Four years after Maidan: What happened to the Ukrainian economy

Author : Olena Holubeva

Source : 112 Ukraine

Russia is still supplying half of the fuel assemblies to Ukraine for Ukrainian NPPs
11:05, 22 November 2017

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Over the past four years, that is after the victory of the Revolution of Dignity, the strongest economic upheaval for Ukrainians was a sharp rise in food prices and the growth of tariffs for utilities. Prices for products, in particular, doubled. The main drivers of their growth were the devaluation of the hryvnia and inflation. People often like to remember that before the Maidan dollar was 8 UAH, and now - almost 27. At the same time, inflation for this four years was 92%. Prices for almost all food products, except for borscht and vegetable vegetables and black and white bread of mass varieties, leveled with the prices of Eastern European countries.

The incomes of the average Ukrainian, however, did not increase, and even fell. If in November 2013, the average salary in Ukraine was 408.5 dollars, then in September 2017 it amounted to 274 dollars.

Over the past 4 years, each category of food products has reduced. Reduction occurred even in the volumes of production of social varieties of bread and traditional Ukrainian fat. The premium segment in food products has already completely died in all product categories - it is already missing as such. The middle segment is also almost dead.

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The cost of utilities has also significantly increased. Heat and hot water went up due to a sharp increase in gas prices. The first stage of increasing retail gas prices for consumers using it for domestic needs occurred on May 1, 2014. Then the prices, depending on the volume of consumption, grew 1.5-3 times. In case of consumption up to 6 thousand cubic meters of gas per year its price increased from 42 to 68 USD for 1 thousand cubic meters. But the most significant increase in prices occurred in April 2015, when the differentiation of prices was abolished (the preferential price for household consumers was balanced with the price for industrial enterprises), resulting in a 6-fold increase in the price of gas from 45 to 276 USD for 1 thousand cubic meters.

Related: Clashes at Maidan Nezalezhnosti in Kyiv

In recent years, the share of the real sector in the GDP structure is decreasing, and this is due to a reduction in industrial production, which has decreased by at least a third in the last four years. At the same time, there is no growth in services.

It should be noted that because of the war in the east, Ukraine lost territories where the coal mines of the anthracite group were left. Now there is not a single mine on the controlled area that would produce anthracite - all 60 of them remained behind the line of demarcation. This led to problems on the blocks of thermal power plants, most of which worked on anthracite. Now they are provided with coal only by 40%.

Ukraine is still continuing to import coal from Russia. Contrary to the numerous statements that we do not take a single ton of coal from Russia, the State Fiscal Service data show that most of this resource comes from Russia. We are talking about coking (necessary for metallurgists) and energy coal. Ukraine also imports the resources from other countries (South Africa, the USA). But the real volumes of supplies are several times less than those declared. And the agreement on the import of American coal was signed, rather, for reasons of political rather than economic expediency.

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Ukrainian metallurgy is also experiencing difficult times now. In the rating of the World Association of Steel Producers (Worldsteel) in September 2017, Ukraine has already fallen to the 13th place among 67 countries. It should be noted that in the best of times our country took the 7th place in the world in terms of steel production and the third one in terms of metal exports. Even in 2013-2016 years. Ukraine still held on to the top ten largest metal producers. Now the volume of production fell to the level of 1995-1996, when the economy faced the post-Soviet deterioration. For 9 months of 2017, the production of pig iron was 14.6 million tons, which is 18% less than the figures for the same period in 2016. Steel was produced 15.8 million tons (14% less), rolled products - 13.5 million tons (16% less).

There are several reasons for the decline in production, the main ones are the loss of the Russian market, dumping on the external markets of China's producers and the severance of production ties due to the war in Donbas.

Among other things, Russia is still supplying half of the fuel assemblies to Ukraine for Ukrainian NPPs. Spent nuclear fuel is still being exported to the territory of our north-eastern neighbor. Ukraine is independent of Russia in the field of energy only in electricity. Our country banned its flows to Russian and uncontrolled territories, we do not deliver energy and to occupied Crimea.

Related: Export compass points to East

In addition, a large volume of mineral fertilizers is supplied to Ukraine from Russia - according to the data provided by the Antimonopoly Committee, the share of imported fertilizers is about 27% and these are mainly Russian supplies.

In connection with annexation of Crimea, Ukraine also lost control over the state-owned company Chornomornaftogaz. The company accounted for 2 billion cubic meters of gas production, 10% of all production in Ukraine.

In general, the volume of gas production in Ukraine has not changed, only the share of non-state companies has grown. The volume of gas production in Ukraine in 2012 was 20.5 billion cubic meters, including private companies produced 2.3 billion cubic meters. In 2016, of the extracted 20 billion cubic meters for private companies accounted for 4.1 billion cubic meters. For 9 months of 2017, private companies produced 3.3 billion cubic meters, by the end of the year this figure could reach 4.4 billion cubic meters.

Since 2016, the situation for private gas companies has improved significantly. Rent rates were halved, the general situation in the economy stabilized. In addition, against the backdrop of the high prices that Naftogaz sets for the industry, the sale of the resource is an extremely profitable business. The advantage of Ukrainian gas over imports is that at least domestic companies do not pay a tariff for entering the Ukrainian gas transporting system (on the border) 12.47 dollars per 1,000 cubic meters.

