Global analysis of Ukraine’s basic macroeconomic indicators (2013-2017)

How the Ukrainian economy has reached its bottom and how to bring it out of the present state: instructions from “Public Audit”

As for the implementation of international experience, it is quite difficult to find countries that would have the same geographical and demographic scope. At the same time, it should be taken into account that, in addition to the shift of power, within the limits of a calendar year, Ukraine faced the annexation of part of its territory, as well as the military conflict on the territory of two important industrial regions.

The starting point for the study was 2013, at the end of which massive civil unrest led to rebooting of political and the state administration systems in general, the formation of new rules that were established under the influence of post-revolutionary moods.

Taking into account these factors, the rapid transformation of economic processes in the country had begun, that led to the drop in industry production, money outflow abroad, withdrawal of investments, fluctuation of the national currency, labor migration. All these factors caused the major problem – true-life impoverishment of the population.

Hereafter the five key indicators, that have direct or indirect significant impact on the formation of social and economic state of the country, have been analyzed.


1.1. Defining the key indicators of the state of the national economy begins with GDP as one of the most important indicators of economic development, that reflects the market value of all final goods and services produced for consumption in a year in all sectors of the economy on the territory of the state, export and accumulation, regardless of the national identity of the used production factors.

It should be noted that after 2013 (when GDP was $180 billion) there was a drop of the nominal GDP in dollar equivalent in the country. The main factors of this factor were the loss of a part of industrial regions of Donetsk and Luhansk regions, where budget-generating industrial estates were located, negative volatility in international markets and state destructive monetary policy.

According to the results of 2015, nominal GDP has fallen to $90.6 billion, which is 50.5% less compared to 2013. Actually, it intensified the fundamental crisis of the domestic economy, that hasn’t been overcome yet. According to the results of 2017, as the State Statistics Service shows, the nominal GDP in dollar currency was $112.3 billion (UAH 2982.9 billion), which is 20.5% more than in 2016. However, these indicators are significantly different from real GDP (it reflects the real growth of production) and had inversely proportional impact on the business activity of the population.

Thus, the new level of nominal GDP was determined by the state monetary policy, which resulted in significant inflation (GDP deflator – 22%) under the conditions of falling production:

– DGB (domestic governmental bonds) are placed on the primary market in 2017 –  + $3.7 billion (UAH 105.4 billion); – increase in the money supply (coins and banknotes) in 2017 –  + $ 1.3 billion (UAH 37.84 billion); – public and private external borrowings (capital inflows on a financial account) –  +  6.4 billion (UAH 169.9 billion);- direct investments in 2017 –  + $2.3 billion, or UAH 60.9 billion (26% of which are operations of debt reassigning to the authorized capital of banks); – money orders from abroad in 2017 – + $9.2 billion (UAH 244.2 billion).

Diagram 1

The question now arises of whether in Ukraine as a whole, the economic capacity is increasing (nominal GDP in UAH equivalent) or is it still falling down (nominal GDP in US dollars)? A straight answer to this is given by the analysis of real GDP, which is measured by steady (constant, basic) prices. In other words, the value of this indicator is influenced only by the change in production volumes, but it isn’t affected by the possible inflationary and devaluation processes, the consequences of which are investigated below.

Diagram 2

Analysis of the dynamics of real GDP clearly indicates the recessionary processes in the Ukrainian economy, namely: the production fall. Even plus of 2.4% in 2016 and plus 2.5% in 2017 to real GDP does not meet the expected projections, as it is calculated for the previous year. As we see from the schedule, the rapid decline in real GDP over 2014-2015 confirms only that the country’s economy has returned to the 2000s.

Diagram 3

The cumulative fall in real GDP since the end of 2013 amounts to 12%.
So, in case of even a very optimistic plan of economic development (+3% of real GDP by the results of the year), the domestic economy will need five years to reach only the basic level of 2013.

At the same time, while calculating real GDP, manipulations are possible due to the essential discrepancy in the value of net exports between the data of the State Statistics Committee and the National Bank. Thus, the difference in the calculations of the trade balance of the NBU (deficit gap – $8.6 billion) and State Statistics Agency (deficit gap – $1.24 billion) reaches 6.5% of nominal GDP for the relevant year. The point is that the NBU operates data of international foreign activity transactions (IFA) from banks (they carry out IFA calculations), and the State Statistics Agency receives information based on a questionnaire of enterprises (legal entities with the number of employees not more than 10 people). That means that State Statistics Agency does not take into account export operations of trading companies with up to 10 employees, which greatly distorts overall statistics. That is why the use of State Statistics Agency data in calculations of GDP leads to the incorrect overestimation of its growth rates.

Diagram 4

In addition, an important fact: in March 2018 NBU (The National Bank of Ukraine) changed the calculation method of private money orders to Ukraine and retrospectively transferred the annual amount of private transfers for 2016-2017 – they were increased by $2 billion or 1.8% of GDP.

Chart 1


The NBU has made an assumption that majority of migrants personally bring earned money – that is why the level of private transfers through informal channels has increased significantly (the difference after review calculation: 2015 – +$1,6 billion; 2016 – +$2 billion; 2017 – $2.5 billion), but the amounts of official transfers remain quite low. The transfers through the banks and international payment systems may not be considerable, because NBU is the primary manager of the analyzed information.

Diagram 5


The review of the methodology has improved the balance of the current account of the payments balance: in 2015 – with a deficit gap of 0,2% of GDP to a net surplus of 1,8% of GDP; in 2016 – with a deficit gap of 3.7% of GDP to a deficit gap of 1.4% of GDP; in 2017 – with a deficit gap of 3.5% of GDP to a deficit gap of 1.6% of GDP.The difference in recalculation makes up $2 billion (1.8%), and it is based on the NBU’s assumptions but not on actual income information.

Estimated by the State Statistics Committee, the “growth” of GDP in 2017 is connected with future payments of additional interests by the creditors committee from the nominal GDP growth (the condition for restructuring debts of Yatsenyuk-Yaresko administration times): payments will be activated as soon as nominal GDP of Ukraine exceeds $125.4 billion, and annual will reach 3%.

Diagram 6

The analysis of the nominal GDP per capita only confirms the above-mentioned tendency of economy decline and its impact on the population whose incomes are directly proportional to the level of the economic situation.

National authorities often compare their economies with the economies of other successful, but previously poor, countries. However, the reality is different: the Belarusians, Poles, Slovaks have taken the lead ahead long ago; we will not be capital or market rivals with them in the nearest future. Unfortunately, at the world economic map Ukraine is currently close to the African and other Third World countries; and exactly these comparisons are more relevant.

Chart 2

Diagram 7

Data: International Monetary Fund, 2016

GDP per capita for purchasing power parity (PPP) is the most accurate characteristic that determines the degree of economic development. Review calculation from national currencies, as is common in international economic comparisons, is carried out not in market exchange rates, but in purchasing power parities.1.2. GDP analysis in the period from 2013 to 2017, showed obvious imbalance between the nominal GDP indicators, which is expressed in national currency (growth) and in dollar equivalent (fall). Having analyzed the data, a production decrease has been identified, therefore the incompliance of the hryvna indicator of nominal GDP can be explained only by high inflation.

Diagram 8

Inflation processes in Ukraine from 2013 to 2017 can be divided into two stages:

  • from 2014 to 2015 rapid inflation deepening to hyperinflation; which on the one hand is caused by the loss of important economic regions and ineffective state policy, that led to the drop of production development rate and its efficiency decrease; and, on the other hand the increase of state budget’s deficit gap with the decrease in revenues income (or saving them at the previous level); increase in public expenditures volume. The result of this, including the lack of investment, was constant emission, and annual inflation rates reached 24.9% in 2014 and 43.3% in 2015.
  • In response to high inflation rates, the Government and the NBU authorities used administrative actions out of fear to receive uncontrolled inflation and began to implement a retention policy. This led to inflation decrease (disinflation) in 2016 to 14.2% and 13.7% in the year 2017, resulting in subsequent recessionary processes. The deficiency of national currency at the market caused a significant decline in business activity. As a result, there is a continued production decline because the NBU purposefully provides funding shortfalls to prevent further devaluation.

It is the constant delayed deficit of commodity mass, falling quality characteristics of products and the lack of effective paying demand will be the basis for the formation of further inflation peaks.

Thus, an artificial increase of minimum wage in 2017 by two times and by 16.3% in current year, without real production development, will result in a higher average production cost, which is the basis for inflationary costs expansion. If the Government and the National Bank of Ukraine do not find tools for managing inflation expectations, then on the principle “wage-price” spring there will be uncontrolled inflation with a rapid pace of price growth, which has a particularly devastating impact on employment and output, because in these conditions it is economically advantageous to invest in speculative operations, not in investments. The distrust in the inconsistent policy of the Government and the National Bank of Ukraine is a suitable “environment” for the deployment of uncontrolled inflation.

Diagram 9

Besides, the gap between inflation and real GDP caused large devastating economic consequences. The increase in prices was beneficial only for the Government, which, due to inflationary processes, ran the figures for state budget revenues. At the same time, due to the lack of business activity and the increase in the cost price (because of increased rates), domestic enterprises ended up in financial distress.

IAS 29 (International Accounting Standards) “Financial Reporting in Hyperinflationary Economies” (paragraph 3) defines 5 characteristics of hyperinflation in the country:

  1. Majority of the population prefers to keep its values in the form of non-monetary assets or in a relatively stable foreign currency. The amounts, held in the national currency are immediately invested to maintain purchasing power.

According to the NBU statistics, the majority of population keep funds in a stable foreign currency.

2. Majority of the population are considering monetary amounts not in the national currency, but in relatively stable foreign currency. Prices can also be given in this currency.

The population, as a rule, compares the level of its incomes in the past or presently in a stable foreign currency – mostly in US dollars.

  1. Selling and purchasing under the conditions of payment delay are carried out at prices that compensate the expected loss of purchasing power during the deferred payment period, even if this period is short.

The fiscal service is authorized to give a deferral or installment payment of taxes, other payments within its powers.

  1. Interest rates, wages and prices are indexed according to the price index.

According to the law, wage indexation of employees is obligatory.

  1. The cumulative inflation rate for a three-year period is close to or exceeds 100%. In the last three years (2014-2017) this indicator has reached 332%.

Thus, the Ukrainian economy is hyperinflationary. Today, the NBU claims to be targeting inflation.INFLATION TARGETING is a monetary regime that involves the declared value of the official inflation indicator (target) over a specified period of time, using the entire list of monetary policy instruments (achieving the target inflation target in the medium-term – 2-3 years). When the NBU’s management speaks of inflation targeting as its main task, they mean consumer prices. It should be noted that the situation with inflation has been not controlled by the Government for a long time and does not correspond to the limits of the annual inflation targeting.

