As one of the poorest countries in the region that is in a very weak macroeconomic position, Ukraine is one of the most vulnerable to the series of external shocks that have been delivered in the last two months.

The obvious blows have been the collapse of oil prices and the start of the coronavirus (COVID-19) pandemic, but not only these. Ukraine doesn't produce oil, but the fall in prices affected Russia, and despite the de facto war between the two countries their economies remain intertwined.

Ukraine's economy shrank by 12% in April after 4.4% decrease in March marking the potential bottom of pandemic crisis. Passenger transportation plummeted; industrial production, and trade and cargo transportation accelerated their decline, while agriculture remained resilient. Compared to Russia’s 28% nominal (20% real) contraction in April Ukraine seems t have done better than its bigger neighbour, but it had less far to fall and the lockdown was spread over two months, whereas all of Russia’s stop shock was concentrated in April alone. 

As the coronavirus was late to arrive in Ukraine, the government of President Volodymyr Zelenskiy was therefore forewarned of the dangers of the epidemic and quick to act in March. The number of infections has been held at an order of magnitude less than those in Russia despite Ukraine having about a third of the population of its northern neighbour. Ukraine’s public health system is weak and underfunded, but as the number of infections has been kept down the system has coped and the number of fatalities is happily relatively low.

Trade has been falling but Russia remains a top five-trade recipient of Ukraine’s exports, so its economy feels the effects of a slowdown. While much is made of 2mn Ukrainians that work in EU countries, especially Poland, there are 3mn expat Ukrainians working in Russia that send money home, so falling remittances will hurt the Ukrainian economy this year. Last year Ukrainians working overseas sent $15bn home, but this year the National Bank of Ukraine (NBU) is expecting that to decrease to some $10bn, which will hurt the balance of payments and make the trade deficit more difficult to cover.

Gas prices have also tumbled, which is a plus for Ukraine as a net importer of gas, but that has also reduced transit prices of Russian gas to Gazprom’s western customers, which is an important source of hard currency earnings.

Commodity prices have also been brought down by the global pandemic, which hurts steel prices, another of Ukraine’s major exports. However, grain and food prices have remained up, but there is now a problem with supply chains, which has hurt this business too.

Having said all that, Ukraine’s economy has been fairing pretty well. There was a scary two-week period in March where the NBU burnt through $2bn of its reserves as the public started panic buying dollars, but the regulator successfully calmed nerves and the buying spree quickly came to an end.

Half the loans in the banking sector are non-performing, but again, the work done by the NBU to clean up the sector since 2016 has paid off, as all that bad debt is now provisioned and so does not pose an existential threat to the system.

The country was also facing default on its international loan obligations as it is unable to finance its increasingly heavy debt repayment schedule this year without International Financial Institution (IFI) help, but a new $5bn standby agreement (SBA) with the International Monetary Fund (IMF) was signed at the last minute and should solve that problem too.

The main impact is that this is a crisis that Zelenskiy could have well done without. The country is still on its back and the economy was only just starting to recover from an almost total collapse in 2015. Ukraine badly needed some peace and quiet to build up some economic momentum and begin attracting international investment as it starts on a long path towards sustainable recovery. That has now been delayed for at least a year, and probably longer. A carefully crafted budget with a modest 2% of GDP deficit has been abandoned as the state loosens the spending spigot to try to absorb some of these economic shocks.

That is money gone on economic stimulus that is badly needed for investment.

So far, the worst damage has not been recorded in the statistics. The drop in GDP in the first quarter was only 1.2%, but that will skyrocket in the second quarter to something like a 6% fall. As a harbinger of what is to come, industrial production tanked in April, falling by 16.2% year on year, down from the 7.7% contraction in March. Manufacturing was worst hit, down by more than 20%.

While this looks bad, as an emerging market with relatively little debt at the state, corporate and personal levels, these markets tend to bounce back relatively fast and the economy can be expected to recover fairly strongly in the second half of this year before returning to modest growth next year.

The government is forecasting a contraction of 4.8% this year (with a 10.9% contraction in the second quarter alone) but the EBRD believes growth will bounce back to a 5% growth in 2021, which many other analysts agree with.

The slowdown will hurt the most vulnerable the most, and real incomes, which have been growing recently, will contract again while unemployment has already added some half a million names to the dole queue in the last two months.

To shorten this process as much as possible, the government, like many others, has already started to lift restrictions in the last week of May in the hope of reviving business and preventing those with thin working capital from going bust entirely.

All in all, it is going to be a very difficult year, but the government has coped well so far and looks like it will muddle through to the end of the year without a big disaster.

Politically this has cost Zelenskiy some of his popularity and he has unsettled his international donors by shaking up the government in the middle and sacking the technocratic reformers. However, the man in the street remains relatively happy and Zelenskiy is without peer in the polls and would be re-elected easily if a new poll were held tomorrow.

As ever with Ukraine, it never takes the easy path but despite the political roundabout and buffeting by the winds of crisis, the country remains on its feet and real reforms continue to be made.

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This article is the Executive Summary in bne IntelliNews’ Ukraine monthly country report; an in-depth report that tracks the details of the slow moving trends in business, economics, finance, politics and the main sectors each month.

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