Friday, March 7, 2014

An Overview Of The Ukraine Economy

This article describes some of the key economic issues in Ukraine.  It is not surprising that the country has had internal political problems.  It would take a strong and capable government to deal with its economic issues.  Instead its government has been part of its economic problem.

Ukraine's per capita GDP was $3,800 in 2012.  This puts it into the lower middle income bracket with countries like Albania.  The Ukraine economy is trade intensive.  Imports and exports account for more than half of its GDP.  A country pays for its imports with exports.  If it imports more than it exports it is forced to borrow money to fund its trade deficit.  Ukraine's major export is steel and its major imports are energy products.  The demand for Ukraine steel is sensitive to economic growth in the nations that import its steel.  Demand has been weak during the global economic crisis.  On the other hand, its demand for energy imports remained high.  Furthermore its currency depreciated by 40%.  That means that it had to pay its imports with a depreciated currency, and it was receiving less for its steel exports which were priced in its depreciated currency.

The depreciation of Ukraine's currency also increased the cost of its debt service to nations with a stronger currency.  It had to purchase the foreign currencies with its depreciated currency to service its debt.  This has weakened its banking system which had borrowed from nations with a stronger currency.  It had to pay back its loans in the foreign currency which it had to purchase with its depreciated currency.

Given the economic issues in Ukraine it had become dependent upon support from the IMF and from Russia which supplied it with energy products.  According to the IMF the Ukraine government was not very effective at making the structural changes in its economy which it had promised to make in return for its financial support.  Instead the government increased subsidies to the government owned energy company.  It will not be easy for any government which ends up in charge of the Ukraine economy to deal with its economic imbalances.

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