A fragile economy that was increasingly leaning towards Ukraine and Europe

Vladimir Puttin has been attacking countries separated from parts of its territory since 2014 by deciding to militarily invade Ukraine, one of Europe’s poorest economies. It took years for repeated clashes between Ukrainian troops and separatist fighters. An unstable situation in which 42 million inhabitants are at risk of disrupting the country if the conflict persists.

However, the Ukrainian economy, which was heavily affected by the 2020 pandemic, began to rise again, especially supported by local consumption and dynamic exports, especially agricultural products. Its GDP recovered 5.9% year-on-year in 2021. FocusEconomics experts predict that GDP will grow 3.5% in 2022 and 3.4% in 2023.

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Intrinsic corruption

The president Volodimeir Zelensky, elected in 2019 as a platform for fighting corruption (ranked 130 out of 177 in the Heritage Foundation’s Index of Economic Freedom), turning the economy around and restoring peace, acknowledges his achievements. It may have been. However, the unemployment rate in the second quarter of 2021 was 9.3%, which is still far from the 2019 level of 7.3%. Inflation was 10% last month and the central bank has posted an interest rate of 10%. In December 2021, the country’s trade deficit was $ 1.12 billion.

Agriculture sector dynamics

The agricultural sector still plays an important role in the economy. According to the World Bank, it contributed 9.3% of GDP in 2020. The main products are cereals, sugar, meat and milk. Ukraine is the 5th largest grain exporter in the world and the 4th largest wheat. To help the country, the European Union has reduced tariffs on Ukrainian agricultural areas. The country is also rich in mineral resources, primarily iron ore and magnesium, as well as fossil fuels, including coal and gas. Coal mining partially located in the Donbus area.

According to World Bank statistics, the industrial sector employs about 25% of the working population, accounting for more than 20% of GDP, and this share has declined significantly in recent years. Ukraine’s manufacturing industry is dominated by heavy industries such as iron (Ukraine is the seventh largest producer of iron in the world) and steel. These two sectors alone account for about 30% of industrial production. Steel production is now below pre-2008 levels. Coal mining, chemicals, mechanical products (aircraft, turbines, locomotives, tractors) and shipbuilding are also important sectors.

According to the World Bank, the services sector employs more than 60% of the workforce and accounts for about 56% of GDP. Ukraine is an energy carrier, historically transporting oil and gas from Russia and the Caspian Sea through its territory to Western Europe and the Balkans, but tensions with Russia have diminished its role. However, this did not prevent the transportation contract between Gazprom and Naftgas Ukraine, which expired on December 31, 2019, from being extended for five years.

Decrease in trade with Russia

The Covid-19 pandemic hit economic activity in 2020, but the results varied by sector. Agriculture, unlike services, trade and transportation, was least affected by quarantine restrictions. According to the United Nations Industrial Development Organization (UNIDO), about 700,000 small and medium-sized enterprises providing services have been closed.

Since 2014, the annexation of Crimea has significantly reduced Ukraine’s trade with its first trading partner, Russia. Most Russian companies have stopped working to turn their neighbors to the European Union and China. If almost a quarter of exports were destined for Russia in 2013, it was only 5.5% in 2020, but especially thanks to the signed free trade agreement, the share of exports to the European Union is 26. It decreased from% to 38%. According to official Ukrainian data, between Ukraine and the EU in 2014.

According to Ukrainians, during this period the country was able to increase its foreign exchange reserves by $ 31 billion, compared to $ 5 billion during the 2014 conflict, thanks to exports of agricultural products, especially grains. Central Bank.

1 hryvnia = 0.030 euro

However, Ukraine’s vulnerability is reflected in the value of its currency, the hryvnia (= 0.030 euros). The hryvnia has fallen 4% against the dollar since the beginning of the year, despite more than $ 1 billion in support from bank power plants. Stop the fall. Since 2014, it has lost 70% of its value.

Under these circumstances, and even more so since Thursday, investors are quite awaited unless they are still full. According to a recent survey by the European Business Association, which surveyed 136 companies operating in Ukraine, 45% planned to continue their operations as usual in the event of a Russian military attack. About 17% said they were considering moving to the western region, which Russia is unlikely to occupy, and only 10% were considering leaving the country. These investors point out the weakness of the legal system, the corruption of state institutions, and the suppression of oligarchy in the monopolistic sector as black spots.

Last month, the European Union promised the country 1.2 billion euros in aid. It also benefits from a funding program from the IMF. It is not yet known if this funding will be maintained or suspended.