Global analysis of the basic macroeconomic indicators of Ukraine (2013–2016)

The purpose of this study is analysis and summarizing of basic macroeconomic indicators of Ukraine during 2013–2016. Long-term governance of the country by representatives of Ukrainian post-revolutionary political elite allows to determine main fundamental errors, in particular, to establish cause and effect relationship within current economical and social situation. Relevant study should result in development of methods of rectification of respective consequences and provision of offers, which would promote further economic and social development.

Appropriate research is based only on open source information, which can substantiate conclusions and suggestions.

First of all, in preparation of material, a basis to start from should be determined. For this purpose, the maximum volume of primary data is taken as a basis from custodians of relevant information.

Besides that, it is very difficult to make a comparison with experience of other countries of similar geographic and demographic scope, and at the same time we should not forget that in addition to the shift in power, Ukraine in just a year suffered annexation of part of the territory and forced military conflict within the territory of two industrially important regions.

A starting point of research is 2013, at the end of which large-scale civil unrest resulted in reloading of political regime and the entire state system of governance and establishment of new rules, which were affected by post-revolutionary sentiment.

Under the influence of appropriate factors, together with the lack of effective reforms and structural incompetence, vigorous transformation of economic processes started in the country, which resulted in the decline of industry, outflow of capital abroad, divestment, fluctuations of national currency exchange rate. All these factors led to the major problem — real impoverishment of people.

Therefore, the study is divided into 5 major indicators, which have direct or indirect significant impact on formation of social and economic situation of the country.


  • We start to determine key indicators of situation in the national economy with GDP being one of the most important indicators of economic development, which characterizes the final result of production activity of resident economic units in the field of material and non-material production.

Statistical analysis shows that the Ukrainian economy is in the crisis, showing a clear trend towards decrease in nominal GDP (measured in current prices at the time of production) in dollar equivalent. At the end of 2015, GDP amounted to USD 90.6 billion, or 50.23% less than relevant indicator in 2013. In quarters I–III of 2016, the GDP level amounted to USD 61.2 billion (UAH 1,559.1 billion), which is just 60.39% of the adjusted estimated figure at the end of 2016. In addition, the amount of nominal GDP estimated by the Cabinet of Ministers of Ukraine (Resolution no. 399 as of July 1, 2016) and normalized to USD rate estimated by the National Bank of Ukraine is USD 94.0 billion, which is just 51.62% of this indicator in 2013.

Diagram 1

It should be noted that, along with decrease in the level of nominal GDP in USD equivalent, a clear trend towards increase of GDP volume in UAH equivalent is maintained. Thus, according to the Cabinet of Ministers of Ukraine estimation, in 2017 the level of nominal GDP will increase to UAH 2,584.9 billion, which is 77% more than in 2013.

So the question arises, whether the economic potential of Ukraine (nominal GDP in UAH equivalent) increases or declines (nominal GDP in USD equivalent). A clear answer can be received through analysis of a real GDP, which is measured in constant (unchanged, basic) prices, i.e. this indicator is affected only by change in production volume and is resistant to potential inflationary and depreciation developments, the consequences of which would be shown below.

Diagram 2

That is, analysis of changes in real GDP clearly indicates recession processes of the economy, namely decline in production. Even the growth of real GDP by 1.5% in 2016 is a negative result, since appropriate growth is calculated in relation to the previous year, and, according to the chart, rash fall in real GDP in 2014–2015 just evidences return of the economy to periods of 2000s level.

It is fair to say that the military conflict within the territory of two main industrial regions, which were considered to be the driving force of the economy, proved dependence of the Ukrainian economy on mining and processing industry, which is concentrated mostly in this region.

Diagram 3

Analysis of nominal GDP per capita provides further confirmation of the aforementioned trend of decline in the economy and its impact on the population, whose income is directly proportional to the level of economic situation.

Domestic policy-makers like comparing national economy with economies of other now-successful, and previously poor countries. Second Poland and almost Slovakia — this list can be long. But the reality is different: the Poles, the Slovaks, the Singaporeans and the Estonians are well away, we will not become their competitors for capital and markets in the near future. Therefore, it is more relevant to compare Ukraine on the economic map with the countries of Africa and other third world countries.

Diagram 4

Purchasing power parity (PPP) GDP per capita is the most accurate indicator, which shows the level of economic development, as well as the growth of the economy. All indicators are expressed in a single currency — US Dollar of the Federal Reserve System (FRS) — for comparability. Recalculation from national currencies, which is customary for international economic comparisons, is carried out not at market exchange rates, but at the purchasing power parity.

Appropriate analysis confirms once again that it is inappropriate to compare Ukrainian population by its purchasing capacity even with neighboring countries, today’s benchmark are the countries of the third world.

Diagram 5

1.2 Analysis of the GDP in 2013–2016 showed existing imbalance between the indicators of the level of nominal GDP expressed in the national currency (growth) and in USD equivalent (fall). Analysis of data for relevant periods of real GDP evidences decline in production. Therefore, disparity of growth in UAH nominal GDP indicator can only be explained by high rate of inflation.

It should be noted that inflationary processes in Ukraine during the period from 2013 to 2016 can be divided into 2 phases:

  • rapid aggravation of inflation from 2014 to 2015 towards hyperinflation, was, on the one hand, due to the loss of important economic regions and ineffective state policy, which resulted in decline of the growth of production and its low efficiency, and, on the other hand, due to increasing deficit of the state budget with the decrease of revenue and preservation of governmental expenditures at the previous level and their growth. All this, partially because of the lack of investment, has resulted in continuous emission, while the annual inflation rate were: 2014 — 24.9%; 2015 — 43.3%.
  • Reacting to the high inflation, the Government and the executives of the National Bank of Ukraine, due to fear of uncontrolled inflation, began to pursue a policy of containment by means of administrative measures, which resulted in decrease in inflation (disinflation) in 2016 to 14.2%, which caused the following recession processes. Creation of deficit of the national currency without indexation of wages has “killed” business activity. This resulted in deferred decline in production, which would continue for a long time, due to the fact that the National Bank of Ukraine purposefully creates financial hunger in order to make potential further depreciation impossible, pursuing only political purposes.

It is a constant deferred deficit of goods, deterioration of quality of products and lack of effective demand, which would become the reasons for creation of further inflationary peaks.

Doubling of the minimum wage without real industrial growth would result in growth of average industrial expenses, which forms the ground for development of expenses inflation. If the Government and the National Bank fail to find tools for management of inflationary expectations, “wage-prices” spring would be the basis for emergence of uncontrolled inflation with fast growth of prices, which makes impact on employment and production particularly destructive since investments in speculative operations would become economically advantageous under such conditions. Distrust to inconsistent policies of the Government and the National Bank is the appropriate “environment” for deployment of uncontrolled inflation.

Diagram 6

In addition, the gap between inflation and real GDP caused large-scale destructive economic consequences. Price growth was beneficial only to the Government, which by means of inflation processes achieved target revenue of the state budget. At the same time, in absence of business activity accompanied with rising costs (through increase in tariffs), domestic enterprises found themselves in a difficult financial situation.

IAS 29 “Financial Reporting in Hyperinflationary Economy” (clause 3) defines 5 characteristics of hyperinflation in the country:

a) Most people prefer to preserve their valuables in the form of non-monetary assets or in a relatively stable foreign currency. Amounts held in national currency are immediately invested to preserve the purchasing power.

The National Bank of Ukraine indicates that the majority of the population prefers to keep assets in a stable foreign currency

b) Most people prefer to store money in a relatively stable foreign currency rather than in the national currency. Prices can be also specified in such currency.

People generally compare level of their income over the past time, or as of today in a stable foreign currency usually USD.

c) Sales and purchases under the terms of deferred payment are carried out at the prices that compensate the expected loss of purchasing power during the period of deferral of payment, even if the period is short.

Fiscal service has the right to grant, within their powers, deferral or installment payment of taxes and other payments.

d) Interest rates, wages and prices are adjusted according to the price index.

 According to the legislation, indexation of wages of employees is mandatory

 e) Cumulative inflation rate for a three year period approaches 100% or exceeds this level.

Cumulative inflation rate for the last three years (20142016) equals to 101.2%.

Therefore, we can conclude that the Ukrainian economy is hyperinflationary.

Today the National Bank of Ukraine declares that it began to manage expectations of what has real economic content, namely inflation targeting.

INFLATION TARGETING is a monetary regime, which stipulates maintenance of the declared value of the official inflation target during a specified period of time using all instruments of monetary policy (achievement of inflation target in the medium term — 23 years).

When the executives of the National Bank of Ukraine talk of inflation targeting as their primary objective, they mean the level of consumer prices. However, one cannot ignore the fact that, according to the results of 2016, growth in producer prices for industrial products amounted to 36%. Isn’t it too optimistic to assume that such serious growth of industrial prices would not to the very significant extent affect consumer prices in 2017?

According to “Basic Principles of Monetary Policy”, inflation is planned at the level of 8% plus or minus 2%. However, it is far from certain that such target would be achieved for the aforesaid reason and as a result of UAH depreciation, which would result in increase in prices of imported products.

