All things considered, Ukraine’s expected 7 percent drop in gross domestic product this year doesn’t seem so bad, especially considering that it has lost Crimea and parts of the eastern Donbas to Russian aggression.
But it could get worse, with forecasts of 21 percent inflation, a reflection of the hryvnia’s 50 percent loss in value.
The corporate sector is not performing well and production of a leading export, steel, fell by 16 percent.
The grain crop of 57.2 million tons was up 13.6 percent up from 2013, but lower prices cut profits.
With central bank’s foreign reserves shrinking to $8 billion, Ukraine is hoping for a quick infusion of International Monetary Fund money — having received only $4.6 billion of a $17 billion loan program so far.
Olena Bilan, an expert on macroeconomics at Dragon Capital investment house in Kyiv, estimates Ukraine’s needs an additional $15 billion beyond the $16 billion expected to come from various Western sources next year.
“Without additional aid, Ukraine will hardly be able to avoid a financial meltdown and a new wave of social unrest,” Bilan wrote in a Financial Times blog on Dec. 10. “This would give Russia another ideal opportunity to regain its grip on Ukraine and ultimately win its geopolitical showdown with the West.”
Shale gas projects halt
The second-largest U.S. energy producer Chevron stepped out of the shale gas extraction project on Oleska field, a 6,300 square kilometers territory in Ivano-Frankivsk and Lviv Oblasts with estimated shale gas reserves of 1.5 trillion cubic meters.
The company hoped to produce as much as 8-10 billion cubic meters a year with investments reaching $10 billion.
“We have just terminated that PSA (product sharing agreement),” said Peter Clark, Chevron’s country manager, on Dec. 16. “When it was signed, things had to be done, but not all of them got done.”
To enable the agreement, Ukraine’s Finance Ministry had to change the tax regime for these type of projects by Nov. 18, a deadline that wasn’t met.
Anglo-Dutch multinational Royal Dutch Shell halted operations and withdrew personnel from the Yuzivska shale gas exploration field in eastern Ukraine in June amid Russia’s war against Ukraine.
Moreover, ExxonMobil, another energy giant, quit the production project in the potentially gas-rich offshore fields in the Black Sea after Russia annexed the Crimean peninsula, a heart of the region, in March.
The U.S. Energy Information Agency estimates the country’s shale gas reserves at 5.5 trillion cubic meters.
Coal shortage
As of Dec. 5, there was as little as 1.4 million tons of coal leаft in Ukraine’s 14 thermal power plants, which cover 42 percent of the nation’s electricity needs. Meanwhile, these stations need 3.2 million tons a month. The war in the east interrupted supplies from coal-rich Donbas.
Purchasing 1 million tons of coal from South Africa ended with a scandal because the coal turned out to be of a very poor quality and “didn’t even burn,” according to Prosecutor General Vitaliy Yarema.
Volodymyr Zinevych, former head of a state trader Ukrinternergo, is blamed for the deal. Despite the initial price of $86 per ton, Ukraine paid an extremely inflated price of $134 after the contract was amended, although Russian coal costs only $80 per ton.
Banking crisis
The central bank declared as many as 32 banks insolvent this year with multimillionaire Oleg Bakhmatyuk’s VAB the largest among them.
“We are cleaning up the banking system off the banks that sometimes don’t have a single client and just serve money-laundering schemes,” said the National Bank of Ukraine governor Valeriya Gontareva during an Oct. 16 news conference.
Ukraine’s banking sector consists of almost 170 banks and needs fewer.
Mriya’s default
The failure of Mriya, an agriculture holding, to make a $32.6 million interest payment shook up the agricultural industry. With $1.28 billion in debt, Mriya’s future looks hopeless. “We suspected they were inventing numbers over the years,” Alex Bart, managing director at Empire State Capital, an investment company operating in Ukraine, told the Kyiv Post. “People obviously felt they were cooking the books, but we never knew the extent of it.”
Mriya blamed the hryvnia’s devaluation – the company’s loan portfolio is mostly in the U.S. dollars – and commodity prices that have fallen by nearly half.
On Dec. 16, Mriya’s management held a meeting with the creditors and called on them to take control of the company to keep it from bankruptcy.
Editor’s Note: The story has been updated on Dec. 19 to provide a more accurate figure on banks declared insolvent this year.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
