Fighting the pandemic-induced economic recession, Ukraine has taken hard punches but managed to avoid a knockout blow.
The country’s biggest stroke of luck is that industries that suffered most from COVID-19 — tourism, petroleum production, services, and manufacturing — don’t dominate the economy. Ukraine’s main sectors like agriculture (40% of Ukraine’s export) and metallurgy either escaped unscathed or even grew.
“It’s not a worst-case scenario year Ukraine has lived through,” said Hlib Vyshlinsky, executive director of the Kyiv-based Center for Economic Strategy.
5% shrinkage
Ukraine’s economy is shrinking, but more developed countries have it worse.
France’s and Italy’s gross domestic product is projected to fall by 9%; Britain’s by 11.2%. For Ukraine, however, the prognoses are more optimistic.
“Some organizations forecast economic collapse in Ukraine, but I can now say confidently that the GDP drop in 2020 will not exceed 5%,” Finance Minister Serhiy Marchenko said in his recent interview with news agency Ukrinform.
That would still leave Ukraine with a GDP of roughly $160 billion – more than $20 billion off the nominal high set in 2013.
According to Olena Bilan, chief economist at investment firm Dragon Capital, stable economic growth at the beginning of the year helped the country avoid a tailspin. “A low budget deficit of around 2.5% in previous years made it possible to allocate funds to support the economy, which did not happen during previous crises,” said Bilan.
The total value of the country’s international trade reached $92.7 billion as of December, 7.5% lower compared to 2019.
Exports fell by 3.5%; imports — by 11%, according to the customs service.
Despite the Kremlin’s war against Ukraine in the Donbas, Russia remained one of the nation’s three biggest trade partners. China, Poland and Germany were among the other top partners.
The banking system also survived the year without any crisis, following a massive clean-up of the sector in which two-thirds of the 180 banks were declared insolvent in the last decade. Only two banks went bankrupt this year, Arkada and Misto Bank.
Crucial IMF support
But Ukraine could have done better, failing to fully tap a $5 billion credit line from the International Monetary Fund, which froze lending a $2.1 billion.
“There was no consistent policy to fulfill obligations before international financial organizations — Ukraine received only one tranche from the International Monetary Fund, instead of three,” said Vyshlinsky.
According to Bilan, cooperation with the IMF remains critica due to the high budget deficit of $8.5 billion. “Having no IMF program… won’t help attract necessary funds to the budget,” she said.
Vyshlinsky also believes that authorities aren’t doing “key things” to attract foreign investment like eliminating corruption in the judiciary system or fighting oligarchs.
Sectors most & least affected
Once the coronavirus started spreading around the world in March, governments introduced strict quarantine measures, including banning international travel.
Aviation was one of the biggest casualties. The number of flights made by Ukrainian airlines reached only 41,000 as of November, 64.8% less compared to the same period in 2019, according to the State Aviation Administration.
For instance, Ukrainian low-cost airline SkyUp alone lost $30 million in March–August, according to its co-owner Oleksandr Alba.
And while Hungary supported its international airline Wizz Air with nearly $800 million from the state budget, German gave its Lufthansa $9.8 billion, and Air France got a historic $8.5 billion, Ukraine hasn’t helped its commercial aviation at all.
“We did not receive a single penny,” Alba told news website Ukrainska Pravda. “We are on the verge of bankruptcy and our 1,300 highly paid specialists will join the ranks of the unemployed.”
Vyshlinsky believes that losing the aviation industry will harm the economy and that the government must inject money to rescue it.
“Ukraine International Airlines employs hundreds of pilots. If they are fired, in the future, there will be a great shortage when the sector recovers. And there’s a high chance that foreign companies will take over the sector,” said Vyshlinsky.
National railway carrier Ukrzaliznytsia has also taken a hit, suffering most during the strict lockdown in March–May, when passengers were barred from using railway transport.
As a result, for the first 10 months of 2020, Ukrzaliznytsia carried over 15 million people, two-thirds of last year’s numbers, according to the State Statistics Service.