In addition, in January 2017 the National Bank of Ukraine worsened inflation forecast from 8% to 9.1% by raising the minimum wage to UAH 3,200.

So the only way for the National Bank of Ukraine to hold a determined inflation benchmark is associated with further deficit of the national currency, not allowing to increase business activity. This method is extremely dangerous for the economy and could lead to a crisis similar to the one of the 1990s, renewing barter transactions and resulting in galloping inflation.

1.3 Balance of payments will be the following phase of troubleshooting of the national economy. This is one of the most important indicators, which reflects trade relations between residents and non-residents, and evidences abundance of foreign currency in the country. Values of the balance of payments have a directly proportional impact on formation of exchange rate policy due to formation of demand and supply of the currency.

It should be noted that in terms of revenue, which affects formation of GDP, Ukraine is an export-oriented country. Most part of products manufactured in Ukraine is sold abroad, as evidenced by the ratio of GDP to export equal to 50%. In addition, unfortunately, Ukraine mostly exports raw materials (steel, grain, ore) rather than finished goods.

Thus, in 2015 exports amounted to 42% of GDP; in addition, the Cabinet of Ministers of Ukraine approved the export target for 2017 in relation to GDP at 50%.

Chart 1

Year GDP, USD billion Export, USD billion Export/GDP
2015 90.6 38.1 42%
2016 64.6* 32.03* 50%
2017 95** 47.2** 50%

* actual data for quarters I–III 2016 (State Statistics Service of Ukraine)

** forecast data in accordance with the Regulation of the Cabinet of Ministers of Ukraine as of July 1, 2016 no. 399

Since the 1990s, Ukraine has chosen the easiest way to get revenue from sale of non-finished products rather than from development of technological products. All countries producing raw materials are at risk: their basic goods may at any time go down in value and bring the economy down. Raw material producing countries are not in control of their own development.

Ukraine has become the next victim of the “staple trap”. If the country does not produce sophisticated products and sells only raw materials, the crisis will certainly happen. It does not matter what kind of raw materials it is: oil, grain, metal.

We found that Ukraine exports a significant part of its manufactured products, and the remaining part of GDP (the other 50%) goes to the domestic market where it tries to compete with imported products.

It should be noted that all imports go to the domestic market due to the fact that the main part of national exports is just sale of raw materials and non-finished products, which excludes presence of imported components in the cost of export.

Chart 2

  Total turnover, USD billion GDP, USD billion Import (goods and services), USD billion Import to turnover ratio/GDP
2016* 41.06 64.6 31.38 76.4%/48.5%
2015 100.6 90.6 49.48 49.1%/54.59%
2014 159 131.9 70.04 44.05%/53.1%

* actual data for quarters I–III 2016

Data: State Statistics Service of Ukraine

Data shown in the above table evidence huge dependence of the domestic market on imported products. It is also a very dangerous trend, since presence of significant volume of import in the domestic market structure results in decrease in the national income.

All these factors are a burden to development of the economy evidencing the need for structural reforms.

When analyzing the balance of payments, we should note that it consists of:

  1. a) current account (difference between export and import of all goods, services and other revenue);
  2. b) volume of transactions from financial account (inflow/outflow of investments and net borrowing).

Firstly, deficit of the current account at the end of 2016 amounts to:
USD 3.4 billion as compared with USD 186 million (0.2% of GDP) in 2015. The rate of decline in exports of goods and services amounted to 4.1% (in 2015 – 26.9%), import increased by 3.9% (in 2015 import fell by 29.2%). It was caused by unfavorable price environment on global commodity markets, especially in the first half of the year, the effect of trade restrictions imposed by the Russian Federation and a number of other constraining factors (such as internal transport problems).

Diagram 7

It should be noted, in connection with progressive loss of the domestic market by domestic manufacturers (reduction in domestic production), with subsequent increase in import. In 2016, such situation led to increased depreciation (demand for currency under import contracts) pressure on the national currency.

Export of goods in 2016 fell by 5.2% (in 2015 – by 29.9%) and amounted to USD 33.6 billion. Exports declined with respect to the following groups of products:

  • ferrous and non-ferrous metals – by 11.6% (in 2015 – by 38.7%);
  • mineral products (including ore) – by 10.5% (in 2015 – by 49.5%);
  • mechanical engineering – by 17.8% (in 2015 – by 38.5%);
  • chemical industry – by 24.8% (in 2015 – by 34.7%).

At the same time, in 2016, export of food products increased by 5.4% (in 2015 – reduction by 13.1%) due to the growth of export of oil crop seeds and products by 15.1%. In geographical terms, exports to Russia fell the most (by 25.8%). Russia’s share in the total export decreased to 9.3% (in 2015 – 11.9%). Exports to the EU increased by 2.4%, and its share in total exports increased to 31.9% (in 2015 – 29.5%).

Annual import of goods increased by 3.8% (in 2015 it decreased by 32.6%), imports amounted to USD 40.4 billion. Energy imports fell by 27.9%, while non-energy imports increased by 16.2%, including:

  • mechanical engineering – by 37.9% (in 2015 – decrease by 30.0%);
  • ferrous and non-ferrous metals – by 15.5% (in 2015 – decrease by 40.9%);
  • chemical industry – by 10.1% (in 2015 – decrease by 26.9%);
  • food products – by 13.4% (in 2015 – decrease by 43.4%);
  • industrial goods – by 11.9% (in 2015 – decrease by 33.1%).

Secondly, significant current account deficit, which existed in 2013, was covered by income from investments or borrowings, forming an overall positive summary balance of payments, which evidenced total inflow of foreign currency revenue into the country. After revolutionary events, military conflicts and annexation of the territory investors not just stopped investing in the economy, but began to withdraw their previous investments. This trend contributed to rapid collapse of the economy, but the country’s new leadership decided to save the situation not by structural changes but by cooperation with international creditors, which, by way of providing loans, began to dictate  the terms which are beneficial to them, forcing the country into the debt pit.

In 2015, capital inflow under financial account (net borrowing) amounted to USD 569 million. (as compared to outflow amounting to USD 9.1 billion in 2014). The main factor included a significant engagement of public administration sector, the net financing of which amounted to USD 3.5 billion (in 2014 — USD 3.3 billion). In particular, USD 1 billion was received from the World Bank, government Eurobonds were placed against guarantees of the US government in the amount of USD 1 billion, loans were received from the European Commission in the amount of USD 0.9 billion. Net financing of the central bank amounted to USD 1.5 billion. At the same time, net outflow under private sector operations (with errors and omissions) amounted to USD 4.4 billion (in 2014 — USD 12.8 billion).

At the end of 2016, capital inflow through financial account (net borrowing) amounted to USD 4.6 billion. Net inflows through direct foreign investment amounted to approx. USD 3.4 billion, which is solely due to the necessary legislative changes regarding recapitalization of Ukrainian banks from foreign parent banks. Net decrease in external position of the real sector (net of direct foreign investments) amounted to USD 4.5 billion (in 2015 the increase amounted to USD 1.6 billion). The main factor includes reduction of the volume of foreign cash beyond banks by USD 4.7 billion (in 2015 — USD 1.8 billion). Debt under credits and loans was reduced by USD 176 million (in 2015 — by USD 1.3 billion).

Diagram 8

Significant decrease in consolidated balance value — by USD 13.3 billion — may be consolidated by the generated deficit of the current account and capital outflow in the amount of USD 9.1 billion (portfolio investments, bank capital) at the end of the year.

The latest similar capital outflow was in 2009 — UAH 13.7 billion, which resulted from the impact of the international economic crisis that engulfed the huge number of countries. However consequences in Ukraine were the most drastic.

In addition, surplus of consolidated balance at the end of 2016 is the technical result (administrative impact of the National Bank of Ukraine) of inflow of foreign exchange proceeds from foreign banks as a means of recapitalization of share capital of their subsidiaries in Ukraine. Namely, 67% of the total direct foreign investment in 2016, or USD 2.2 billion, accounted for inflow of direct investments into the banking sector.

So, even in 2017 the Government cannot overcome the consequences of 2014, having selected the wrong mechanism to eliminate the consequences only by means of financing from international lenders rather than by searching for fundamental problems in the economy of the country.

1.4 Study of gross foreign debt allows to analyze the total debt under all existing obligations, which must be paid by debtors, and which are the obligations of residents of this economy to non-residents. In other words, it is the total debt of the country under foreign loans and interest unpaid thereon.

Analysis of relevant indicator for the period starting from 2013 allows to assert that gross foreign debt decreased by 18.3%. However, despite decrease in total debt, a negative trend of increase in debt in relation to GDP is observed — from 78% as of January 1, 2014 to critical values of 131% as of October 1, 2016.

Diagram 9

Liabilities should be covered by revenues from sale of manufactured products. Therefore, such imbalances are unacceptable because later on debt would be repaid from received borrowings while they are provided, whereupon there would be the only way out — default. Due to the fact that the total gross foreign debt represents total debt of all private entities and the state, it is expedient to analyze the structure of foreign debt in order to clarify reasons.

