Ukraine Economy Plummets in the First Quarter

Ukraine’s economy contracted by an amazing 10.2 percent in 2014 and 17.6 percent in Q1 2015, stemming in part from a long-term civil war where eastern Ukrainians are fighting for autonomy. Manufacturing output dropped to around 40 percent, due to the government losing a great deal of manufacturing centers to eastern rebels, causing the nation to lose 20 percent of the overall economy. Ukraine was already in a two-year recession before the conflict erupted.

Ukraine’s economy contracted by an amazing 10.2 percent in 2014 and 17.6 percent in Q1 2015, stemming in part from a long-term civil war where eastern Ukrainians are fighting for autonomy. Manufacturing output dropped to around 40 percent, due to the government losing a great deal of manufacturing centers to eastern rebels, causing the nation to lose 20 percent of the overall economy. Ukraine was already in a two-year recession before the conflict erupted.

World leaders and institutions are at a loss over the Ukraine situation. Ukraine is not only dealing with a severe lack of growth, but high inflation and a lacking money supply. The Ukrainian hryvnia has plummeted in value, but exporters cannot gain enough traction to fully thrive in the export market, with exports to the European Union falling at the beginning of the year, and exports to Poland fell by a third annually. Wages have increased slightly, but the nation’s 60.9 percent increase in inflation means a skyrocketing cost of living. The West has contributed some financial support, but Ukraine is going to need more bailout money to stay afloat.

Ukraine’s Debt Giant

According to data from the International Monetary Fund, Ukraine racked up public debt amounting to over 70 percent of GDP, and the debt is ever increasing. The IMF plans to raise $40 billion on Ukraine’s behalf, raising $15.5 billion thus far.  Over a third of the total package will arrive once the IMF and Ukrainian authorities enter debt renegotiations. Creditors holding just $10 billion of Ukraine’s debt have had a tough time negotiating with a nation that is near default, and Ukraine will be in for greater austerity measures with the acceptance of more bailout money. However, creditors are willing to negotiate because they would lose money if Ukraine defaulted, and officials have no other choice but to come to the table.

Signs of Hope

Getting beyond Ukraine’s debt problem, the nation is standing on a goldmine of fertile ground that can be a launching point for success in the future. Known as the ‘breadbasket of Europe’, it is a large reason why Chinese investors have been interested in Ukraine’s agriculture sector. Ukraine is already a major producer of sunflower oil and wheat, and the nation only needs a slight push into modernization to fully develop its farming potential. Agriculture is just one sector where western authorities are looking to compensate for losses in manufacturing output, including IT.

Both sectors are vital components of the western Ukrainian economy, but Ukraine will continue to be in hot water without a solid manufacturing base. Authorities hope to offset the imbalance by fostering greater trade ties with the European Union, which was at the heart of the protests that led to the ousting of President Viktor Yanukovych over a year ago, but Ukraine has yet to gain anything substantial from its trade relationship with the West. However, Ukraine established a deal with the EU that allows Ukrainians to get more natural gas imports from the EU instead of Russia. From a trade perspective, Ukraine may be in better shape when new trade regulations come into effect in 2016.