The war-torn country is on the brink of economic collapse.
Ukraine’s central bank raised benchmark interest rates from 19.5% to 30% effective Wednesday. Its currency, the hryvnia, lost nearly 70% of its value against the dollar in just a year. The GDP shrunk by 7% in 2014.
And while Kiev secured $40 billion international bailout package in February, the chances of a swift recovery are small.
Ukraine has been battling Russia-backed separatists in the eastern part of the country for the past year. The fighting has contributed to the ravaged state of Ukraine’s economy.
Here are some of the major economic obstacles:
1. Corruption
Corruption is draining Ukraine’s economy — or what’s left of it. Ukraine ranks 142 of 175 on the Transparency International list of most corrupt countries.
Even the government admits the situation is bad. Ukrainian Prime Minister Arseniy Yatsenyuk said the government loses around $10 billion every year through graft.
2. Political risk
The International Monetary Fund agreed to provide $17.5 billion emergency lifeline for Ukraine, demanding economic reforms in exchange for its money.
The government passed the first batch of reforms this week, including gas price hikes and pensions cuts. The government also needs to cut its debt, currently at 100% of the country’s GDP.
But the IMF required reforms are hugely unpopular in Ukraine.
“If Ukraine continues with the reform program, it can overcome the difficulties,” emerging markets economist Liza Ermolenko said, adding this is not the first time Ukraine’s government is trying to reform its economy.
“But more protests could force the government to step back. It has happened before,” she said.
3. Banks
Ukraine’s banking sector is one of the weakest parts of the economy. The key interest rates are the highest in 15 years, and experts estimate bad loans make up between one third and one half of all banking assets.
Over 40 banks have been declared bankrupt since the war began, with the country’s fourth largest lender, Delta Bank, going under earlier this week.
4. Industry in trouble
Donbas region was at the heartland of Ukrainian heavy industry. It’s now among the areas hardest hit by the conflict.
Nearly all steel production, one of the major drivers of Ukraine’s exports, is based in the east, as is a huge chunk of its mining and energy sector.
Ukraine’s industrial output has dropped over 10% in 2014, as the war forced mines to shut and cut off factories from supplies. The forecasts for this year are not optimistic. The GDP is expected to slide further 5% in 2015.
5. History lesson
The economic collapse was long in the making. Like many post-Soviet countries, Ukraine was not designed to function independently from the rest of the Soviet Union.
For over a decade after the breakup of the union, Ukraine struggled with hyperinflation and low productivity. Ukraine never managed to properly transition from the Soviet model like other countries with similar history.
“GDP per capita is actually below the 1992 levels,” Ermolenko said.
The struggling economy is as much a consequence as a cause of the current conflict. Ukraine was in recession for five consecutive months before the Euromaidan protests, which ultimately led to the civil war, kicked in November 2013.