Chart 3

 (USD million) January 1, 2014 January 1, 2015 January 1, 2016 October 1, 2016
General government 29 922 32 884 35 959 37 389
Central Bank 1 775 2 176 6 708 6 482
Other depositary corporations 22 555 18 752 12 823 9 504
Other sectors 76 642 63 239 54 677 53 947
Direct investments: intercompany debt 11 185 9 257 8 562 8 693
Gross foreign debt 142 079 126 308 118 729 116 015

Data: National Bank of Ukraine

As it appears from the structure of the gross foreign debt, when private entities tried to repay funds to the maximum extent of previously assumed obligations or to restructure debt, the state only accumulated debts from USD 31.6 billion at the end of 2013 to USD 43.87 billion as of October 1, 2016, or increase by 36%.

Chart 4

USD billion UAH billion
Gross foreign debt  


Debt on loans received from international financial organizations 14.07 360.86
European Community 2.47 63.31
European Bank for Reconstruction and Development 0.61 15.58
European Investment Bank 0.53 13.65
International Bank for Reconstruction and Development 5.08 130.41
International Monetary Fund 5.38 137.88
Clean Technology Fund (IBRD) 0.00 0.02
Debt on loans received from governmental bodies of foreign states 1.79 45.89
Canada 0.31 7.87
Germany 0.24 6.03
Russia 0.61 15.54
USA 0.01 0.23
Japan 0.63 16.21
Debt under issued securities in foreign market 18.04 462.85
foreign government bonds 2013 3.00 76.96
foreign government bonds 2014 1.00 25.65
foreign government bonds 2015 14.04 360.24
 Debt not attributed to other categories 1.71 43.92
International Monetary Fund 1.71 43.92
Guaranteed foreign debt 8.63 221.34

Data: Ministry of Finance of Ukraine

As of October 1, 2016, foreign obligations of general government sector increased to USD 37.4 billion (up to 41.3% of GDP) or by USD 7.4 billion (+24%) as compared with the end of 2013, mostly, on account of:

  • money raised from international cooperation;
  • reorganization of obligations under guaranteed loans of state enterprises by way of additional issue of foreign government bonds;

As of October 1, 2016, foreign obligations of the Central Bank increased by USD 4.7 billion (+265%) as compared with the end of 2013 and amounted to USD 6.5 billion (7.2% of GDP). Reduction of obligations under swap transactions in the amount of USD 1.3 billion was partially compensated by receipt of the next loan tranche from the IMF in the amount of USD 1 billion in quarter III.

Foreign debt of other Ukrainian depositary corporations (banks) as of October 1, 2016 amounted to USD 9.5 billion (10.5% of GDP). During 9 months of 2016, obligations under loans from Ukrainian banks decreased significantly — by USD 3.2 billion, including by USD 2.4 billion — under interbank loans. Debt of Ukrainian banks decreased due to reduction of loan obligations — by USD 4.6 billion, including by USD 3.7 billion under interbank loans; debt securities (including UAH) — by USD 0.9 billion; long-term deposits and balances on non-resident accounts with Ukrainian banks — by USD 0.6 billion.

As of October 1, 2016, foreign debt of other sectors of the economy amounted to USD 53.9 billion (59.6% of GDP), which is USD 0.7 billion less than as of the start of year. The main factors for this are:

  • debt reduction under long-term guaranteed loans;
  • debt decrease under long-term non-guaranteed loans.


USD has remained the main currency of foreign borrowings of Ukraine as of October 1, 2016 (73.9%). The percentage of obligations in SDR to the IMF has increased in quarter III up to 11.7% (from 11.1%), and the share of foreign debt in UAH remained insignificant — 0.9% of the gross amount of debt. Obligations in RUB amounted to 1.7% of gross foreign obligations of Ukrainian residents.

The state also looks for borrowings in the domestic market; such borrowings are carried out with the purpose of budgetary deficit coverage on state and regional levels, financing of various programs, replenishment of necessary reserve assets and for refinancing of previous government borrowings.

Diagram 10, Chart 5


Chart 6

  USD billion UAH billion
Government internal debt 21.58 553.62
1. Debt under issued securities in domestic market 21.48 551.04
internal government bonds (15-year) 0.62 15.85
internal government bonds (14-year) 0.13 3.25
internal government bonds (13-year) 0.10 2.62
internal government bonds (12-year) 0.06 1.50
internal government bonds (11-year) 1.52 38.88
internal government bonds (10-year) 2.36 60.56
internal government bonds (9-year) 1.99 51.15
internal government bonds (8-year) 1.22 31.30
internal government bonds (7-year) 1.74 44.74
internal government bonds (6-year) 0.94 24.10
internal government bonds (5-year) 6.19 158.86
internal government bonds (4-year) 0.16 4.11
internal government bonds (3-year) 1.19 30.44
internal government bonds (2-year) 2.33 59.89
internal government bonds (18-month) 0.76 19.38
internal government bonds (12-month) 0.11 2.71
internal government bonds (9-month) 0.01 0.20
internal government bonds (6-month) 0.04 1.09
internal government bonds (3-month) 0.02 0.42
2. Debt to banking and other financial institutions 0.10 2.58
National Bank of Ukraine 0.10 2.58
Guaranteed internal debt 0.77 19.70

Data: Ministry of Finance of Ukraine

According to existing laws, the total amount of issues domestic government bonds is regulated by the Verkhovna Rada of Ukraine within the limit amount of internal government debt determined by budget for the current year.

When the government buys internal government bonds, it makes monetary payments thus increasing the money supply. If the government sells securities, the money supply decreases since commercial banks have lower potential for lending, which affects the rate of inflation in the country and the exchange rate of the national currency.

There were many attempts to resolve the demonetization problem with money issuing measures in Ukraine. And each time issues resulted in consequences; increase of national currency supply; growth of prices in the national currency along with relatively stable USD prices; increase of turnover of national currency, “dollarization” of the economy; outrunning growth of UAH prices as compared to growth of UAH supply, which resulted in decrease of the level of state of monetary aggregates and GDP.

Diagram 11

UAH 227 billion — this is the amount for repayment and servicing of government debt in 2017. 1/3 of this amount (or USD 2.5 billion) is used for repayment and servicing of foreign debts. Peak payments under foreign debt in March and in September (approx. USD 500 million each) are coupon payments under Eurobonds. We also begin to repay the debt to the IMF from August.

It would be harder to service debts from year to year. Currently, Ukraine receives borrowings for restructuring of previously assumed obligations; otherwise, default will take place.


Primary analysis of major macroeconomic indicators has revealed the negative trend of economic processes in Ukraine and main reasons for appropriate consequences.

Firstly, rash fall of the economy occurred during the period from the end of 2013 to 2016. Even the positive value of real GDP for 2016 in the amount of +1.5% cannot be compared to the multiple fall of the economy from the end of 2013. Besides, it is inappropriate to compare GDP per capita by its purchasing capacity even with neighboring countries, today’s benchmark are the countries of the third world.

Secondly, uncontrolled growth of inflation in 20142015 has resulted in structural imbalances of the national economy. Resolving political tasks as to maintenance of inflation at the rate of 1015% and prevention of inflation, the Government created financial hunger for domestic enterprises. Due to the lack of cheap money in the market, companies reduce production or even wind up. Obtained results regarding control of inflation in 2016 may adversely affect future inflationary processes, which may be accompanied by barter schemes and further uncontrolled inflation.

Thirdly, it was found that due to dollarization of the national economy, export of non-finished and non-technology products is a structural problem, which makes the country dependent on foreign conditions and too high dependence on imports on the domestic market; it is easier for foreign manufacturers to compete with domestic ones, which are now in poor financial condition.

Fourthly, dependence of the national economy on foreign loans is one of the main risks for it. Even today it is necessary to look for ways to get out of the debt trap rather than to accumulate new debts. In addition, the domestic market of internal government bonds can now become an important driver in promotion of economic activity in the country, inflow of investments and stabilization of the currency market. And all this requires just political will of the Ministry of Finance and consent from the National Bank to presence of the Ministry in the money market with supply of liquidity to the extent, which was agreed by them in advance. However, without activation of the primary market this can not be achieved, since, as specified above, internal government bonds are fully concentrated with the National Bank of Ukraine and government banks, and just slight volumes can be traded in the secondary market. Therefore, one should start with replenishment of market bonds and then utilize them for execution by the Ministry of Finance of transactions in the secondary market. After implementation of such transactions on a regular basis, the National Bank of Ukraine would be able to participate in the market replenishment, offering internal government bonds from its own portfolio, which would be further used in transactions with the Ministry of Finance.


Having determined the main benchmarks of economic processes on the macro level, the next step will be the study of economic processes at the level of individual economic entities and identification of the main problems of industry markets.

Study of cause-and-effect relations allows to reveal the motives of behavior of economic entities and to build a model of development.

Analysis of the structure of the gross added value of manufactured products allows to define the economy-forming sectors of the national economy. At the previous stage, general decline in the economy was determined in quantitative indicators of manufactured products, for which reason there are also changes in the general structure of GDP income formation.

