Ukraine’s economy is at stake. Learn about the effects of the crisis with Russia

Kiev The scenario of a Russian invasion of Ukraine remains in the circle of possibility, and Russian intentions remain confined to the Kremlin in this regard; But talking about it, and the escalation taking place amid Russia’s military buildup on Ukraine’s borders, were enough to cause the economy and investment to be among the first casualties.

These indicators are highlighted by exchange rates, bonds and inflation rates, and the most dangerous may come from investors’ reluctance to enter the Ukrainian market, and Kiev’s having to knock on the doors of donors and the IMF again.

Since the beginning of this year, the value of the local currency “hryvnia” has fallen by nearly 12% against the dollar, and inflation rates have jumped on average by 10.2%, while the prices of Ukrainian sovereign euro bonds against the US dollar suddenly fell by 11% to 14%, which threatens Ukraine Practically speaking, by not having access to the international financial market.

The most dangerous escalation

Here, some may wonder what distinguishes the current escalation from its predecessors to make it the most dangerous, especially since Ukraine has been witnessing a war with pro-Russians, and tense relations with Moscow, since 2014.

The Executive Director of the Center for Economic Strategy, Halep Fislinsky, explains to Al Jazeera Net, “The main difference from the situation in 2014-2015 is that the market now interacts with threats directly, by virtue of the fact that the crisis is open to all possibilities, and not with actual actions on the ground, and this interaction includes the bond market.” and the amount of investment.

He adds that such a situation – in the long run – may lead to a decline in the ability of the Ukrainian government to enter the borrowing market. Before news of the escalation by Russia spread, Ukrainian bonds were interest rate of 6-8% per annum in dollars, and taking out loans at an interest rate of 25% per annum would lead to bankruptcy.

He continues that the pressure of information will increase the risk of long-term investments moving away from Ukraine, and slow down economic growth, which is already affected by the Corona pandemic.

Investors’ reluctance

Despite the challenges that the year 2021 brought, Ukrainians consider it a successful investment year, in which investors pumped about $6 billion into the country’s economy, which contributed to achieving a 5.7 percent growth in GDP during the second quarter of the year only. Cash set its expectations at 3.2%.

But this matter is threatened today by the escalation and the harbinger of war, because “the mood of investors and the global financial mood deteriorated in early 2022,” said Andrey Dmitrenko, managing director of Dragon Capital.

Dmitrenko explains that the escalation is prompting foreign investors to classify investment in Ukraine – currently – as a kind of excessive risk, and therefore they are not ready to lend to the Ukrainian government or Ukrainian companies at any price.

He added that this imposes serious constraints on Ukraine’s economy, and is likely to lead to a decline in the chances of recovery and economic growth below the already modest expectations of the International Monetary Fund for 2022, which amounted to 3.6%.

borrowing ghost

Despite the tension, Ukraine has been able to achieve relative economic stability during the past years, but this stability is now more threatened than ever, and it may push it again to request IMF loans, despite the difficulty of this matter.

Before the end of 2021, Ukraine’s international foreign exchange reserves amounted to about $31 billion, compared to $7.5 billion in 2014, which led to a reduction in the budget deficit to record levels.

Indeed, Prime Minister Denis Shmyal confirmed that Ukraine intends to continue cooperation with the International Monetary Fund immediately after the end of the period of the previous “cooperation” program in the summer of this year.

The difficulty of the matter, according to Heleb Fislinsky, lies in Ukraine’s ability to convince the IMF and the rest of the donors in light of the escalation.

Fislinsky notes that the previous Ukrainian government, led by Prime Minister Arseny Yatsenyuk, took several years to convince the world to finance the country after the global financial crisis, and the scene was repeated in the first years of the current crisis (2014-2015).

He added that in light of the continuation of the crisis and the current escalation, Kiev may be between the fire of inflation and deficit, and the fire of conditions for obtaining loans, which are often linked to raising prices to levels that the people may not be able to bear.

Despite the tension, Ukraine has managed to achieve relative economic stability over the past years (Reuters)

gas prices

The mention of the current military escalation is linked to an introduction that preceded it when Russia raised gas prices to record levels during the past few months, as well as the Nord Stream 2 project to transport Russian gas directly between Russia and Germany via the Baltic Sea.

The expert points out that Ukraine will feel the price shock after the end of the heating season, and the need to fill the tanks according to new prices has multiplied 7 times in Europe, and then – in his opinion – the prices of domestic gas and prices at gas stations will double as well, which means an increase in the prices of almost everything.

He added in another context, “If Russia – with this escalation – is able to force the West to submit and impose the launch of the Nord Stream 2 project, which America and several European countries oppose, this will be a disaster for Ukraine’s economy and its position in the gas transport market, from which it earns about two billion to the 3 billion dollars annually.

Leave a Reply

Your email address will not be published.