22 July 2022

The Ukrainian economy is suffering. However, it has a good chance to recover and flourish after the war. Russia, on the other hand, has slim chances to recover. Its financial sector is bleeding. Mykhailo Kukhar, MIM-Kyiv professor of macroeconomics discussed the current economic situation.

On Ukrainian Economy

No economy can flourish after 5 months of the war. But the good news is that IMF’s forecast of a 40% - 45% GDP fall is wrong. The GDP was reduced by 35%. It is a third, not a half.

On Logistics and Inflation

Our ports that are blocked accounted for 70% of the cargo. Railroads do not have enough capacity to service our exports. Yet, we might have had an even more dramatic reduction in exports. According to our findings, Ukraine is losing nearly 40% of its exports this year. It is bad enough but better than could be. In 2021, an economically successful year, our exports grew by 40%. We are returning to the previous GDP. Instead of 200 billion hryvnias, we are expecting to have 155 billion hryvnias. We are also expecting the GDP deflator to reach 36.5% and 20 %- 25% of the inflation rate. It is expected to reduce from 25% to 20% by the end of this year.

On NBU’s and Ministry of Finance Decisions

Our economic downfall peaked in April. In May and June, we witnessed the growth of exports, manufacturing, jobs, and even a modest increase in salaries in the Western region. Retail sales are growing as well. The financial system is stabilized. In March our banking system was at risk of shutting down. The introduction of the hryvnia’s fixed rate of exchange was the best solution that helped to keep the financial system afloat. The NBU managed the payments seamlessly. It did not stop even for a day. Serhii Marchenko, our Minister of Finance is to be praised for his work as well because all state budget transactions except for capital investments are executed regularly and timely.

On Budget Revenues in March

In March the revenues of the budget exceeded the set objectives due to our entrepreneurs’ efforts. Most businesses paid all taxes in the first war month. It is arguably a unique case. We are not Russians; we were through two Maidans and we do not need our “Fuhrer” orders. Our businesspeople set their contributions to the war efforts.

On International Assistance and Revaluation

The recognized calculations proved that we need 3 – 5 billion of external assistance or loans per month. We were promised those amounts this year and the next year. Our Ministry of Finance should execute everything properly. We do not have to do anything else. No request to reschedule our debt payments because it undermines our credit ratings. Somehow, in COVID year and now are having positive payment balance. We do not consume too much of imports. As a result, our currency inflow is positive. That results in a stable rate of exchange. Many are discussing 40 – 50 hryvnias for a dollar. But hryvnia falls if there is a solid currency outflow. When we have inflow, we have to think about revaluation. That’s what we are going to face in autumn and winter.

On non-existent russians’ money

They do not have a safety net. Since the very beginning of the war, we at Ukraine Economic Outlook teamed up with American colleagues and shared information. Then we used information from hackers who downloaded more than 400 thousand classified documents from the Russian Central Bank. We have a lot to analyze. Russians do not have their savings in the banks. They banned withdrawal of deposits until September 2. Let’s see what will happen on September 3. 120 billion deposits disappeared from the two largest banks. How are they going to pay back the currency deposits? They do not have that. And they will not pay back. I am surprised that there are people who did not withdraw their deposits from the banks.

On Sanctions

No country, even Cuba or Iran has imposed so many sanctions. However, no one was lethal. A full oil and gas embargo paired with expelling all banks from SWIFT could have killed the economy. But Russians managed to amplify the sanctions with self-sanctioning. First, the rouble’s rate of exchange crashed. They robbed their foreign investors. They lost 200 – 800 billion dollars. Secondly, half of the Russian central bank reserves, or 300 billion dollars are frozen. They have 150 billion worth of gold, but it is sanctioned. Out of the rest, 150 billion dollars are in yens they have already spent nearly 120 billion. They keep a positive trading balance because they lost 79% of the imports. Thus, they artificially reduced the currency demand. Many exporters have to sell their exports’ gains at 60 roubles per dollar whereas they planned 85 - 90 roubles per dollar rate of exchange or a third cheaper. Do you know any importers with a 33% margin?

On Upcoming Bankruptcy

The fall of the banks has started. The ban to disclose bank balances is evidence of the banks’ poor condition. At the end of the day, they will go bankrupt and get nationalized. I think that the banking sector will collapse this fall.

In Ukraine, we have had arguably the worst year. It is only natural for wartime. But next year we will start our revival due to the large-scale international programs and funding. We are talking about hundreds of billions. Whereas Russia is an economic black hole. It spirals the economy down.