Industry, trade and agriculture remain the main sectors, which form GDP. In addition, share of industry in GDP has been reduced recently, from 25.7% in 2010 to 23.3% in 2016. Instead, the share of agriculture demonstrates significant growth, from 8.4% in 2010 to 14.2% (+5.8%). Detailed analysis of relevant sectors will allow to determine reasons for such changes and further potential consequences.

Diagram 12

2.1 Industrial sector plays a key role in the economy of Ukraine, and its performance is a key factor for social and economic development. Therefore, deeper understanding of the structure and trends in the industrial sector is important for politicians, because this sector has an extraordinary impact on the overall health of the economy, including, as shown above, export potential.

General fall of GDP (in USD), which was studied in section 1, is directly proportional to the fall of industrial production index, which describes change of produced material assets during the current period as compared to the base period.

Diagram 13

An aggregated overview shown above should be complemented with more analytical (disaggregated) review, i.e. more detailed analysis of individual sectors with the purpose of better understanding of contribution of the shrinking sector to the economy and export.

Shares of individual industries in the general industrial production in 2016:

Diagram 14

Mining, food industry, energy and metallurgy are the dominant industries, the total share of which in the total gross value added in the industry exceeds 60%.

It should be noted that in recent years the structure of industrial production has changed dramatically, which can account for the general fall rather than structural changes. Mechanical engineering — mining industry has reduced by 13.9% in the total structure as compared to 2013, mechanical engineering — 7%, light industry — 2.3%.

If you look at the share of particular industries in exports, you can see that the industrial sector is characterized by a fairly high percentage of exports: metallurgy (62.6% of exported products), mechanical engineering (48.8%), light industry (44.2%), wood industry (35.2%). Other sectors export less than 30% of their products.

In addition, it should be noted that in 2013, the following industries had high share of export: light industry (78% of products is exported), metallurgy (65%), mechanical engineering (60%) and chemistry (54%).

Chart 7

Metallurgy is the main industrial export industry (23.3% of total export in 2016). Moreover, it is the only industry, the products of which are exported more than imported.

For example, in 2016 Ukraine was the 10th largest steel producer in the world. 24.2 million tons of steel were produced in 2016, which is 5.2% higher than in 2015. Moreover, according to London Commodity Exchange data, in 2016 steel prices went back to the pre-crisis level (3-months futures — USD 300 per ton).

Chart 8

Volumes of steel production, million tons Ratio
2012 2015 2016 2016/2015 2016/2012
China 720.57 798.8 808.4 1.20% 12.19%
Japan 107.17 105.1 104.8 -0.29% -2.21%
India 77.05 89 95.6 7.42% 24.08%
USA 88.74 88.74 78.8 -11.20% -11.20%
Russia 70.44 70.9 70.8 -0.14% 0.51%
Republic of Korea 68.9 69.7 68.6 -1.58% -0.44%
Germany 42.83 42.7 42.1 -1.41% -1.70%
Turkey 35.88 31.5 33.2 5.40% -7.47%
Brazil 34.54 33.3 30.2 -9.31% -12.57%
Ukraine 32.99 23 24.2 5.22% -26.64%

Comprehensive analysis shows stagnation of both metallurgy and the economy in general. Thus, growth of steel production in 2016 as compared to the previous year demonstrates just deceleration of fall. If we compare change in the volume of production in 2016 compared to 2012, contraction in production by 26.64% is evident. In turn, it is the largest fall of production among global competitors.

Diagram 15

It should be noted that the fall of the economy was largely caused by problems in metallurgy, which started in 2014. The impact of loss of parts of industrial regions, multiple rise in the price for energy sources, which affects costs, and absence of governmental support caused such situation. Even uncontrolled devaluation, which was supposed to reduce export costs, together with the above factors and loss of key markets and logistical links, failed to increase production volume of the national metallurgy.

In its turn, export depends on the pricing environment on international markets. Conditions, under which prices change at the world’s exchanges, are created by large industrial states, which provide expectations as to the demand for raw materials necessary for them.

Due to the fact that the main part of the exported production accounts for non-finished non-process products, which does not allow to receive additional added value and reduces competitiveness of exports, export reduction becomes a real threat, which makes sectors unprofitable in the absence of domestic demand. In addition, products of chemical, textile, mechanical engineering industry are to a greater extent more imported than exported.

Dependence on the pricing environment creates huge risks for major national industries. Minimization of these risks is possible only by means of restoring technological production and efforts to create a closed cycle of production of finished products by way of combination of production capacities of national enterprises, reducing imported component of cost.

Diagram 16

Current fall of the percentage of industry exports supports a general trend of decline in exports in recent years. Thus, long-term Russian sanctions restricted access to the key Russian market, which created problems for many exporters, including industrial enterprises. In addition, some companies have become subject to export embargo, or faced similar problems.

Under these conditions, the following problems of the domestic industries should be considered and solved immediately:

1) obsolescence and physical wear of fixed assets;

2) high dependency on conditions in the global markets and excessive impact of foreign demand. Underdevelopment of domestic demand;

3) high energy intensity of production;

4) scarcity of own energy resources;

5) manufacturing of products with low added value;

6) lack of the effective system of treatment of low-quality domestic raw materials.

2.2. The agricultural complex has become a major driver amid the economy’s fall. It is the increase of relative share of agriculture in the total structure of GDP from 8.4% in 2010 to 14.2% (+ 5.8), which has prevented default of the economy.

Main contribution to growth of the production index of basic industries was due to increase in agricultural production (by 66.4% as compared to the previous year), mainly due to high volume of corn harvesting. High yields of industrial crops in 2016 also became the driver of growth of food industry (production of oil and sugar), which, in turn, promoted general growth of industrial production (up to 4.5% year-on-year). Significant volumes of production in agriculture and industry supported the wholesale trade.

Diagram 17

Growth of the index of agricultural production was caused by unusually high volumes of harvesting of late crops at the end of the year. In particular, corn crops achieved record yields, so the time limits of active harvesting of this crop were extended. In 2016, total grains crops surpassed the best case forecasts and amounted to 66 million tons. Trends of major livestock categories have also improved. In particular, growth of milk production has resumed (by 0.6% year on previous year).

High yields of industrial crops supported acceleration of growth in the food industry (up to 15.1% year-on-year), primarily in production of sugar (up to 2.6 times) and oil (almost 50% year-on-year).

Diagram 18

Diagram 19

At the same time, it is the growth of prices for agricultural products, which caused increase of core inflation. Even high yields: in Ukraine — grains, vegetables and some fruits (such as apples), and in other countries — citrus, did not have enough impact on the growth of index of prices for agricultural products. Meat prices have increased rather moderately (by 5.0% year-on-year compared to 22.5% year-on-year in 2015) due to restrictions on the export of pork and chicken amid adverse epizootic situation. At the same time, prices for milk and dairy products grew rapidly in 2016 (by 21.1%, in 2015 — by 26.4% year-on-year) amid strengthening of processors’ demand due to the high volumes of exports of dairy products.

It should be noted that it is export of agricultural products, which generated foreign currency revenue in 2016, 34.8% in the general structure of export. High impact of international prices for products is the main risk, similar to industry products. Sharp decline in international prices for grain crops can completely destroy the national industry.

In addition, lack of processing facilities for agricultural products makes the national industry even more dependent on international conditions and does not allow to get more added value from sale of finished products.

Chart 9

Code and name of commodities under Ukrainian classification of exported/imported products Export
USD thousand % of % of total volume
January – November 2015
Total 32,734,437.2 94.1 100.0
Agricultural products 11,404,667.3 111.0 34.8
10 grain crops 5,413,342.06
19 finished grain products 191,816.78

The functional model of agricultural production is not capable of making a significant leap in its development, solving social and economic problems of rural areas, full implementation of the industry’s huge natural and resource potential. Achievement of the above objectives is denied by a number of systemic obstacles, which were not overcome during a long period of reforming of the agricultural sector, the main of which are:

sectoral imbalance of agriculture, export of non-processed products, significant dominance in production of certain types of agricultural products or large or small commodity producers.

Currently, labor intensive production of the vast majority of livestock (56%), fruit and berry (80.6%) and vegetable (88.3%) products is concentrated in personal rural farms, which are not able to cover the needs of the market for high-quality standardized goods. At the same time, large agribusiness (agricultural holding companies) specialize in production of export-oriented, highly profitable and fast-payback crops, which is often accompanied with their failure to comply with the requirements of rational land use, breach of crop rotation and neglecting measures for protection of agricultural lands, which adversely affects environmental condition of farmland, leads to exhaustion of soils, lowering of agricultural lands quality;

shortage of financial resources for sustainable conduct of economic activities of agricultural producers, in particular due to the lack of investment funds, inaccessibility of loans from banks, as well as the low level of governmental support of agriculture.

