

2008-08-20T10:47:00.000+02:00

According to the Ukraine State Statistic Committee, as of August 1, 4,495,000 hectares of wheat had been harvested. This brings production to 16,544,000 tons with a yield of 3.68 tons/ha. The wheat production area is up by 24% and the yield by 47% compared to the same date of last year.

The barley harvested area is 2,857,000 hectares, production is estimated at 8,945,000 tons with a yield of 3.13 tons/ha. The barley production area is up by about 40% with about double the yield obtained last year.

Export

Following the cancellation of grain export quotas, export volumes increased significantly in June and July 2008. Official Ukrainian statistics show grain exports in June 2008 totaled; wheat = 483,000 tons, barley = 413,000 tons and corn = 486,000 tons. Total July-June wheat exports totaled 911,000 tons; barley exports totaled 1,040,000 tons and corn 1,600,000 tons. Official Ukrainian statistics show grain exports in June 2008 totaled; wheat = 600,000 tons, barley = 800,000 tons and corn = 274,000 tons. Please refer to the grain export tables (by month and destination) in the Statistical Tables Section.

June 2008 grain stocks are 44% higher than June 2007 grain stock levels. According to inland silo industry information, silos are currently at full capacity, much higher levels than for an average year. The owners of these silos are also expecting to have some difficulties accommodating grain from the new record high crop. The storage capacity of inland silos is estimated to be approximately 25-28 million tons for all crops, including oilseeds. Total 2007/2008 grain stocks amounted to 6.7 million tons on June 1 and about 0.7 million tons of oilseeds.

Ukraine Consumer Inflation Drops To "Only" 29.3% in June 2008

2008-07-08T14:33:00.000+02:00

Ukraine's inflation, the fastest in Europe, slowed in June, as food prices rose more slowly thanks to an increasing supply of fruits and vegetables from local farms. The annual inflation rate fell back to 29.3 percent in June from the 31.1 percent high hit in May according to data released by the Kiev-based state statistics committee earlier today. Food prices, which constitute about 60 percent of the basket used to measure the Ukraine consumer price index, rose 43.9 percent in June from a year ago, compared with a 48.5 percent increase in May.

Consumer prices rose 0.8 percent in June from May, the slowest monthly increase so far this year.

Producer prices on the other hand accelerated in June (a bad sign for the future of consumer inflation) rising 4.2 percent month on month from May, which compares with a 3.7 percent increase in May from April, according to separate data released by the state statistics committee. Year on year the producer price index was up to a shocking 43.7% from 37.6% in May.

Ukraine Central Bank Widens The Hryvnia Band

2008-07-04T15:58:00.000+02:00

Ukraine's central bank announced today that it was going to allow the Hryvnia (Ukraine's national currency) to fluctuate more, in a desperate attempt to slow what is far and away Europe's fastest inflation. The Natsionalnyi Bank Ukrainy will allow the currency to rise or fall 4 percent from a midrate of 4.85 against the dollar. The decision was made public by the bank's Governor Volodymyr Stelmakh at a press conference in Kiev today. The bank kept the hryvnia at 5.05 to the dollar between April 2005 and May this year.

Stelmakh indicated that the decision was a reflection of a policy of moving towards a regulated floating hryvnia rate.

Rising inflation recently prompted Standard & Poor's to cut Ukraine's credit rating. Monetary policy makers view the wider hryvnia trading band as a step toward inflation targeting according to Petro Poroshenko, head of the bank's council. At the present time the central bank controls the hryvnia rate by selling and buying dollars.

Ukrainian policy makers had previously strengthened the hryvnia by 4 percent on May 21 in a bid to curb inflation, which accelerated to 31 percent in May.

The bank's 14-member supervisory council, which includes political appointees, reversed the hryvnia revaluation on May 22, the first veto since Ukraine gained independence in 1991, saying a stronger currency will harm exporters. The bank's board, led by Stelmakh, then in turn overturned the veto the next day.

The dispute over the exchange rate echoes a wider struggle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko over economic policies. Timoshenko has welcomed the hryvnia strengthening, while Yushchenko has criticized it.

Ukraine Grain Exports To Triple

2008-06-24T16:12:00.000+02:00

Ukraine, which is the world's second-largest barley exporter,has said it expects overseas grain sales to triple in the marketing year that starts next month, easing two years of curbs caused by drought and record prices. Exports are expected to rise to between 13.5 million and 14 million metric tons in the 12 months starting July 1, compared with 3.7 million tons this year, according to Agriculture Minister Yuriy Melnyk in Kiev today. The grain harvest will be in the region of 37 percent to 40 million metric tons, after favorable weather, he said.

Of the 40 million-ton harvest, half will be wheat, 9 million tons barley and 9 million tons corn, the minister said. Melnyk reiterated that grain exports would continue to be subject to state-set limits.

Ukraine is expected to export 4 million tons of barley in the year ending September 2009, up from 1.7 million tons this year, the U.S. Department of Agriculture forecasts. That ranks equal with Australia but behind the European Union. The Ukrainian agricultural ministry set forecasts today of 50 million metric tones of grain harvest for the next two to three years.

Ukraine's wheat exports in the year ending June 2009 will be 6 million tons, compared with 700,000 tons this year, the USDA estimates. Corn exports in the year ending September 2009 will be 2.5 million tons, from 1 million tons this year.

Ukraine Inflation May 2008

2008-06-07T08:01:00.000+02:00

Inflation in Ukraine accelerated last month to the fastest in more than a decade. The annual inflation rate rose to 31.1 percent in May from 30.2 percent in April, the highest in Europe, accroding to the Kiev-based state statistics committee yesterday.

Consumer prices increased 1.3 percent in May from April, while producer prices rose 3.7 percent from April and 24.2 percent from December 2007.

The government of Ukraine, where the World Bank estimates almost 3.7 million people live in poverty, has so far failed to reduce the average inflation rate this year from 16.6 percent in 2007. Government and central bank officials have pledged to curb inflation to keep the economy stable as the former Soviet republic strengthens its economic ties with the European Union.

The central bank raised the benchmark interest rate to 12 percent from 10 percent in April and strengthened the hryvnia by 4 percent on May 21 in an effort to curb price increases. The Natsionalnyi Bank Ukrainy earlier predicted inflation this year will be below 20 percent.

Accelerating price growth threatens the credit ratings of Ukraine and other emerging-market nations, Fitch Ratings said May 27. Central bank Governor Volodymyr Stelmakh in April called inflation ``a real threat'' and said the government should cut social spending to help tame price increases.

Monetary Chaos Breaks Out at the Ukraine Central Bank

2008-05-22T22:40:00.000+02:00

Does anyone happen to know offhand the "official" dollar rate of the Ukrainian currency, the Hryvnia? I am asking this question since clearly over at the central bank they are having difficulty deciding at the moment, since - like the legendary character Hydra - they seem to be speaking with two "heads" at the same time, and the only question I can ask is: would the real representative of the Ukraine central bank please stand up!

This issue unfortunately is neither a small nor a comic one, since Ukraine is currently running a 30% plus annual inflation rate, and letting the currency rise against the dollar is one of the few serious anti inflation policies anyone has on the table at the present time.

Essentially the story to date is that the Ukraine central bank had been keeping the "official rate" for the national currency - the Hryvnia - at 5.05 to the dollar (within a broader target band of 4.95-5.25) since August 2005 - although traders have generally been saying that the bank effectively stopped intervening around February-March. However during the last 24 hours the "official rate" has become a highly contested issue, with one part of the bank's monetary policy structure suggesting that the official rate has now been revalued to 4.85 to the dollar, while another part is denying this and maintains the rate is still 5.05. Basically one part of the structure is challenging the right of another to take decisions.

Of course the reaction of the financial markets to this state of affairs is not that hard to predict (at least in the immediate term), and Ukraine's hryvnia fell the most against the dollar in a single day in over eight years yesterday, falling 4.01 percent on the day to trade as low as 4.7875 per dollar by 6:04 p.m. in Kiev, down from 4.5550 late Wednesday, making it the worst performer among the 178 global currencies being tracked by Bloomberg yesterday.

The fall at this point may, however, be more part of the internal tussle which is taking place in the bank itself than any knee-jerk financial markets reaction (although that could well be to come as central bank credibility at this point must be tending towards zero), and a according to Agata Urbanska, an emerging-markets currency strategist in London at ING Bank "They (the central bank, or part of it) are back in the market................This is all about the central bank weakening the currency.''

The latest incident is only one more episode in a long term tug-of-war which has been going on inside the central bank (and of course, inside the Ulraine parliament itself, since, it will be remembered, President Viktor Yushchenko was recently physically prevented from giving his state-of-the-nation address before parliament by legislators loyal to Prime Minister Yulia Tymoshenko who blocked access to the speaker's chair). The immediate problem started on Wednesday when Ukraine`s central bank board (note here the key term board) announced that it had decided to strengthen the official rate of the hryvnia to 4.85 to the dollar from the previous level of 5.05.

This move was not entirely unexpected since the bank has been under constant pressure to revalue or liberalise the hryvnia since inflation began rising dramatically in the autumn of last year, and Central Bank Governor Volodymyr Stelmakh had announced back in late April that there would soon be a "move" on the exchange rate front. However in a statement which now assumes rather more significance than it did at the time, the bank`s council (yes, note the COUNCIL - not the board - since the council is the other main player in this game) explicitly repudiated Stelmakh and rejected the idea of broadening the band on the very same day. From that moment on it should have been clear that monetary policy at the Ukraine National Bank was in for a bumpy ride, and so it has been.

Not to be upstaged by the decisions of the Board, Ukraine's central bank council itself met yesterday and formally rejected the hryvnia revaluation which had been decided on by the bank's board only one day earlier, and issued a press release stating that the official rate still stood at 5.05 to the dollar. This was the first example of one body vetoing another since the bank was founded when Ukraine became independent in 1991.

