Ukrainian newsletter #2: Ukrainian economy in collapse

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Parliament appoints two new members to the High Council of Justice

Ukrainian parliament (Verkhovna Rada) appointed two independent lawyers – Roman Maselko and Mykola Moroz – as members of the High Council of Justice (HCJ), the judiciary’s main body.

Maselko, 43, is a well-known Ukrainian lawyer who gained his fame while defending activists, whistleblowers, and protesters. He worked at anti-corruption watchdog AutoMaidan. Maselko used to be the head of the civic oversight council at the National Anti-Corruption Bureau of Ukraine. He also was a member of the juridical watchdog Public Integrity Council aimed to promote juridical reform.

Moroz, 47, the second appointed member, is less known in Ukraine, but is also known for his integrity. He works as an associate professor at the Kharkiv National Law University.

HCJ can comprise of up 21 members who passed an integrity check and is tasked to appoint, punish or dismiss judges. Currently the judiciary body has 6 out of 15 minimum members needed for the council to be able to be operational. The HCJ was created to bring judiciary in line with European standards of transparency and accountability. Judicial reform is a key requirement for Ukraine to start accession talks with the European Union.

Halyna Chyzhyk, legal expert at the Anti-Corruption Action Centre:

Almost all power in the judicial system is concentrated in the hands of one body – the High Council of Justice. In fact, the role of the HCJ is reduced to selecting the best candidates for positions and punishing judges who violate law or ethical rules. The election of Roman Maselko to the High Council of Justice is important as he personifies the struggle for a fair trial and the integrity of the judiciary. The parliament appointed to the HCJ the person who can fulfill the tasks that the HCJ is facing today – cleaning the judicial system of unworthy judges and appointing virtuous specialists to vacant positions.

Roman Maselko and Mykoła Moroz, photo:

Russia causes ecocide in Ukraine

Six months into the Russian full-scale invasion to Ukraine, Ukraine’s environmental ministry announced that the damage to Ukrainian nature caused by Russian military forces reached UAH 396 bln ($10.7 bln). This includes air pollution assessed at UAH 176 bln, water resources at UAH 106.3 bln, and soil – UAH 8.8 bln.

Overall, the environmental ministry registered over 2,000 cases of environmental damage caused by the Russian aggression. The ministry stated that they recorded all the occupiers’ crimes done to the environment “to make them (Russians) pay in full for what they have done to Ukrainian people.

Ukrainian territory accounts for 35% of Europe biodiversity. There are 70,000 rare species of plants and animals that inhabit Ukraine. Experts say that the war has affected about a third of the Ukraine’s natural reserves.

Yevhen Khlobystov, PhD in Economics, professor, expert in environmental economics and environmental safety:

I currently work as a member of the headquarters of the State Environmental Inspection aimed to determine the damage caused to the environment by the war. My colleagues and I concluded that our enemy deliberately and constantly destroys our environment and our unique ecosystems. The war is not over yet, so these are only preliminary assessments of Ukraine’s Ministry of Ecology. I am sure that after the war we will see the real scale of the damage. Threats to the Black and Azov seas are very serious. We currently don’t know for sure the situation with marine flora and fauna because we do not have an opportunity to conduct research there. As for the rivers that flow in the areas where hostilities are taking place the situation is very critical. I now would not even dare to comment on how much pollution and how many different types of toxins are in those rivers. After the war we will be able to partly restore the environment. However, some losses will be irreparable. These are our unique species of plants and animals, our black soil because it takes millions of years to be formed.


Six months after Russia’s invasion of Ukraine: the turning point in the war

Explosions in the Russia-occupied Crimea are the evidence of the new stage of the war, Kyrylo Budanov, the head of the Main Directorate of Intelligence of the Ministry of Defense of Ukraine said on Aug 24.

Explosions in the peninsula started on Aug 9, hitting several airfields and ammunition depots. Experts say that overall Russia lost half of its Black Sea fleet combat aircraft due to the blasts.

Ukraine did not take responsibility for these attacks.

The strikes and explosions in Crimea immediately caused panic among the Russians and their families who illegally entered Crimea back in 2014. Now they are trying to leave the peninsula urgently though the Crimean bridge into Russia causing several kilometer-long traffic jams on their way. On Aug 27 the Russian authorities banned the disclosure of information regarding the explosions at Russian military facilities on the peninsula to prevent escalation of panic.

Ukrainian Defense Minister Oleksiy Reznikov says that the threat of having a worst-case scenario for Ukraine in this war is over and Ukraine is now on the threshold of a new stage of the war. “Currently we are in the process of stabilizing the entire front or contact line,” Reznikov said.

Oleksiy Melnyk, Razumkov Center think tank:

It is still early to say that Ukraine has took over the initiative in operational or strategic terms. At the same time, we can really speak about a qualitatively new stage of the war. These strikes, which were carried out on targets on the Crimean Peninsula, had, in addition to purely military significance, an extraordinary symbolic effect and had a very strong impact on the reputation of the Russian government, including in Crimea.





Fitch upgrades Ukraine’s rating to “probable default”

On Aug 17 the American credit rating agency Fitch upgraded Ukraine’s long-term default rating from “restricted default” to “probable default” due to Ukraine’s restructuring of external debt earlier in August.