High interest rates are not economically feasible for manufacturers of agricultural products. Due to lack of cheap loans many small, local agricultural producers cease their operations. At the same time, there is monopolization of the market by large agricultural holdings, which have working capital and preferences as to VAT refund. 2017 amendments to the Tax Code of Ukraine as to cancellation of the special VAT regime, which would withdraw 20% of current assets of agricultural producers, has administered even a greater blow to agricultural producers.

delay in development of agricultural logistics system to the needs of the market, for which reason losses of agribusiness  products reach 1/3 of the annual volume of production.

In particular, technical losses of grain in Ukraine reach 15% of the annual harvest, while the losses of grain in Europe and in the United States do not exceed 1-2% of the harvest, which is a technically inevitable minimum value. There is an insufficient number of warehouses for storing grain, fruit and vegetable products. Wholesale markets do not contribute to formation of wholesale prices, since they are the only organized sites, on which goods may be purchased in retail too. The rolling stock for transportation of bulk cargo — grain cars — are in critically shot supply during peak periods of collecting and transportation of harvest;

− non-compliance of Ukrainian agricultural and food products with European standards poses a significant threat for development of the national agri-food sector, since it restricts supply of products to the markets of the EU countries during the period of implementation of all necessary technical regulations and obtaining of certificates of conformity, causing decrease in profitability of domestic small and medium-sized enterprises, as well as weakening of competitive positions of Ukrainian products in the domestic market in comparison with European products, which are already duly certified.


            Metallurgy maintains its status of high-risk industry: debt burden does not allow to raise significant funds for modernization, and own resources are restricted by low profitability, which is adversely affected by growth of prices for ore and coal. Large enterprises of the industry are close to the area of active hostilities, prompting operational risks: the companies regularly have problems both with supply of raw materials and with demand, since international traders primarily reduce procurement of Ukrainian products during seasonal fluctuations of demand.

            Food industry is in the risk zone. Debt burden and the share of negatively classified loans remain high. Profitability of companies in the industry has declined due to reduction of exports to Russia, tough competition of products with imported goods and slow and costly promotion to European markets, which is caused by difficulties in compliance with sanitary norms.

            Electricity, gas and public utilities sector is also exposed to significant risks. Profitability of the sector’s companies is low, while the debt burden is significant. Low level of payment discipline of population, which would likely maintain, is a significant problem for suppliers of housing and utilities services.

            Contrary to the expectations, risks in mechanical engineering have not decreased since the loss of the Russian market was not compensated with increase in production of military products (computers, electronics, optics) and reduction in personnel costs. Therefore, this branch is generally unprofitable; besides, significant debt burden and bad credit record would restrict its attractiveness for creditors and investors.

            Minimal risks in agriculture and mining industry. After the last year’s drop, the prices for metal ores have recovered and remain high despite pessimistic forecasts. Increase in profitability of the industry in 2016 was also promoted by reduction in the tax rate on gas production from the beginning of the year — from 70% to 50% for Ukrgasvydobuvannya state company and from 55% to 28% for private companies. Rent rates in oil and gas sector may be subject to further reduction.


The banking system of Ukraine, being one of the most sensitive industries to changes in the external environment, suffered significant losses during recent revolution, war and power shift in Ukraine. Crisis developments in the banking sector are caused by both objective reasons and ill-considered regulator’s policy, which has caused credit deficiency in the national economy. Mass outflow of deposits caused by the fears of citizens to lose their savings has become the quintessence of banking crisis deepening.

Problems in the national financial sector began to build up quickly starting from the end of 2013, the last year of relative economic stability in Ukraine. But as the economy has ceased to grow, banks have lost the opportunity for expansion of assets and forming the foundations for further development. Lack of prospects and vague monetary policy of the National Bank of Ukraine in 2014 with further devaluation of UAH have formed a significant gap between assets and liabilities of financial institutions.

Chart 10

Chart 11

Build-up of assets in 2016 up to UAH 1,625 billion, or + UAH 213.4 billion, or + 15.08% until 2013. Due to the fact that most deposit accounts (assets) of financial institutions are opened abroad (67% in 2016) and are maintained in a foreign currency, it may be stated that the growth of assets was triggered by a steep devaluation of UAH (341% as compared to 2013), which affected foreign exchange assets of banks’ portfolios.

The same is true for liabilities of financial corporations. Besides, the lack of real growth of attracted deposits combined with uncontrollable inflation and devaluation evidences distrust of population towards the banking sector.

UAH-denominated value of the deposit portfolio has significantly increased due to devaluation (high dollarization of economy), while the loan portfolio began to lose its quality rapidly and turned into distressed assets. As a result, commercial banks faced a significant need for resources in order to form reserves under problem loans and outflow of funds, which still remained in financial institutions, after withdrawal of deposits by individuals and legal entities.

Furthermore, the total amount of bank deposits expressed in dollars fell by USD 50 billion in three years. Distrust in the banking system in general, which was caused by distrust in the state (war and revolution always caused instability in the banking sector and waves of deposit withdrawals), was the main reason for occurrence of such situation.

Distrust in the banking system in general, which was caused by distrust in the state (war and revolution always caused instability in the banking sector and waves of deposit withdrawals), was the main reason for occurrence of such situation.

In its turn, ineffective policy of the National Bank led to the liquidation of 88 banks (including provisional administration in 6 banks, liquidation of which did not start due to pending legal proceedings), for which reason more and more depositors have to receive only limited deposits of under UAH 200,000 through the Deposit Guarantee Fund.

As of January 1, 2017, the Deposit Guarantee Fund has disbursed to depositors more than UAH 80.8 billion of state-guaranteed compensation (up to UAH 200,000), which is 94.3% of the total guaranteed amount of compensation in accordance with the register of 88 banks, which are liquidated by the Fund.

In accordance with the Law of Ukraine “On Deposit Guarantee System”, in 2012 executive directors of the Deposit Guarantee Fund determined the guaranteed amount of compensation — UAH 200,000. It should be noted that the amount of state-guaranteed compensation does not correspond to the realities of fall of the economy and devaluation of the national currency (during 2014–2016). In 2016, the amount of guaranteed deposit converted into USD fell by 319% as compared with the corresponding amount in 2013, and cumulative inflation from 2013 amounting to 81%.

Independent valuers have assessed that the total value of assets of 70 banks, which are subject to liquidation and have a liquid mass, equals to UAH 94 billion, while their “on the books” value exceeded UAH 418 billion. Almost the entire loan portfolio of insolvent banks (90% of the entire debt) is troubled and not subject to maintenance.

These figures are explained by the fact that in the process of the assessment, the quality and the actual market value of loans security are taken into account in the first place, rather than figures recorded in the accounting documents of the banks.

According to the assigned duties, the National Bank is the regulator of the banking market, and, therefore, it must have minimized all possible risks during the operational monitoring. The policy of the National Bank of Ukraine was formed under the influence of actual circumstances, which have led to the banking crisis.

In addition, removal of “Brokbiznesbank”, Bank “Forum”, “Finance and Credit” and other systemic banks from the financial and banking system was a hasty decision. Many banks, which have been removed from the system, had incorrectly formed their capital, and they participated in its withdrawal abroad. So, the National Bank of Ukraine had enough arguments in order to introduce temporary administration and revoke licenses of these banks. Also, the National Bank of Ukraine was accused of provision of refinancing to the banks, which were then subject to liquidation (Delta Bank — systematically important), and money disappeared. The policy of bank supervision was strange: the bank’s managers deceived its customers (PJSC “Bank Mykhaylivskyy”) and unexpected nationalization of “Privatbank”, which resulted in losses for 2016 — UAH 135 billion (net profit as of October 1, 2016 — UAH 591 million).

Difficult recovery of credit provision is another problem for the banks, which currently gain only fee income. Currently, Ukrainian banking system is non-competitive as to provision of loans to the real sector of the economy due to the lack of resources and outflow of deposits. Banks can only maintain existing loans of those customers, which saved production after 2014 crisis. In 2016, the Ukrainian economy remained at its low, which does not allow to consider an opportunity to renew provision of loans.

As to the resource base of financial institutions, administrative restrictions of the National Bank keep the banking system from erosion of liquidity. Starting from October 2013, money of individuals have been “leaving” the banking system. The banking system has been losing liquidity for two years in a row. However, administrative constraints hinder this process.

3.1. In order to achieve and support price stability, the National Bank should use the existing monetary instruments, the most important among which is the key interest rate of monetary policy – the discount rate of the National Bank.

The discount rate of the National Bank is one of the monetary instruments, by means of which the National Bank of Ukraine sets a benchmark for participants of the monetary market concerning the value of raised and available monetary funds for relevant period, being the basic interest rate, which depends on the processes occurring in the macroeconomic, budgetary areas and monetary market.

The monetary policy pursued by the National Bank of Ukraine should be well-balanced. In the context of current Ukrainian situation, rates on deposit certificates of the National Bank of Ukraine, which are directly linked to the discount rate and to which commercial banks look up, is the only transfer mechanism of impact of the discount rate.

When discount rates are high, it is profitable for business entities to keep money in banks, which reduces the market liquidity (disinflation). But on the other hand, when the discount rate is high, loans are an expensive tool, which results in reduced business activity, GDP.

