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Ukrainian Economy Collapses In Third Quarter

Set to shrink by a painful 14% this year. In excess of $100 billion in grants, not loans, needed to make country solvent. Russian participation in financial rescue unavoidable.

This post first appeared on Russia Insider

Ukrainian Industrial Production contracted by 17% and Retail Sales by 13% in the third quarter as the economy collapsed due to the civil war in the East.

At the same time inflation spiralled to 17.5% year on year in September as the government is forced to print money to pay for its deficit and the devalued currency pushes up domestic prices. 

<figcaption>Basic arithmetic.  The head of Russia's gas company talking to Ukrainian president Poroshenko last week</figcaption>
Basic arithmetic. The head of Russia's gas company talking to Ukrainian president Poroshenko last week

This economic data came just a few days after a former Ukrainian economy minister Volodomy Lanovy said:

The GDP decline will amount to 13 or 14% and continue to decline. I think it will be a long-term decline, and not like in 2008 (where decline was followed by a sharp rebound)

This is a major blow not only to Ukraine but to the West. The IMF had been predicting a 6.5% decrease in 2014 and a 1.5% increase in 2015 - numbers which are completely divorced from reality. Those figures lay the basis of an already dubious 17 billion dollar bailout package. Quite simply, the real sum that the West are on the hook for runs well in excess of 100 billion dollars in grants (free money) and not loans. 

As I wrote in my analysis of the gas deal reached in September, the major problem is that once the West starts handing out empty cheque books to Ukraine the money will just be stolen (as I suspected had already been the case by analysing currency movements).

To remind readers; Ukraine needs to bail-out its entire banking system which will cost more than 10 billion dollars, it has to pay Russia 5 billion in debt which makes up around 35 billion dollars-worth of external debt, it needs to fund around 36 billion cubic meters of gas imports (which at current negotiated prices is valued at 14 billion dollars) all of this on top of defending its currency as all economic agents seek any way to dump the hryvina. 

In normal times paying for such debts is difficult but manageable given that the market might allow you to re-finance the debt, however, with an economy contracting by 15% per annum there is absolutely no chance of this happening. This will make problems all the more worse as the budget deficit is and will continue to balloon; leaving the only remedy of widespread and vast expenditure cuts - which given the revolutionary mood in Ukraine will be extremely difficult to pass of politically. 

Ukraine will be locked out of public markets for well over five years meaning it must entirely on a donor - the IMF or Russia. The question is will the IMF be prepared to hand out 100 billion dollars and not see any of it returned? Ultimately the IMF has to think about its own balance sheet and future bail outs of other countries. The IMF cannot stomach this money and the damage it would do to its negotiating position. 

The conclusion is once again Ukraine has no other choice but to revert back to Russia whether it wants to or not. It is a question of pure survival and simple logic. The only question is how long will it take for Kiev to reverse course? 



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