Chart 3

Inflation targeting Factual inflation
2017 8% +/- 2п. 13,7%

As a matter of fact, inflation targeting policies have shown complete inefficiency, and the only tool used by the NBU to combat inflation is the discount rate, that affects other economic properties of the country.According to the State Statistics Service, following the results of 2017, the inflation rate was 13.7%. However, official data does not correspond with price growth indexes that more precisely reflect price fluctuations. For example, the dynamics for the index of industrial producer prices during the year reached 16.6%, and this is one of the key indicators for further increase in the cost price of other goods, that reflects the inflationary processes in the country more objectively.

Diagram 10

Dynamic of inflation and manufacture price rate in Ukraine over the recent years

The confirmation of conclusions regarding higher (than official data) inflation is a decrease of the industrial production index by 3% in 2017, reduction of the population’s savings (increased by 4 times – up to UAH 69 billion), retail trade fell by 43.9%.Due to the fact that the discount rate is now 17%, profit on deposits and government bonds have increased – so the NBU managed to slightly reduce liquidity in the market and somewhat restrict inflation at the end of the year. However, in the future, this step will negatively influence the business activity of the business, because the cost of borrowed resources will increase.

In the budget for 2018, the Government has set an inflation rate of 9%. However, as it was last year, the country’s economy does not undergo fundamental macroeconomic changes that would contribute to the inflation slowdown. Firstly,
a high level of effective discount rates will not allow inflation to drop below 14%. Secondly, the average annual dollar exchange rate in the budget is set at 29.3 UAH / USD and it proves the devaluation of the national currency by 10%, which additionally will lead to price rise.

Diagram 11

In addition to it, the budget provides for an increase in salaries by 16.3%, which, under the conditions of normal production deficiency, will have a very negative impact on prices.Given such macroeconomic factors, the lack of a strategy for economic recovery in the context of international price volatility at the commodity markets and payment of foreign debt, inflation in Ukraine this year will show further growth (target benchmark 15-18%).

The method chosen by the National Bank of Ukraine in order to restrain certain inflation targets (with the help of the national currency deficit) is extremely dangerous for the economy and could lead to a 90-year crisis, restoring barter transactions and causing galloping inflation.

1.3. The next stage of the diagnostics of the domestic economy is a study of the balance of payments. This is one of the most important indicators reflecting the trade relations between residents and non-residents and indicates the saturation of the country’s economy with foreign exchange. The value of the balance of payments directly and proportionally influences the formation of exchange rate policy (due to the formation of currency demand and supply).

From the point of view of the incomes (affecting the formation of GDP), Ukraine belongs to an export-oriented state. The main part of the products produced in Ukraine are being sold abroad, as shown by the ratio of GDP to exports. However, our country mainly exports not finished products, but only raw materials (steel, grain, ore), and this is its key issue.

Thus, in 2015 exports amounted to 42% of GDP. In addition, the Council of Ministers approved the forecast for export in 2018 in relation to GDP at the level of 48%.

Chart 4

Ratio of exports to GDP in Ukraine

Data: SSC

*forecast data in accordance with the Council of Ministers resolution from 31.05.2017 № 411

From the 90s Ukraine has chosen the easiest way to receive revenues from the sale of unprocessed products instead of technological development. All countries-producers of raw materials are at risk: their main products can become cheap any time and cause the economy to fall. Countries with raw materials do not control their own development. Therefore, Ukraine has become another victim of a “raw trap”: if it does not produce sophisticated products and sell only raw materials, the crisis will definitely happen. Moreover, it does not matter what kind of raw material it is: oil, grain or metal.So, we have determined that Ukraine exports an essential part of its manufactured product, while the rest enters the domestic market, where it tries to compete with imported products. The main part of domestic exports is the sale of raw materials and unprocessed products, which leaves out the presence of imports as part of the cost of exports.

Chart 5

Data: SSC

This data proves a huge dependence of the domestic market on imported products, which is rather a dangerous trend, since the presence of a significant import percentage in the structure of the domestic market leads to the decrease in national income.All these factors are the burden of economic development and a signal of the need for structural reforms.Having analyzed a balance of payments, it should be determined that it includes: a) account of current operations (the difference between export and import of all goods, services and other income); b) volume of financial account transactions (investments inflow/outflow and net borrowing).The current account deficit gap according to the results of 2017 is $3.8 billion (2016 – $3.4 billion). In addition, one of the negative indicators of the economy state is the trade deficit gap, that reached $9.16 billion in 2017 (2016 – $6.94 billion).

Diagram 12

Thus, export of goods made up $39.9 billion. Within a year this figure has increased by 19% due to the significant supply of grain, butter and fats, and intensive export of meat and dairy products. Disruption of production and logistics ties with enterprises at uncontrolled territory led to a decrease in the physical volumes of ferrous metals export, but positive price dynamics on the world market “made a great contribution”, due to which the value of exports of metal industry’s products has increased by 22.1%.

Imports of goods in 2017 made up $49 billion. The annual growth rate speeded up to 21%, going ahead of exports growth.

First of all, there was an expansion of energy imports by 1,5 times. There was a  shortage of coal in the domestic market, a significant part of which was supplied from the Donbas in previous years. At the same time, energy prices have risen in the world.

Apart from this, a significant current account deficit gap, which existed in 2013, was overlapped by inflows from investments or borrowings, creating a general positive external surplus. This brought to attention that there is a general influx of currency earnings into the country. After revolutionary events, military conflicts and annexation of the territory, investors not only stopped investing in the economy, but also began to withdraw investment from our country. This tendency led to a rapid collapse of the economy and with this background, the country’s management decided to save the situation not by structural changes, but thanks to cooperation with international financial organizations, which, by providing the loans, began to dictate favorable conditions for themselves and thus to drive Ukraine into a “debt hole”.

In such a way, in 2015, the capital inflow into the financial account (net borrowing) made up $569 million (compared with $9.1 billion outflow in 2014). The main factor was the serious external involvement of the public administration sector, with a net financing of $3.5 billion (in comparison with 2014 – $3.3 billion). In particular, $1 billion was received from the World Bank, government Eurobonds were placed under the guarantees of the US government for $1 billion, loans from the European Commission, amounted to $0.9 billion, were received. Net financing of the central bank made up $1.5 billion. At the same time, net outflow from private sector operations (along with errors and omissions) makes $4.4 billion (in 2014 it was $12.8 billion).

On the results of 2016, the inflow of capital into the financial account (net borrowing) was equivalent to $4.6 billion. The net inflow of funds for foreign direct investment was about $3.4 billion. This is only due to the requirements of legislative changes regarding the capitalization of Ukrainian banks from foreign parent companies structures. A net decrease in the external position of the real sector (excluding foreign direct investments) is $4.5 billion (in 2015, for example, the increase was $1.6 billion). The main factor is the cash reduction outside banks by $4.7 billion (in 2015 it was $1.8 billion). Loan and credit indebtedness was decreased by $176 million (as compared with 2015 – by $1.3 billion).

The net capital inflow in the financial account in 2017 has increased by $6.4 billion. Unlike last year, the public sector has played a significant role in capital inflows – the Government has actively attracted foreign exchange resources both on the external and on domestic markets. Completion of the third revision of the EFF program with the IMF enabled the Government to receive another tranche of the European Commission’s macrofinancial assistance amounting to $0.6 billion.
Also, in September 2017, Ukraine returned to the external borrowing markets after a four-year break – net borrowing from sovereign Eurobonds amounted to $1.3 billion with maturities of 10 to 15 years and a coupon of 7.75%, which is a high rate. Internal governmental bonds, purchased by foreign banks, denominated in foreign currency led to a decrease of $0.6 billion in assets of the banking system.

Diagram 13

A significant decline in the consolidated balance sheet in 2014 – by $13.3 billion was due to the current account deficit gap and capital outflow of $9.1 billion (indirect investment, banks capital).

The last such capital outflow was observed in 2009 – UAH 13.7 billion, due to the international economic crisis, which covered a huge number of countries. However, in Ukraine, its “consequences” were the hardest.

Besides, the positive balance of the consolidated balance on the results of 2016 and 2017 is a technical effect, which became possible because of the funds inflow from foreign banks – as a way for the capitalization of the authorized capital of their subsidiaries in Ukraine. 67% of total foreign direct investment in 2016 ($2.2 billion) was the direct investments inflow in the banking sector. In 2017, the balance of payments surplus was formed at the expense of external borrowings, which should be repaid with interest in the future, while by the results of the year foreign direct investment amounted to $2.3 (26% of them were the operations to redeem the debt in the authorized capital).

So the consequences of 2014 the Government will not be able to overcome even in 2018, because it chose the wrong mechanism for eliminating them by simply funding from international moneylenders, rather than seeking solutions to fundamental problems.

1.4. The study of gross external debt allows us to analyze the total amount of debt on all existing obligations that must be paid by the debtors; the corresponding guarantees were provided by residents to non-residents. In other words, it refers to the general debt of the country on external loans and interest that are not paid on them.

Having analyzed the relevant indicators for the period from 2013, it can be claimed that the total reduction of gross external debt has been made by 17.4%. However, despite a decrease in the total debt, there is a negative tendency of its increase regarding GDP – from 78% as of 01.01.2014 to a critical 150.4% as of 10.01.2017.

Diagram 14

Incomings, in particilar, being received from the produced product’s sale, should meet the obligation. Therefore, the assumption that there are relevant imbalances is unacceptable, since further debt repayment will have to be carried out at the expense of subsequent borrowings, and after that, there is only one way out – it is a default.

In relation to the fact that the indicator of total gross external debt reflects the total debt of all private entities and the state, it is reasonable to analyze the structure of external debt.

Chart 6

Data:  The National Bank of Ukraine

As we see from the structure of gross external debt, at the time when private entities tried to pay out funds in full extent in accordance with earlier obligations or to restructure debts; the state only increased its debts — from $31.7 billion at the end of 2013 to $46,5 billion as of 10.01.2017 (plus 46%).

According to the Ministry of Finance, as of December 31th, 2017, the state and state-guaranteed debt of Ukraine made up 2141.67 billion UAH, or $76.31 billion.

The state debt of Ukraine makes 1,833.71 billion UAH (85.62% of the total amount of state and state-guaranteed debt), or $65.33 billion.

The state-guaranteed debt of Ukraine is 307.96 billion UAH (14.38%),
or $10.97 billion.