Related: Anthracite illegally exported to Poland from occupied Luhansk region

Almost the only high-margin branch in Ukraine is controlled by large financial and industrial groups.

One of the largest mining companies Regal Petroleum is in the "Smart Holding", controlled by Vadym Novinsky. "Geo Alliance", according to market participants - the company of Victor Pinchuk, Burisma is associated with Mykola Zlochevsky, working in the industry, and the company of Igor Kolomoysky. After the Maidan, the company "Nadra Ukrainy" lost its position, which was connected with the family of ex-president Viktor Yanukovych, but DTEK's company Rinat Akhmetov became the leader. It entered the business in 2013 after the purchase of the company Naftogazdobuv owned by Nestor Shufrych and Mykola Rudkovsky.

In addition, the companies that are associated with the current Minister of Internal Affairs Arsen Avakov came to the gas production market. According to market participants, these are, in particular, "Granulit" and "Energy 95".

Those foreign companies that entered Ukrainian gas production segment, left it. This is about Shell (participated in the PSA on the Yuzivska area) and Chevron (participated in the PSA on Oleska area).

Related: Ukraine lost 1 billion of dollars of export in 2016 due to Russian trade aggression

There are victories, too, but unfortunately they are still very small. One of the islands of stability in Ukraine is the IT sector, which is growing every year. In addition, there are achievements in the agrarian sphere. In 2016, Ukraine harvested a record grain harvest. Also, a new record was set for grain exports. The Ministry of Agrarian Policy and Food forecasts that this year the harvest will not be even higher - a new record will not be established, but we will collect about 61 million tons. The State Consumer Protection Service informs that since the beginning of the marketing year, Ukraine has already exported 16.3 million tons of cereals and 2.5 million tons of oilseeds. For the same period last year, it was 17 million tons and 1.4 million tons. Among the notable achievements, we can call a significant increase in the export of flour and sugar from Ukraine - and this has been a growth many times in recent years, the export volumes of these products are now much higher than the domestically produced figures.

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One of the important milestones, which actually gave impetus to the development of the agricultural sector, was the abolition of the social regulated prices that were practiced by the domed authorities, as well as the reduction of corruption losses with reimbursement of export VAT.

At the same time, a number of serious problems remain in the agrosphere. Farmers lost from a significant reduction in state subsidies and the abolition of special regime, in which they could accumulate VAT on their enterprises' accounts and invest in development. After the farmers protests, a new mechanism was introduced - the "quasi-VAT regime", which is still in effect. certain funds are returned to farmers, but this is less by USD 0,8 billion than they received earlier, before the change of this mechanism. In comparison, in Europe more than 40% of the budget goes to support of agriculture, and in Ukraine now it is less than 1%.

Related: Ukraine sees exports of poultry rise by 29%, pork by 2.8 times in Jan-July

Also, the agrarians are unhappy with the quotas on the supply of agricultural products, which the European Union has established.

Many of them use advanced technologies, modern agricultural technology, which allows them to receive a low cost of agricultural products, competitive in foreign markets.

In 2013, exports of goods from Ukraine to the EU countries amounted to 16.76 billion dollars, or 26.5% of the country's total exports, and in 2016 - 13.5 billion dollars, or 37.1%. FTA has played an insignificant role here. Nevertheless, against the backdrop of the fall in trade with Russia, this price of the FTA with the EU does not seem fair.

Let us note that Ukrainian officials have repeatedly stated about their intention to privatize one of the largest state-owned companies - Ukrspirt, which is called the source of illegal alcohol, which is used to make "illegal" vodka. The abolition of the state monopoly on alcohol before the end of this year was one of the conditions prescribed in the memorandum with the IMF. However, it is still there - now the Cabinet is holding another contest for the appointment of the head of the state enterprise.

The uniqueness of the Ukrainian situation, according to experts, is that in certain sectors of the economy we could witness the general decline and poverty that also became the drivers of victories and growth. In particular, they gave a powerful impetus to the development of domestic light industry. Clothing and shoes in Ukraine are now mostly of Ukrainian origin. Now, these products can cost 10-20% cheaper than shoes and clothes imported from China, so it actively replaces the imported goods from the shelves of stores.

Related: Ukraine starts exporting flour to South America

In Ukraine, well-known Western companies sew products (such as Zara). However, since such proceedings are often semi-underground, the state's tax benefit from them is negligible.

Low prices for Ukrainian footwear and clothing can be achieved, mainly due to low labor costs. "China can no longer compete for our buyer, because our buyer is very poor, even if we discard logistics costs, the average salary in Ukraine is $ 220, and in China $ 860. So who should produce for whom?.

The low level of wages in the country gave impetus to the opening of some enterprises in Western Ukraine, which are close to the markets of the European Union. In Ukraine, in particular, the price of 60 minutes of work on cable production is 1 euro. This is 5 times cheaper than in China and 6.5 times less than in Poland or Hungary. Such company as Leoni, Bader, the French Nexans enterprises opened here. The car-maker "Kromberg and Schubert" has already opened a factory in Zhytomyr.

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Despite the announcement about the opening of "dozens of new plants" and the creation of "tens of thousands of jobs," there is absolutely no hope for the restoration of the real sector of the economy in the next few years yet.

The authorities must finally decide and work out at least some kind of strategy, which has not yet been traced.

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