Russian bailout masks Ukraine's economic mess

Ukraine protesters Political protests have obscured Ukraine's deep economic problems

Related Stories

There is no shortage of grim data that could illustrate Ukraine's troubled economic condition.

But perhaps the most damaging statistic is to do with gas prices.

Ukrainian consumers pay approximately 20% of the wholesale price of gas, leaving the state with a huge bill and destabilising the state-run energy monopoly Naftogaz Ukrainyi.

Poor deal

Successive governments have been unwilling to upset voters by raising the price of gas, which has contributed to the government's strained financial position.

To make matters worse Ukraine has struggled to negotiate favourable deals with its main gas supplier - Russia.

Back in 2009 the government signed a 10-year deal with Russia that has been described as "disastrous" as it saw Ukraine pay much more than European nations for gas.

Russia's leader Vladimir Putin and Ukrainian former leader Yulia Tymoshenko In 2009 Ukraine signed a unfavourable gas deal with Russia

Although Ukraine has negotiated a discount since then, gas imports have caused other economic problems.

To help pay for the gas, Ukraine's central bank has been propping up the Ukrainian currency the hryvnia.

Reports say the central bank has recently spent around $800m defending the currency, which has helped deplete the nation's foreign currency reserves.

The expense of propping up the currency and subsidising gas has made international investors reluctant to lend money to Ukraine.

To borrow money on the international markets, Ukraine was facing interest payments of more than 8%, which is extremely high for a national government.

Financial crunch

But Ukraine needed fresh funding.

Next year it has to refinance around $7bn worth of foreign debt and almost $3bn of that was owed to the International Monetary Fund.

That pressure meant Ukraine's President Viktor Yanukovich badly needed the $15bn of financing from Russia.

And in the short term the financing from Russia will prevent the nation heading for default.

Gas pipes Ukraine Ukraine's energy market needs reform

But it will not fix Ukraine's deeper economic problems.

Lilit Gevorgyan Senior Economist at IHS Global Insight says Ukraine has suffered from a "toxic combination" of poor economic policy making and a slump in demand for its exports of steel and capital goods, like industrial machinery.

As mentioned above the nation's currency is kept artificially high to help pay for imports, including gas, as well as keeping foreign debt servicing low.

But that has made Ukraine's exports much less competitive on the international markets. Ukraine is a big exporter of steel and machinery but those exports have slumped, partly because of the strong currency, but also weak demand from customers in Europe.

Ms Gevorgyan says that since Orange Revolution of 2004 governments have failed to take tough decisions that would stabilise the economy.

And that stabilisation is sorely needed as the economy has been in recession for more than a year.

More on This Story

Related Stories

More Business stories

RSS

Business Live

  1.  
    07:59: Trinity Mirror
    Mirror.co.uk

    Trinity Mirror will start paying a dividend for the first time since 2008 - of 3p a share - as pre-tax profits rose 1% to £102.3m for 2014, the Daily Mirror publisher said. However, print advertising revenue fell 14.1% in the second half of the year as supermarkets cut their spending.

     
  2.  
    07:45: Thorntons
    choc

    A "mixed performance" from Thorntons, chief executive Jonathan Hart tells investors. International sales rose by 19.9% to £5.4m in the first half of the company's financial year, but UK commercial sales melted away by 12.4% to £54.7m. Sounds more like a pick 'n' mixed bag to us...

     
  3.  
    07:32: Nationwide house prices
    For sale sign

    House prices fell by 0.1% in February, according to Nationwide - the first decline in five months, since September. That brought the annual rate of price rises to 5.7% compared with 6.8% in January - a sharper than expected slowdown.

     
  4.  
    07:16: Lib Dems Norman Smith Assistant political editor, BBC News
    Lib Dems

    The Liberal Democrats announce the first of many proposed tax rises today as part of their vow to pay off the deficit by 2018 by increasing the tax take rather than cutting spending further. Norman Smith tells Radio 4's Today programme that banks would have all the cuts in corporation tax since 2010 wiped out in a move that would generate about £1bn for the public purse. However, the Lib Dems still need to raise a further £7bn or so to make their sums add up, he adds.

     
  5.  
    07:02: Buffett letter
    bricks

    A quick reminder of what Mr Buffett's company owns. Among other businesses, Berkshire Hathaway owns about half of Heinz, engine oil firm Lubrizol, clothing maker Fruit of the Loom, the pleasingly named Acme Brick company and private plane operator NetJets. He also owns stakes in Mars, Coca Cola and American Express.

     
  6.  
    06:50: Bank shares BBC Radio 4

    David Cumming, head of equities at Standard Life, tells presenter Simon Jack on Today there is a "lot of noise" around banking stocks given the regulatory pressure the sector is now under, meaning they have a "higher than average risk profile". He also thinks the FTSE 100 will crack the 7,000 mark in the next few weeks as the economy continues to improve.

     
  7.  
    06:37: East Coast trains Radio 5 live
    train

    The East Coast rail route between London and Scotland has returned to private hands after more than five years in the public sector. David Horne of Virgin Trains East Coast is on 5 live. He says Virgin has done a good job with the West Coast line. National Express took over the line during a recession, so starting a franchise now should work better for Virgin, Horne adds.

     
  8.  
    06:24: Market update

    China's decision to cut interest rates over the weekend - the second reduction in four months - in a bid to ward off deflation has boosted stock markets in Asia today, with Sydney up 0.5% as mining companies bounced higher, while the Nikkei in Tokyo and the Shanghai Composite were both 0.3% higher.

     
  9.  
    06:11: Buffett letter Radio 5 live
    warren

    Sue Noffke, fund manager at asset manager Schroders, is 5 live's markets guest. Billionaire investor Warren Buffett sent his annual letter to shareholders on Saturday, summing up his 50 years building one of the planet's biggest companies. Because he behaves more like an owner than an investor, "he has had a longer-term investment horizon" than other investors, says Ms Noffke.

     
  10.  
    06:02: Software security Radio 5 live

    Online security firm AVG's chief executive Gary Kovacs is on 5 live speaking from Barcelona's Mobile World Congress tech show about security breaches. The internet has "only been around for 20 years," so securing the place is now a priority, he says.

     
  11.  
    06:01: Chris Johnston Business reporter

    Good morning! Get in touch via email bizlivepage@bbc.co.uk or on Twitter @BBCBusiness

     
  12.  
    06:00: Howard Mustoe Business reporter

    Good morning everyone. Welcome to Monday. The UK government has said it will block the sale of 12 North Sea oil and gas fields to Russian billionaire Mikhail Fridman after concerns about the effect of "possible future sanctions". Stay tuned for more of the best business news.

     

Features

  • A very clever little girlBrain gain

    Why are people getting better at intelligence tests?


  • Don Roberto Placa Quiet Don

    The world's worst interview - with one of the loneliest men on Earth


  • A reveller attends celebrations to mark the 450th anniversary of the city of Rio de Janeiro - 1 March 2015Partying in the streets

    Rio de Janeiro marks 450 years since it was founded


  • BeefaloBeefalo hunt

    The hybrid animal causing havoc in the Grand Canyon


From BBC Capital

Programmes

  • BatteriesClick Watch

    More power to your phone - the lithium-ion batteries that could last twice as long

Try our new site and tell us what you think. Learn more
Take me there

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.