The bank council has 14 members, including the governor, parliamentary speaker Arseniy Yatsenyuk, and a number of parliamentary deputies. Stelmakh himself abstained at yesterday's vote while the other members all backed the veto of the board's decision.

"Today, the action of the board of raising the official rate to 4.85 was rescinded. Therefore, the official rate stands at 5.05/$," Petro Poroshenko, the council's head, told a news conference after a council meeting. He also advised the bank's board to re-examine the issue on Friday and suggested the board could only overturn the council's decision with a two-thirds majority.

Now for those of you who are - like me - a little bit confused by this somewhat Byzantine institutional structure, perhaps I should make plain that the board is effectively the bank's executive, while the council is a body created to formulate a framework for ongoing monetary policy. But now we find the board hold that the hryvnia is valued at 4.85 to the dollar, while the council maintain that the "official" value is still 5.05. So which is it? Well at this point your guess is as good as mine - and this is certainly "pluralist" monetary policy in action - but the board do seem to want to insist that they are going to have the last word, since late last night Reuters reported that the board had decided to overturn the councils veto and had issued a statement saying the hryvnia's rate on Friday would stand at 4.85 to the dollar -- unchanged from the rate it had set for Thursday, revalued from 5.05, before the council imposed its veto.

The Ukraine parliament - the Verkhovna Rada - have however voted to summon central bank of head Volodymyr Stelmakh to give an explanation of his actions (by 382 votes out of a possible total of 447) following a proposal put forward by the parliamentary groups of the Party of Regions, the Block of Lytvyn, BYuT, and CPU.

Anyway, I do know how many of you are able to follow all of this? Personally my head is already whirling. And the whole situation became even more bizarre late last night when central bank officials declined to comment on whether the board had in fact overturned the earlier council veto decision, effectively sidestepping the problem posed by head of the council Petro Poroshenko earlier in the day when he stated only a two-thirds vote on the board could do this.

Basically the background to all of this is that until recently, the central bank had been intervening regularly, buying and selling currency to maintain the hryvnia within a prescribed tight-corridor of 5.0-5.06. As a rseult the hryvnia had been hovering around 4.7-4.8 since the central bank stopped intervening in February-March, but in recent days it had begun to soar, touching at one point 4.6 to the dollar, following comments from various central bank officials indicating a revaluation was coming soon, and pressure from credit ratings agencies and multilateral bodies like the IMF to allow the currency to rise in an attempt to soak up some of the globally imported inflation.

Earlier this week a rapid (and possibly speculative) surge in demand took the market rate to 4.6 leaving a gap of about nine percent between the interbank and the official rates, leading the bank`s deputy chairman, Oleksander Savchenko, to state on Monday that decisions would be taken "in the next few days" to tackle the hryvnia`s "highly volatile rate". Effectively it was the developing gap between the official and the interbank rates which precipitated the move on the part of the bank BOARD.

So the problem here is inflation and what to do about it. Ukraine's inflation rate was once more up sharply in April - passing the threshold of the 30% annual rate - as the bickering continued between Prime Minister Yulia Tymoshenko's government and the office of President Viktor Yushchenko over economic policy and how to handle the problem. Inflation was up 3.1 percent month on month (running at an incredible 37.2 annualised rate), and although this was lower than the 3.8 percent monthly increase registered in March (which was a 9-year record) it was still far higher than most analysts were expecting.

Annually, inflation reached a huge 30.2 percent - aided by an almost 50 percent jump in food prices - and the cumulative price rise for the first four months of this year was 13.1 percent, a 'mere' 3.5 percentage points above the government's whole year 2008 target of 9.6% which the government has yet to revise.

The Ukraine central bank has been trying to soak up hryvnia liquidity since the start of the year, twice raising the refinancing rate (which is now at 12 percent, up from 8 percent at the end of last year) and issuing a large amount of depository certificates.

The bank has also repeatedly said that it sees a strengthening of the hryvnia as a means to combat inflation. And of course the bank has been under continuing pressure to revalue or liberalise the hryvnia after inflation began to accelerate in the middle of last year.

When the decision to change the official rate was announced by the board on Wednesday the ratings agency Standard and Poor`s immediately called the move a step towards curbing price rises.

"Liberalising the exchange rate regime should help to curb inflation of tradeables, and in particular commodities such as gas and food, which are priced in dollars," the agency said in a statement. It has currently a rating of BB- for Ukraine.

However ones the smoke finally clears on all this we will be left with a number of outstanding questions. Not least of these is whether in the mid term the hryvnia is not more likely to move DOWN than up. Certaily Ukraine's economic problems are now substantial ones. This was explicitly recognised by Standard and Poor's in its comments following the decision by the bank`s move board, and they painted a bleak picture for Ukraine, saying inflation was boosted by non-monetary factors and that a stronger hryvnia would ultimately harm exporters, raising the current account deficit.

"In the first quarter of 2008, nominal government expenditures increased just under 50 percent, pushing up public sector wages and sending a highly inflationary signal to the private sector," it said. "Loose income policy continues to affect goods prices via second-round effects."

The agency also lambasted the government of Prime Minister Yulia Tymoshenko in January, calling its fiscal policies "populist" after it began paying compensation to people who`s Soviet-era savings were wiped out by hyperinflation during the 1990s.

Tymoshenko has repeatedly promised that the government would be able to bring inflation under control in just a few months, and some officials had even predicted deflation during the summer months due to bumper food harvests (which are more than possible, the harvests, not the deflation, and this may mean in the short term that economic growth and inflation only accelerate).

Meantime Ukraine is currently running a current-account deficit, a deficit which has widened to $4 billion since the beginning of the year, and many analysts estimate it may exceed $15 billion by year-end. In fact the IMF estimate that it will reach 7.6% of GDP this year.

Conclusion

By way of conclusion I would like to make three simple points about this strange affair. The first of these is that the situation in the Ukraine to some extent parallels the situation in Russia, since both countries are facing a major inflation problem, and both are under pressure to allow the currency to rise to soak up some of the inflation. The political battle in Ukraine also mirrors the one in Russia in this sense, since the Putin/Medvedev group have been making it quite clear that they favour going for growth over the need to tackle inflation, and thus will resist currency revaluation pressures, even though the inflation itself will at some point almost inevitably undo all this solid growth performance due to the instability which will eventually follow, as I attempt to explain in this post.

The second point would be that the ability of simple currency appreciation alone to handle the kind of overheating Ukraine is experiencing is in fact rather questionable. Basically letting the currency appreciate can soak up some of the global dimension in Ukraine inflation, but it will not in and of itself resolve the internal overheating dimension. Ukraine, like Russia, has a declining population and a declining working age population. Unlike Russia Ukraine has out-migration and not inward migration. This means that the labour shortage issue in Ukraine is expecially acute when growth is in the 5 to 7% pa range. Basically Ukraine does not have the human capital resources to grow this quickly, and having a steady stream of remittances from those working abroad fueling consumption and construction only adds to (and does nothing to help resolve) these underlying problems.

Lastly, it is clear that Ukraine is now locked in to some sort of "boom-bust" cycle, but the bust may well not be imminent: that is to say we may well go up further before we finally fall back to earth. The reason for this is the current high in wheat prices, and the fact that Ukraine may well have a bumper harvest this year.

Economic analysts (and CEE specialists) 4Cast are predicting a significant recovery in agricultural performance across the entire East European region this year, driven by a massive rise in crop yields and farming output. They say weather conditions seem favourable in many countries in the region. Gábor Ambrus, analyst at 4Cast in London. believes the effect will be most visible where the share of farming is high, i.e.: Ukraine and Romania, while Poland, for example, may not benefit especially as it was spared from much of the regional draught in 2007.

Ambrus sees Romania and Ukraine as particularly likely to benefit from an agricurally driven boost to headline GDP effect. (The share of Romanian agriculture in GDP is 7-8%, so even a 30% increase in farming output may boost GDP by 2pp above expectations.) The effect on Ukraine is even larger with agriculture having something like a 17-18% share in GDP. The crop estimates being offered by UkrAgroConsult indicate a 35% increase in crops, and this could boost GDP by as much as 6pp over 2008, offsetting much of the slowdown coming from other sources, Ambrus argues. Of course this estimate may well be on the high side, but nonetheless Ukraine should get a substantial GDP boost, which means we should watch out, since this train may well now be about to accelerate before coming to what looks like it will inevitably be a "sudden stop".

Anyone interested in a rather fuller explanation of the underlying human capital resource problem could do worse than read this post I wrote some months ago on the topic.

Update

Well it is less than an hour since I put the post up, and already I am updating. I suspect this may happen more than once in the coming days. The latest news is that - unsurprisingly - Ukraine`s central bank chairman Volodymyr Stelmakh publicly confirmed this morning the bank's change in the official hryvnia rate to 4.85 per dollar from 5.05. The show goes on.

“The bank’s board made decision to confirm the change of the rate. We are confident that we do everything right, and we will defend our position”, V.Stelmakh said. According to him, the bank`s council had no right to decide on economic or legal issues and he saw the bank`s change of the official rate as merely eliminating imbalances in the market, and based on economic factors, rather than a "revaluation".

ERDB Report and the Hryvnia Band

2008-05-19T14:42:00.000+02:00

The European Bank for Reconstruction and Development this weekend cut its growth forecasts for Ukraine, Kazakhstan, and Romania. More than the cut itself, what was perhaps more important were the reasons given. The EBRD warned that Kazakhstan was suffering from 'the impact of inflation and credit stagnation' and reduced expected gross domestic product growth from 8.5 to 5.1 per cent. In Romania's case the growth forecast was cut from 6.5 to 5 per cent, on the grounds of 'rapid monetary tightening', with the central bank raising interest rates to counter inflation.For Ukraine, the growth forecast was reduced from 6 to 5.5 per cent, as the EBRD warned of the impact of inflation which last month hit an annual rate of 30 per cent, the highest in Europe and indeed among the highest globally at this point.