Thus, in March 2015, the National Bank of Ukraine raised the discount rate up to 30% (Regulation of the Management Board of the National Bank of Ukraine as of March 2, 2015 No. 154) in order to reduce liquidity, which has contributed to high devaluation of the national currency and attracted deposits to banks. But that decision almost completely blocked access to credit resources, making it a too expensive tool, as evidenced by significant decrease in the volume of lending.

Diagram 20

As of October 28, 2016, the National Bank of Ukraine reduced the discount rate to 14% (Resolution of the National Bank of Ukraine as of October 27, 2016 no. 372-рш), for which reason the risk of deposit conversion at the owner’s request (UAH 197 billion) remains as a response to reduction of deposit rates.

During previous financial crisis in 2008, when the discount rate was 12% (in 2007 — 8%), the National Bank reduced the discount rate to 10.25% (with devaluation of UAH and drop of all macro indicators) in order to renew lending. Such policy has resulted in conversion of 15% of deposits withdrawn in 2009 at the depositors’ request into cash, which would certainly cause subsequent devaluation and growth of inflation.

Diagram 21

On the one hand, significant reduction in the discount rate by the National Bank of Ukraine provides the signal for recovery of the lending market, but also carries huge risks of release of deposits, which can be converted to cash at the owner’s request, and which may then get to the foreign exchange market to diversify risks.

3.2. According to the official data of the National Bank of Ukraine, USD 1,601 million was an average amount bought from banks each month of 2013. Subsequently, due to large-scale outflow of foreign currency from Ukraine and imposition of currency restrictions in 2014, this volume was reduced to USD 669 million, and in 2015, when restrictions became more severe, it amounted just to USD 57 million, or 3.6% of 2013 level. Officially, in two years the amount of foreign currency purchase decreased almost 30 times.

Until 2014, the National Bank of Ukraine implemented a fixed exchange rate policy (5 UAH/USD, 8 UAH/USD). The National Bank restrained devaluation of the national currency by means of interventions, reducing gold and foreign exchange reserves. However, the amount of international reserves remained at the level of USD 21 billion as of the end of 2013.

Starting from February 2014, the National Bank of Ukraine started to pursue a floating exchange rate policy, which resulted in growth of USD exchange rate, which, in turn, caused currency shocks for businesses and people, which found it hard to forecast fluctuations. In February 2015, foreign exchange reserves amounted just to USD 5.6 billion. At the same time, the official exchange rate of the National Bank of Ukraine was UAH 25 per USD 1 (black market — UAH 38 per USD 1). This was caused by refinancing of commercial banks carried out by the National Bank of Ukraine, whereupon banks approached the foreign exchange market, creating a huge demand for currency.

Generally speaking, certain actions performed by the National Bank of Ukraine in order to settle a situation in the foreign exchange market are surprising. Thus, in the last days of 2016, the increased demand for foreign currency was formed in the interbank currency market, which resulted in UAH devaluation from UAH 26.4 to UAH 27.7 per USD 1 within 2 weeks.

Chart 12

Sale of USD at the NBU Auction
Date Exchange rates claimed by banks


Exchange rates following the auction results of which at the min rate (%)


min max min max av.*
16.01.2017 27.3500 27.7505 27.7000 27.7505 27.7180 35.7
13.01.2017 27.2500 27.7000 27.6000 27.7000 27.6486 7.2
10.01.2017 26.9100 27.2100 27.1000 27.2100 27.1396 24.9
06.01.2017 26.6000 27.0500 26.9000 27.0500 26.9768 14.5
29.12.2016 26.9000 27.2500 27.1000 27.2500 27.1682 8.1
28.12.2016 26.7000 26.9305 26.8500 26.9305 26.8892 20.5
27.12.2016 26.4000 26.6800 26.6000 26.6800 26.6371 22.4

Thus, the National Bank of Ukraine failed to respond to the growth in demand, while the trade volume was less than UAH 120 million. If during the first days of the exchange rate drop (27.12.2016) the National Bank of Ukraine supplied USD 200 million at the exchange rate of UAH 26 per USD 1 and imposed administrative measures on speculating agent banks (joint task forces with fiscal bodies as to identification of “bad faith” importers, which submit speculative requests for currency purchase), speculating banks would have suffered losses, and the exchange rate would remain within the range of 25.9–26.1 (interbank). In 20 days, the National Bank of Ukraine spent USD 531 million, and the rate went down to 27.7

Chart 12

Interventions Made by the National Bank of Ukraine in the Foreign Exchange Market

Sale of USD at the NBU Auction
Date Bank requests
Sales volume
Satisfied requests (%)


Average weighted exchange rate
16.01.2017 52.70 38.70 73.4 27.7
13.01.2017 82.00 55.50 67.7 27.11
10.01.2017 57.30 51.00 89.0 27.2
06.01.2017 63.50 55.20 86.9 27.02
29.12.2016 87.40 59.10 67.6 27.2
28.12.2016 120.00 96.80 80.7 26.89
27.12.2016 68.10 46.80 68.7 26.65
531 403.1 76%


The National Bank of Ukraine pursued a strange policy in the foreign exchange market. Having sold USD 0.53 billion in 20 days, the National Bank of Ukraine devalued the national currency by 6.5%, which is surprising. Besides, it is unclear, what principle the National Bank of Ukraine applied when selling “cheap dollars” to certain banks (76% of currency purchase requests were satisfied). On January 4–5 the regulator purchased currency during the exchange rate growth, assuring that there is excess supply in the market. Another day it turns out that there is no excess of dollars, and the currency should be sold.

As of today, the National Bank of Ukraine does not want to link itself with the dollar exchange rate, affirming that it is the right time to stop paying attention to the exchange rate (which results from ineffective actions of the National Bank of Ukraine) and it is better to manage expectations of inflation targeting, which has a real economic substance. The National Bank has even developed an “Inflation Targeting Transition Road Map”.

Mechanisms of inflation targeting free, floating determination of exchange rates — are possible and, perhaps, they can be successfully applied in strong, developed, differentiated economies (which is not the case when we talk about the Ukrainian economy). Our economy is weak, not differentiated — and, therefore, it is completely vulnerable to the impact of the price factor on the group of agro-industrial complex products.

In the current political conditions, consolidation of legislative and executive authorities with the purpose of achievement of common goals can not be observed. Therefore, it is likely that in the context of the national environment, inflation targeting will not give expected results as to achievement of targets over the long term.

3.3. Increase in the monetary base since the end of 2013 has resulted from inflation processes and overall drop in the economy. High discount rates, which destroyed lending of domestic enterprises under the conditions of falling purchasing power, have caused financial starvation of enterprises. At the same time, in order to support settlement operations, the Government began to build up stock of money, which at the macro level converted into scarce foreign currency with depreciating national currency. Significant increase in money stock took place in 2014 in the amount of + UAH 38.7 billion, which had a delayed cumulative effect, which, being one of the factors, caused high inflation in March 2015 — 10.8%, in April 2015 — 14% (43.3% during the entire year). This was caused by refinancing of banks in 2014 — UAH 222.26 billion (UAH 115.6 billion, refinancing for a term of more than 30 calendar days), as a result of which part of liquidity got into the market, and financing of budget expenses.

Diagram 22

Analysis of indicators of monetary aggregates, which are published by the National Bank of Ukraine and define the total amount of liabilities of depositary corporations over other entities, is an important stage of the study. That is, aggregates are grouped by the types of liquidity, larger aggregate is included into lesser, from M0 (the smallest and the most liquid) to M3 (monetary stock, which includes the total amount of money within a state).

M0 the most liquid, cash beyond bank deposits;

M1 includes M0 + deposits, which can be converted into cash at the owner’s request.

Following the results of analysis of M0 and M1 aggregates as of November 2016, a large amount of deposits, which can be converted into cash and enter the market, has been formed amounting to UAH 196.9 billion. (10% of GDP in 2015).

The monetary policy of NBU is very important due to the need for financing of expenses for subsidies, increase of the payroll fund after increase of the minimum wage up to UAH 3,200 promised by the Government, plus the entire Privatbank burden imposed on the state, and financing of budgetary deficit. Uncontrolled build-up of monetary stock without entering the real sector of economy would cause hyperinflation and destruction of the economy.


            Growing distrust in the banks. This problem has been caused both by difficult economic situation in Ukraine and injudicious actions of the National Bank, when banking supervision actually failed to discharge its duties. Since the end of 2013, and particularly in 2014, the banking sector of Ukraine has faced a serious problem, which threatens its liquidity and proper functioning of the entire financial system large-scale outflow of deposits.

            Devaluation of the national currency. In 20142016, UAH depreciated more than 3 times against USD. Such steep devaluation resulted in increase of bad debt of the customers to the banks (servicing of foreign currency mortgage loans has become impossible for most borrowers). Yet another consequence of devaluation is the growth of foreign currency assets and liabilities and the need for additional capitalization of most banks.

