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Friday, 21 March 2014

EU is aware that Ukrainian economy is in really terrible shape. - analyst

The European Commission has proposed another 1 billion euro for Kiev, which will come as a part of the 11 billion euro package agreed earlier in March. A rapidly worsening balance-of-payments and weak fiscal situation in the wake of the latest developments in Ukraine pushed the EU to consider a new perk. The Voice of Russia talked to Lilit Gevorgyan is a Russia/CIS country analyst with IHS Global Insight and Jane's Information Group.

How can this financial aid change the situation in Ukraine? In your opinion, will it somehow help to stabilize the country’s economy?


If we look at what the Ukrainian economy is really suffering from and what it needs at the moment, it basically needs to finance its current account deficit and its budget deficit. And indeed, with the IMF and the EU bailout these goals can be achieved.

But there is another side to this story and that is the impact on the economic performance of the bailout program. And that in the short-term could be negative because what we are really looking into is a range of austerity measures that Ukraine would have to implement.

And that means that private consumption that has been the major contributor to the Ukrainian economic performance in the past quarters, it will weaken and, possibly, contract having an overall negative impact on the GDP.

  • Does it mean that Ukraine will be more dependent on the EU? Because any additional aid to Ukraine from the European leaders automatically increases the country’s debt. And does that mean that Ukraine will have to follow the EU’s line of policy on the international stage?

  • I don’t think that the EU bailout money will come with political strings attached. I believe that the European block is aware that the Ukrainian economy is in a really terrible shape and is facing serious problems with its external financing need.

And what the EU and the IMF are trying to do is to pull together their resources to help. To first of all stabilize the economic situation, help Ukraine to meet its debt obligations so that the country avoids a default and also help them to rebalance the economy, which is the most painful part that Ukraine has to go through, unfortunately.

When it comes to expecting Ukraine to behave in a certain way in foreign policy, I don’t think that that is necessarily the case.

How can the alliance between EU and Ukraine affect the Russian-Ukrainian economic ties?

I think from Russia’s economic and commercial perspective, it is quite interested in seeing the Ukrainian economy stabilizing. Russia is the major trading partner for Ukraine. It is the major investor in the country. There are vast business interests of the Russian businesses in Ukraine.

So, obviously, when the Ukrainian economy is underperforming or failing, it is having an impact on Russia as well. If the EU is helping the Ukrainian economy to stabilize, I don’t see why it will have a negative impact on the Ukrainian-Russian relations.

What are your forecasts for the further development of the economic situation in Ukraine?

As I said earlier, I think what we are currently seeing is the IMF continuing the negotiations. Clearly, these are difficult negotiations, because the Ukrainian Government is aware that the austerity measures that they have to implement will have a significant impact on their popularity and overall stability of the Government.

The IMF and the EU have made it clear that they will start seriously implementing the aid and rolling out a bailout only after the May’s presidential elections. They need some political stability and, secondly, they need seriously commitments by the new Ukrainian authorities that they will stick to these austerity measures, because, effectively, what they are asking for is increasing gas prices, cutting the public spending, trimming pension payouts and also maintaining flexible exchange rate for hryvnia.

All of these are going to take toll on households. And once the Ukrainians are going to experience a serious drop in their disposable income, this will naturally feed into an already tense situation in the country, particularly in the eastern regions of the country, where people could say that they didn’t even agree to a Government change.

So, it is a really toxic combination of austerity measures that have to be implemented to really rebalance the economy and keep Ukraine away from default and political instability. I think Ukraine is quite unfortunate in the sense that while this is a pill that they have to swallow because it is important for them, it is a very bitter pill and it could turn poisonous politically.

So, we are looking into a protracted period of political instability and economic instability in Ukraine for the next year or year and a half, at least. And also, depending on how they will build their relations with Russia, it will also have an impact on their economy. If there is a continued antagonism in Ukrainian-Russian relations, this could only lead to further difficulties with trade with Russia – potential trade restrictions, potential increasing gas prices and so forth. All of this could make Ukraine even worse-performing than we’ve seen before.

So, there are lots of challenges that the Ukrainian Government and the new authorities have to deal with. And another drawback for them is that it is a coalition Government that has a strong nationalist element, who are populists and quite possibly in the future they could turn their back the Government that is implementing austerity measures, and lead to more political instability with Ukraine experiencing the fate of many countries that have governments that are grouped with instability.

So, the picture doesn’t really look that great, to be honest. But the Ukrainian Government has face up to the mismanagement of the previous Government in the economy. And they really have to be brave to face these challenges and push ahead with them no matter what political cost is for their careers.
Read more: http://voiceofrussia.com/news/2014_03_21/EU-is-aware-that-Ukrainian-economy-is-in-really-terrible-shape-analyst-9389/

21/3/14
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