In a move which is possibly related to the ERDB report Ukraine central bank Deputy Governor Oleksandr Savchenko said this morning - at the meeting organised by the ERDB in Kiev - the central bank may have to change its policies to cut the inflation rate to its current target of between 18 percent and 19 percent this year (after it soared to 30.2 percent in April). This is being widely interpreted as meaning that the Ukrainian central bank may allow the hryvnia to trade more freely against the dollar - possibly as soon as this week - in an attempt to cap inflation after it accelerated to the fastest pace in more than a decade last month. The central bank has been effectively controlling the national currency since 1998.

The hryvnia has so far gained 5.1 percent this year in interbank trading amid speculation the Natsionalnyi Bank Ukrayyny has abandoned its practice of buying and selling the currency to keep it steady against the dollar.

Ukraine Inflation April 2008

2008-05-12T21:36:00.000+02:00

Ukraine's inflation rate was once more up sharply in April - passing the threshold of the 30% annual rate - as the bickering continued between Prime Minister Yulia Tymoshenko's government and the office of President Viktor Yushchenko over economic policy and how to handle the problem. Inflation was up 3.1 percent month on month (an incredible 37.2 annualised rate), and although that was lower than the 3.8 percent registered in March (which was a 9-year record) it was still higher than most analysts were expecting.

Annually, inflation reached a huge 30 percent - aided by an almost 50 percent jump in food prices - and the cumulative price rise for the first four months of this year was 13.1 percent, a 'mere' 3.5 percentage points above the government's whole year 2008 target of 9.6% which the government has yet to revise its 2008.

All of this however is far too little far too late. With inflation running at 30%, even 12% interest rates are far from sufficient (since there is still a negative 18% incentive to borrow against inflation). The figures thus simply add to the pressure on the National Bank of Ukraine to take stronger action, from further hikes in key interest rates to letting the hryvnia appreciate rapidly against the U.S. dollar.

“We are standing at the threshold behind which the NBU would let the hryvnia
half free float within the [currency trading] band,” Iryna Kryuchkova, a deputy
economy minister, said in an interview with Kontrakty newspaper. “There is no
other way out. Everyone understands that.”

The NBU met on April 24 to consider the idea of letting the hryvnia appreciate against the dollar, but decided to postpone the matter indefinitely. And it isn't only consumer prices which are causing concern, producer prices were up at a 37.6% annual rate in April, suggesting that there is still plenty of fuel left in the inflation pipeline, and that the fire is still set to burn for some months to come.

Part of the problem which existis in addressing the inflation issue is the level of in-fighting in the government itself, with Tymoshenko under constant criticism from the Yushchenko camp, the present government's better known policies have included raising wages and social benefits and paying compensation for lost Soviet-era savings. Budget finances - which the government has yet to amend despite having set themselves a March deadline to do this - are currently uncertain as most of the privatisation plans which are potentially worth billions of dollars have been suspended by Yushchenko.

The economy - which has been growing in the 6% to 7% annual rate in recent quarters -continued to grow in the first quarter of 2008 (at a 6% year on year rate) but it is obvious the economy is now slowing (although a bumber harvest expect for 2008, and high wheat prices, may give the headline number a little 'bounce' as we move forward).

Foodstuffs constitute about 50-60 percent of the Ukraine CPI basket and in March they were up by 5.6 percent month-on-month, with a 14.4 percent rate over the first quarter. The ministry reported that bread in April alone grew 1.2-2.9 percent, flower 3.6 percent, rice 18.2 percent, beef 13.4 percent, chicken meat 3.5 percent and sausages 7.2 percent.

Some prices did fall back however - egg prices were down 5.9 percent, sunflower oil 4.1 percent, sugar 2.3 percent, milk 1.1 percent and cream 1.2 percent.

The poor 2007 harvest continues to exact a toll on agriculture and food processing industry performance. Over the first three months of the year, agriculture reported a meager 0.4% year on year increase in value added. Output in the food processing industry grew by 10.3% year on year over the period, slightly accelerating from 10% year on year growth in 2007.

The acceleration in food prices is largely the result of strong food demand (see this post here for a much more detailed explanation of all this), both domestically and externally (food exports were up by 52% year on year in January-February 2008), while shortages of some agricultural products on the domestic market were partially compensated for by growing imports (particularly livestock products and vegetables).

High grain and forage prices explain the continuing reduction in the Ukraine livestock population (cattle and pig stock declined by 10.5% year on year and 17.7% year on year over the first two months of the year, respectively), and this slaughter of the livestock population lead to an increase in the output of meat and meat products.

In the short term the agricultural situation may be about to improve, since economic analysts (and CEE specialists) 4Cast are predicting a significant recovery in agricultural performance across the region this year, driven by a massive rise in crop yields and farming output.

They say weather conditions this year are favourable in many countries across the region. Gábor Ambrus, an analyst at 4Cast in London believes the effect will be most visible where the share of farming is high, i.e.: Ukraine and Romania, while Poland slightly may not benefit especially as it was spared from much of the regional draught in 2007.

He sees Romania and Ukraine as particularly likely to benefit from this effect. (The share of Romanian agriculture in GDP is 7-8%, hence even a 30% increase in farming output (may boost GDP by 2pp above expectations.)

The effect on Ukraine is expected to be even more pronounced with agriculture having something like a 17-18% share in GDP. The crop estimates of UkrAgroConsult indicate we coupd see something like a 35% increase in crops, and this could boost GDP by a quite significant value over 2008, offsetting much of the slowdown which coming from other sources, according to Ambrus' forecast.

Apart from food, the current inflationary wave has undoubtedly been fuelled by very strong wage rises across the economy, wage rises which are undoubtedly partly produced by the fact that - after years of low fertility and strong outward migration - Ukraine's "fit and available" domestic labour supply is strongly constrained. This has put a strong upward pressure on wages, given the vigorous expansion the economy has seen, but as inflation has accelerated this has started to burn strongly into the real values of those increases, and while it is still too early to call really, the chart below does seem to be indicating that the wave is now begining to lose momentum.

Loose monetary conditions as well as large private sector borrowing from abroad have given rise to rapid increases in commercial bank credit, which have averaged a 70% per annum growth rate over the last three years. In January 2008, commercial bank credit portfolios were up by an extraordinary 78% yoy. High loan growth rates were reported for both corporations and households.

Annual growth in loans to households grew at a faster pace than those to the corporate sector. In 2007, bank credits to households grew by 98% yoy. In just two years, their share of total credit has grown from around 25% at the end of 2005 to 37.6% at the end of 2007. Almost 70% of all household loans were for immediate consumer purposes, and the high growth rate in these consumer loans has undoubtedly contributed to strong consumption growth and thus added to inflationary pressures.

At the same time, the measures the NBU has been taking since the end of 2007 to contain rapid credit growth (as a key part of their strategy to reduce aggregate demand and thus tame inflation) have now started to bear fruit, and the expansion in bank credit has been slowly but steadily losing speed, increasing at a 76.1% year on year rate in March, down from 78% year on year in January.

The combined impact of the NBU`s tightening of reserve requirements and capital adequacy norms in November 2007, the rise in the discount rate by 400 base points to 12% since the beginning of 2008, the sizable sterilization operations (since November 2007, NBU has absorbed about $12 billion of excess liquidity),and the impact of the global liquidity tightening, all of these have meant that pressure on consumer credit has been mounting, and we are now see the consequences.

At the same time, a significant proportion of domestic credit is in non-hryvnia denominated loans. The strong inter-bank competition which has existed following the entry of a number of foreign banks into the Ukrainian banking system in the last two years has only aggravated the situation here. The attraction of such loans is, of course, that they are much cheaper than the hryvnia denominated ones, and with all the talk being of a coming upward revaluation in the currency, short term currency risk may be seen as slight. Should however the Ukraine economy come in for a hard landing at some point, and should this hard landing be accompanied by a sharp downward adjustment in the value of the hryvnia (which might well be anticipated following all the inflation) the situation would be rather different, and household distress and non-performing loans could become a serious problem. The increase in the cost of hryvnia denominated loans from a weighted average credit rate of 13.9% in January to 15.2% pa in March 2008 compares with the rate on on forex-denominated loans which still stood at 10.8% pa in March 2008 (which was up slightly compared with February but still down on January 2008 and December 2007 which were 10.9% pa and 11.2% pa respectively.

Another disturbing feature of the current Ukraine situation is the existence of a trade deficit. Gooods exports were up by a strong 28% year on year in the first quarter, underpinned by a 26.5% yoy increase in the export of metallurgical products, 20.2% yoy in chemical goods, and about a 45% yoy increase in agricultural and food commodities. Export of machinery and transport vehicles recorded impressive 53% yoy growth.

However, continuing high growth in domestic demand, surging energy and raw material prices, and rising transportation costs caused even higher growth in imports. In particular, CIF merchandise imports grew by almost 35% yoy.

On a positive note, capital goods amounted to about 17.5% of total merchandise imports. In addition, intermediate goods hold another significant share in imports, suggesting that the widening trade deficit was partly investment-driven.

Driven by sharp deterioration of the merchandise trade deficit, Ukraine`s current account deficit widened to $5.9 billion in 2007, representing 4.2% of GDP. Despite the widening CA gap, the strong capital inflow allowed for not only covering the gap but also replenishing international reserves.

According to BoP data, the net FDI inflow amounted to a record high $9.2 billion, partially thanks to a number of acquisitions in the banking sector and food processing.

Moreover, despite global financial turbulence, Ukraine received $5.75 billion of portfolio investments in 2007, while its external private debt grew by more than 70%. As a result, the financial account surplus (analytical representation of balance of payments) reached 11.2% of GDP, which allowed the NBU to raise its international reserves to $32.5 billion, a level sufficient to cover more than 4.5 months of future import of goods and services.

Buoyant growth of world steel and food prices promises another year of robust export growth for Ukraine in 2008. However, export performance was somewhat disappointing in January as it reported a rather moderate 14% yoy increase.

