“Blessed is he who has believed”: Ukrainian economy for a week

August 14. A new record of Ukraine is registered – by official data, the shadow economy totaled 47% by the half of 2015 with a tangible growth versus the same period of 2014 – 5% in the first quarter of the year.

By data of the Ministry of Economic Development, the shadow economy comparing to GDP in Ukraine was as follows during the last five years: 38% in 2010, 34% in 2011, 34% in 2012, 34% in 2013, 41% in 2014  (record-breaking year since 2007).

Yet, the index is not terrible for the circumstances Ukraine has plunged into. This index shows that the economy is still functioning, but business trusts in the government less and less. The nominal incomes of Ukraine’s citizens are frozen amid shrinking real incomes, which was quite anticipated an outcome. The taxes collected by the country are to be returned to the citizens via the system of state healthcare, education, payment of pensions, scholarships etc. People have no stimuli and see no reason in paying taxes if they get nothing in return and have to rely on themselves only. Business – starting from the small up to the big companies – live their every day like it is their last day, having lost faith in tomorrow. The state and the people, or, as they now say, the nation live more and more independently from one another. The people even ask the government at least not to interfere and let them survive.  

August 12-14. Finance Minister of Ukraine Natalie Jaresko left to the United States but promised to be back.

Negotiations with the Special Group of creditors started on August 12 and lasted longer than expected. The creditors did not show much feelings either for the minister’s 6000-miles-long trip or to the Ukrainian media reports on the escalation of the frontline situation in Donbass (it is quite probable that they escalated the situation to appeal to the creditors’ better feeling and show that the funds received by Kiev are being worked off).

Yet, there is certain progress – the creditors comforted the Ukrainian leadership saying they may write off another 5% of their debt in addition to the already promised 5% if there is no sharp growth in Ukraine’s economy. In addition, good news in such situation – the $2.6 billion bonds maturing in July 2017 fell by 0.33 cents to 57.40 cents on the dollar by 6:00pm on August 13.

August 13. Ukraine as a friendly country of Poland ought to help its partner in anti-Russian sanctions with electricity.

As the energy system in Poland is experiencing a crisis, the government of that country has appealed to Ukraine for help.  Prime Minister Arseniy Yatsenyuk charged taking immediate measures: “We must support our friendly country Poland and do everything possible to help our partners stabilize the energy situation in their country as soon as possible.” To that end, Ukraine will increase the import of electricity from Russia by 200MW.

August 12. Ukraine decided to buy coal in Donbass, but deliver it via the territory of the ‘aggressor’.

It has become a tradition that the raw materials bought by Ukraine make a long way around the territories of the neighbor countries. Political principles do not let Kiev buy coal directly from the Donbass ‘terrorists,’ but these principles do not hold it from delivering coal via the territory of the ‘aggressor’ Russia. They try to reduce their dependence on the Russian gas too by buying it from Slovakia, Germany, and Poland. It is strange but the Russian electricity is still supplied directly from Russia, not via Turkey or by means of battery storages from the United States.

Ukraine’s Cabinet has just to inform Russia of its plans to transit the Donbass coal.  As to the fact that Ukraine joined EU’s extended economic sanctions against Russia on July 29, Russia already knows about it.

Anyway, there are certain positive shifts. Deputy Prime Minister of Ukraine Valery Voshchevsky says a freight-train route will be launched to deliver fuel from Donbass to ensure operation of the energy sector in the autumn-winter period and supply coal to the storages of the Ukrainian TPPs. To that end, repairs have been launched at the Mayorsk-Nikitovka railway section.  However, the shelling must be stopped too. As winter approaches, they may speed up the implementation of the Minsk Agreements and stop the military actions. Otherwise, it will be impossible to deliver the anthracite coal from Donbass.

So far, Ukraine receives coal from the Republic of South Africa. The Darnitskaya TPP procured 80,000 tons of coal from RSA for $65 per ton. Director General of the plant Vladimir Sandler says the difference in the caloric and ash content of the coal does not affect the services provided to the Kiev residents. Mr. Sandler preferred not to speak about the cost of the repairs that will be necessary to launch due to the improper quality of the imported coal.

August 11. In Ukraine they take too literally the expression “economy needs rehabilitation.”

The former minister of healthcare, now people’s deputy from Poroshenko’s Bloc Oleh Musiy has engaged in economy and decided to rename kopeyka into ruble, which as he thinks is the most necessary thing to be done to restore the historical justice.  He has even registered a bill of “amendments into some laws of Ukraine to introduce a historically-substantiated name of ruble as the smaller part of the Ukrainian hryvnia.”  It appears that the deputies have too much time or have no other, more important problems in the economy of Ukraine to discuss.  Let them think big and make more radical decisions, for instance, rename water into oil, air into gas, and hryvnia into dollar.

August 10. Ukraine’s Cabinet announced two scenarios of economic development for 2016.

The Cabinet considers a 0.3% GDP growth and 14.7% inflation forecasts pessimistic. There is an optimistic scenario too – a 2% GDP growth amid 12% inflation in 2016.

The Cabinet’s enactment No.558 “Approval of the Forecast of Economic and Social Development of Ukraine for 2014 and the main macro-economic and social development indicators for 2017-2019” resembles two proverbs at once: “Blessed is he who has believed” and “Ignorance is bliss.”  With a faith in tomorrow and without reasons to worry about, the Cabinet of Ministers easily marches ahead, regardless of the fact that its promises and forecasts have not come true over the past 1.5 year.  Instead, “the best prime minister of all time” is in power.

It is noteworthy that Ukraine’s state budget for 2015 was based on the optimistic scenario too – a 5.5% GDP decline amid 26.7% inflation. The latest forecasts of the IMF and Ukraine’s National Bank for late 2015: 9%-9.5% GDP decline and 45.8%-48% inflation.  However, even these forecasts look optimistic.

Alexander Dudchak, economist, specially for EADaily