By Anders Åslund

Project Syndicate

Ukraine’s economy may no longer be in free fall, but it remains in dire straits. The country’s GDP contracted by 6.8% last year, and is forecast to shrink by another 9% this year – a total loss of roughly 16% over two years. While things seem, to some extent, to be stabilizing – depreciation of the hryvnia has eliminated the country’s current-account deficit, and a massive fiscal adjustment brought Ukraine’s budget into cash balance in the second quarter of this year – the situation remains precarious.

Ukraine’s primary economic challenges are not homegrown; they are the result of Russian aggression. The country’s belligerent eastern neighbor has annexed Crimea, sponsored rebels in eastern Ukraine, pursued a trade war, intermittently cut off its supply of natural gas, and is threatening financial attack. So far, Ukraine has miraculously managed to withstand these assaults with little international support – but it is in desperate need of assistance.

Russia’s annexation of Crimea in March 2014 seized 4% of Ukraine’s GDP. Since then, Russian-supported armed forces have occupied territories in eastern Ukraine that accounted for 10% of the country’s GDP in 2013. With the Donbas region’s production having plummeted by 70% in the months since, this has cost Ukraine some 7% of its 2013 GDP.

Since 2013, Russian trade sanctions have slashed Ukraine’s exports to the country by 70% – accounting for a drop of 18% in Ukraine’s total exports. Last year alone, Ukraine’s exports to Russia – which included machinery, steel, agricultural goods, and chemicals – fell by half. Logistical issues, the lack of commercial links, and the specialization of some products meant that the goods could not be redirected in the short term. I estimate that the loss is likely to correspond to a 6% decline in Ukraine’s GDP.

Businessmen everywhere are aware of Russia’s assault on Ukraine, and, unsurprisingly, few want to invest in a war zone. As a consequence, Ukraine’s net foreign-direct investment, which was slightly over 3% of GDP before the start of hostilities, has evaporated. This amounts to a corresponding reduction of 3% of GDP. In addition to this, Ukraine has faced an intermittent gas war. A financial assault may be yet to come.

Continue to full article . . .

–

Picture: Vladimir Yaitskiy (Flickr: Ukrainian flags) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)%5D, via Wikimedia Commons