The slowdown should be primarily attributed to slower growth in metals exports, the weightiest component of Ukraine`s exports. Accounting for about 42% of total merchandise exports, metallurgical products exports grew by a meager 1.8% yoy in January, which was closely related to poor metallurgical industry performance at the beginning of the month.

Fitch Lowers Ukraine Rating

2008-05-12T18:34:00.000+02:00

Fitch Ratings has lowered its outlook for Ukraine's credit ratings to stable from positive as inflation surges upwards. Fitch confirmed the foreign and local issuer default rating at BB-, three steps below investment grade.

Ukraine is the biggest former Soviet republic with credit ratings below investment grade, a legacy of political instability and delays in selling state assets.

Fitch has also lowered its outlook for nine Ukrainian banks, following the reviewed outlook for the whole country. The banks include Ukraine's biggest private lender KB Privatbank, the state-run Oschadbank, the State Export-Import Bank of Ukraine as well as Swedbank, BNP Paribas, Commerzbank and UniCredit's Ukrainian units.

``Ukraine's recent strong macroeconomic performance faces growing risks from accelerating inflation and a rising current- account deficit,'' Andrew Colquhoun, the director of Fitch's Sovereigns Group, said today. ``An uncertain policy response is not convincingly mitigating the near-term risks facing the economy. A clearer anti-inflationary strategy from the authorities would be positive for the ratings"

Ukraine's April inflation rate jumped to 30.2 percent, the highest since January 1997, as global food prices surged and the government increased social spending. The government pledged to cut the annual rate to 9.6 percent this year from 16.6 percent a year ago. The International Monetary Fund forecast an inflation rate of 17.2 percent for this year.

Fitch forecasts Ukraine's current-account deficit will rise to 7.5 percent of gross domestic product in 2008, compared with 4.2 percent a year ago. It projects the country's gross external financing needs, including short-term debt, at 136 percent of reserves in 2008.

Ukraine Central Bank May Widen Hryvnia Band

2008-04-24T13:50:00.000+02:00

Ukraine's central bank council may widen today the corridor in which the hryvnia trades in an attempt to curb inflation, Petro Poroshenko, who is head of the council announced today.

The Natsionalnyi Bank Ukrayyny council is discussing a widening of the trading band to 4.90-5.30 against the dollar, compared with 4.95-5.25 now, Poroshenko stated at an investment conference in Kiev.

``We may widen the band, but we are not going to strengthen the hryvnia,'' said Poroshenko. ``There is no trend to the hryvnia's strengthening.''

The Kiev, Ukraine-based central bank controls the hryvnia rate by selling and buying dollars unlike other European banks that use interest rates to tackle inflation. It strengthened the hryvnia to 5.05 against the dollar in April 2005 from as low as 5.6 in November 2004. The bank has kept the official rate at 5.05 to the dollar ever since.

Ukraine's inflation rate jumped to an eight-year high of 26.2 percent in March as global food costs soared and domestic demand rose after the government increased social spending. The central bank is also trying to fight inflation by demanding commercial banks cut household loans and increase reserves. The bank will sell more than three billion hryvnias ($600 million) through an auction to refinance lenders, Poroshenko said.

Ukraine Inflation March 2008

2008-04-07T10:53:00.000+02:00

Ukraine's inflation rate rose to 26.2 percent in March, the fastest level in eight years, as global food prices surged, the government repaid people who lost savings when the Soviet Union collapsed, and Ukranian workers are out all over Eastern Europe filling gaps in local labour markets and sending remittances home. Inflation accelerated from 21.9 percent in February, the fastest pace in Europe for that month and the quickest in Ukraine since 2001, according to data released by the state statistics committee today. Consumer prices rose 3.8 percent in March from February.

Ukraine's inflation rate has more than doubled in the past year because of a surge in global food costs and rising wages produced by rapid economic growth and growing labour shortages. Consumption is also being fuelled by payments for savings lost when the Soviet Union collapsed and the state-owned Sberbank went bankrupt. Government payments alone may add 1.5 percentage points to the inflation rate this year, Economy Minister Bohdan Danilishyn said on Jan. 15. The rate, which the government aims to keep at less than 10 percent, may average 17 percent this year, according to International Monetary Fund estimates. The truth of the matter is that noone really knows at this point. Nor do we know how all this is going to end. Strangely few seem to be talking about the dangers of a "hard landing" in the Ukraine at this point, but looking how the inflation fire is now burning away out of control the danger of this must be very great indeed.

Ukraine Current Account Deficit 2008

2008-03-18T21:31:00.000+01:00

Ukraine's current-account deficit widened to 4.2 percent of gross domestic product in 2007 as imports outstripped exports in the former Soviet state.

The deficit totaled $5.92 billion, compared with $1.62 billion in 2006, the central bank said today. In the fourth quarter, the shortfall widened to $3.45 billion from $488 million in the previous three months.

Ukraine posted a current-account deficit of 1.5 percent of GDP in 2006, the first shortfall in seven years, after Russia doubled the price at which it sells natural gas to Ukraine and the government stopped grain exports. Russia also banned some Ukrainian food imports, including meat and dairy products.

Exports were $49.8 billion in all of 2007, the bank said, while imports totaled $60.4 billion, according to the central bank. Import growth also outpaced exports because of strong domestic consumption, spurred by higher wages, the bank said. It was also driven by companies that had to import equipment for their upgrades, according to the bank.

Foreign direct investment into Ukraine rose to a record to $9.2 billion last year, the central bank said.

Ukraine Inflation February 2008

2008-03-07T12:17:00.000+01:00

Ukraine's annual inflation rate rose to 21.9 percent in February. Inflation accelerated from 19.4 percent in January, which was already the fastest rate since 2001 according to data released by the state statistics committee earlier today. Month on month, consumer prices rose 2.7 percent, compared with a 2.9 percent increase from December to January.

Producer prices increased 3 percent in February from January, according to the state statistics office. Prices rose 5.4 percent in January and February combined . The office has not yet released the annual figure for February immediately, but since the PPI was up 3.4% in January and February 2007, and the annual rate was 23,3% to december, a good working guess is that in February year on year the PPI was up by around 25%.

Ukraine Inflation January 2008

2008-02-07T15:03:00.000+01:00

Inflation in Ukraine shot up to an incredible annual rate of 19.4% in January 2008, as compared with January 2007, and rose in January when compared with December 2007 by a whopping 2.9% according to data from the State Statistics Committee of Ukraine, released today.

Annual inflation in Ukraine in in 2007 - January-December 2007 compared with January-December 2006 – was 12.8%. This, as can be seen below, is well down on 2000, but is a sharp acceleration on 2006, and just at a time when more sophistocated techniques of demand management and monetary policy should be containing inflation within acceptable limits. It would seem that Ukraine is now on some sort of ramp or other.

Ukraine’s strong economic growth, increased demand for skilled laborers, and workforce migration abroad are all combining to drive up labor costs, and this is pushing inflation to ever newer heights. Naturally it is not clear at this point how this will end.

A number of recent studies have found the rate of expansion in Ukraine’s economy is giving business growing headaches in finding qualified labor. Observers repeatedly state that quality professionals are scarce, and demand for highly trained employees has grown significantly faster than their availability. According to labour market experts those most in demand at the present time are financial specialists, such as chief accountants, analysts, directors, and logistics controllers.

Meantime the population ageing and decline mean that Ukraine's labor force dropped by 83,400, to 28.1 million betwen 2005 and 2007, according to data from Ukraine’s State Statistics Committee.

And at the same time the numbers registering as unemployed steadily declined during 2007.

The Ukrainian office of manpower firm Brain Source International report having received an unprecedented number of requests in recent months to fill accounting positions. Demand for marketing and sales directors is also strong. Ukraine’s rapidly developing construction and real estate sectors have also boosted demand for other highly skilled professionals, such as certified architects, engineers, project managers, and property lawyers.

The burst in foreign investment that followed the Orange Revolution of 2004 has not only increased demand for labor, but increased competition for labour within sectors. The increasing number of Ukrainian companies pursuing initial public offerings (IPOs) has naturally enough boosted demand for IPO preparation consultants, of whom in the past there have been relatively few.

Due to the growing labour scarcity in the capital, many companies are now moving out of Kyiv and into the regions in the search for staff. Retailers are also increasingly opening supermarkets and hypermarkets in the regions due to increased competition in Kyiv. Retail banking is also developing rapidly in the regions, driving up the demand for employees.

Naturally such labor pressures have turned the Ukraine labour market to the workforce’s advantage. Kyiv has virtually no unemployment, in the sense that anyone wanting a job can find one, according to Yuriy Perch, general director of the Ancor Ukraine recruitment agency. Positions are available in both the blue-collar and white-collar sectors, he is quoted as saying.

Job seeker counter offers have significantly increased lately, Perch said. Retention costs are up too, many employers are raising salaries and benefits in an effort to stabilize their workforce. In the past, employers set compensation levels, but today’s qualified and experienced job seekers are establishing their own price to an increasing extent.

According to survey results published recently by Big Four auditor Ernst & Young, attractive compensation packages, not just salary increases, are being used more regularly by medium- and large-sized foreign and domestic businesses in Ukraine to offset soaring inflation and fierce competition for qualified employees.

The Ukraine Compensation and Benefits Survey 2007/2008, an annual survey of business practices conducted over the past six years, reported base salaries increased an average of 17 percent between August 2006 and July 2007. Meanwhile, 83 percent of companies also paid additional annual bonuses.

Perch also pointed out that in the near future the rate of out-migration might even increase, as labor migration from Ukraine to Poland (and of course other EU10 states) may well start to accelerate as a result of recent Polish legislation aimed to address Poland's own labour shortages by attracting workers from Ukraine and points further East.

At the amse time the WTO General Council endorsed on 5 Feb a protocol on Ukraine's accession to the EU. Clearly Ukrainian exporters and consumers will benefit from joining the WTO, but local small-scale manufacturers may well suffer as a result of the decision.

