You're reading: Ukraine economy rebounds after dizzying fall

Last year, the Ukrainian economy nearly collapsed in the global financial crisis as steel plants stopped production and construction cranes froze. Angry Ukrainians lined up to empty their bank accounts and Kiev restaurants idled without customers.

Today the capital’s diners are crowded again as the country’s economy bounces back strongly, largely on demand for its steel from the global recovery.

But experts are warning Ukraine remains far too dependent on exports and the world economy. If demand for steel falls, they say, the country could face another free fall.

Ukraine is expected to become the second-fastest growing economy among emerging markets in 2011, trailing oil-rich Kazakhstan, according to Dragon Capital investment bank in Kiev. Experts say Ukraine is growing faster than others simply because it was one of the worst affected by the global financial crisis and the growth is fueled mostly by rising prices for metals, its main export.

"The Ukrainian economy is highly exposed to global commodity cycles," said Olena Bilan, chief economist at Dragon Capital, a leading investment company in Ukraine. It "contracted sharply and now is recovering faster than regional peers."

And commodities, including metals, are up strongly worldwide, due to factors including strong demand in emerging economies such as China. Low interest rates and loose monetary policies by the U.S. Federal Reserve and other central banks also play a role, as investors pour easily available cash into commodities in search of higher yields.

Gross domestic product is expected to grow 5.0 percent this year and 4.5 percent in 2011 after plummeting 15 percent in 2009, according to Dragon. France, by comparison, will grow a modest 1.6 percent this year, after contracting 2.6 percent in 2009.

The growth is also spurred by political stability brought by the election of Kremlin-friendly President Viktor Yanukovuch, which ended years of government paralysis due to fighting between former President Viktor Yuschchenko and then-Prime Minister Yulia Tymoshenko. The country’s finances were stabilized by a $15 billion bailout loan from the International Monetary Fund.

Restaurants in Kiev are snapping back to life as Ukrainians can afford to eat out more. Shokoladnitsa, a coffee shop chain, opened a 10th cafe in Kiev this year and introduced sushi to its menu as sales grew 10 percent and the number of customers went up 5 to 7 percent compared to last year, when sales contracted 30 percent.

Some Ukrainians are feeling the change. Some aren’t.

In this photo made Saturday, Nov. 13, 2010, a woman tries on a fur hat at an outdoor clothing market in Kiev and studies herself in the mirror. Last year, the Ukrainian economy nearly collapsed in the global financial crisis as steel plants stopped production and construction cranes froze. Angry Ukrainians lined up to empty their bank accounts and Kiev restaurants idled without customers. Today the capital’s diners are crowded again as the country’s economy bounces back strongly, largely on demand for its steel from the global recovery. (AP Photo/Sergei Chuzavkov)

Valery Ilyin was afraid he would lose his $110,000 three-room apartment in southwestern Kiev when his dollar mortgage doubled in local terms after the hryvna lost 50 percent of its value at the end of 2008, falling from 5 to 10 hryvna against the dollar. The currency has now stabilized at 8 hryvna to the dollar and he hopes to pay out the loan in five years.

"I think about my future plans in a positive way now," said Ilyin, who is married and has two daughters and a son. "When there is some kind of stability, things look hopeful."

But the recovery hasn’t reached many.

Yaroslava Stalchuk, a 72-year-old retired accountant, spends most of her 1,000 hryvna ($125 or €90) monthly pension on kidney medication and sells cigarettes for 25 hryvna ($3 or €2 euro) a pack in downtown Kiev to feed herself. "Whatever I earn here is my dinner and I cannot afford much" said Stalchuk, adding that she usually eats buckwheat porridge, cottage cheese, milk and bread after food prices more than doubled in the past couple of years.

Encouraged by higher salaries, a strengthened hryvna and political stability, more fortunate consumers are back at department stores, snapping up vacuum cleaners, cell phones and pricier groceries. Retail sales were up 5.2 percent in the first nine months of 2010 compared to the same period in 2009, Dragon Capital said. The retail sector contracted by 20.7 percent in 2009.

Kviza Trade, which operates a chain of 47 grocery stores across the country, reported a 24 percent rise in sales in the third quarter of this year compared to the same period last year.

The banking sector is healing from a run on banks when jittery consumers rushed to withdraw their hryvna savings and convert the Ukrainian currency into dollars to be stashed under their mattresses. Bank deposits grew 26 percent, and corporate and private lending showed a minuscule 0.4 percent growth as of October, year on year, according to Dragon.

Alfa Bank Ukraine has resumed consumer lending, such as car loans, checking account overdrafts and cash loans of up to 150,000 hryvna ($18,750 or €13,800). The bank said customers are regaining confidence in the banking sector and an average bank deposit is held nine months as opposed to one to three months last year.

Inflation reached 15.9 percent last year and is expected to slow to 13 percent this year and to 11 percent in 2011, according to Renaissance Capital.

To sustain growth in the long run, experts say, Ukraine must get down to serious reform and develop domestic industries and services. Currently, exports constitute 50 percent of the Ukrainian economy, and more than half of that is hard commodities, mainly steel.

"Ukraine is metals," said Timothy Ash, London-based head of emerging market research at Royal Bank of Scotland. "Ukraine would suffer as metals prices fall."

Ukraine ranks 145th out of 183 countries, on par with countries like Cambodia, in a World Bank group study on the ease of doing business due to excessive red tape, which fuels corruption. The authors urged the Ukrainian authorities to ease licensing regulations, make it easier to connect new offices to the electricity grid, reform the tax system and adopt a bankruptcy law.

Anastasia Golovach, an economist with Renaissance Capital, said that Yanukovych should use his broad political power to push through unpopular reforms. She called for a land reform that would help develop the agricultural and food industries by allowing foreign ownership and long-term leases of agricultural land.

Cutting subsidies to households for heating and hot water would free up money to renovate the aging pipelines that carry Russian natural gas to Europe, she said.

Developing tourism is crucial in Ukraine, especially ahead of the 2012 European football championship, which Ukraine is hosting together with Poland, Golovach said.