United Nations Development Programme
Ukraine
06 July 2014
VULNERABILITY RISK ASSESSMENT
This note provides a short analysis of current socio-economic trends in Ukraine, on the basis of
high-frequency official data. It focuses on data that can serve as leading indicators in the context
of Ukraine’s gathering socio-economic crisis, as well as helping to monitor the impact of this crisis
on vulnerable households. This analysis is intended to serve as an internal document to support
UN and UNDP contingency planning and evidence-based programming in Ukraine.
Overview
Despite the restoration of exchange-rate stability during the second quarter of 2014, the socioeconomic crisis in Ukraine continued to intensify. In addition to declines in production and
employment, the most recent official data point to accelerating inflation rates and growing
stresses with the banking system. Socio-economic vulnerabilities would seem to be especially
sharp in the Donbass, where press reports and official statements suggest that particularly steep
declines in living standards may now be unfolding. Whether the June signing of the economic
component of the EU Association Agreement, which includes the Deep and Comprehensive Free
Trade Agreement between the EU and Ukraine, will help to arrest this downward spiral remains to
be seen.
The deepening recession
Recent data suggest that the decline in GDP, which dropped -1.1% in the first quarter of the year,
intensified into the spring. The volume of industrial output and construction activities during
January-May was reported down 4.6% and 6.5%, respectively. And while the volume of retail
trade turnover was up slightly during this period, year-on-year changes for April and May likewise
show sharp declines (Figure 1). Labour market trends suggest that household spending could be
poised to fall further: after dropping continuously during 2010-2013, the number of unemployed
workers (as measured by ILO labour force survey methodology) jumped sharply in the first
quarter of 2014 (Figure 2). The unemployment rate, which stood at 7.6% during the third quarter
of 2013, had risen to 9.3% of the workforce in the first quarter of 2014. This quarterly
unemployment rate was the highest recorded in the past four years. Households with growing
fears of unemployment are likely to cut back on spending, further slowing the economy.
Production declines continued to accompany sharp drops in foreign trade turnover, with the
dollar value of imports down by 23% during the first four months of the year (compared to the
same period of 2013). Gas imports decline by 35% during this time—due both to the recession
and to the lack of agreement on a new contract with Gazprom. (The absence of an agreement on
price and payment modalities led the two sides to file litigation against one another in the
Arbitration Court of the Stockholm Chamber of Commerce).
1
Figure 1—Year-on-year changes in retail sales volume
(2013-2014)
Figure 2—Year-on-year changes in numbers
of unemployed workers (2012-2014)
0%
-5%
-10%
-15%
2013
2014
May
0%
March
2%
Jan
5%
Nov
4%
Sept
10%
July
6%
May
15%
March
8%
Jan
20%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
-2%
2012
2013
2014
-4%
-6%
Exports likewise dropped 13% during January-April, on the back of a 28% decline in sales to other
CIS countries. However, as the reduction in imports was much steeper, Ukraine recorded a trade
surplus (of $351 million) during January-April 2014. This was the first surplus reported for JanuaryApril in more than ten years, and should help stabilize Ukraine’s external position. (Preliminary
National Bank of Ukraine data likewise point to sharp improvements in the current account
balance during the January-April 2014).
Accelerating inflation
Some progress in restoring Ukraine’s external balance is apparent in the nominal exchange rate,
which stabilized against the dollar during the second quarter (Figure 3). The start of Ukraine’s
standby programme with the International Monetary Fund in late April,1 under which some $3
billion was made available for immediate disbursement, helped stopped the hryvnia’s sharp slide.
However, the pass-through from the hryvnia’s sharp depreciation during the first quarter of the
year, combined with the impact of the instability in the Donbass, pushed inflation rates into
double figures in April-May (Figure 4). Consumer price inflation in May reached 10.9% in year-onyear terms—the highest rate recorded in nearly three years. This jump was driven by a sharp
increase in food prices (12.1%); increases in sugar and vegetables prices were in the 30-60%
range. It also reflected higher energy costs: as mentioned in previous analyses, gas tariffs were
reported up 62.8% in May, while prices of other fuels rose 40%. Inflation in pharmaceutical
products was reported at 21.5%, helping to boost health care costs by some 15%.