The big winners will undoubtedly be members of Ukraine's growing middle class who, due to the country's pre-WTO import tariffs on consumer goods and processed foods, pay as much as 40 per cent more for things like washing machines and smoked sausage than in neighbouring countries who are inside the European Union. Ukrainian car prices are predicted to be likely to fall anywhere between 10 and 20 per cent, household appliances some 20 per cent, and processed foods between 10 and 40 per cent.

"Right now, Ukrainian consumers pay more than any one else in Europe for inferior quality milk" Mykola Vernitsky, an agricultural consulting company director is quoted as saying, "Meat is going to fall in price some 30 to 40 per cent".

And the move will be welcomed by millions of low-income Ukrainians who, over the last five tears, have been steadily striking regular meat purchases and non-essential foodstuffs off the family shopping list, as a result of spiralling prices spurred by a GDP growth rate exceeding 6 per cent every year since 2000.

In the short term these price reductuctions will be welcomed by Ukraine's pro-Europe government, given the problem of the inflation rate, but given that the underlying problem in Ukraine is structural rather than short term excess demand, the arrival of cheap manufactured products may not be such an unqualified boon in the longer run as it will put a lot of struggling domestic manufacturers out of business, while it is not clear which activities will really serve Ukraine as the basis of long run export growth to pay for the new flow of imports.

Everything from Ukrainian livestock and paper products to medical supples, clothing, and shoes will soon face an onslaught of competition from China and other WTO members, they said. Particularly hard-hit could be small Ukrainian farms and agricultural businesses which, besides now facing unfettered foreign competition for the first time, will lose a cherished tax benefit of not having to pay a 20 per cent Value Added Tax, as do all other businesses in the country, WTO opponents predicted. Even if small-scale Ukrainian agricultural producers manage to absorb the lost tax benefit, they are unlikely to be able to improve their goods to meet WTO quality standards, noted Yury Mel'nik, Agriculture Minister, according to a Korrespondent magazine report.

But the story will be dramatically better for large-scale agriculture and other substantial industry, able to produce an export-quality product, most observers said.

Commodities like wheat, sunflower seed, steel, and chemicals, for years the pillars of Ukrainian trade surpluses, all can expect to benefit from WTO membership, as the already-cheap Ukrainian products will become even more affordable abroad, once foreign markets are obliged to remove excise barriers.

Ukraine's steel industry, in the past often hit with anti-dumping sanctions including taxes and quotas, should according to observers especially gain from WTO membership, as WTO rules prohibit the imposition of such measures by a WTO signee against another member. The advantages of WTO membership to Ukraine's powerful industrial magnates, most operating in the Russian-speaking east, have not been lost on the Kiev government's generally Ukrainian-speaking leaders.

'The mere fact we are entering the WTO will increase our economy by 1.5 to 1.7 per cent in one year alone,' said President Viktor Yushchenko in a 1+1 television interview, hours before travelling to Geneva for the treaty signing. 'That kind of growth is something I think few Ukrainians can oppose.'

It took 15 years for the World Trade Organisation (WTO) to finally approve Ukraine's membership, the first step in what Ukrainian officials hope is the country's inevitable journey towards the European Union (EU).

Formal talks for joining a free trade zone with the EU, a pre-requisite being membership of the WTO, could start as early as Feb. 17, Ukrainian President Viktor Yushchenko said shortly after Ukraine joined the WTO.

Ukraine Inflation December 2007

2008-01-10T14:26:00.001+01:00

Ukraine's annual inflation rate accelerated to 16.6 percent in December, the fastest since 2000, on rising prices of food and fuel, the state statistics committee reported late yesterday. Ukraine's inflation rate surged from 15.2 percent in November, which was the highest in Europe for that month. Food costs increased 23.7 percent in December from a year earlier. Consumer prices rose 2.1 percent from the previous month.

Really I have very little more to say on all this that hasn't already been said in this post (or in this much longer and fuller attempt at diagnosing the Ukranian issue). Prime Minister Yulia Timoshenko said at a Cabinet meeting in Kiev that ``The government should approve a plan of anti- inflationary measures.'' But this is just the point, since at this stage noone is very clear what can be done about all this, as inflation moves from one Eastern European country to another like a stack of dry timber catching fire.

Merry Xmas and A Happy New Year

2007-12-24T23:54:00.000+01:00

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

Why Ukraine Needs to Run a Budget Surplus

2007-12-22T12:29:00.000+01:00

Ukraine, whose economy will miss its central bank inflation target for a fourth consecutive year running in 2007, should adopt a budget surplus in 2008 to help curb consumer price growth, the International Monetary Fund said earlier this week in the concluding statement issued on completion of its staff mission to the country.

"The Ukrainian economy has enormous long-term growth potential, as industrial efficiency continues to improve, financial markets deepen, and its structure of production evolves.

"However, there are near-term challenges. First, inflation is on the rise. While much of the increase in 2007 reflects food prices, strong domestic demand growth has intensified underlying inflationary pressure. Moreover, the current account position is eroding, and further deterioration in the years ahead—gas import prices may rise further and world steel prices may fall toward their long-term real average—could raise external financing risks. Finally, rapid credit growth points to rising risks in the financial sector.

Stability-oriented fiscal and monetary policies, a stronger monetary and financial sector policy framework, and progress on structural reform are needed to help Ukraine achieve high growth with low inflation and improve the living standards of all its citizens.

Does any of this sound familiar? It should do, at least to those of you with an interest in economics and what is going on at the moment in Central and Eastern Europe it should, since this profile is very typical of one we have seen extending itself right across the whole region in country after country over recent months. Claus Vistesen has already extensively covered (in this post) the issue of what is called "translation risk" (or what might get "lost in translation" if an effectively "dollarised" currency like the Ukranian Hryvnia is allowed to fall substantially at some point - to tackle, for example, the problem of the lack of export competitiveness which results from the combination of the rise value of the currency and the ongoing above-par inflation which is currently being sustained in many Eastern European countries).

GDP growth in the Ukraine has been "solid" but not "exaggerated" this year (think the Baltics or Bulgaria in comparison), and at this point been slowing slightly, running at a year-on-year rate of 7.2% from January to November.

The Ukraine government now forecasts inflation to stabilise at 9.6 percent next year, having missed its 7.5 percent target for this year. This view may be hopelessly over optimistic. Inflation ccelerated to 15.8 percent in November and will probably atttain 16 percent plus this month, according to a statement from President Viktor Yushchenko's office.

Inflation is the biggest of the "near-term challenges" according to the IMF. I would certainly agree, and while much of the increase we are seeing in 2007 reflects food price rises, strong domestic demand growth and a set of underlying structural demographics which also serve to intensify the inflationary pressure.

The Ukraine Cabinet announced on Nov. 21 that it now plans to run a budget deficit of 1.86 percent of gross domestic product next year, compared with the shortfall of 2.33 percent of GDP which was initially planned. The IMF argue for fiscal surpluses as a means of draining liquidity from domestic demand since, given the strong wave of inward capital flows that comparatively high growth countries like Ukraine are expeciencing, and the widespread availability of low interest non-local currency denominated loans.

The difficulty which comes into operation in a situation like that in Ukraine, where there is considerable dollarisation of the local economy, is that exchange rate and monetary policy become either effectively non-existent (in the former case) or impotent (in the latter) to correct growing competitiveness problems - since given the extent of dollarisation it is not practical to adjust the exchange rate downwards and increasing the interest rate only puts upward pressure on the currency, and encourages the contracting of non-Hryvnia denominated loans. The tightening of monetary policy also serves to attract additional funds in search of extra yield and these only serve to make the excess demand problem even worse.

Thus the only real arm left in the government policy arsenal is the fiscal policy one, whereby the government attempts, by running a fiscal surplus, to "drain domestic demand" from the system, and thus work to effect some form of price deflation (for a fuller discussion of this complex topic in the Latvian context see this post). And this, of course, is exactly the policy that the IMF economists tirelessly advocate that the Ukranian government practices.

But it is exactly here that we hit a problem, since far from running a fiscal surplus as the situation requires, the Ukrainian government has been running fiscal deficits, even if, up to the election year of 2007, these have been reducing.

One of the things we should now be learning from looking at what is happening across Eastern Europe is that in an environment where a number of underlying problems exist - ranging from a lingering and heavy state presence in the economy, a high public sector debt and deficit level, an absence of strong goods exports competitiveness, labour supply shortages due to migration and long term low fertility, and extensive euroization of the banking sector - heavy capital inflows can come to seriously strain the entire macroeconomic framework. This risk becomes even greater if measures are not taken to drain excess liquidity from the system (by running a fiscal surplus for example), to loosen labour supply constraints by facilitating inward migration of unskilled workers, and to accelerate the pace structural reforms - and particularly those which facilitate the development of "greenfield" investment sites which help channel capital flows towards productivity-enhancing uses and in so doing raise exports.

A Declining and Ageing Population

According to data from the Ukraine Statistics Office the national population fell by 232,485 people from January to October of 2007. This was a result of the fact that while there were 397,806 births (up from 383,384 during the comparable period for 2006) there were also 630,291 deaths (down slightly from 631,403 last year). What this means is that Ukraine's population is now falling at an annual rate of 0.675%. This is very fast, for population decline, and remember this is the natural decline, not counting out migration. As we can see in the chart below the Ukraine population peaked in 1993, and has been in some sort of free-fall ever since.

There are a number of factors which lie behind this dramatic decline in the Ukrainian population. One of these is fertility, which is currently in the 1.1 to 1.2 Tfr range. In fact Ukraine's fertility actually dropped below the 2.1 replacement level back in the 1980s.