Chart 7

State and guaranteed external debt

  Billion $ USA Billion, UAH
State external debt 38,49 1 080,31
Loan indebtedness which are received from international

financial organizations

14,52 407,47
The European Community 3,35 94,12
The European Bank for Reconstruction and Development 0,64 18,00
The European Investment Bank 0,69 19,36
The International Bank for Reconstruction and Development 4,91 137,87
The International Monetary Fund 4,91 137,95
Clean Technology Fund (CTF) 0,01 0,17
Loan indebtedness which are received from foreign governments 1,76 49,30
Canada 0,32 8,90
Germany 0,27 7,49
Russia 0,61 17,00
The USA 0,01 0,17
Japan 0,56 15,73
Indebtedness on issued securities on the foreign market 20,47 574,46
Internal governmental bonds(IGB) of 2013 3,00 84,20
IGB 2014 1,00 28,07
IGB 2015 12,47 349,92
IGB 2016 1,00 28,07
IGB 2017 3,00 84,20
The debt that isn’t referred to other categories 1,75 49,08
The International Monetary Fund 1,75 49,08
Guaranteed External Debt 10,97 307,96

         Data: The Ministry of Finance 

External obligations of the public sector in 2017 have increased from $3.6 billion to $46.3 billion (41.3% of GDP). The private sector debt has reduced from $0.7 billion from the beginning of the year to $70.2 billion (62.6% of GDP) as a result of a reduction in foreign obligations of Ukrainian banks ($2.7 billion) at a time when real sector accumulated further obligations before non-residents ($2.1 billion).

External obligations of the general government sector have increased from $2.4 billion in 2017 to $38.9 billion (34.6% of GDP) as a result of:

  • the mission of IGB was held in the third quarter of 2017, in the amount of $3 billion, due to which the obligation for IGB were partly restructured ($1.7 billion) in 2015, emission of 1st and 2nd series;
  • net borrowings for direct government loans worth of $0.5 billion.

The planned repayment of loan commitments, such as Stand-by credit or EFF (Extended Fund Facility) commitments  to the IMF, has reduced the public external debt by $0.6 billion from the beginning of the year.

Since the beginning of 2017 the external debt of the central bank has increased from $1.2 billion to $7.4 billion (6.6% of GDP) ‒ in particular :

  • net borrowing from the IMF in sum of $0.7 billion;
  • obtaining a loan from the Central Bank of Switzerland in sum of $0.1 billion in the first quarter;
  • exchange rate changes ‒ $0.4 billion from the beginning of the year.

In general, after 2017 exchange rate changes, external debt of the public sector has increased by $1.3 billion.

From the beginning of 2017 the debt of other sectors of the economy (together with the inter-firm debt) has increased by $2.1 billion up to to $64 billion (57% of GDP).

As a whole, for 2017, overdue debt of economic branches in terms of loans (including direct investors) has showed a growth of $1.2 billion — by the end of the year they have made up $21.2 billion (18.8% of GDP).

The total volume of real sector obligations to be repaid over the next 12 months (together with inter-firm debt) has increased by $627 million (up to $40.9 billion): future payouts for long-term loans reduction have been compensated by a build-up of short-term obligation tools.

Also, the state is looking for borrowing on the domestic market, which are carried out in order to cover the budget deficit gap at state and regional levels; targeted financing of various programs, replenishment of the necessary reserve assets, and also refinancing the previous state borrowings.

Chart 8

Structure of a state and state-guaranteed debt  (internal and external debt) as for 31.12.2017

Billion, $ Billion, UAH %
The total amount of state debt 76,31 2 141,67 100 %
External debt 48,89 1 375,00 64,2%
Internal debt 27,32 766,68 35,8%

Diagram 15

            Data: The Ministry of Finance

Chart 9

State and state-guaranteed  internal debt

  Billion, $ Billion, UAH
State internal debt 26,84 753,4
1.  Securities indebtedness issued on the domestic market 26,76 751,02
IGB (10 years) 2,23 62,65
IGB (11 years) 0,68 19,03
IGB (12 months) 0,25 6,90
IGB (12 years) 1,30 36,50
IGB (13 years) 1,02 28,70
IGB (14 years) 1,67 46,90
IGB (15 years) 3,33 93,44
IGB (16 years) 0,22 6,05
IGB (17 years) 0,22 6,05
IGB (18 years) 1,08 30,28
IGB (18 years) 0,86 24,20
IGB (19 year) 0,43 12,10
IGB (2 years) 2,55 71,61
IGB (20 years) 0,43 12,10
IGB (21 years) 0,43 12,10
IGB (22 years) 0,22 6,05
IGB (23 years) 0,65 18,15
IGB (24 years) 0,43 12,10
IGB (25 years) 0,43 12,10
IGB (26 years) 0,43 12,10
IGB (27 years) 0,43 12,10
IGB (28 years) 0,43 12,10
IGB (29 years) 0,43 12,10
IGB (3 months) 0,02 0,55
IGB (3 years) 1,68 47,02
IGB (30 years) 0,43 12,10
IGB (4 years) 0,00 0,03
IGB (5 years) 1,75 49,24
IGB (6 months) 0,39 10,88
IGB (6 years) 0,28 7,80
IGB (7 years) 0,70 19,73
IGB (8 years) 0,67 18,90
IGB (9 years) 0,69 19,40
2. Indebtedness before banking and other financial institutions 0,08 2,38
The National Bank of Ukraine 0,08 2,38
Guaranteed internal debt 0,47 13,28

Data: The Ministry of finance of Ukraine

According to the current legislation, the total amount of IGB is regulated by the Verkhovna Rada of Ukraine within the limits of the budget for the current year by the maximum amount of internal state debt.

When a government buys IGB, it makes cash payments and thus increases the money supply. If the country sells securities, this leads to the money supply reduction, as the lending capacity of the commercial banks decreases, which affects the inflation rate in the country and exchange rate of the national currency.

The problem of demonetization has been attempted to be solved a lot of times by emission measures and each time it led to the increase in the supply of national money; prices increase in national currency at relatively stable dollar prices; acceleration of the speed of national money circulation; “dollarization” of the economy; the outpacing growth of hryvna prices in comparison with the growth of the hryvna mass, which caused a further decrease in the level of the state of monetary aggregates and GDP.

General payments for state debt that will have to be made in 2018 at the expense of the state budget are estimated as 305.8 billion UAH, of which 63.2% (193.3 billion UAH) are payments on domestic debt and 36.8% (112.5 billion UAH) are payments on external debt.

Diagram 16

Part of spending in servicing state debt in the general fund spending of the state budget for 2018 will be approximately 14.3%. In 2018, payments for acquitting the state debt are planned in the amount of 175.7 billion UAH, of which 114.02 billion UAH (64.9%) are payments for internal debt, and 61.7 billion UAH (35.1%) are payments for external debt (of which obligations repayments to the IMF are 43.7 billion USD, before the IBRD are 8.3 billion USD, before the EBRD are 3.8 billion USD).

Since 2014, the level of state debt has increased by 2.5 times, and debt repayment has decreased from 11% (the ratio of payments to total debt) to 6%.

Diagram 17

The largest size of payments for acquitting of the state domestic debt in 2018 are foreseen for IGB in 2016 in the amount of 79,597.2 million UAH, IGB in 2017 in the amount of 21,178.6 million UAH and IGB in 2013 in the sum of 11,873.1 million UAH.

The size of payments servicing public debt for 2018 is foreseen in the sum of 130.2 billion UAH, of which 79.3 billion UAH (60.9%) are payments for domestic debt, 50.8 billion UAH (39.1%) are paid for external debt.

Payments on IGB in 2017 in the amount of 42.5 billion UAH (including
30.3 billion UAH for IGB issued in 2017 as part of a legal step with state debt by exchanging IGB owned by the National Bank); IGB in 2016 in the amount of
16.5 billion UAH and IGB in 2014 in the amount of 9.9 billion UAH will have the largest share in servicing the domestic debt in 2018.

In the service of public external debt during this period, the largest share will be paid by the restructured IGB in 2015 in the sum of 27.3 billion USD, IGB in 2017 in the amount of 6.6 billion UAH, IMF loans in the sum of 5.2 billion UAH and for IBRD loans in the sum of 3.1 billion UAH.

In 2018 it is planned to finance the State Budget of Ukraine with the help of a wide range of debt instruments for the total amount of 231.1 billion UAH.

In the domestic market borrowings have been expected in the amount of approximately 123.7 billion UAH, or 53.4% of the total borrowings. In foreign markets, taking into account loans from the state budget’s special fund the borrowings will be in the sum of 108.2 billion UAH, or 46.6%.

Indicators of sovereign debt and, accordingly, public debt may undergo some changes as a result of conditions at the financial markets due to the exchange rate change of the national currency, as well as in the case of capitalization of state-owned banks and Deposit Guarantee Fund.

The amount of payments of state domestic debt repayment may be increased in case of early redemption of IGB in US dollars and rise in the issue of short-term IGB with redemption in 2018. Such changes will require a corresponding increase in borrowings.

The amount of public debt servicing payments may be higher than predicted in case of a tendency change in floating rate dynamics (LIBOR, EURIBOR and inflation index).

Every next year, Ukraine will be burdened with debt, because today it receives borrowing to restructure previously undertaken commitments, but not for the development and improvement of social and economic relations.

Conclusions to this chapter

The primary analysis of the main macroeconomic indicators has determined the negative tendency of economic processes in Ukraine and the main causes of the relevant consequences.

Firstly, the country in the period from the end of 2013 to 2017 has suffered
a rapid economy decline. Even a positive GDP figure of +2.5% in 2017 cannot be compared with the multiple economy fall since the end of 2013 (a cumulative fall in real GDP since 2013 is 12%). Besides, GDP per capita at the level of purchasing power is not even appropriate to compare with even neighboring countries, today’s reference point is Third World Countries.

Secondly, uncontrolled inflation growth in the period of 2014-2015 has led to structural imbalances in the domestic economy. Solving the political task of keeping inflation at 10-15% and preventing further growth, the Government created
a financial gap in real economy. Due to the lack of cheap money in the market, companies reduce production or even close down. The results of inflation maintenance in 2016 and 2017 may negatively affect future inflation processes, which will be accompanied by barter schemes and further uncontrolled inflation.

Thirdly, it is determined that due to the domestic economy’s dollarization, the structural problem is the export presence of non-refined and non-technological products, that makes the country dependent on the external condition and is too import-dependent on the domestic market. It is easier for foreign manufacturers to compete with domestic ones, who are financially shaky.

Fourthly, one of the main risks for the national economy is its high dependence on external lending. Today, the authorities only increase the amount of debts to critical indicators, that indicates a high default probability.


2.1. After defining the main reference points of economic processes at the macro level, the next step will be to study economic processes at the level of individual economic entities, as well as the main problems of the field markets.

Investigation of cause and consequences will allow us to establish the motives of economic entities behavior and build a model of development.

