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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

“There are three months to stabilize the situation”

If the government fails to come to an agreement with protesters during this period, our economy will become turbulent in April, experts warn
29 January, 2014 - 17:57

In case of aggravating instability in the Verkhovna Rada, an even larger wave of civil protests, plummeting foreign investments and as a result, a growing threat of economic collapse should be expected.

The first alarming signs of economic trouble in the market are already there. Last week showed record amounts of foreign currency sales at the interbank market. Sales reached the record highs in the entire history of independent Ukraine: 11.81 billion dollars, out of which 9.87 billion were dollar sales. According to the data provided by the National Bank of Ukraine, the highest turnover in the market fell on Unity Day, January 22: the total foreign exchange trading was equal to 3.23 billion dollars, 2.73 of them being dollar sales. Is it a coincidence, or did the market start reacting to the bloody events of Maidan and confrontation within the country? The question seems to be more than rhetorical.

International investors have put their actions on pause as well. Compromise or confrontation: the international community is waiting for Ukraine to make its choice in this context. Another proof of that is the statement by Fitch, one of the largest international credit rating agencies, which intensified the expectation of hryvnia’s fall and announced the revision of Ukraine’s rating in February.

Meanwhile, the business community is nervous as well. The meeting of Ukraine’s Prime Minister Mykola Azarov with heads of the European Business Association, American Chamber of Commerce, French Business Association, Delegation of German Economy, British-Ukrainian Chamber of Commerce, Italian Chamber of Commerce and Industry in Ukraine, and Italian-Ukrainian Association, scheduled for today, was canceled, informs Interfax-Ukraine. However, there was no official confirmation from the Cabinet of Ministers of Ukraine as this issue went to press. But such an option is quite probable, since the Verkhovna Rada can consider the reformatting of the Cabinet of Ministers today, which shifts conversations with business to the background.

Whoever comes to the steering wheel today, be it the old crew or a new one, they will have to give an answer to one complicated question very quickly: how can the negative influence on the economy be minimized? There is no official answer from the government yet, so The Day asked for economists’ opinions on how the current events affect the country’s economy and what consequences should be expected should the protests continue.

Oleksandr PASKHAVER, president, Center for Economic Development:

“The confrontation that has been going on for two months influenced the state of the economy. Obviously, we are going to finish this year with a negative GDP index. As for long-term tendencies, everything depends on the order that will be established after the confrontation is over. Our economy has not rebounded since the 2008 crisis, so if the old order is preserved, the tendency towards the fall will continue. This is related to the absence of stimuli for its renewal. If in a result of a compromise between the government and protesters some new liberal conditions appear, we will have a chance for the renewal of economic growth, at least to the level of 2008. If the confrontation ends in February, it will affect general economic performance only slightly. However, negative tendencies in the economy continue, since it will be hard to find out the extent to which the conflict complicated the situation. But the protests give a chance for stopping that four-year-long harassment of the economy, which led to its illegal monopolization. Protests are a healthy reaction of the society. If there are no protests within a society, it is an unhealthy society. In this case, protests are more important than economy. These protests are related to the general conditions in which the economy works. And these conditions provide the rise or the fall of economy. At the moment of the protest’s implementation the economy suffers, but in the future it can lead to economic growth.”

Andrii NOVAK, chairman, Committee of Economists of Ukraine:

“Such sharp confrontation must influence economic processes in the country. It is the most noticeable on foreign exchange and stock markets already. Since stock market in Ukraine is not developed, to put it mildly, the internal confrontation influences the devaluation of securities. The longer the political crisis in the country lasts, the more devalued the hryvnia will be. If we talk about the real sectors of the economy, manufacturing processes continue, since political rallies are not taking place near industrial sites or facilities. However, there will be no economic development in this period because nobody will invest additional funds into the modernization and development of enterprises (neither foreign investors nor domestic businessmen). All of them, at the least, will put investing on pause and wait for the conflict to be solved.

“Procrastination will stimulate the worsening of the situation in the foreign exchange market. The continuation and intensification of depreciation threaten with rising inflation, since the majority of consumer goods in the internal market is imported, and producers and traders cannot and will not work at a loss. I think that during the period of the political crisis, those businessmen affected by negative forecasts will try to withdraw their capitals by selling their enterprises or at least freezing them. And those who are inclined to bullishness (hoping that these sharp political confrontations will eventually take Ukraine to a new level) will still wait, but nobody will invest in industrial development during the crisis. So, no GDP growth should be expected.

“Obviously, it will not be possible to hold to the predicted hryvnia exchange rate, which was included by the government in the 2014 budget. The exchange rate of 8.5 hryvnias for a dollar, which was predicted by the Cabinet of Ministers, has already been registered on the interbank, even though now the rate is lower. In these conditions, a rather moderate inflation index of 4.3 percent, which has been indicated in the budget, looks unreal. Besides, we already have preliminary summarized data of the Treasury and Ministry of Finance for the previous year, which might have been published under the influence of the political crisis. The State Treasury announced that during the past year the GDP decrease was registered at 6.4 percent. Also, the Ministry of Finance published data on the state debt. It turned out that the size of the government debt increased, now it stands at 584 billion hryvnias, which is already exceeding the limit stated by the government in the budget for this year by 4 billion. These data show that the state of the economy is even worse than we expected. Is it going to get better? No, because there have been no changes to the Constitution, tax legislation, and international situation.

“Theoretically, the risk of default in Ukraine is relatively small today: the external debt to GDP ratio is not as critical as it was in Greece or Italy, were a similar index exceeded 100 percent of economic growth. In our country it is about 40 percent. However, in the second half of 2013, the budget’s development articles were not implemented, and there were difficulties with social articles during the last quarter. This means that the public budget is in a difficult state and without loan resources it is incapable of performing even its social functions. Nominally, there are no dangers, but the real state of the budget is such that we will not be able to pay back old loans without the new ones, and this creates the risk of default. In order to avoid default in such conditions, the economy has the first quarter of 2014 to set things straight.

“But if economic sanctions are imposed not against officials, but against Ukraine and separate entities, we should expect the worst scenario. In this case, the currency imbalance and devaluation will deepen, and as a result, GDP will fall. But on the other hand, it might favor the settling of the political crisis, because the people are becoming more and more radicalized, and the government will have no other choice but make concessions. So, it is a stick with two ends.”

Oleksandr KENDIUKHOV, chairman, All-Ukrainian Union of Economists:

“Everything will depend on how the events unfold in the future, because political instability influences economic processes. Firstly, obstacles for investments inflow are created, because no investor will invest in a country that has no clear future. Secondly, domestic businesses will take their capital abroad because they are afraid of various risks. The risk of aggravating the situation after the nationwide state of emergency is introduced or the conflict acquires a more violent form makes people even more cautious, since in that case a lot of them will feel uncertainty in the future and can start withdrawing their money from banks. It will decrease the stability of the national currency. That is why from the point of view of social and economic well-being, the situation must be regulated as soon as possible. It is hard to predict something here. But we see that the situation is changing, and the risks for the economy grow respectively. Our entrepreneurs and oligarchs must realize that in this case, risks for their businesses grow too, and they must be interested in settling the conflict as well. As for the sanctions that might be imposed by other countries, it is very hard to predict something here, since it is yet unknown in what form and against whom they will be implemented.”

By Natalia BILOUSOVA, Maria YUZYCH, The Day