A second factor which influences population size is life expectancy, and in the Ukraine case the recent evolution of life expectancy has been most preoccupying, since it has been falling rather than rising in recent years. In particular male life expectancy which is currently running at around 64. Apart from stating the obvious here, we should note that the deteriorating health outlook which this low level of life expectancy reflects places considerable constraints on the ability of a society like Ukraine to increase labour force participation rates in the older age groups, and this presents a big problem since increasing later life employment participation is normally though to be one of the princple ways in which a society can compensate for a shortage of people in the younger age groups.

The third factor influencing population dynamics is obviously migration. Ukranian out migration since the turn of the century has been distinguished by two factors, a reduced intensity when compared with the rather dramatic population movements which characterised the 1990s, and by a significant change in destinations. From migrating East the Ukranians are now moving West. Data on this latter movement has not been systematically collected but we have some national data on Ukranians in Portugal, Spain and Italy, and lots of anecdotal information about Ukranian migrant workers in Latvia, the Czech Republic, Poland and elsewhere in the EU 10.

According to information provided by Ukrainian diplomatic missions, 300,000 Ukrainian migrants may be working in Poland, 200,000 each in Italy and the Czech Republic, 150,000 in Portugal, 100,000 in Spain, 35,000 in Turkey, and another 20,000 in the US. According to official information based on the number of permits issued by the Russian Federal Migration Service, some 100,000 Ukrainian citizens currently work in Russia, although the real number of Ukrainians working there is often estimated to be more in the region of 1million.

With Fewer and Fewer People Avaialble For Work

This out migration is very significant from the economic point of view, since all those working abroad send money back (see chart below) while at the same time are not present in the country to offer themselves for the work which this extra money creates. So out migration and the accompanying remittances are one thing in a high fertility, growing population like that which is to be found in Ecuador or the Philipinnes, and quite another in the long term low fertility, declining population environment of Central and Eastern Europe. Hence all that demand driven wage inflation. As we can see from the data in the chart below (which the World Bank Economists themselves recognise if surely a substantial underestimation) the flow of remittances into Ukraine has increased steadily in recent years.

As a result unemployment has been falling steadily all year:

As salaries grow, of course, so do retail sales:

The Litmus Test?

In many ways Ukraine could be considered to be a rather important strategic unit in the whole Eastern labour supply and demographic puzzle, since many imagine that as labour supply runs out across the whole region, then countries as diverse as the Baltics, Poland, Hungary, the Czech Republic and Russia may all - and at one and the same time - be able to leverage Ukraine's population reserve to help them out of their own difficulties. In this sense many live in the hope that outward flows from Ukraine may serve to plug a lot of otherwise increasingly evident holes in the East European labour force. My feeling is that the people who make this kind of projection for the Ukraine tend to forget three things.

1) The corrosive effect that long term lowest-low fertility across all the East European and many of the CIS societies is already having on the numbers of people who are becoming available in the labour market of these countries.

2) That large migrant outflows from one society to help meet the domestic needs of the labour market in another (Poles and Latvians in the UK and Ireland or Romanians and Bulgarians in Spain) produce significant labour shortages in the home (sending) country, shortages which when combined with rapidly growing domestic demand (and especially for new housing) - domestic demand which is fueled by i) globally available non-local-currency denominated cheap credit and ii) a steady and growing return flow of remittances from those abroad, then this whole process only serves to push up sending country wages very dramatically indeed, and potentially feed through to a loss of competitiveness which can make the whole external position of the country concerned (and with this the local currency, and the sustainability of the non-local currency denominated mortgages) very vulnerable indeed. Let's call this whole process - with no perjorative intention whatsoever - the Baltic syndrome.

3) That these sending countries, and in particular as a result of the processes detailed in (1) and (2), themselves start to experience fairly high rates of economic growth, and as a result they themselves start to need migrants. Ukraine is now a classic case of this process at work. The only thing which remains to be seen here is how all this ends up in practice, since at this moment in time we are all basically off on a voyage into the unknown, since we have definitely never been here before.

A much fuller analysis of the underlying problem in the Ukraine economy can be found in this post here.

The Economic Outlook In Ukraine

2007-09-29T12:37:00.000+02:00

Whoever wins the elections which are being held in Ukraine today, one thing is certain: they will have their work cut out, since Ukraine is a country with a very large accumulated set of problems, and of course, its size (in a European context) means that it is also a country which few (and especially those countries in the European Union) can afford to ignore.

What I will present below is a general review of the state of the Ukraine economy - which is at the surface level a lot healthier than many perhaps expect - but it will do this in a specific context, that of the inflation and labour supply problem which currently besets the emerging economies of Eastern Europe as a whole (and indeed see this systematic analysis of a very similar situation which exists in neighbouring Romania only last week).

Now earlier this year the World Bank published a very comprehensive report on the demographic future of Eastern Europe and Russia entitled "From Red to Gray - The Third Transition of Ageing Populations in Eastern Europe and the former Soviet Union". The key topic addressed in this report was the impact of long term low fertility on Eastern Europe's ageing labour force. The World Bank offered three policy remedies, more labour productivity, higher participation rates, and more migration.

If measures are taken to improve labor productivity, this would clearly outweigh the losses due to a smaller labor force. Output in aging countries can also receive a boost from increases in labor force participation through raising retirement ages and encouraging flexible forms of employment. And politics permitting, shortfalls in labor supply can be minimized by interregional migration.

The first of these is evident, but involves a fairly long term process to raise the education level and human capital content of the entire Ukranian population. It is the other two, the potential of increased participation rates and internal CIS state migration processes to resolve (or at least mitigate the problem) which will be examined here.

In this sense Ukraine may be considered to be rather an important strategic unit in the whole Eastern labour supply and demographic puzzle, since many imagine that as labour supply runs out across the whole region, then countries as diverse as the Baltics, Poland, Hungary, the Czech Republic and Russia may all . and at one and the same time - be able to leverage Ukraine's population reserve to help them out of their own difficulties. In this sense many live in the hope that outward flows from Ukraine may serve to plug a lot of otherwise increasingly evident holes in the East European labour force. My feeling is that the people who make this kind of projection for the Ukraine tend to forget three things.

1) The corrosive effect that long term lowest-low fertility across all the East European and many of the CIS societies is already having on the numbers of people who are becoming available in the labour market of these countries.

2) That large migrant outflows from one society to help meet the domestic needs of the labour market in another (Poles and Latvians in the UK and Ireland or Romanians and Bulgarians in Spain) produce significant labour shortages in the home (sending) country, shortages which when combined with rapidly growing domestic demand (and especially for new housing) - domestic demand which is fueled by i) globally available non-local-currency denominated cheap credit and ii) a steady and growing return flow of remittances from those abroad, then this whole process only serves to push up sending country wages very dramatically indeed, and potentially feed through to a loss of competitiveness which can make the whole external position of the country concerned (and with this the local currency, and the sustainability of the non-local currency denominated mortgages) very vulnerable indeed. Let's call this whole process - with no perjorative intention whatsoever - the Baltic syndrome.

3) That these sending countries, and in particular as a result of the processes detailed in (1) and (2), themselves start to experience fairly high rates of economic growth, and as a result they themselves start to need migrants. Ukraine is now a classic case of this process at work.

If we start to look at how all of the above is currently working out in the case of Ukraine, we find that:

1) The Ukraine economy has itself been growing quite rapidly in recent years (despite a slowdown in 2005). It grew at an annual rate of nearly 7% last year, and was growing at an annual rate of nearly 8% during the first six months of 2007.

This reasonably strong performance is also reflected to some extent in the annual rates of increase of industrial output.

And again the healthy tendency has continued throughout 2007.

2) As a result of this more rapid growth employment is growing moderately, but as a result of the ageing labour force unemployment is coming steadily down and was at 6.8% of the labour force using ILO criteria in 2006, while the number of those registering as unemployed in August 2007 was down to only 595,000. Wage inflation, on the other hand, was running at an annual rate of increase of 11.2% in the period Jan-Aug 2007 when compared with the same period in 2006.

What we can deduce from the above is not that people will stop leaving the Ukraine for the west - this is unlikely to happen, since the wage differential is just too large - but rather that the Ukraine economy will itself need to import labour if it wishes to continue to grow at the present rate. And this problem is real, and exists in the here and now, and is not a hypothetical situation set to arrive in 2025 or some other more-or-less-exotic date in the future. I am putting things this way as I imagine much of the above will come as some sort of surprise to many people.

So Ukraine is not a bottomless pit as far as labour supply goes, and the question is why?

Demographic Data

Firstly lets look at the Ukraine population.

As we can see the Ukraine population peaked in 1993, and has been in some sort of free-fall ever since.

Now there are a number of factors which lie behind this dramatic decline in the Ukrainian population, and one of these is fertility, which is currently in the 1.1 to 1.2 Tfr range. As we can see below, Ukraine's fertility actually dropped below the 2.1 replacement level back in the 1980s.

A second factor which influences population size is life expectancy, and in the Ukraine case the recent evolution of life expectancy has been most preoccupying, since it has been falling rather than rising. The chart below shows life expectancy at birth for both men and women, the male life expectancy is evidently significantly below the combined figure.

This situation is, as well as preoccupying, highly unusual (it is however paralleled to some extent in Russia itself). Apart from the obvious, the deteriorating health outlook which this data reflect places considerable constraints on the ability of a society like Ukraine to increase labour force participation rates in the older age group, and this is a big problem since this is normally though to be one of the princple ways to compensate to some extent for a shortage of people in the younger age groups.

The fertility and life expectancy situation described above is, of course, reflected in the relative size of annual births and deaths:

As can be seen the balance of birth and deaths, or natural rate of increase in the population without taking immigration into account, turned negative in the early 1990s. It is very hard to see how this situation can right itself, certainly at any point in the coming half century.

