2008 Year in Review

Economic News

22 Jul 2010
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Despite a very good start, 2008 turned out to be a difficult year for Ukraine, as the country continued to experience political instability, high inflation and the external shocks of the global financial crisis.

The Ukrainian Ministry of Economy recently predicted that the country would see a Gross Domestic Product (GDP) growth rate of 3.5%-4% in 2008, compared to 7.6% in 2007. The Ukrainian government had initially forecast a growth rate of 6.8% for 2008, but revised its figures downward in December.

Despite the lower expectations, there have been some encouraging signs of growth in 2008, including a bumper grain harvest that seems set to boost the country's farming sector and the broader economy. In September, the Agriculture Ministry estimated that Ukraine would produce 48.7m tonnes of grain this year, up from a previous expectation of 43-45m announced in August. This represents an increase of 66% on the 29.3m tonnes produced in 2007, when harvests were particularly poor. The rebound from last year's weak crop could add momentum to the further development of agriculture in the country.

In the construction sector, 2008 continued to build on the successes of 2007, even though it is now facing a serious lack of funding from the banking sector.

At the beginning of the year Kiev's commercial real estate market maintained rapid development, with 240,000 sq metres of new office space created in 2007 and 250,000 more slated for 2008, compared to only 177,000 sq metres produced in 2006. Much of it will not be delivered due to financing difficulties. However, Ukraine continues to operate at a vacancy rate of 2%, and real estate remains less mature than many Central European markets.

The government of Prime Minister Yulia Tymoshenko has been moving forward with its ambitious efforts to reshape Ukrainian energy policy. In February, the National Security and Defence Council adopted a plan to revoke the contracts of gas intermediary companies RosUkrEnergo and UkrGazEnergo. This development marks the first steps of Tymoshenko's wide-scale plan to overhaul energy relations between Kiev and Moscow.

By removing the middlemen of the Ukrainian-Russian gas trade, Tymoshenko hopes to use the strengthened position of Ukraine's state-owned Naftohaz Ukrainy as a bargaining chip when gas prices are renegotiated in 2009. Ukraine would like to re-establish direct energy relations with Russia and Turkmenistan without any Gazprom-backed intermediaries.

The government is progressing on the three major goals of its westward integration strategy: entry into the World Trade Organisation (WTO), economic integration with the EU and accession to the North Atlantic Treaty Organisation (NATO). On January 17, the EU agreed on the final terms for Ukraine to join the 151-member WTO, paving the way for full membership on February 7. Additionally, the EU and Ukraine have officially begun preliminary discussions for the creation of a Free Trade Agreement (FTA).

However, the short but destructive war between Russia and Georgia has put Ukraine's bid for NATO membership, and its relations with Moscow, sharply back into focus. Opinion in Ukraine is divided on what stance the government should take. Meanwhile, the conflict and its repercussions are hardening dividing lines between NATO members, with some calling for Ukraine's membership process to be accelerated and others wanting to slow or halt it.

The international financial crisis hit Ukraine swiftly, and the IMF stepped in with a $16.4bn loan, with much of the package going toward "pre-emptive" recapitalisation of banks. The move followed the National Bank of Ukraine's (NBU) announcement that it was instituting a series of measures designed to shore up the banking system, guaranteeing deposits and limiting withdrawal rights, having already extended $1.1bn of emergency funding to troubled institutions.

Even before the global crisis, the country faced serious economic troubles. In the first half of 2008, Ukraine's inflation continued to spiral out of control, reaching 30% in April and becoming one of the country's most urgent economic concerns. Ukrainian officials placed much of the blame for the inflation spike on high global food prices, high charges for imported gas and an increase in budgetary spending. July's inflation figures, however, showed a drop in prices, indicating a downward trend as year-on-year inflation fell to 26.8% from 29.3% in June. As global inflationary pressures ease, the worst may well be over. Nonetheless, with inflation almost certain to remain in the double digits by the end of the year, possibly topping 20% on current forecasts, elation could be somewhat tempered.

Politically, already tumultuous relations between Ukraine's President Viktor Yushchenko and Prime Minister Yulia Tymoshenko reached an impasse over inflation, contentions of electioneering in the run-up to the January 2010 election and the country's response to the Russian-Georgian War. On September 3, Yushchenko announced that he was seeking a new governing coalition and threatened to call a snap election if one could not be formed. In October, Tymoshenko offered to establish a coalition, arguing that elections should not be held "until the threat of the global financial crisis is averted in Ukraine and in the whole world."

The continued fragility of the government into 2009, however, at a time of rising divisions regarding the country's stance towards Russia and the West, has worried markets and leaves the immediate future uncertain.

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