            Appreciation of credit resources in Ukraine. Actions performed by the National Bank of Ukraine in order to form an accounting policy do not allow the banks to discharge one of their main functions to provide credit to the economy, which makes the Ukrainian economic crisis even worse. That is, it is impossible to develop business, when credit resources are so expensive.

            Low level of risk management with most banks. As shown by 20142015 results, many Ukrainian banks failed to pay relevant attention to management of credit risk and liquidity risk, which resulted in growth of bad debt in the credit portfolio and impossibility to discharge their duties in a timely manner.


The state budget is the main financial plan, pursuant to which the state operates during a year. The principle of balance should be maintained in the State Budget. Reasonably calculated tax amount must conform to the state financing of expenditures (social, economic development).

In recent years, growth of revenues and expenditures of the state budget was explained by purely macroeconomic factors (high inflation and devaluation), while the actual production was in crisis.

Governmental actions were aimed at collection of taxes in any way, which made business return to the shadow sector and finance costs, which did not ensure development. That is, the funds collected as taxes were just guzzled and embezzled.

Following the results of 2016 (as well as previous years), revenues of the state budget were received not owing to high rates of the economy growth or elimination of loopholes in taxation laws, but only due to rise in inflation and devaluation. For example, rise of prices in the industrial sector budgeted at the rate of 10.4%; however, actually it turned out to be three times higher — 35.7%, and, furthermore, budgeted exchange rate of UAH 24.1 per USD 1 increased to UAH 26.3 per USD 1. Generally, in 2016 the national economy remained in the condition of long-term stagnation. Year-on-year 1–1.5% growth of real GDP in 2016 is insufficient due to 9.9% decrease in 2015 (2014 — -6.6%).

Diagram 23

According to international forecasts, international economy would continue to shrink in 2017, and the fall in prices for raw materials is quite possible (share of raw materials in the total volume of Ukrainian export of goods amounts to almost 50%).

Domestic market can not be an engine of economic growth due to lack of “cheap money” for production and low consumer purchasing power.

Therefore, in view of the above, we believe that increase of income in 2017 by 21.1% is unlikely to be achieved due to the lack of economic conditions (projected growth of real GDP 1–2%, inflation 8–12%).

Under these conditions, increase of income can be planned primarily by virtue of inflation and devaluation factors and changes to tax legislation with respect to increase of rates for certain taxes. Calculations of state budget income do not stipulate additional revenue from the economy’s unshadowing. The budget stipulates receipt of income mostly from growth of indirect taxation (excise, VAT — more than 60% of all revenues), i.e. by way of shifting of the burden of taxation to the end consumer. In view of general stagnation of the economy, such actions would result in growth of inflation and further devaluation, which would cause further impoverishment of people.

Therefore, we assume that the budgeted items of income are likely to be unperformed due to the lack of economic prerequisites. In view of the above, this budget is not a development budget, since the objective balance between revenues and expenses can not be maintained.

Both draft Law no. 5000 and the Law no. 1801-VIII stipulate, that the deficit of the 2017 State Budget amounts to UAH 77.5 billion, which accounts for 2.99% of projected annual GDP. However, together with draft Law no. 5000, the Government failed to submit the state borrowings plan, which includes the list of loans specifying lenders, types, purpose, name of currency, maturity and interest rate of state borrowings, as well as the situation with execution of loan agreements (in accordance with part 1 article 38 of the Budget Code).

Furthermore, groundless increase of revenues of 2017 State Budget, together with the need for additional financing of expenses, which are not stipulated by the budget, may result in increased deficit, which is a big problem for economic processes.


Decrease of real wage is one more proof to the above analysis of the country’s economic situation. According to the State Statistics Service of Ukraine, as of the end of February the REAL WAGE of individuals was reduced by 8.3% as compared to February 2015. Note that the last increase of the real wage index occurred in spring 2014. Since then, the rate has been falling and peaked in April 2015 (-29.6% year-on-year).

In view of such long-term fall, for example, the real wage as of the end of 2015 rolled back to the level of 2010. The State Statistics Service of Ukraine calculates the real wage index adjusted for nominal (actual) wage, inflation rate and the amount of paid taxes and levies.

Chart 14

  Nominal wage Real wage
year-on-year December on December of the previous year year-on-year December on December of the previous year
2012 114.8 110.5 114.4 111.1
2013 107.9 107.2 108.2 106.7
2014 106 110.4 93.5 86.4
2015 120.5 130.4 79.8 90.1


Meanwhile, in December 2016 the nominal wage grew up to UAH 5,183, which is 23.5% higher than the corresponding value of the previous year. However, bear in mind that the country has suffered uncontrollable inflation in recent 3 years, and due to the fact that the domestic market depends on import to quite a large degree, it is more reasonable to analyze the level of nominal wage in USD. Thus, as of the end of 2016, the average nominal wage amounted to just USD 202, which is 50.2% lower than its corresponding value in 2013.

Diagram 24

Wage earned in companies of information and telecommunications fields has demonstrated the largest growth — by 19.8%. The smallest growth was demonstrated in real estate business — by 0.14%, while warehousing and auxiliary transport activities showed decrease by 0.07%.

In February, regardless of slight decrease as compared to January results (-3.8%), overdue payroll liabilities  remain at the level, which is by 7% higher than the level of the end of 2015, which exceeded the level of 2004.

71.3% of the entire unpaid wage accounts for debt in the industrial sector, other 11.7% – in the transportation industry. More than a half of overdue payroll liabilities was generated by companies of Luhansk (24.7%), Donetsk (19.4%) and Kharkiv (9.4%) regions.

It is fair enough that the crisis in the economy causes increase in the number of unemployed people in the country. In September 2016 there were 1.66 million unemployed people of active working age, as compared to 2013 — 1.55 million (+7%).

Increase in employment is caused by the following factors: decrease in production volumes, falling demand for goods and services, reduction in staff of public bodies and accelerated winding-up of sole proprietors, starting from December 2016, when the taxation system changed. Sole proprietors will join the ranks of unemployed people.

Income and expenses of Ukrainian population, USD million

2013 2015
Income – total 193,833.9 79,463.6 -59.0%
Wage 78,940.4 30,991.6 -60.7%
profit and mixed income 30,496.6 14,809.4 -51.4%
income from property (received) 11,007.8 3,663.8 -66.7%
social benefits and other received current transfers 73,389.1 29,998.8 -59.1%
– social benefits 40,440.9 15,681.7 -61.2%
– other received current transfers 7,311.1 3,483.9 -52.3%
– social transfers in kind 25,637.0 10,833.2 -57.7%
Costs and savings – total 193,833.9 79,463.6 -59.0%
purchase of goods and services 163,207.9 71,127.4 -56.4%
income from property (paid) 2,639.7 850.7 -67.8%
current taxes on income, property and other paid current transfers 13,434.9 6,891.3 -48.7%
– current taxes on income, property etc. 9,129.3 4,615.8 -49.4%
– contributions to the social insurance 2,036.7 750.0 -63.2%
– other current transfers 2,269.0 1,525.6 -32.8%
accumulation of non-financial assets 673.1 -96.9 -114.4%
increment of financial assets 13,878.3 691.1 -95.0%
– increase in deposits and savings in securities 13,107.3 -4,866.4 -137.1%
– savings in foreign currency 2,692.0 -1,045.4 -138.8%
– obtained loans other than repaid (-) 661.3 -3,788.2 -672.8%
Disposable income 152,122.3 60,888.4 -60.0%
Disposable income per capita, UAH 3,344.1 1,421.1 -57.5%
Real disposable income, as a percentage year-on-year 13.3 3.6 -73.2%


At the end of 2015, the average real disposable per capita income amounted to USD 1.42 thousand, while this indicator amounted to USD 3.34 thousand in the similar period of 2013 (-57.5%). Analysis of general indicators of income and expenses of Ukrainian population in recent years confirms general impoverishment of people caused by post-revolutionary events in the country.


            The national economy, having inherited a great industrial potential from the Soviet Union, did not participate in technological development for 20 years, which required large-scale investment costs. Operation of large Ukrainian industrial facilities during a long-term period allowed to export non-finished products, receiving good income on assets, which were gained almost for free.

            Large industrial groups, which received high income under the conditions of favorable international demand for chemical, metallurgical, engineering products and raw materials, did not pay attention to innovative development of branches. Moreover, the government did not attempt to initiate establishment of large closed cycles of manufacturing of finished products.

            Lack of technological development of the economy resulted in impossibility for domestic products to compete against foreign equivalents. Therefore, well-developed national industry has become a participant of international market, which would provide raw materials and materials for production of finished products by foreign manufacturers. In turn, national industry has become dependent on the pricing environment in international markets, which resulted in impossibility of planning of development of certain branches.

            Revolutionary events of 2014 resulted in the loss of main industrial regions of the national economy and restriction of access to main trade selling markets. In addition, military conflicts and political turmoil caused unprecedented outflow of foreign investment.

            National unbalanced economy turned out to be unprepared for such events. Sharp reduction in manufacturing of industrial products was a logical result of the economic policy, which has been pursued in the country since 2014. Operating industrial facilities were seen only as a mechanism for pumping up the budget, regardless of the structural problems of international trade (blocking of trade routes, which formed demand for products), which resulted in stable fall of the real manufacturing of products, which has pushed manufacturing of industrial products back to the level of 2000s.