One of the key factors to think about in the economic context are the actual numbers of live births, rather than the more complex measures of fertility. In 1989 - which is the earliest year for which I have access to data - there were nearly 700,000 children born. By 1998 this number was near to 400,000 (ie a 40% or so drop in a decade). In practical terms (and if we take 18 as an average age for labour market entry in a country like Ukraine) then this year there are potentially 700,000 people to enter the labour force, while by 2016 this number will be only 400,000. Even if some of this loss can be offset by increasing labour force participation at the older ages this still implies a sharp rise in the average age of the workforce. This is just one of the reasons why fertility matters.

And in this context I am not optimistic about any large scale recovery in fertility in Ukraine in the forseeable future simply because of the comparatively low mean mothers-age at first birth which exists in the Ukraine. The reasoning behind my opinion here is explained in this paper: The path to lowest-low fertility in Ukraine, by Brienna Perelli-Harris.

According to Perelli Harris, although Ukraine has undergone immense political and economic transformations in the past decade, it has maintained a comparatively young age at first birth and nearly universal childbearing. Her analyses of official national statistics and the Ukrainian Reproductive Health Survey show that fertility declined to very low levels without a transition to a later pattern of childbearing.

That is to say - and for those of you who are familiar with the birth postponement process and the importance of the tempo-quantum distinction - the Ukraine still has a very low mean age at first birth by European standards (around 23 as contrasted with the West European average mean-age which is currently near to 30) and thus very probably has many more years of birth postponement (and with this a reduced number of recorded live births) in front of her. In other words Ukraine still has a long way to go in the current demographic transition, and as a result a real improvement in the birth rate may not be expected till average first birth ages have settled at a new, and much higher, level. We could be talking about a couple of decades here, at a rough guess.

So even if, as we can see from the above graph, there has been a small increase in the number of births in the last few years, it is hard to attach any real importance or significance to this. In large part fluctuations in annual birth levels during epochs of substantial postponement are shadows of earlier fluctuations in the level of annual births, fluctuations which are now reflected in the numbers of potential mothers.

On the other hand, and as I have noted above, while Ukraine has one of the lowest fertility levels in Europe, it also has one of the highest death rates. In 2000, for example, the death rate reached 15.3 per 1,000 as compared with a 10.6 per 1,000 average rate for the countries of the European Union. Between 1991-2000 an increase in the death rate was recorded in practically all age groups (with the exception of the 1-14 age group), but this increase was especially pronounced among working age males. The death rate for the working-age group grew by a factor of eight in the years between 1991 and 2000, and the portion of the overall death rate which came from the working age group reached almost twenty-five percen.

In all but the oldest-old age groups the death rate for men significantly exceeds the death rate for women (and in some cases by a multiple of two or three), but the difference is especially noticeable in the 30-45 groups - ie in ages which still fall within the boundaries of the reproductive age.

The Ukraine and Migration

The third factor influencing population dynamics is obviously migration.

We can break the evolution of migration in the Ukraine context into three phases. The first of these covers the period of 1991-1993, the second runs from 1994-1998, while the third started in 1999 and is ongoing (I owe this classification to the work of Olena Malynovska, see reference below).

The first phase followed the break-up of the old Soviet Union and was characterized by massive migratory movements - or so-called stress migration processes. During this phase, there was a strong migratory surplus into the Ukraine.

Such migratory growth was primarily driven by Ukrainians who wanted to live in their own country and who were repatriating themselves from the North of Russia, the Far East and Kazakhstan, as well as repatriation of those previously subject to repression and exile such as the Crimean Tartars. In the forefront of this was a large influx of both Ukrainians and indigenous population fleeing conflicts in Central Asia and Transcaucasia. To give an example of the very large migratory surplus in 1992 60% were ethnic Ukrainians.

On the other hand among emigrants ethnic Ukrainians constituted only 37.7 % of the total in 1991 and 28.8% in 1992.

The second migratory phase -1994 - 1998 - was characterized by a very sharp reduction in the inflow to Ukraine from former USSR republics and a steady increase in the volume of outflow which lead to a migratory deficit in Ukraine of 91,600 in 1994. Altogether, over five years, more than 900,000 people migrated from Ukraine to CIS and Baltic states, whereas only 630,000 immigrated into the Ukraine. This is undoubtedly a reflection of the serious economic crisis which took place in the Ukraine during this time.

The vast majority of Ukrainian emigrants at this time went to Russia (636,000 people in five years or 70% of those who went to the post- Soviet countries), since the economic situation there was better, wages and the standard of living higher and entrepreneurial conditions more favorable. Only 270,000 people arrived from Russia, i.e. the migratory deficit caused by migration to Russia in 1994-1998 was about 366,000.

This whole position can be clearly seen in the chart below which comes from the research of Olena Malynovska (full reference below).

And the specific situation vis-a-vis Russia can be seen in this chart, which comes from data supplied by Pirozhkov and Safarova (see full reference below).

The volume of population migration between Ukraine and the CIS and Baltic states has decreased significantly since the turn of the century according to the official statistics that register changes of residency. Thus in 2002, the volume of gross-migration was only one eighth of that registered in the early 1990s. This transition is also clearly reflected in the Ukraine official migration statistics which form the basis of the following chart.

The third phase in the migratory process began around 1999 continues today. This phase is distinguished by less intensity in the migratory process itself (to date) but also by a significant change in destinations. From migrating East the Ukranians are now moving West. Data on this latter movement has not been systematically collected but we have some national data on Ukranians in Portugal, Spain and Italy, and lots of anecdotal information about Ukranian migrant workers in Latvia, the Czech Republic, Poland and elsewhere in the EU 10.

According to information provided by Ukrainian diplomatic missions, 300,000 Ukrainian migrants may be working in Poland, 200,000 each in Italy and the Czech Republic, 150,000 in Portugal, 100,000 in Spain, 35,000 in Turkey, and another 20,000 in the US. According to official information based on the number of permits issued by the Russian Federal Migration Service, some 100,000 Ukrainian citizens currently work in Russia, although the real number of Ukrainians working there is often estimated to be more in the region of 1million.

According to information provided by one Portuguese charity which specifically studies Ukrainian migrant workers, the largest number of Ukrainian migrants are currently working in Russia, at more than 1mn, 500,000 are working in Italy, 300,000 each are working in Portugal and in Germany, around 200,000 are employed in Great Britain, more than 150,000 each are working in France and Spain. Significantly less, but still large numbers of Ukrainians are working in Greece, Turkey and Israel—Greece and Turkey account mostly for seasonal workers—, and smaller numbers work in Northern Europe, the Baltics and the Middle East. (cited in: Andriy Kyrchiv, Labor Migration and National Security in Ukraine - in Ukranian)

This new era of Ukraine outmigration has also been accompanied by a shift in the source countries for in-migration. According to this paper (Popson, 2004, full reference below), which deals exclusively with Kyiv:

In the early 1990s, migration patterns in Ukraine were dominated by repatriating Ukrainians and Russians, Kazakhs, and other Soviet nationalities departing to their titular states. By mid-decade the makeup of migrants began to shift. Although the Ukrainian economy provided few incentives for migrants from the former Soviet Union, migrants from ethnic groups who had not historically resided in Ukraine continued to arrive, and in larger and larger numbers. These migrants came from Asia, Africa, and the Middle East; they arrived through legal, semi-legal, and illegal channels; and they were often on their way to Europe or other destinations. As Ukraine’s borders with Eastern Europe and the European Union solidified, it became more and more difficult for migrants to cross into Europe, and many found themselves in Ukraine for the medium to long term.

Serhiy Brytchenko, the head of the Presidential Administration’s Migration Directorate, published an article in Uryadovyy Kuryer on increasing migration trends in Ukraine. According to Brytchenko, the number of people adopting Ukrainian citizenship in 2004 was far greater than those relinquishing it: in the first six months of the year, the number of people granted Ukrainian citizenship rose 40 percent over the same period in 2003, and by 180 percent in comparison to 2002.2 The article by Brytchenko echoes research conducted by sociologists in Ukraine suggesting that many of these migrants are now seeking permanent residency in the country. While they may not have originally chosen Ukraine as their final destination – either they were in transit further north and west or were simply seeking a safe haven away from political and economic strife in their home countries – they now consider themselves part of Ukrainian society. They are working in Ukrainian markets, sending their children to Ukrainian schools, using Ukrainian state services, and purchasing Ukrainian goods.....

According to official statistics, in 2001, 101,268 foreigners were registered with the Ministry of Internal Affairs in Kyiv. These include foreigners with permanent residency status on business and work permits, students in the city’s colleges and universities, refugees and asylum seekers, and illegal migrants who have been identified by the city’s law enforcement agencies. These figures surely miss a number of illegal migrants who have escaped the notice of city authorities. According to estimates of social scientists working on migration in Kyiv, approximately 15,000 of these foreigners represent ethnic groups that were not present in Soviet times – in particular migrants from Africa, Asia, and the Middle East.
Kyiv is a microcosm encompassing many of the issues created by new migration trends in Ukraine. Changes to the city’s functions (from capital of a Soviet republic to capital of an independent nation) and the consequential shifts in legislation and jurisdiction of particular agencies left an opening for migrants to find their place in the city. The development of a robust shadow economy provided space for immigrants – even those with incomplete or no documentation – to find accommodations and employment. Ukraine’s willingness to accept immigrants and refugees and to offer them many of the same rights as citizens also made Kyiv a welcoming home for many. Added to this, Kyiv has become an important transit point where international routes for the transportation of illegal migrants from Asia and Africa intersect.

The issue of migrants in Ukraine’s cities and towns is an interesting avenue of research for those looking at civil society development. In Kyiv alone there were nearly 500 national and regional ethnic cultural associations who were active in 2000.

What we can see, is that the numbers of Ukranians currently working outside their country is large, and as the labour market needs of the receiving countries increase this number will undoubtedly rise. The numbers of those now arriving may also be large, but possibly not as large as those who are leaving. This finding (and there are of course questions about the level of accuracy of all the data we have) is consistent with the very tight labour market position which we are now about to examine. As we have seen in Latvia, Poland, Romania etc, this whole process is very dramatic for the countries concerned (and not least of these for cultural reasons) and the stability and sustainability of everything which is happening (and so fast) must be under question.