Analysis of the gross value added structure of the produced products allows us to determine the industries that form the domestic economy. At the previous stage, the general economy decline in the production’s quantitative indicators was determined, which led to changes in the general structure of GDP formation.

Diagram 18

The important industries for GDP are: manufacturing industry (25,7%), trade and agriculture. Besides, in recent years, there has been a decline in the share of GDP in the manufacturing industry from 27.6% in 2010 to 25.7% in 2017; building – from 3.7% to 2.7%; transport – from 12.7 % to 7.6%. Instead, the share of agriculture had been increasing significantly, from 8.2% in 2010 to 12.1% in 2017. A detailed analysis of the relevant areas will allow you to identify the causes of change and possible consequences.

The industrial sector plays a key role in the Ukrainian economy, because its performance index is a major factor in socio-economic development. Understanding the structure and trends in the industrial sector is important for politicians, because it has a tremendous impact on the overall condition of the Ukrainian economy, including, as already stated above, export capacity.

The general fall in GDP (in US dollars) is directly proportional to the index of industrial products decline, which marks the change of mass produced material goods in the current period compared with the base period.

Diagram 19

The presented above aggregated review should be supplemented by a more analytical (disaggregated) overview, thus, a more detailed analysis of some branches in order to understand better the contribution from the declining sector to economy and exports.

Parts of some individual industry branches in general industrial production in 2017 are the following:

Diagram 20

Mining and quarry development, food industry, power and metallurgical industries dominate  – their total contribution to total gross value added in industry is over 70%.

In the recent years, the structure of industrial production has changed a lot, which is explained by the general fall, not by structural changes. The engineering and mining industry have decreased by 13.9% in comparison with 2013, engineering has declined by 7%, and consumer goods industry has gone down by 2.3%.

Considering the contribution of certain industry branches to exports, it can be seen that the industrial sectors are defined by a fairly high share of exports: metallurgical industry (63.6% of the output is exported), machine producing industry (51.9%), consumer goods industry (46.3%), wood processing industry (35.8%). Other sectors export less than 30% of their output.

Diagram 21

In 2013, the large share of exports was defined by consumer goods industry (78% of exported products), metallurgical industry (65%), machine producing industry (60%) and chemical industry (54%).

Chart 10

Commodity structure of foreign trade in 2017

Code and name of goods

according to UCGFEA

(Ukrainian Classification of

Goods for Foreign Economic Activity)

Export Import
Thousand $.               USA % of total


Thousand $


% of total


Total 43 266 580,0 100,0 49 598 476,4 100,0
which includes
Agriculture 14 931 093,7 34,5 2 366 170,1 4,8
Non-precious metals and items from them 10 124 248,1 23,4 3 012 036,9 6,1
Machines, equipment and devices; electrical equipment 4 276 995,5 9,9 9 901 671,3 20,0
Mineral commodity 3 947 735,0 9,1 12 504 582,4 25,2
Products of the chemical and some industries related to it


1 660 671,8 3,8 6 546 515,9 13,2
Wood and items made of it 1 723 977,1 4,0 1 205 328,9 2,4
Textile materials and products


759 566,2 1,8 1 738 253,7 3,5

Data: SSA

The main industrial and export branch is metallurgical industry (23.4% of total exports in 2016). In addition, it is one of the few industries whose products we export more than we import of similar kind.

For example, in 2017 Ukraine ranked 12th among the world’s steel manufacturers. In 2017, 19.9 million tons of steel were produced, which is 10.4% less than in 2016. In addition, in 2017 the price level for it, according to the London Stock Exchange, returned to the pre-crisis level (three-month futures in amount of $300/ton).

Chart 11

International steel production

Steel production output, mln ton Correlation
2012 2015 2016 2017 2017/2016 2017/2012
China 720,57 798,8 808,4 831,7 2,88 % 15,42 %
Japan 107,17 105,1 104,8 104,7 -0,10 % -2,30 %
India 77,05 89 95,6 101,4 6,07 % 31,60 %
USA 88,74 88,74 78,8 81,6 3,55 % -8,05 %
Russia 70,44 70,9 70,8 71,3 0,71 % 1,22 %
North Korea 68,9 69,7 68,6 71,1 3,64 % 3,19 %
Germany 42,83 42,7 42,1 43,6 3,56 % 1,80 %
Turkey 35,88 31,5 33,2 37,5 12,95 % 4,52 %
Brazil 34,54 33,3 31,3 34,4 9,90 % -0,41 %
Ukraine 32,99 23 24,2 19,9 -17,77 % -39,68 %

Data: WorldSteel

Having analyzed the situation comprehensively, we see that metallurgical industry, as well as the economy as a whole, has been in stagnation. Thus, the fall in steel production output in 2017 versus 2016 is due to the suspension of cargo movements through the confrontation line within Donetsk and Lugansk regions, as well as enterprises seizure that are located at the uncontrolled territories. The decrease in the output level of main products types for 2017 is also a consequence of delayed and incomplete provision of the enterprises with raw materials due to unsatisfactory work of “Ukrzaliznytsia”.

Diagram 22

If we compare the change in production capacity in 2017 versus 2012, we can state the production slowdown by 40%. This is the largest drop in production among world competitors.

Diagram 23

It should be noted that economy decline has mainly caused problems in metallurgical industry, which have lasted since 2014. The effect from the loss of parts of industrial areas, the frequent rise in energy prices, which determine the formation of cost and lack of state support, has led to this negative situation. Even uncontrolled devaluation, which had to reduce export costs along with the above-mentioned factors and the loss of key markets and logistics, did not allow domestic metallurgical industry to increase production capacity.

At the same time, exports depend on the price situation at international markets. The conditions under which prices are changing on world markets are formed by large industrial states that are waiting for demand in terms of the raw materials they may need.

Since the main part of export is unready non-technological products that do not permit to get additional added value and reduce competitiveness, there are threats to decrease exports, which with the lack of domestic demand, make these industries unprofitable. In addition, the production of chemical, textile, machine-building industry is more imported into the country than exported.

Dependence on the price situation creates huge risks for the main domestic economic industries. It is only possible to minimize them by means of the restoration of technological production and the creation of production’s closed cycle of finished products by combining the production volumes of domestic enterprises. This will reduce the import component of the cost.

Diagram 24

The dynamics of steel prices change on the London Metal Exchange, USD / tonne

Data: London Metal Exchange

Diagrams 25,26

One of the decisive factors for the global industry situation in 2018 will be China’s policy as for reducing steel supply and demand growth.

Thus, the reduction of raw material production in China under the pressure of the Government’s environmental initiatives and the growth of the regulatory burden will determine the volatility of world prices for raw materials – coking coal and ore.

Apart from this, there is still the problem of excess capacity (loading, according to the World steel association, is 70%), which leads to increased protectionist measures in the developed regional markets.

Meanwhile, Ukraine is not worried about providing compensators for budget-forming branches of the country, while it supports (subsidizes) enterprises of the agriculture. In 2017, the total amount of subsidies to agricultural producers made up 4 billion UAH (in 2018 it was 6,5 billion USD). At the same time, two profitable holdings (“Myronivsky Hliboproduct”, “Ukrlandfarming”) received 47.6% of the total amount in 2017.

It should be mentioned that most industrial groups that operate in Ukraine are vertically integrated. That means that a violation of raw materials supply between the enterprises of the group can lead to an additional increase in losses of the entire group, as well as influence the economic situation in the country as a whole.

One of the main accelerant for reducing industrial production in 2017 was the consequences of Donbas economic blockade, which has a delayed effect. Increase in the negative contribution of net exports in connection with the reorientation of the energy and metallurgy sectors enterprises to imported raw materials in order to replace the lost resource base, as well as the loss of production volumes of export-oriented industries, the ineffectiveness of compensatory mechanisms introduction to minimize losses from halting in the movement of goods through the confrontation line within Donetsk and Lugansk oblasts are the fundamental reasons for a significant shrinking of economic processes.

Estimated economic losses from the Donbas blockade in 2017 have made up 62 billion UAH, or 2% of GDP (increase in trade deficit was $2.25 billion or 60 billion UAH, 2 billion UAH in tax losses).

The current decline in the share of industry exports confirms common tendency of exports shrinking in the recent years. Thus, Russia’s sanctions limited access to the Russian market, which has created problems for many exporters, including industrial enterprises. Besides, some companies have been subjected to the export embargo or have encountered similar problems.

In this case, the following problems of domestic industry should become mandatory for consideration and immediate solution:

  • moral and physical depreciation of fixed assets;
  • violation of raw materials supply between the enterprises of the group that are at the uncontrolled territory of Donetsk and Lugansk regions can lead to additional increase of losses of the whole group;
  • high dependence on market conditions at the world markets and excessive influence of external demand; undeveloped domestic demand;
  • great energy-consuming production;
  • limitedness of its own energy sources;
  • production of goods with low added value;
  • absence of an effective system in enrichment of low-quality domestic raw materials.


2.2. In the conditions of industry decline, the main driving force was agriculture. It is the increase in the agriculture share in the general structure of GDP from 8.4% in 2010 to 13.8% (+5.4%), which kept the economy from default.

Agriculture was the leading industry (sponsor) of the national economy, actually forming the country’s economic profile. It should be mentioned that agricultural products have a low level of added value, which affects the slow growth of GDP. In fact, there is not much to gain from it. And in domestic conditions it is also import-dependent. Seeds, fertilizers, fuel, machinery – most of these items are imported. As a result, everything we earn is immediately spent on the purchase of what is needed to grow a new crop.

Lately, Ukraine’s agriculture has been steadily growing and has broken the records on certain indicators: for example, grain harvest (66 million tones in 2016/17 marketing year) was more than 12% in 2016 by country’s share of GDP, 35.6% in commodity exports. So, due to favorable weather conditions, agricultural production in Ukraine in 2016 showed an increase of 6.3% compared to 2015.

Meanwhile, in 2017, agricultural production in Ukraine has declined by 2.7% versus 2016. Last year, agricultural enterprises reduced production by 3.9%, households by 1.2%. In 2017, crop production decreased by 3.6%, livestock production was lower by 0.4% compared to 2016.

According to preliminary figures, the capacity of agricultural products in actual prices amounted to 690.9 billion USD in 2017 (in 2016 it made up 637.8 billion USD). However, given the inflation and devaluation factors, the real volume of agricultural products in the year 2017 decreased by 2.7% compared to 2016.

Diagram 27

Data: SSA

The main contribution to the index of production growth of basic industries was due to an increase in agricultural production (by 66.4% in the previous year), mainly because of the high extent of corn harvesting. A high harvest of industrial crops in 2016 also served as a driving force for the growth of the food industry (oil and sugar production), which in turn contributed to accelerating the development of industrial production as a whole (up to 4.5%).