At the same time, by November, the railway monopolist almost caught up with last year’s figures for freight transportation — 251 million tons, only 5% less than last year.
Overall, head of the company Volodymyr Zhmak expects the company to finish this year with $520 million in losses but next year he forecasts a net profit of $120 million.
Meanwhile, Ukrainian seaports seem to have hardly noticed the pandemic. Most of them kept exporting grain, sunflower oil, ore, and ferrous metals. Thirteen ports on the coast of the Black and Azov Seas handled 145 million tons of cargo as of December, 1.3 million tons more than in 2019.
A man plows a field in Kyiv Oblast before on April 25, 2020. The agriculture industry, which exports provided 40% of the country’s foreign currency earnings and secured 11% of Ukraine’s gross domestic product in 2019, was one of least affected during the COVID-19 pandemic. This has become one of the key factors protecting Ukrainian economy from the catastrophic consequences of quarantine restrictions. (Oleg Petrasiuk)
Ukraine also held two of its first ever seaport concessions: a 30-year concession for a seaport in Kherson and a 35-year concession for Olvia Seaport in Mykolaiv Oblast. Businesses that won the concession auctions have now the right to use the state property for commercial purposes, but will have to invest a total of $630 million.
During the annual Ukrainian Investment Roadshow on Dec. 10, Minister of Infrastructure Vladyslav Kryklii said that, over the next 3-4 years, the state plans to put other seaports up for concessions or privatization.
The same is planned for six railway stations in Kyiv, Dnipro and Kharkiv, as well as 1,400 kilometers of highways.
This is part of a strategy to “reduce the number of projects which are managed by our state managers to zero,” the minister said.
The construction industry has also been one of the least affected — in 2020, it was a priority sector for the government through President Volodymyr Zelensky’s Big Construction program.
As of mid-November, state road agency Ukravtodor repaired 82 bridges and around 3,900 kilometers of roads, exceeding almost five times the figure for the whole year of 2019.
However, such a breakneck pace was widely criticized when, in July, the government took half of the money from the COVID-19 fund, $1.3 billion, to repair 1,500 kilometers of roads.
It was “a big mistake” to spend money on construction, instead of on oxygen beds, according to Vyshlinsky.
“Ukraine would have a better situation, more lives could have been saved,” he said.
In the long-term perspective, constant underfunding of health care can discourage people from becoming doctors in Ukraine, which, in turn, can further lower the average life span in the country. As a result, the chances that a 60-year-old person can work and contribute to the economy will be lower compared to other European countries, Vyshlinsky said.
Privatization postponed
The privatization boom planned by the State Property Fund at the beginning of the year didn’t pan out.
In March, the Ukrainian government postponed the privatization of large properties, above $10 million in value, until the quarantine ends.
The fund has been able to sell small and medium-sized enterprises at 1,790 auctions, earning $52 million for the state budget as of December.
The most public sale took place in July, when the four-star state-owned Dnipro Hotel in central Kyiv was sold for $40.7 million, 13 times higher than the opening price.
The fund, which planned to earn 10 times more at the beginning of 2020, has already submitted a draft bill to parliament to overturn the government’s ban and is waiting for its approval.
“I hope we’ll open Big Privatization again,” said Dmytro Sennychenko, head of the fund.
Unemployment threat
The pandemic has hit the labor market in Ukraine, forcing thousands to ask for state help.
From March to mid-October, some 525,000 citizens were officially unemployed, 50% more than last year.
According to the State Employment Center, the sharpest rise of unemployment — by up to three times — was in Kyiv, Odesa, and Lviv Oblast. In August, an average of nine people applied for each job opening, the state agency reported.
Now, as the government plans to impose another lockdown after the New Year and Christmas holidays, more people may end up out of work, raising unemployment by 15%, the same increase the country went through in the spring, according to social policy expert Andriy Pavlovskiy.
“A large number of people, small businesses, will be in ruins — there will be an unemployment explosion, up to 3 million people,” Pavlovskiy said.