Changing Population Age Structure

One additional obvious consequence of the low fertility and substantial outward migration which Ukraine has experienced has been a slow but steady rise in the median age of the Ukraine population:

At just over 39, this is not especially high in comparison with elderly societies like Japan, Germany and Italy (median age circa 43), but it is very high when you consider the state of economic development in Ukraine, and when you consider the comparatively low life expectancy. This is another of the "details" about Ukraine's demographic and socio-economic evolution which worries me deeply, and if you are not really at all sure why the issue of median ages should matter to economists, well you could try this post here.

Obviously such diversity at the level of key demographic indicators leads directly to divergence in terms of the comparative population age structures. Ukraine has a very low proportion of young children (for Ukraine in 2003 this group was only constituted 15.8% of the entire population) and a quite high proportion of elderly people(the over 65s constituted 21.3% of the total population in 2003).

Nowhere is this problem clearer than when we come to look at the 25-44 age group as a percentage of total population. This group is critical since in many senses (credit acquisition, home establishment, productive prowess) it is the group which carries the economy on its shoulders.

Now this data is very, very strange. In the first place after peaking in 1994 the group hovers around the 28% mark (you need to go into decimal points to see the changes) and secondly the level at which it peaks (28.95), since this is extraordinarily low. If Ukraine had had a more "normal" population evolution this figure should have been four or five points higher (say 33/34%). This gives a measure of Ukraine's lost population, and of the wealth creating capacity which has gone with it.

Labour Shortages and Wages

Ok, so now lets have a look at some of the consequences of these structural distortions in the demographics. Let's start with the labour force.

So as we can see the numbers of those employed has steadily increased, while the size of the economically active population is steadily dropping. This has its direct reflection in the unemployment data. Here are the unemployed as a % of the economically active population.

There is nothing especially spectacular to note about the above data, except that the total numbers of employed persons does not rise enormously, moving only from 20,270,000 in Q1 2005 to 20,537,000 in Q1 2007. Thus despite the fact that the Ukrainian economy is growing steadily, employment is not rising to anything like the same extent, at least as far as the official sectors of the economy go. In part this may (hopefully) reflect some sectoral shifts, and some consequent increase in productivity as people move from less productive to more productive sectors in terms of value added. ( Of course it would be really, really nice to have a comparative skills balance sheet on this). But the lack of new job creation must also in part reflect the labour market tightening - and hence wage inflation - that is taking place inside Ukraine itself. Wage levels - at least from the official data - seem to be rather volatile, but the trend is undeniably up, and seems to be running at an annual rate of increase of around 20% this year. Meantime the number of those who are unemployed heads steadily down.

An idea of the velocity of this decline in the numbers of unemployed can be gained from the next chart which shows the monthly change in the numbers of unemployed for 2007. I have used the numbers registering with the employment agency as unemployed for this chart as there are, as in the case of most Eastern European countries, difficulties in getting through to the true meaning of the regular unemployment statistics. Still, this is a measure, and does give some indication of the tightening which is taking place. Total numbers of registered unemployed have fallen now from 790,000 to 595,000 in just seven months. At this rate of expansion Ukraine will run out of labour serviceable labour soon, very soon.

Wage Costs

The impact of this rapidly tightening labour market in Ukraine is, of course, not hard to predict: wages have been rising rapidly. Here we can see the rapid rate of wage inflation which there has been in Ukraine over the last few years.

And here's a chart showing the monthly rate of wage inflation since February 2007 (percentage increases in comparison with the same month in the previous year). As can be seen, the rate has been accelerating since May as the labour market has steadily tightened.

Now one solution which is often advanced to this kind of problem is to try and raise the level of labour market participation (See the from Red to Grey World Bank report). So let's take a look at the Ukraine labour market participation rates for different age groups. First for males.

As can be seen the rates of participation in the core age groups are already very high. Even in the 50 to 59 age group they are up around 70%. The only male groups where more workers really could realistically be found are in the 15 to 24 group, and in the 60 to 70 one. But a number of things need to be said here. Firstly, male life expectancy at birth in Ukraine is only around 63, and while life expectancy at 60 is likely to be somewhat higher this age group generally (at least for males) are hardly likely to be "hail and hearty" so I think it is unrealistic to imagine we can see a large number of extra workers coming from this group.

If we look now at the 15-24 age group, it is important to bear in mind that this is a comparatively small cohort of people. In total this year there are around 7.25 million. Around half of these are males. This gives about 3.6 million, and 40% of these are already working. So we are down to around 2 million males in this group not working. But many of these people are in school, or tertiary education. So at a really optimistic guess you could find another half a million people here if you really tried. But the Ukraine labour market appears to need 200,000 extra people every six months, judging by the recent reduction in unemployment. Now obviously these are just very rough and ready back-of-the-envelope calculations, but they are simply to give an indication of the of the magnitude of the problem and the realism of those who simply talk about increasing participation rates without looking at the reality which lies behind the surface in a country like Ukraine.

Now let's look at the female rates:

Well, across the board these are rather lower than in the male case, but even in the female case the central core age groups have reasonably high participation rates by international standards. There is of course the 15 to 24 age group, but I think here we need to remember, apart from the fact that many young Ukranian women want and expect a reasonable education just like their male counterparts, that Ukranian women still have children comparatively early (around the age of 23) and hence we need to be coherent here. In the longer term the future of the Ukraine rests on having more children, so we should not be simply eating the seed corn now by trying to extract the maximum levels of young female labour force participation, we should be dynamising policies which make it easier for them to have children.

So we are left with women in the 50 to 59, and 60 to 70 age groups. This is fine - although do remember that some of these will have responsibilities as grandmoms if you want a higher proportion of the young mothers to be out working, so even here there are limits, and again being realistic, it is hard to see the white heat of the new technological revolution being brought to Ukraine by a group of poorly educated Ukranian women in their sixties.

The Current Outlook

Well, as I said at the start, the Ukranian expansion is thundering along at the moment on the back of a major global expansion in the demand for steel. This is producing a consumer boom, which is reflected, for example, in the rate of expansion in retail sales this year. These, as can be seen below, have also really been thundering along at a huge monthly year on year rate.

One of the factors which has been fueling this consumer boom has been wage inflation, another has been worker remittances, which have been increasing steadily in recent years. Here is some data which is now provided by the National Bank of Ukraine, but it should really be borne in mind here that these numbers can only be taken as an indication since the actual level is undoubtedly much higher. The Polish National Bank, for example, has actually, following all the notoriety which the "Polish in Britain" phenomenon has created started to make a pretty serious attempt to compile accurate data. According to the World Bank Poland has measured 785 million dollars in remittances for 2006. The Ukranian National Bank only estimates 34 million. Even accepting that many Ukranians are still in Russia and on Russian wages, can Ukranian labour be worth that much less than Polish labour, especially when we take into account the number of Ukranians in Italy, Spain, Portugal etc. Even little Moldova manages to find $85 million coming in in 2006.

Apart from helping generate a mini construction boom (12.7% annual increase in construction activity Jan to June 2007 over the same period in 2006, and again where are the workers to come from to do all this specialized work), this consumer driven boom is creating imbalances in Ukraine's external trade as imports are rapidly sucked-in to satisfy all the extra domestic demand. The Ukraine trade balance has, in fact, steadily deteriorated since the end of 2004.

As can be seen from the monthly balance for 2007 below, this situation has continued as the year has progressed, and in some ways even deteriorated.

Conclusion

I would like to close this post by stressing a number of basic points. Basically there is a danger here of interpreting what Claus and I are saying about the whole labour market situation across Eastern Europe in a very crude fashion, and we are anxious that people do not do this. The rate of labour market tightening (and hence inflation) across all of Europe's economies depends in part on available labour. This affects those in the EU (like Ireland, the Uk, and Spain) just as much as it does those who are outside (like Russia, Croatia, Ukraine etc). The extent to which this tightening (and hence the wage inflation and the exhaustion of reserve pools) occurs will depend on two things. Firstly it depends on the rate of economic growth, and secondly on the rate of sectoral transition to higher value activities.

Both of these are semi-independent variables which cannot be predicted from simply looking at population numbers and fertility. But they are only semi-independent, since lower population levels and ongoing low fertility (ie over 20 years or more) do have an impact on the relative price of labour. This impact that the combined effect of this double whammy has is to slow growth, and to encourages a transition to more capital intensive activity (as labour becomes more expensive). It should miss no-one's attention that just this sort of discussion is already taking place inside China, as people begin to worry that the cheap labour intensive product era may be coming to an end as labour market tightening begins to have an effect even there (and here).

So the both the immediate and the long term future for Ukraine look none too promising, and fraught with difficulty, from a demographic point of view. Especially when the majority of influential international agencies seem to ignore the fertility component in this problem.

The World Bank has published another report on the EU10 economies just this week, and they are very aware of the growing difficulties represented by the evident labour shortages which are occurring. Here is just a short extract to give an idea:

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This has given rise to skill shortages and associated wage pressures, often amplified by out-migration of EU8+2 workers. However, employment/working age population ratios remain relatively low.

Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems and improving domestic mobility; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers.

There is much that constitutes sound sense in this report, although as I have already indicated it is not clear that labour force participation rate increases can do as much work in a country like Ukraine as they seem to imagine. What I found hard, very hard, to understand is why nowhere, but nowhere, in the whole report is the issue of doing something about the severe underlying fertility problem even mentioned.

Data References

The Ukraine Statistics Office

International migration in contemporary Ukraine: trends and policy , by Olena Malynovska, October 2004

Demographic development of Russia and Ukraine: fifteen years of independence
Sergei Pirozhkov and Gaiane Safarova, 2006

Migration in Ukraine and the Case of Kyiv: Suggestions for Preparation of a Research Agenda by Nancy Popson
Kennan Institute (Washington, DC)

National Bank of Ukraine