Author: Olga SHELKOVA | 27.08.2014
Translated from Russian, by Maria Razdiak
Edited by Ken Griffith and S. Naylor
Original article: http://odnarodyna.com.ua/node/24311
[Olga Shelkova is an independent economic journalist, primarily analysing, the events of the CIS (The Commonwealth of Independent States).]
The published results by the Goskomstat (Federal Bureau of Statistics) of changes to the Ukrainian economy during the first half of 2014 can be shocking. But the most important figures in the situation at hand are not the fact that the GDP fell 4.5% , nor even that the gross domestic product is predicted to fall -7% by the end of the year, but the irreplaceable losses concealed by these frigid statistics—the losses that will destroy the actual possibility of a Ukrainian economic recovery in the future.
We are speaking primarily about the collapse of the industrial sector, which is accelerating. During the period from January to June, the volumes of industrial production shrank by 5.8%, while July alone brought that sector down by another 12%. The most profound damage was suffered by the coal sector (-28.7%), the automobile production (-23.8%), the chemical manufacture (-22.2%), the oil refining sector (-15.9%), the rubber industry (-13.8%), metallurgy (-12.3%), and furniture production (-12.5%). Clutched by war, the Lugansk and Donetsk regions have lost 56% and 28.5%, respectively, of their industrial potential. The crisis of the component supply from Donbass in turn led to the collapse of the industrial giant of Zaporozhie (ZAZ). This enterprise lowered its production volume by 98.9%, and by October will probably stop all manufacturing, leaving 21,000 workers out of the street.
The industrial potential was also dented by the fall in exports to Russia, which ranged from 25% to 70% over the different sectors. For example, automobile production lost 40% of all exports, metallurgy – 32.6%, agricultural – 37%.
It must be noted that these horrific statistical indicators include the period during which Ukraine had a legitimate government, and economic relationships with Russia were actively developed. With the complete severance of economic ties with the Russian Federation by the Kiev Junta, the pace of industrial collapse will only accelerate.
The state of the agricultural sector, for which Kiev has great hopes, is no better. The first quarter of 2014 showed a 3.9% decrease in the volume of agricultural productivity, while the amount of produce fell by 17.6%. The fall in plant production during the six months totaled 30.1%. Grain production (not including corn, as the marketing year for such starts and finishes in September) shrunk by 2.1 times (i.e. more than half), winter and spring wheat – 4.8 times, rye – 27.5 times, grain legumes – 2.3 times, rapeseed – by 36.5%, the collection of fruit and berries – 11.8%, cattle livestock – 3.2%.
Specialists predict an estimated a 10% fall in the gross output of grain, which will lower the export potential by 7%; while Ukrainian agriculture by the end of the year may shrink by 10-15%.
Instead of assuring the country’s food security, Ukraine has increased grain export in the second quarter by 89.4% (in comparison to the previous year). And to entirely destroy the agricultural sector, Yatsenyuk’s government cancelled taxation subsidies for those agro-industries with a turnover of 20 million hryvnias or more and with an agriculture-land mass of 3 thousand hectares or more. In reality almost 90% of the agro-producers have lost their tax privileges, as small agro-holdings account for only 10-15% of the Ukrainian agriculture, while medium companies hold 60-65%, and 20-25% are the large agro-producers. Taking into the account that the devaluation of the hryvnia, the cost of production resources has automatically increased by 40-50%. It is time to say goodbye to the legend of the “Grainary of Europe” Europe and the industrial sector.
The worrying situation in the real economy is leading to a fall in the government budget. The Finance Minister A. Shlapak has stated that the current budget deficit of 30 billion hryvnia ($2.3B) can reach 87 billion hryvnias ($6.6B) by the end of the year. Thus, it can already be said that the country is caught in a stagnationary spiral.
Firstly, government debt is growing with a geometrical progression. While 2013 bought an increase in the public debt (during the first semester) of 11.3%, and the external debt fell by 6.4%; the same period of 2014 presented a 50% increase in public debt and a 65% increase in external debt.
Secondly, Ukraine’s international reserves are decreasing rapidly. Despite IMF credits, gold and foreign exchange reserves of Ukraine have shrunk from $20.41 billion to $17.08 billion. Plus, over $10 billion are not gold, nor currency, but debt obligations (read as IOUs) of the NBU (National Bank of Ukraine).
Thirdly, from February the national currency has devalued by 62%. By the end of the year it may reach 15 hryvnia to 1 US dollar. The International rating agency, Fitch, lowered the long-term rating of the default issue of the Ukrainian national currency from B to CCC, or to the “extremely speculative” level.
Fourthly, international investments have fallen. The volume of direct international investment has fallen by 11.9% since the beginning of the year. Leading the decrease are the countries of the EU: Austria decreased direct investment by $404.9 million, Great Britain – by $354.5 million, Netherlands – by $193.8 million, Germany – by $178.4 million, Italy – by $128.2 million.
Consumption, a useful tool in increasing the economic growth during a crisis, is also on the decline. The negative tendencies are further worsened by IMF mandates in regard to lowering public and social spending. Thus, this year Ukrainians have cut their trips abroad by 40%. Imports have fallen by 20-25%, pharmaceutical sales – by 18%. Airlines have lost half their passengers; railroads have seen a 50-70% decrease in freight (depending on the industry). The turnover of Ukraine’s retail trade and restaurant business fell by 21.5% (July 2014 compared to July 2013), while the June decrease was 20.9%.