            According to the analysis of the structural problems of the industries, which used to form the main part of national GDP, agro-industrial complex has become one of the priority areas of GDP formation. Having fertile lands at their disposal, large agricultural producers focused mainly on export of non-finished products (wheat, sunflower seeds, corn).

            Agricultural products are the products with low share of added value. It is basically impossible to make much money in this field. In the context of Ukraine, it also depends on imports. Seeds, fertilizers, fuel, machinery — most items are imported. As a result, practically all that we earn, is spent right away for purchase of everything, which is necessary for growing new harvest. This is an endless circle. By the way, it is another reason for the absence of devaluation impact on increase of export — the share of imports in agricultural products is very large.

            We would remain poor until we sell grain — this is the law of economics, which can not be evaded with fine phrases. If you want to earn, you should trade not with corn but with machines, equipment, electronics, technologies. These are the products traded by developed countries, which avoid being called “agrarian superpower” like the plague.

            Decline in exports, being a primary channel of sale of products, and lack of domestic consumption resulted in reduction in production, which, in turn, caused general fall of the economy. By cutting production, companies have lost an opportunity to adjust wages and even started to cut jobs.

            In turn, the purchasing power of wages started to fall. We should mention rise of heating rates by 88%, electricity rates — by 60%, natural gas rates — by 42%. By the way, this is a reason for large-scale defaults of payment for utility services, even when two thirds of households receive subsidies.

            Since 2014, when the economy started to fall, the state failed to act as a guarantor of the economic potential, performing destructive actions with respect to business entities.

            Decrease of  the real income of companies did not allow the state to administer (to a necessary extent) taxes in order to cover expenses for anti-terrorist operation in the East of the country and for financing of social expenses (subsidies, pensions), which have become necessary in the context of decline in the real income of population. Moreover, in Ukraine, when corruption level is extremely high and equals to half of GDP, these trends become even stronger.

            Due to the lack of funds in the state budget, the state began to aggravate the fiscal burden on the economy, trying to increase tax administration under the conditions of the fall of a real GDP, and to print money with the purpose of coverage of necessary expenses. Cooperation with international creditors was not stable, and the obtained loans were directed towards repayment of the previously assumed obligations, digging Ukraine into a deep debt hole.

            All relevant actions resulted in supply of unbacked hryvnia into the market, which, in turn, caused inflationary processes and devaluation of the national currency.

            Due to high inflation and devaluation, the National Bank of Ukraine started to raise the discount rate, providing benchmarks to commercial banks, which required funds for maintenance of credit portfolios from non-residents and support of business related to banks’ management.

            Raising of deposit rates proportionally increased loan rates, for which reason loans were no longer provided to the real sector of the economy. Financial hunger has narrowed down potentialities of business entities to such extent, that most of them simply ceased their operations.

            Having allowed a significant devaluation of the national currency together with the fall of purchasing power, the National Bank of Ukraine and the Cabinet of Ministers of Ukraine through their actions caused significant meltdown of the domestic market, which depends on import, with further growth in inflation rates in 2015.

            Relevant economic processes resulted in such a great drop of income of population, and most part thereof is at the level of real poverty. In turn, this resulted in even greater reduction in business activities. Governmental initiatives to increase wages under the conditions of reduced production of goods would not increase the real income of population, but would only lead to subsequent inflationary shocks.

            In absolute terms, any growth of macroeconomic indicators occurred only due to hyperinflation and depreciation of the national currency, while real indicators (in prices of pre-crisis periods) have dropped by several times.

            In addition, corruption and deoligarchization are not struggled against, while the need for this is really high, since politicians corrupted by bunch of businessmen adopt administrative decisions to their favor, mitigating the social need for changes.

            Improper formation of the national economical model structure, which lasted for many years, accompanied with post-revolutionary factors, ineffective state governance and external factors have brought current economy to the state of complete smashup.



          The first stage lies in support of current economical model. As of today, revival of the national economy starts with filling thereof with cheap financial resources, which would allow to renew economic activity.

            It should be noted that gross manufactured products are distributed for export and the domestic market. In times of crisis and uncertain conditions of global markets, the domestic market should become the main driving force of economy.

            The National Bank should be given an instruction to start the so called productive emission. It is expected that the Central Bank should provide to Ukrainian enterprises or whole sectors loans in order to restore the economic growth in the short term and for economic development in the long term.

            It is very important to choose right industries, which, above all, require appropriate financial support. It is necessary to find an intermediate branch of the economy with large share in GDP structure, where the cost of products includes various national component goods.

            Having received financial loans at low rates, companies would primarily channel them towards manufacturing of products. Chain reaction would start when, in order to create added value, manufacturers would start buying goods/services necessary for manufacturing of new goods. This, in turn, will improve business activity of various economic entities.

            For example, in developed countries such as the United States and China, the problem of reduction in business activity was solved by increase in government expenses on construction of infrastructure projects, which gave the desired effect. But in Ukraine it is not possible to implement (at the current stage) such projects due to high corruption component, for which reason most funds will be completely embezzled.

            It is the private industrial sector which must become a driving force for the launch of the following economic processes. In turn, granted loans will be repaid in some time with further withdrawal from circulation, which would not result in uncontrolled growth of money supply.

            In such way, the issue of production growth and business activity can be resolved. In turn, corresponding positive trends will have an exclusively temporary nature (related to the current crisis). This time will allow to level macroeconomic indicators and to make structural reforms in the economy.


            It is absolutely true that economic development is not possible in case of inflation targeting (control at benchmark levels). Production needs cheap money for development, which, in the future, in the form of wages (new jobs) will improve business activity of the population, triggering domestic trade turnover.

            At the second stage you need to implement a clear monetary policy, which should be aimed at the possibility of creation of additional product at the micro level (business entities) rather than at support of processes at the macro level.

            It is necessary to start reduction of the NBU discount rate, which would allow to provide loans for the entire business. In addition, strict and effective administrative control over foreign exchange market operations should be implemented due to the fact that a part of cheap financial resources can be speculatively directed to foreign exchange market, which would result in devaluation. Development of the algorithm of impossibility of buying foreign currency by importers, which meet the risk criteria developed by the State Fiscal Service and the State Financial Monitoring Service, can be one of such options.

            At this stage, inflation should be restrained (if necessary) administratively at the level of 10 – 13%, which is necessary at the stage of economic recovery.

            In addition, amendments to the tax code should be adopted to reduce fiscal function. Income tax should be replaced with distributed income tax, a part of financial flow (including income and amortization), which would be allocated as distribution to the company’s owners in the form of dividend, or equivalent payments, which can conceal withdrawal of capital, would become a tax base. Along with open and full refund of VAT and current system of VAT electronic administration (it is necessary to deposit an appropriate amount of tax in order to register a tax invoice), this will result in significant reduction of tax optimization by way of using of conversion centers. Fight against tax minimizers due to the possible “state dumping” of tax minimization rates. The risk of using the services provided by conversion centers would surpass economic benefits.

            Appropriate effective solutions would contribute to further development of the economy and attract foreign investments in the economy, which would give a strong push.

            It is necessary to review the conditions of cooperation with creditors, which are adverse to the country. Gradual cancellation of cooperation programs with the IMF should become essential. Accumulated debts should be restructured for larger periods. Gold and foreign exchange reserves should be accumulated by way of receipt of foreign exchange earnings from export rather than by means of borrowed funds.


            In a period when the economy demonstrates real production growth and macro-economic indicators retain a positive trend, it is necessary to carry out structural changes of the national economic model.

Principles of functioning of a well-balanced economy:

– Only finished products should be exported. Administrative restrictions on export of non-finished products should be imposed on first stages.

– Creation of closed production cycle should be encouraged. State encouragement of the processing industry by way of provision of targeted credit programs and development of the logistic infrastructure projects.

– Encouragement of technological innovations and renovation of production by way of provision of state guarantees and tax liberalization. It would help to reduce the cost and to enhance quality, which would become a competitive advantage in international markets.

– Termination of the trade war with Russia. It will allow to return the largest market with the need for the national products. In addition, important Far Eastern logistic connections would resume.

            To great regret, currently there is no political will and intent in Ukraine towards structural reforms, which would significantly improve social and economic indicators of Ukraine. Corruption, legislative lobbying, unprofessionalism remain a major obstacle for achievement of the desired result. Ineffective state policy causes destructive actions, which cumulatively affect the population, putting it on the verge of poverty. Collapse of the economy, losses in the banking sector, outflow of investments were caused by irresponsibility and impunity of the executive power. Lack of clear and objective plan for crisis recovery leaves our nation in a state of economic and social chaos. For the most part, even at the stage of initial analysis and forecasting, legislative and Government initiatives create even bigger future problems. Therefore, development of a structural long-term concept of political and economic recovery from the crisis as a consistent plan of clear actions can give a chance to rebuild a prosperous country.

NGO «Public Audit»