75% of Ukraine’s overseas bondholders backed the country’s request to freeze the payments and agreed to the debt restructuring which will allow the country to avoid a debt default. Almost $6 bln in principal and interest payments on Ukrainian Eurobonds is postponed by 24 months. However, Fitch predicts that the debt restructuring will not end there “although the timing is uncertain,” it says. “We expect the war to extend well into 2023, driving public debt above 100% of GDP, adding to the already huge costs to infrastructure and economic output, and fuelling inflationary and external pressures, while deficit financing sources remain uncertain,” Fitch emphasizes.

The agency also predicts that Ukraine’s economy will decrease by 33% in 2022 and will slightly recover in 2023 to 4%. At the same time inflation will speed up from 22.2% in July to 30% by the end of 2022 and will remain high in 2023. The current account will reach a deficit of 1.7% of GDP in 2023.

Mykhaylo Demkiv, financial expert at ICU investment firm, Ukraine:

Ukraine went through the formal process of restructuring its debt surprisingly quickly,

having received the necessary support from investors to change the terms of issuing its Eurobonds. The owners of these securities agreed to postpone payments for 2 years, helping the Ministry of Finance of Ukraine to relieve its debt payment schedule. However, prices for Ukrainian Eurobonds remain low even after restructuring. It indicates a high probability of repeated restructuring after the end of the war. The new restructuring may also include the wring off of part of the debt if needed.


Ukraine’s GDP can drop by more than 30% in 2022

The National Bank of Ukraine (NBU) estimates that Ukrainian economy will fall by 33% in 2022 due to the devastating consequences of Russia’s war against Ukraine. Considering the significant losses of production and human potential as well as security risks, the rate of recovery of the country’s economy will be about 5-6% per year in 2023-24, according to the NBU’s inflation review published in late July.

Nominal GDP may decrease to 4.54 trillion UAH ($122 bln) in 2022, compared to 5.46 trillion UAH in 2021. Inflation rate will reach 31% in 2022 compared to 10% last year. The NBU also predicts the inflation rates to decrease to 20.7% in 2023 and 9.4% in 2024. Because of high inflation rate nominal GDP will reach UAH 5.99 trillion in 2023 and UAH 7.1 trillion in 2024.

Experts say that the decrease of industrial production will reach around 50% this year as the largest industrial giants are in the east of Ukraine where the fiercest battles have been taking place. Also due to military operations the production of agricultural products is expected to be decreased by 45%. This year Ukraine can harvest about 50 million tons of grain compared to 86 million tons of grain in 2021. Besides, the decline of the economy increased unemployment rate. According to the UN, a third of Ukrainians have lost their jobs because of the war.

Vitaliy Vavryshchuk, Head of Macroeconomic Research Department of the ICU investment firm, Ukraine:

NBU’s forecast of Ukraine’s GDP drop is perhaps one of the most optimistic forecasts among government agencies, international financial and research organizations. The NBU expects a 33% drop in GDP in 2022, yet there are forecasts from reputable organizations that expect the GDP to drop by more than 40% this year. Of course, such a big loss of GDP is extremely painful for the country. However, despite this, the economy continues to function properly in the territory that is currently controlled by the Ukrainian government. Unemployment rate is gradually decreasing and tax revenues to the budget is increasing. Economic recovery will be slow in 2023 as much manufacturing capacity has been destroyed, much human capital has been lost through population emigration, and the security situation remains volatile.


Ukrainian defense expenditures may exceed half of the country’s budget

On Aug 15 Ukrainian parliament Verkhovna Rada increased defense budget by UAH 269 billion for this year. Earlier in 2021, the approved funding for security and defense sector was UAH 131 billion, or 5.95% of Ukraine’s targeted GDP for 2022. It compares to the defense budget of UAH 118 billion, or 5.92% of Ukraine’s GDP, for 2021.

Overall, from March to June the government allocated UAH 293 billion from the reserve fund to cover the needs of the security and defense sector. Defense ministry got 69% of these funds and the Interior ministry, Security Service of Ukraine, Defense Intelligence and State Service of Special Communications and Information Protection received the rest.

According to the defence ministry, in July cash payments to Ukrainian military increased by 15% and were around UAH 70 billion compared to UAH 63 billion in June and UAH 65 billion in May.

According to adviser of Ukrainian President Oleh Ustenko, because of the war the annual deficit of the state budget will reach 50 billion dollars and will be about 30-35% of Ukraine’s GDP by the end of 2022.

Vitaliy Vavryshchuk, Head of Macroeconomic Research Department of the ICU investment firm, Ukraine:

Defence spending may exceed 50% of tax and non-tax revenues of the Ukrainian budget in 2022. Many other areas will inevitably remain underfunded, as defence is currently the country’s priority. Of course, budget planning today takes place under conditions of great uncertainty, and any plans can be approximate and will be adjusted several times. However, it is obvious that the lack of funds from the state budget will exceed the equivalent of $35 billion and it will be largely financed by international financial aid in the form of grants and loans.

Ukraine’s economy could fall 33 percent this year, photo:

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