The Economist explains: Why the Ukrainian economy is in deep trouble | The Economist

The Economist explains: Why the Ukrainian economy is in deep trouble | The Economist:



"IN RECENT months Ukraine’s problems have mainly been political. But in addition to the annexation of Crimea and fighting in the east of the country, Ukraine’s economy may be entering a full-blown depression. This year its currency, the hryvnia, has lost half its value against the dollar. Inflation is at nearly 20%. Ukrainians are panic-buying food and other essentials. Economists worry that by the end of this year, the country may have no money left to pay its debts. What has gone so wrong?



Ukraine’s problems were a long time in the making. Botched privatisations after the collapse of the Soviet Union created an oligarchic class that sucked up most of the country’s wealth. In Kiev, battered Soviet-era cars and tractors can be seen on the roads alongside Ferraris. According to a report by Credit Suisse, a bank, Ukraine has the world’s most uneven distribution of wealth. Even before the crisis began, the average Ukrainian was a tenth poorer than at the end of the Soviet era. 




Russia’s meddling has done two things to the Ukrainian economy. First, it has inflicted serious damage on Ukraine’s industrial heartland in the east of the country. Luhansk and Donetsk normally account for 16% of Ukraine’s GDP, supply 95% of its coal and produce a big chunk of exports. In September industrial production in Luhansk fell by 85% year-on-year; in Donetsk it fell by 60%. Second, the crisis has made investors reluctant to have their money anywhere near Ukraine. A recent investors’ conference in Kiev was a dour affair. That has had terrible knock-on effects. As investors have pulled money out of Ukraine, the hryvnia has tumbled. That makes imports more expensive. Agriculture is suffering because farmers cannot afford to buy inputs from abroad. Ukraine has depleted its foreign-exchange reserves in a desperate attempt to prop up the hryvnia: they have fallen from $18 billion to $12 billion in a matter of months. Worst of all, a weak hryvnia makes it more difficult for Ukraine to repay the $14 billion-worth of foreign debt due before the end of 2016."



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