Positive tendencies are not observed. With the backdrop of a 62% loss in the national currency and 12% annual inflation – which lightened the wallets of the population by three-quarters – citizens are not in a mood for shopping. The devaluation of the currency is paralleled by the increase in prices. According to the Finance Ministry: the price of fruit increased by 56%, sugar – by 35%, vegetables – by 28%, pork – by 25%, fish (and fish produce) – by 21%, beef – 10%, bread (and baked goods) – by 30%, pharmaceuticals – by 60%, petrol – by 50%, public transport – by 100% (i.e. doubled in price). The first wave of increases in tariffs will be followed closely by a second. In October, the price for electricity will increase by a further 40%, gas – by 73%, water – by 84%, sanitation – by 105%.
The broke and hungry Ukrainians will face another trial – the cold. In connection to the multi-billion gas debt to Russia, the gas supply was terminated in June. Here the conversation is not only about the heating and the hot water supply to the residential sector but a worsening of the economic crisis due to the gas deficit. The decline of 30% in volume of gas utilized occurred because of the closure of whole factories. Gas shortages will soon hit cement, nitrogen, glass, metallurgy and separate segments of the chemical industries. Thus, the initial effects will be felt by a number of basic enterprises (some international) which carry a great social responsibility: “ArcelorMittal Krivoy Rog”, “Azot” in Cherkasy, “HaidelbergCement Ukraine”, “Dneprazot” and others. Unsurprisingly, this will sharply increase the unemployment level, which may double by the end of the year; reaching 10.2%. This number is only the official statistic. It fails to take into account a shortening of the work week, and forcing the employees into unpaid vacations of unspecified length.
The Ukrainian Department of Energy set limits on the use of natural gas for all consumers; estimating a reduction in the use of natural gas by 30% for the communal and the industrial sectors. In turn, “Kievenergo” announced their plans to use less than half of the gas necessary to heat the capital during winter.
The consumers responded to the government plans of freezing them in their own flats by increasing the demand tenfold for water and space heaters. That will have little effect apart from the increased danger of the electric grid having brownouts (which will in turn lead to a water supply collapse). Russian gas is required to produce electricity, as is the Donetsk coal, which together generate 42.2% of the Ukrainian electricity supply, which in turn powers the domestic heating plants. An increase in electricity production from the nuclear plants is also unrealistic, considering the titanic efforts of the Junta to replace Russian nuclear fuel with American fuel produced by the Westinghouse Company, which is not even suitable for the reactors.
Despite all the efforts to organize a reverse gas flow from Europe, Yatsenyuk was forced to admit that without Russian gas Ukraine would not survive. He went on to state that the government has reserved $3.1 billion to purchase 5 billion cubic meters of the Russian gas. The problem is that as of the August 1st 2014 “Naftogas Ukraine” owns “Gasprom” $5,296 billion, and until some of that is paid the negotiations are stalled.
Whilst the international experts are predicting the greatest economic decline in the world for Ukraine, the economies of the countries in the Eurasian Customs Union – despite the sanctions pressure from the EU and US – are showing a positive dynamic.
According to the CIS Interstate Statistical Committee, on the basis of the economic development of the States of the Commonwealth during the first half of the year 2014, there has been a 1.2% increase in the GDP of Belarus, 0.9% – in Russia and a 3.8% growth in Kazakhstan. The rates of growth of the Belarus economy in the second quarter have accelerated due to the increased retail turnover, despite the decrease in industrial manufacturing. Kazakhstan is showing good results throughout: capital investments increased by 5.2%, logistics – by 4.1%, while retail turnover increase by 11.8%.
Failure of industrial cooperation with Russia did not bring benefits to the Ukrainian producers. However, Russian volume of industrial manufacturing has increased by 1.5% – mostly due to a need to replace the Ukrainian imports in the high technology and innovative sectors. In the future the positive effects of the banned imports from Ukrainian military-industries into Russia will only increase. For example, the internal program for developing the strategic nuclear forces no longer plans for the presence of Ukrainian manufacturers. Thus, Russia is now planning to establish domestic production of air-to-air missiles. The manufacture of the helicopter engines will be moved to St. Petersburg, at the factory “Klimov”, which, by 2015, should be producing 450 motors yearly; thus, completely replacing the imports from the Ukrainian factory “Motor Sich”, located in Zaporozhie.
Russian sanctions on European and American agricultural produce allow for the expectation of continuous growth, not only in the industrial sector but also in agriculture.
Personal income in Russia continues to grow. The average pay cheque in June, was 32,715 rubles ($877), a growth of 9.4% in comparison with June 2013. This is a growth rate that Ukrainians can only dream of.
All the Ukrainian attempts to wound Russia have only hurt Ukraine. “Already, even without the use of any measures, our trade turnover with the Customs Union has fallen by 30%” – said Poroshenko, during a meeting in Minsk on the 26th of August. “And in no situation can we allow for a further deterioration in terms of trade.” But, the Kiev regime – not with words but with actions – is turning down a possible partnership with Russia and with the other countries of the ECU. It seems that Kiev has declared an economic war – not on Russia, but on Ukraine and the Ukrainian people.