Diagram 28

Data: SSA

The growth of the agricultural production index in 2016 was due to the unusually high volumes of harvesting of late agricultural crops by the end of the year. In particular, the corn harvest was record-breaking, so the timing of the active gathering of this crop was continued. In general, the grain crop in 2016 exceeded the most optimistic forecasts and made up 66 million tons. By the end of 2017, this tendency has not been retained, and all categories of agricultural products have demonstrated lower productivity due to lower late cereals and industrial crops, particularly corn. At the same time, in livestock production, the decline in production volumes slowed down a little; primarily due to an increase in milk and egg production (also because of significant external demand), as well as a slight slowdown in the fall of the pig population.

Chart 12

Crop capacity, centner from 1 ha



2016 2017 (previous data)
Cereals and grain legume 41,1 46,1 42,3
Sugar factory beet 435,8 481,5 465,5
Sunflower 21,6 22,4 20,1
Potato 161,4 165,8 167,8
Vegetable crops 206,1 210,5 207,8
Fruit and berry crops 104,5 101,9 105,2


Meanwhile, the growth in prices for agricultural products has led to an increase in basic inflation. Low harvests of cereals, vegetables and some fruits (in particular, apples) have affected the growth of the agricultural prices index. Prices for meat have increased rather moderate (by 5% as compared to 22.5% in 2015) due to restrictions on pork and chicken export in a sign of an unfavorable epizootic situation. At the same time, in 2017, milk and dairy products (by 21.1%, and in 2015 – by 26.4%) grew at a high pace as demand from processors has increased due to high exports of dairy products.

Diagram 30

It should be mentioned that in 2017, the export of agricultural products assured the receiving of foreign exchange earnings, in the overall structure of exports – 44.7%. The main risk, as with industrial products, is the high impact of international prices on products.

Besides, the lack of agricultural production processing makes the domestic industry even more dependent on the international situation and does not permit to obtain additional added value from the sale of finished products.

Chart 11

Structure of the export of agriculture goods

Code and product name according to UCGFEA Export
billion $               USA % of general


Total 43 266,5 100,0
Agriculture 10 325,3 23,8
Cereal crops 6 501,6
Ready grain products 296,4

Data: SSA

The transition of agriculture to a leading position in economic activity in the nearest future will increase the tax burden on it (abolishing the VAT refund for industrial crops), that will restrain the agriculture growth, and therefore it risks to turn into stagnation.

It should be noted that the thickness of the humus layer has decreased by 20% in the last decade; almost 40% of the total land area of ​​Ukraine has been contaminated. Therefore, to maintain the productivity of the land, long-term measures and, accordingly, substantial investments are needed. Unfortunately, neither companies nor the state now have the opportunity to plan them in the terms of real resources and timing, so the low productivity of the main commodity agricultural crops is recorded in comparison with the main rival countries.

The model of agricultural production functioning cannot make a significant qualitative leap in its development, provide solutions to social and economic problems of the village, fully realize the strong natural resource potential that the industry has. This is hindered by a number of systemic obstacles that have not been overcome during a long period of agricultural reform. The main ones are:

1. Sectoral imbalances in agriculture, exports of unprocessed products, a significant predominance in the production of certain types of agricultural products or large or small commodity manufacturers.Today, the labor-intensive production of the vast majority of livestock (56%), fruit and berry (80,6%) and vegetable (88,3%) products is concentrated in private farms, which are not able to provide the market with high-quality standardized goods. At the same time, large agricultural formations (agroholdings) specialize in the cultivation of export-oriented, highly profitable and quick-purchasing agricultural crops, which is often accompanied by non-compliance with the requirements of rational land use, violation of crop rotation and negligence of measures for the protection of agricultural lands and negatively affects their ecological state. That leads to depletion of soils, dropping of qualitative indicators of agricultural land.

  1. Lack of financial resources for stable economic activity of agricultural manufacturers, in particular due to lack of investment funds, difficult access to bank loans, and low level of state support for agriculture.

High lending rates are not economically efficient for agricultural manufacturers. Due to the lack of cheap loans, a lot of small local agricultural manufacturers are closing down. At the same time, there is a monopolization of the market by large agricultural holdings, which have working capital and preferences for VAT refunds. The adoption of a change to the Tax Code of Ukraine in 2017 (the part of the abolition of the special VAT regime) has become quite a serious shock to agricultural manufacturers, because it will take away another 20% of working capital from them.

  1. Lack of development of the system of agrarian logistics from the market needs, as a result of which the loss of agricultural products has reached 1/3 of the annual volume of its production.

In particular, technical losses of grain in Ukraine make up 15% of the annual harvest, while grain losses in Europe and the USA do not exceed 1-2% of the harvest, which is a technically inevitable minimum. The level of provision of agricultural manufacturers (with storage facilities for grain and fruit and vegetable production) is insufficient. Wholesale markets do not provide the formation of a wholesale price, since they are only organized platforms on which goods can be bought and sold. In the peak periods of harvesting and transportation of the crop, there is a critical shortage of rolling stock for the transport of bulk cargo – grain carriages.

  1. The inconsistency of Ukrainian agricultural and food products with European standards is a significant threat to the development of the domestic agro-food sector, as it restricts the products supply to the markets of the EU countries for the period of the introduction of all necessary technical regulations and obtaining certificates of conformity. As a result, there is a decrease in the profitability of domestic small and medium-sized agricultural enterprises, as well as weakening of competitive positions in the domestic market of certain types of Ukrainian products in comparison with the European one, which has already been properly certified.


Conclusions to this chapter

Metallurgical industry keeps the status of the industry with high risks: the debt burden makes it difficult to attract significant funds for modernization and its own resources are limited by the low productivity, which is negatively affected by the growth of iron ore and coal prices. Large enterprises are situated not far from the zone of active combat operations, which leads to operational risks; the companies regularly have problems both with the raw materials supply and the demand, because during its seasonally fluctuations international traders firstly cut down purchasing of Ukrainian products.

The food industry is in the risk zone. The debt burden and part of the negatively classified loans are kept at a rather high level. Profitability of industry companies has decreased due to the fact that exports to Russia have dropped; the products of the industry are rigorously competing with imports; and due to difficulties with compliance with sanitary norms, the promotion to European markets is slow and costly.

The sphere of electricity supply, gas and housing and utilities also has significant risks. Companies’ profitability in the industry is low but the debts are high. A significant problem for utility providers is the low level of population’s payment discipline, which is likely to be maintained.

Risks in machine building, in spite of expectations, also hasn’t decreased, as the loss of the Russian market hasn’t been compensated by an increase of military products production (computers, electronics, optics) and reducing staff costs. Therefore, the industry as a whole remains unprofitable. In addition, a noticeable debt burden and a bad credit history will soon limit its attractiveness for lenders and investors.

Agriculture has become the leading industry (supplier) of the national economy, practically forming the country’s economic profile. It should be mentioned that agricultural products have a low share of added value. In addition, it is also import-dependent. Therefore, a highly predictable unstable price situation and weather conditions that affect productivity are the main risks to the industry.


3.1. The banking system of Ukraine, as one of the most sensitive areas of business, has undergone significant losses during the recent revolutions, wars and changes in power in Ukraine. Crisis in the banking sector is caused both by objective reasons and by the ill-considered policy of the regulator, which has led to the credit deficit’s increase in the national economy. The key point in deepening of the banking crisis has become a massive outflow of deposits due to fears of citizens losing their savings.

Problems in the domestic financial sector have begun to accumulate rapidly from the end of 2013, the last year of relative economic stability in Ukraine. As the economy stopped progressing, banks lost the opportunity to expand assets and, accordingly, to form the basis for further development. The lack of prospects and the uncertain monetary policy of the NBU in 2014, followed by the devaluation of the hryvna, created significant gaps between assets and liabilities of financial institutions.

Chart 14

Assets of financial corporations, million ₴

Period Cash Deposits Securities apart from shares Loans Other accounts receivable Non-financial assets Assets altogether
2013 35 847 141 142 133 544 931 941 73 572 86 103 1 412 061
2014 27 911 130 525 164 179 1 058 190 36 689 87 197 1 516 116
2015 33 974 165 921 200 040 1 023 210 67 141 82 593 1 589 476
2016 36 205 172 614 333 495 1 031 255 1 923 101 684 1 772 461
2017 44 668 209 285 361 001 1 068 946 1 022 91 844 1 864 742

Data: NBU

The increase in assets in 2017 up to 1,864 billion UAH, or +32% (+452.6 billion UAH) by 2013, is due to the fact that the bulk of deposit accounts (assets) of financial institutions are opened abroad (67% in 2017) and are accounted for in foreign currency. Therefore, we can acknowledge: the assets growth was provoked by a rapid hryvna devaluation (+232% in 2013), which affected the currency bank’s portfolio.

Chart 15

Liabilities of financial corporations, million ₴

Period Deposits Securities apart from shares Loans Derivative




Accounts payable

Shares and other forms of equity participation Liabilities altogether
2013 738 274 13 985 208 131 256 219 313 232 103 1 412 061
2014 725 663 4 554 321 536 406 250 403 213 554 1 516 116
2015 769 989 319 281 962 193 374 923 162 090 1 589 476
2016 865 139 389 216 196 236 529 255 161 246 1 772 461
2017 939 427 371 182 676 110 553 985 188 173 1 864 742

Data: NBU

The same situation can be observed with liabilities of financial corporations. In addition, we can acknowledge the absence of real growth of attracted deposits at a rapid inflation and devaluation, which indicates the distrust of the population to the banking sector.

The hryvna value of the deposit portfolio in connection with the devaluation (due to high dollarization of the economy) has significantly increased, while the loan portfolio has quickly lost its quality and turned into problematic assets. As a result, commercial banks have faced an important need for resources to create provisions for problem loans and an outflow of those funds remaining in the financial institutions due to the withdrawal of deposits by the population and business.

In addition, the total amount of bank deposits in dollars has decreased by $ 57 billion per 3 years. The main reason for this situation is the distrust to the banking system as a whole, which appeared as a result of distrust to the state (war and revolution have always caused instability in the banking sector and a wave of withdrawal of deposits).

At the same time, the ineffective policy of the National Bank has led to the elimination of 92 banks (including 2 banks having a temporary administration), and more and more depositors are forced to receive only limited deposits in the amount of 200 thousand UAH through the Deposit Guarantee Fund.

As of January 1, 2018, the Deposit Guarantee Fund paid depositors over 87.9 billion UAH of state-guaranteed reimbursement (up to 200 thousand UAH).