These exchange-rate and inflationary trends can be expected to pose increasing difficulties for
vulnerable households in Ukraine. The average monthly salary in dollar terms had dropped to
$295 in April, down from $404 in April. Remittances—which make important contributions to the
income of many vulnerable households—were likewise reported down (by 8%) during the first
quarter of 2014.
1
See IMF press release no. 14/189 (30 April 2014), http://www.imf.org/external/np/sec/pr/2014/pr14189.htm.
2
Figure 4—Year-on-year inflation rates (consumer
prices, foodstuffs, 2013-2014)
12%
May
April
March
Feb
Jan
2014
Dec
2013
Nov
Oct
Figure 3—Nominal exchange rate trends
(hryvnia/$, monthly averages, 2013-2014)
CPI
10%
7
8%
8
6%
9
4%
Food
2%
10
12
2013
May
April
March
Feb
Jan
Dec
-2%
Nov
Oct
0%
11
2014
A key question is whether the above-mentioned improvements in Ukraine’s external position, and
the stabilization in the exchange rate, will help to bring inflation under control—or whether
Ukraine’s overall macroeconomic, monetary, and security difficulties will continues to produce
financial instability. Recent news regarding the banking system is not promising in this respect:
according to media reports, banks lost 10 billion hryvnias (the value of deposits dropped from
UAH 348 to 338 billion) in May alone, with particularly large withdrawals noted in the Luhansk
and Donetsk regions. The implementation (on 1 July) of the Law on Preventing Financial
Catastrophe, which taxes incomes from household deposits (at rates of 15% to 25%, depending
on income levels) may further reduce household deposits. Moreover, stress tests conducted in
June on 37 Ukrainian banks showed that only nine banks are resilient to market and political
instability. The test results indicated that the recapitalization of Ukraine’s biggest banks (to the
tune of over $4 billion) may be necessary.
Figure 5—Trends in government expenditures, in real terms^ (2013-2014)
14%
14%
2013*
2014**
5%
3%
Overall
Health
0%
Social protection
Education
-4%
-10%
-11%
^ Nominal changes in expenditures, divided by changes in the consumer price index.
* Full-year data.
** January-May data (relative to the same period of 2013).
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Meanwhile, fiscal austerity combined with Ukraine’s rising inflation rates to reduce overall
government expenditures, in real terms, by some 4% during January-May. These declines were
particularly notable for health and education spending (Figure 5). Expenditures on the “antiterrorist operation” can be expected to put further pressures on social programmes. Meanwhile,
debt-service expenditures during January-May were up 37% (in nominal terms) compared to the
same period of 2013.
Developments in the eastern regions
Economic situation in the conflict affected regions – Donetsk and Lughansk regions remain
sensitive and leads to
According to the secretary of the Parliament’s committee on national security and defense, 60%
of the enterprises in Donetsk oblast are not operational. In the opinion of the Donetsk
administration, industrial production in the region has declined by 40%. According to the Ministry
of Finance, many large Donbass companies are reregistering in other regions of Ukraine, while
many small and medium-sized enterprises have either suspended, closed, or relocated their
operations.
Prime Minister Arseniy Yatseniuk on 19 June announced that the state budget may receive 1
billion hryvnias less than anticipated from the affected regions—even though recent information
from the State Treasury indicates that state budget revenues during the first half of 2014
increased by some 8% compared to the same period of 2013.2 Press reports indicate that
numerous enterprises have been attacked or vandalized by separatist forces. Denis Pushilin, one
of separatist leaders, stated on 29 June that enterprises which do not pay taxes to the “Donetsk
People Republic” and do not cooperate with DPR authorities will be “nationalized”.
These trends do not bode well for prospects for reversing the decline in Ukraine’s industrial
production. The Luhansk and Donetsk regions not only account for a significant share of Ukraine’s
industrial output in and of themselves—they also produce components for industrial value chains
needed in many other parts of Ukraine. For example, the owner of the Zaporizhzhia Automobile
Plant, Tariel Vasadze, has announced that shortages in components produced in the Donbass
could halt production at the plant in September.3
2
3
http://treasury.gov.ua/main/uk/publish/article/224482
http://delo.ua/auto/proizvodstvo-na-zaze-mozhet-ostanovitsja-uzhe-v-sentjabre-240594/
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