According to the Ukrainian law “About the system of guaranteeing deposits of individuals”, the executive directorate of the Deposits Guarantee Fund in 2012 determined the amount of the guaranteed amount of compensation – 200 thousand UAH. It should be noted that this amount does not correspond to the realities of the economy fall and the depreciation of the national currency (during 2014-2017): the amount of the guaranteed deposit, converted into US dollars, in 2017 decreased by 232% compared to the corresponding amount in 2013 and cumulative inflation from 2013 at 128%.

In accordance with its obligations, it is the National Bank that is the regulator of the banking market, and therefore, in the course of operational monitoring had to minimize all possible risks. The policy of the NBU was formed under the influence of the actual circumstances that led to the banking crisis.

The withdrawal of “Brokbiznesbank”, banks “Forum”, “Finance and Credit” and other systemic banks from the financial and banking system was a hasty decision. In many of them there was incorrectly formed capital, the leadership of the financial institutions took part in the withdrawal of this capital outside of Ukraine. Therefore, the NBU had enough arguments to introduce a temporary administration and to deprive these banks of the license. Also, the regulator was reproached by providing refinancing to banks that were subsequently liquidated (especially important Delta Bank), and funds disappeared.  The policy of banking supervision is unclear, when the board of directors obviously cheated clients (PJSC “Bank Mikhailovsky”), as well as the unexpected nationalization of Privatbank, which resulted in a loss in 2016 of 135 billion UAH (net profit as of 10/01/2016 –591 million UAH).

Another problem for banks that currently receive only commission income is the difficulty in restoring lending. The Ukrainian banking system has become uncompetitive in terms of lending to the real economy due to lack of resources and money laundering. Banks can only maintain current loans for those customers who have saved production after the crisis in 2014.

Speaking about the resource base of financial institutions, the administrative restrictions of the National Bank have kept the banking system from losing its liquidity. Starting from October 2013, the banking system “gives away” money of the population. For two consecutive years the banking system has been losing liquidity. Nevertheless, administrative constraints have restrained this process.

During 2017, a significant liquidity surplus remained in the banking system, which began to narrow in mid-2017. This was primarily due to significant volumes of taxes transfers and other payments to the budget, and later because of the growth of cash demand and the conversion of foreign exchange interventions from the channel of the liquidity provider to its removal channel. Despite the traditional expansion in December, according to the results of the term, liquidity of the banking system has decreased (by 11.4% term to term). On the gradual reduction of the liquidity the banks have reacted by reducing the balance of funds on deposit certificates of the NBU. Besides, this led to a situational increase in demand for liquidity from individual banks in the second half of 2017 and prompted them to turn to the NBU for refinancing loans from time to time, which had a negative impact on punctual conduct of banks’ operations.

In general, the situation with the assets structure of Ukrainian banks is critical in connection with the high level of unemployed loans. Thus, according to the NBU, as of 01.01.2018 the loan portfolio of Ukrainian banks was 1.07 trillion UAH (equivalent –  $40 billion, 2013 – $117 billion). At the same time, in the corporate portfolio of “live” banks, the amount of non-performing loans is 620 billion USD, or 58%.

Diagram 30

Non-working loans of the non-financial corporations in September 2017

The most risky economy branches, where the high part of non-performing loans is observed, are: mining industry – 83%, building– 79%, chemical industry –  69%, machine producing industry – 64%, metallurgical industry – 63%.

According to the NBU, the share of non-performing loans in state-owned banks is 71.12% (a significant part belongs to Privatbank), banks with foreign capital – 41%, with private capital – 24%, while part of non-working loans in hryvnas as of January 1 is 50.6%, in foreign currency – 63%.

The crisis of 2014-2017 led to the largest reduction of the authorized capital (about 61 billion UAH), namely in banks with Ukrainian private capital against the background of state-owned banks and financial institutions with foreign capital. The common feature for the above-mentioned banks is that their position in the market directly depends on the influence of the owners. Or to be more precisely, from the ability to knock out any privileges from the state or another tariffs increases for their native monopolies, for which then not only the state budget pays, but also all other market participants, and above all ordinary citizens.

Ukraine is the country with the largest historical maximum of the share of NPL (non-performing loans) – 56.2% (Moody’s corporation recognized the level of NPL in Ukraine the highest among CIS and Eastern Europe). According to the results of 2013, the share of problem loans in banks amounted to 7.7%.

The high level of toxic loans today is one of the main threats to the stability of the financial sector and indicates the high risks of a new wave of the banking crisis.

Diagram 31

3.2. In order to achieve and maintain price stability, the regulator must use available monetary instruments, the main among which is the key interest rate of monetary policy – the NBU discount rate.

The discount rate is one of the monetary instruments with the help of which the National Bank establishes a benchmark for the value of borrowed and placed funds for the relevant period. It is the subject of the monetary market and is the principal interest rate that depends on the processes occurring in the macroeconomic, budgetary spheres and on the money market.

The monetary policy implemented by the NBU must be balanced. In the Ukrainian conditions, the only transfer mechanism of the discount rate influence is the rates on deposit certificates, which are directly attached to them, commercial banks are guided by them.

At high accounting rates, it is advantageous for business entities to keep funds in banks, which reduces market liquidity (reducing inflation). At the same time, in a high interest rate, loans are becoming an expensive tool and as a result, business activity decreases.

Thus, in March 2015 the NBU raised the discount rate to 30% (resolution of the NBU Board from March 2, 2015, №154) in order to reduce the liquidity that caused a high devaluation of the national currency by increasing the volume of banks deposit portfolios. However, this decision almost completely closed the access of economic entities to credit resources, as was proved by a significant decrease in the range of lending.

Diagram 32

Due to the new level of discount rate, the profitability on deposits and internal government bonds has increased and the NBU is trying to mobilize additional revenues to the budget and reduce liquidity in the market and thus curb inflation. However, in the future, this will negatively affect the business activity of the enterprises, as the cost of borrowed resources will increase.

Chart 16

Year IGB, nominated in hryvnas IGB, nominated in dollars IGB, nominated in euros Internal

Governmental debt, billion hryvnas

Total sum, billion hrv Average profit, % Total sum, billion dollars. Average

profit, %

Total sum, billion dollars. Average

profit, %

2016 166,2 9,16 3 7,29 0,14 4 689,7
2017 103,5 10,47 1,8 4,8 0,13 3,95 766,6


According to the results of 2017, IGB were placed in the amount of 103.5 billion UAH (average profitability – 10.47%). It should be noted that the state budget attracted 32.7 billion UAH out of this sum, while the average profitability for respective government bonds made up 15.02%. To increase the authorized capital of banks, 70.7 billion UAH were sent with an average profitability of respective IGB of 8.36%. The indicated funds were directed mainly to the pre-capitalization of the nationalized “Privatbank”.

Reducing liquidity and redirecting it to financing the budget, state authorities worsen the situation with bank lending, depriving small and medium business funds of development money, and accordingly, creating jobs, having tax deductions. In addition, the state will have to repay these documents at the expense of emissions, which will negatively affect inflation and devaluation processes.

Diagram 33

It should be mentioned that the NBU actions in order to maintain a high discount rate give a signal for inflation and devaluation, but they also carry huge risks of slowing economic development and falling business activity.

3.3.   According to official NBU data, in 2013 the average monthly purchase of $1 601 million was made in banks. Due to the massive outflow of foreign currency abroad and the introduction of currency restrictions in 2014, the amount decreased to $669 million, and in 2015, when restrictions became even tighter, they were only $57 million, or 3.6% of the 2013 level. Officially, the volume of currency purchases has declined by almost 30 times in two years.

Diagram 34

By 2014, for a long time, the NBU has been pursuing a fixed rate policy (5 UAH / USD, 8 UAH / USD). Due to interventions, the National Bank deterred the national currency decline, while decreasing the gold and foreign exchange reserves. However, international reserves at the end of 2013 were at $21 billion.

Since February 2014, the NBU has begun to support the policy of a floating rate, as a result of which the dollar showed the dynamics of the upward movement. This led to currency shocks for business and the population: it was difficult for them to predict currency fluctuations. Foreign exchange reserves in February 2015 amounted to only $5.6 billion. At the same time, the official NBU rate was 25 hryvnas/dollar (at the “black market” the rate was 38 hryvnas). This can be explained by the NBU refinancing of commercial banks: the latter went to the currency market, forming a high demand for currency.

Besides, due to the fact that the domestic economy is import-dependent, large volumes of imports come into the domestic market. Therefore, the following devaluation effects create conditions for the intensification of inflationary processes (the rise in the cost of goods after customs clearance), which, in their turn also increase the tax base for domestic indirect taxes.

Therefore, due to the economic situation prevailing in the country since the beginning of 2014 and the provision of social financing of expenditures set in the budget (without real growth in incomes during the economic downturn), the authorities focused on inflation and emission policy and deliberately provoked devaluation processes for ensuring budget execution by increasing the tax base. The consequence of such a policy was the structural recessional problems of the economy (from the collapse of commercial lending to galloping inflation), which led to a significant reduction in business activity in the country. Therefore, the policy of a “floating rate”, which led to a significant devaluation of the national currency, was aimed at (exclusively) ensuring the implementation of the budget and preventing a possible default.

So, the formation of the course is influenced only by demand and supply. In the peak periods of excess demand in the interbank market, the NBU proceeded to intervene, repaying its currency from international reserves. Thus, in 2013 net international reserves, which are defined as dollar-denominated, the difference between liquid gross international reserves and reserve-related liabilities to non-residents, have increased in comparison with the previous year, indicating a relative parity in the foreign exchange market between sellers and buyers. At the same time, the NBU massive refinancing of commercial banks, which used the funds allocated for speculation in the currency market, caused a rapid devaluation.

Diagram 35

Sources: NBU, IMF

The above mentioned demonstrates that if we create a model of the actual execution of the revenue of the government budget over a period of 2014 and 2015 under the conditions of constant foreign currency exchange rate that was formed at the National Bank of Ukraine at the moment of the government budget approval, one can see that the government revenues would be underperformed (reduction of administration of taxes and duties on imported goods)

Diagram 36

Budget revenues (VAT, excise tax on imported goods and taxes on international trade) the tax base of which depends on the current foreign currency exchange rate, provided the support of the rate by NBU at the time of the budget adoption, indicates that the Government might be interested in a directed fall of national currency.

Thus, in 2014 in the absence of devaluation processes, the government budget fell short of revenues by 48.9 billion UAH (11% of the government revenue), by 94.8 billion UAH in 2015 (14.5%), by 42.01 billion UAH in 2016 (5.36%). According to the results of 2017, the average annual dollar exchange rate did not have significant deviations from the forecast indicators at beginning of the year, and the execution of the government revenue helped increase revenues from the expanding of total imports.

At present the National Bank of Ukraine does not want to be associated with the US dollar, claiming that it is time to stop to pay attention to the foreign currency exchange rate but to start to manage the expectations of what has a real economic sense, namely inflation targeting. The National Bank even developed a ‘Roadmap of the transition to inflation targeting’.

Mechanisms of inflation targeting – a free, floating exchange rate definition – are possible and expectable to succeed in strong, developed, differentiated economies, among which the Ukrainian economy cannot be classed. Our economy is weak, one way oriented and therefore completely vulnerable to the influence of the price factor on goods of agro-industrial complex.

In present day political conditions legislative and executive authorities don’t coordinate their actions to achieve common goals. Therefore, in the conditions of country’s facts of life, targeting inflation will not give desired results in terms of achieving the target performance in the long run.

3.4. The larger monetary base since the end of 2013 was the result of inflation and a general downfall in the economy. The high discount rates destroyed granting credits to domestic enterprises in the face of declining purchasing power and led to the financial famine of enterprises. At the same time, to support payment transactions the Government began to increase the money supply, which at the macro level converted into a foreign currency in short supply and devaluated the domestic currency. It was in 2014 that the total of cash funds increased significantly to + 38.7 billion UAH, which had a delayed compounding effect. It became one of the factors that were the reason of high inflation of 10.8% in March 2015 and 14% in April 2015 (the total of 43.3% over a year). The reasons for this include the refinancing of banks in 2014 that amounted to 222.26 billion UAH (115.6 billion UAH of refinancing for a term of more than 30 calendar days) and as a result a part of liquidity came to the market and was aimed at financing budget expenditures. According to the results of 2017, the National Bank of Ukraine refinanced banks in the amount of 7.7 billion UAH (including 7 billion UAH for state-owned banks). The funds were given for a term of more than 30 days on security of government bonds (15.5%)

Diagram 37

An important part of the study is the analysis of monetary aggregates indicators that are reported by the National Bank of Ukraine and characterize the total amount of liabilities of deposit-taking corporations to other entities. That is, the aggregates are grouped according to types of liquidity: the larger one belongs to the smaller, from M0 (the most liquid aggregate) to M3 (the money supply which includes the total amount of money in the state).

M0 – the most liquid, all cash money beyond bank deposits;

M1 – includes M0 + deposits that can be converted into cash money upon demand of the owner.

According to the analysis of monetary aggregates as of January 2018, the amount of cash money was 321.3 billion UAH (compared to 235.8 billion UAH in January 2013). Besides, a significant portfolio of deposits was formed that can be converted into cash money and come into the market, the total of 241.3 billion UAH (+12% of GDP in 2016). Therefore, it is important for the National Bank of Ukraine to keep a high refinancing rate for holding back the inflation tendency that at the same time creates significant obstacles to the development of the economy influenced by the increase in loan instruments.

Monetary policy of the National Bank is very important since there is the need to finance expenses on subsidies, increase the payroll budget, plus the burden of PrivatBank the state has to carry, and finance the budget deficit. An uncontrolled increase in the money supply that does not get into the real economy will lead to hyperinflation and destruction of the economy.

Conclusions to the chapter

First, lack of trust in banks remains of current concern today. This problem is caused by both the difficult economic situation in Ukraine and the reckless actions of the National Bank when, banking supervision did not practically perform its functions. The Ukrainian banking sector from the end of 2013 and in 2014 particularly  faced a serious problem that still endanger its liquidity and the normal functioning of the entire financial system by a massive outflow of deposits.

Second, the devaluation of national currency is in process. From 2014 to 2017 the hryvnia devaluated more than three times against the US dollar. Such a sudden devaluation caused an increase in non-performing loans of customers to banks (it became impossible for most borrowers to service foreign currency loans on mortgages). Another consequence of devaluation is the growth of foreign currency assets and liabilities and the need for additional capitalization of most banks.

Third, Ukraine may expect the further rise in cost of credit resources. The actions of the National Bank of Ukraine regarding the formation of accounting policies do not let banks perform one of their main functions namely lending to the economy which results in deepening the economic crisis in Ukraine. That is why it is impossible to develop business with such expensive credit resources.

Fourth, there is a low level of risk management of most banks. According the 2014 and 2015 results many Ukrainian banks did not pay enough attention to the management of credit and liquidity risks, which made it impossible to fulfill the commitments in due time.


The government budget is the main financial plan by which the state works throughout the year. The budget must keep the principle of balance. The objectively calculated amount of taxes has to be in compliance with the state financing of expenditures (social ones and on economic development).

In recent years, the growth of government budget income and expenditure has been explained exclusively by macroeconomic factors (such as high inflation and devaluation), while real production was in breakdown.

The Government aimed its actions at accumulating taxes in any way and that pushed the business to go back to the shadow economy, and at financing expenditures that would not guarantee the development. That is, the collected funds in the form of taxes would be simply eaten away and stolen.

According to 2017, and as it was in previous years, the government budget revenues were not filled by high economic development or the closing of loopholes in taxation, but by inflation and devaluation. Although officially the consumer inflation amounted to 13.7% (8% according to the forecast) the GDP price deflator namely the index to measure the total level of prices for goods and services in the economy at the end of 2017 was 22%, reflecting the real mechanisms to fill the budget.

Altogether in 2017 the domestic economy continued the process of long-term stagnation (the decrease in production in quantitative terms), while in 2017 the declarative growth of real GDP by 2.5% is insufficient if one takes into account the significant decline in the economy in 2014 and 2015. In 2013 the cumulative decline in real GDP was 12.7%.

It should be noted that the Cabinet of Ministers of Ukraine promises not to raise the taxes and that incomes will increase by means of economic growth. According to the Cabinet of Ministers optimistic scenario GDP should be 3% bigger but in the context of present economic conditions there are no fundamental factors that will ensure economic development in the conditions of macroeconomic and monetary instability.

At the same time revenues of the government budget are anticipated in the amount of 917.8 billion UAH, which is 19% more than the revenues that were forecast in the budget for 2017 (770.9 billion UAH). The total fund of the government budget is 842.8 billion UAH, including a special purpose fund of 75 billion UAH.

Diagram 38

According to the set dollar exchange rate the Cabinet of Ministers of Ukraine plans the revenues of the government budget to be in the amount of 31.4 billion $ (28.3 billion $ in 2017, 32.8 billion $ in 2013).

Thus, among the main ways for accumulating revenues from the government budget are tax proceeds (by 18.6%), which in the general amount of incomes make up 85%. However, only inflation and devaluation can influence the fulfillment of the mentioned indicators if additional taxes are absent.

Dynamics of tax revenues:

– personal income tax – + 17.62%;

– excise tax on domestic products – + 22,38% (increase of excise rates);

– VAT on imported goods – + 34.59%.

The increase of indirect taxation and personal income tax means that the main tax burden will pass on to buyers (citizens). This proves the possible increase of budget revenues by means of the Government’s targeted emission policy.

One of the mechanisms for implementing the revenue of the budget is the foreseen transfer of the profit of the National Bank of Ukraine in the amount of 50 billion UAH. In fact, these funds were previously issued under the bonds by the Ministry of Finance and since the National Bank of Ukraine owns the bonds it indicates the monetary financing of budget expenditures.

The fact that government and local budgets can administer large sums of money does not imply automatic growth of the economy. Ukraine lacks actual development programs. There is money, yet at the local level no one knows how to use them except for placing it on deposit accounts in commercial banks.

Therefore, the forecast level of government budget revenues may not be reached, which in turn will increase the budget deficit which sources of coverage are very “vague”.


The decrease in real wages is the proof of the above mentioned analysis of the country’s economic situation. Thus, according to the State Statistics Committee, based on the results of February, real wages of citizens decreased by 8.3% compared to February 2015. Last time the index of real wages rose in spring 2014. Since then, the indicator kept falling and reached its peak in April 2015 (-29.6% before the previous year).

Due to such a long fall and according to 2015 results the real salary in particular decreased to the level of the year 2010. The State Statistics Committee calculates the real wages index, taking into account the nominal (home-take) wages, inflation and the amount of taxes and dues paid.

Table 17

Dynamics of nominal and real wages change in Ukraine, %

  Nominal wages Real wages
Before the previous year December to December of the previous year Before the previous year December to December of the previous year
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
2016 123,6 123,8 109,0 111,6
2017 137,1 135,5 119,1 118,9

         According to the State Statistics Committee

Meanwhile, the nominal salary in December 2017 was 7140 UAH, which is 35.5% higher than the corresponding indicator of the previous year. However, it should be borne in mind that the country has encountered rapid inflation over the last four years, and since the internal market is quite import-dependent, it is more objective to investigate the level of nominal wages in US dollars. Thus, the average nominal wage at the end of 2017 was only $ 268, which is 34.3% lower than the corresponding figure in 2013.

Diagram 39

With the “real growth” of wages by 19.1% per year, the increase in prices for consumer goods of prime necessity of the same year reached from 17% to 70.5%.

Diagram 40

Distortion of statistics by means of the regulatory establishment of a higher rate of minimum wage has nothing to do with a real increase in income. Such measures, on the contrary, accelerate inflation, increase tax pressure on business, lead to its closure and to shadow economy and a reduction in real incomes of the population, all of these were observed in 2017.

The government continues to raise the minimum wages artificially in 2018 and intends to continue doing so, and the population has to get ready for further price increase in stores, gas stations, and transportation.

Consumer Confidence Index is an indicator of consumer confidence measured as a degree of optimism about the economic situation that the population expresses through the consumption of goods. The indicated index was developed in order to identify the readiness of the population to spend their own funds. In February 2018, the Consumer Confidence Index was only 55.4 points. Before the 2014 revolution this figure was 56% higher and amounted to 86.4 points.

The volume of retail sales for 12 months of 2017 at actual prices amounted to 816.5 billion UAH ($ 30.7 billion) and for the corresponding period of 2016 – 1 159.2 billion UAH ($ 45.3 billion), which indicates the decline in retail sales by 47.5%. Besides, at that time the cumulative inflation amounted to 13.7% and devaluation was 5%. This indicates a deeper real decrease in retail sales.

It should be noted that retail sales for January and December 2013 amounted to 884.2 billion UAH ($ 110.6 billion) at a dollar exchange rate of 7.99 and an annual inflation of + 0.5%.

Diagram 41

According to the State Statistics Service, the average amount of purchases per person fell 2.33 times from $ 858.5 in 2013 to $ 368 in 2017. The expenses that Ukrainians can afford spending for food decreased by 2.5 times for the mentioned period, for non-food products decreased by 2.5 times (from $ 23.1 billion to $ 9.3 billion).

In addition at the beginning of the year arrears of wages according to the results of 2017 increased to UAH 2.36 billion, which is 32.2% more than during 2016.

The main part of the amount of indebtedness of economically active enterprises falls on the industry (80%). At the same time, about half of the indebtedness of these companies fell on Donetsk (30%), Luhansk (17.3%) regions.

These indicators correlate with the index of industrial production and indicate serious structural problems in the economy of Ukraine.

It is logical that the economic decline leads to an increase in the number of unemployed people in the country. Thus, in September 2016 the unemployed people constituted 1.66 million people of working age – +7% compared to 2013. That said, the level of economically active population of working age in 2016 amounted to 17.3 million people (2013 – 20.4 million people).

According to the State Statistics Service in the previous year incomes of people reached 2,475.8 billion UAH, expenses amounted to 2544.8 billion UAH, and the savings of Ukrainians decreased by 69 billion UAH.

Diagram 42

It should be noted that the main factor that influenced the growth of revenues (485 billion UAH or + 24.4%) is an increase in the total wages (+ 31%) that increased due to the minimum wage doubling at the beginning of the year. However, in the absence of fundamental factors in the economy, the new “minimum living wage” resulted in significant inflation.

At the same time, the expenses for purchasing goods and services showed a growth of 26.6%, to 2 297.5 billion UAH. The volume of retail sales for the 12 months of 2017 at actual prices was 816.5 billion UAH ($ 30.7 billion), and for the corresponding period of 2016 it constituted 1,175.3 billion UAH ($ 46 billion) that indicates a decrease in retail sales by 44%, and hence the purchasing power of the population.

According to the State Statistics Service current taxes on income, property and other paid current transfers measured up to 247.2 billion UAH which is 9.1% more than over the corresponding period of 2016. The stated information confirms that the fiscal burden on the part of the state increases in the conditions of the actual absence of growth in real income.


The domestic economy inherited a large industrial potential from the Soviet Union and for 20 years has not participated in technological development and demanded high investment. Ukraine has operated for a long time industrial capacities and has mainly exported unprepared goods, receiving good profit from assets that the country received almost free of charge.

In times of favorable international demand for chemical, metallurgical, machine-building products and raw materials large financial and industrial groups that were beneficiaries of all incomes did not pay attention to the innovative development of industries, and the state did not try to initiate to create large closed cycles of production of finished goods.       

Absence of the country’s technological development made competition between domestic products and foreign similar products impossible. Therefore, the powerful Ukrainian industry became the subject of the international market that supplied raw materials and materials for the production of finished goods by foreign producers and became hostage to price environment which greatly complicated the planning of the development of certain industries.

The events of 2014 resulted in the loss of main industrial sectors of the economy and in the closure of key trading markets. In addition, the conflict in the east of the country together with political instability caused an unprecedented outflow of foreign investment.

The Ukrainian economy was not ready for this. The sharp decrease in industrial production was a logical continuation of the economic policy that has developed in the country since 2014. Available industrial facilities were regarded solely as a mechanism to fill up the budget and no attention was paid to the structural problems of international trade (closure of trade routes that formed the demand), all that resulted in a steady decline in real production and dropped it to the level of the 2000s.

The above mentioned resulted in a situation where the agro-industrial complex became one of the most strategic directions of GDP formation. Having fertile lands available large agricultural producers concentrated mainly on the export of unprocessed products (such as wheat, sunflower seeds and corn). However, agricultural goods have low added value and they are not much profitable. Within the domestic conditions these products are also import-dependent. Since seeds, fertilizers, fuel and machinery are imported and it means that in actual fact everything we earn is immediately spent to buy what is needed to grow a new crop. So we face a closed circle. Another concealed reason why the devaluation does not affect the increase in exports is that an imported part in agricultural products is very significant.

As long as we sell grain we will remain a poor country and it’s an economic law which will not be deceived by beautiful phrases. In order to gain real profit, it is important to sell not corn but machines, equipment, electronics, and technologies that the developed countries of the world offer and which are scared of the plague title of “agrarian superpower”.

Reduced production resulted in the impossibility to index wages, and companies even began cutting down on workers.

At the same time the purchasing power of wages has also significantly fallen down. We should not forget the growth of utility rates which created massive non-payment for utility services even though two thirds of households get subsidies.

With the economic fall from 2014 till present the state not only didn’t guarantee the economic potential but, on the contrary, it began carrying out destructive actions towards the economic agents.

Lacking funds in the state budget, the authorities have enhanced the fiscal burden on the economy and tried to increase tax administration with the fall of real GDP and print money to cover expenses. Cooperation with international lenders was not stable and the received loans were used to repay earlier obligations, burying Ukraine deeply into a debt pit.

Reducing real earnings of enterprises did not let the state administer the expected taxes to provide expenses for the Anti Terroristic Operation in the east of the country and to finance social needs (subsidies and pensions) which became necessary in the context of a decrease in real income of the population. In addition, there is an extremely high level of corruption in Ukraine which amounts to half of GDP and the above mentioned tendencies intensify even more.

These actions all together led to the entrance of the unsecured hryvnia into the market and its accumulation that caused inflation and devaluation of the national currency.

Due to high inflation and devaluation the National Bank of Ukraine raised its discount rate by giving guidance to commercial banks that needed funds to service non-resident loan portfolios and businesses related to bank management.

New deposit rates increased the rates on loans proportionally that is why loans to the real sector of the economy stopped completely. Funding shortfalls narrowed the opportunities of economic agents the significant part of which stopped their economic activity.

Having allowed a significant devaluation of the national currency including a decline in buying activity, the National Bank and the Cabinet of Ministers of Ukraine caused by their activities a significant collapse of the internal market which is import-dependent.

These economic processes have led to a disastrous increase in real incomes of the population the biggest part of which is beyond the real poverty line. It also led to a further decrease of business activity.

In absolute terms any increase in macroeconomic indicators can be explained only by hyperinflation and devaluation of national currency, while real indicators (in pre-crisis prices) fell by several times.

In addition the corruption and oligarchic network are not in fact being fought against, yet it is extremely indispensable as some politicians make managerial decisions in the favor of businessmen they depend on, while at the same time they outweigh the public demand for change.

Incorrect structure formation of the economic model of the country that was built for many years against the background of post-revolutionary factors, ineffective state governance and external factors led the present economy to a complete collapse.



  1. First, it is necessary to form a new structure of the economic model. At present in order to revive the domestic economy it should be saturated with cheap financial resources that would rebuild the economic activity.
  2. It should be noted that gross manufactured product is distributed to exports and the domestic market. In the conditions of the crisis and uncertain market conditions on the world market the main driving force of the economy has to become the domestic market.
  3. The discount rate of the National Bank of Ukraine should be gradually reduced which will reduce the cost of business lending. Production requires cheap money for its development which in future will increase the population business activity in the form of wages (new jobs) and trigger domestic trade.
  4. A clear monetary policy should be introduced which would allow to create an additional product at a micro-level (business agents), rather than concentrate exclusively on supporting the general macroeconomic processes.
  5. Ukrainian enterprises or whole sectors should be purposefully (point-by-point) given loans at low interest rates to restore economic growth in the short-term and for economic development in the long-term.

Along with this the fight against inflation should go on by increasing the offer of goods that will hold back the inflation pressure.

It is very important to choose the right sectors of the economy which above all others demand appropriate financial support. If they receive financial loans at low interest rates companies will be able to direct them first of all to create products which, in turn, will improve the business activity of various economic agents.

For example, in economically developed countries such as the USA and China the problem of reducing business activity was solved by increasing state spending on infrastructure projects construction which gave the desired result. However, in the present stage Ukraine it is impossible to implement such projects because of high corruption which is the reason why most of the allocated funds will be completely stolen.

It is the private industrial sector that has to be the driving force to launch the following economic processes. At the same time, the given loans will be repaid over time, after which they will be withdrawn from circulation.

This way one can solve the problem of strengthening the production growth and business activity. However, one should not forget that the relevant positive trends will be of a temporary nature (depending on the current crisis). This time will make it possible to level out macroeconomic indicators and start to reform the economy on structural level.

  1. It is important to introduce tight and effective administrative control over operations in the foreign exchange market, since a part of cheap financial resources can be speculatively directed to the foreign exchange market which leads to devaluation. One of the options is to develop an algorithm to prevent the purchase of foreign currency by importers that meet the risk criteria developed by the State Fiscal Service and the Financial Monitoring Service.
  2. It is essential to adopt amendments to the Tax Code of Ukraine in order to reduce the fiscal function. The tax on income should be replaced by the tax on distributed profit, a part of the financial flow will become the tax base (which includes profits and depreciation) aimed at paying dividends to enterprise owners (equivalent payments), which may hide the outflow of capital. Together with the open and full VAT refund in the present electronic system of VAT administration (to register a tax invoice it is necessary to set the appropriate amount of tax) one may expect the reduction of tax optimization through the use of conversion centers. The risk of receiving services from conversion centers will exceed the economic benefits.

Appropriate efficient decisions will help further develop the economy and attract foreign investment.

  1. The terms of cooperation with creditors under disadvantageous for the country conditions must be reviewed. Gradual curtailment of cooperation programs with the IMF has to become a key objective. Accumulated debts have to be restructured for longer periods. It is appropriate to augment gold and foreign currency reserves by obtaining foreign currency earnings from exports and not by means of borrowed funds.

The structural changes in the economic model of the country need to be made in a period when the economy demonstrates a real increase in production and macroeconomic indicators keep a positive trend.

Principles of a balanced economy functioning:

– only finished products should be exported (at the first stage administrative limits for the export of unfinished products should be established);

– state incentive to create a closed cycle production (for example, the development of the processing industry by allocating purpose loan programs and the development of logistic infrastructure projects);

– encouraging technological and innovative renewal of production by providing state guarantees and tax liberalization (in future it will lower production cost and improve the quality of products, which will become an advantage in international markets competition);

– ending the trade war with Russia (this will return the largest market which has demand for domestic product and rebuild important logistic connections in the Far-East directions).

Unfortunately, today in Ukraine there is no political will and aspiration for restructuring that would significantly improve the social and economic performances of Ukraine. Corruption, legislative lobbyism and lack of professionalism are the main barriers to achieving the desired result. Ineffective government policy results in destructive actions that cumulatively affect the population and drive it beyond the poverty line. The collapse of the economy, the loss of the banking sector and the outflow of investments led to irresponsibility and impunity of the executive authority. The absence of a clear and objective plan to get out of crisis leaves our country in a state of economic and social chaos. Most of the time legislative and governmental initiatives at the stage of primary analysis and forecasting create deeper and more serious further problems. Therefore, the development of a structural long-term concept of a political and economic exit from the crisis as a coherent plan of clear tactics can help rebuild the prosperous country.

NGO “Public Audit”