An old balance-of-payments problem, and why it kept coming back

Ukraine's recurring external crises were not a series of separate misfortunes. They were the same problem arriving repeatedly, and the arithmetic behind it is simple enough to state in a paragraph.

The structure

The country ran a persistent current account deficit — it imported more goods and services than it exported. The gap was driven principally by energy imports, which were large in volume and priced in dollars, and by consumer goods imports that rose whenever domestic demand grew.

A deficit has to be financed. The financing came from three sources: foreign direct investment, which was modest; external borrowing by the government and by banks; and remittances from Ukrainians working abroad, which were substantial and undercounted.

When the financing was available the deficit was sustainable. When it was not, the currency had to adjust or the reserves had to be spent, and the reserves ran out faster than the political system could accept.

Why it repeated

Each crisis was resolved by external lending — an IMF programme, a bilateral loan, a bond issue. That closes the immediate gap and adds to the debt stock, which means the next year's financing requirement includes the repayment of this year's rescue.

Debt maturities therefore clustered, and a country with clustered maturities faces a refinancing wall rather than a smooth obligation. If market access is closed at the moment the wall arrives — for political reasons, or because a global risk-off episode has closed emerging market issuance generally — the crisis is immediate and has nothing to do with that year's economic performance.

What would have fixed it

Three things, all of which were recommended repeatedly and all of which were politically difficult.

Energy efficiency and domestic production, to reduce the import bill. This was the largest single lever, and it was blocked by the household tariff subsidy, which removed any incentive to consume less.

Export diversification into higher-value goods, so that export revenue did not swing with commodity prices.

And a floating exchange rate, so that the adjustment happened continuously in small amounts rather than being stored up.

What actually happened

All three eventually arrived, and they arrived together after 2014 because the crisis was severe enough to make them unavoidable.

Tariffs moved to cost recovery, which cut gas consumption materially. Gas imports fell to zero from the eastern direction and were replaced by European reverse flow and domestic production. The exchange rate floated. Agricultural and IT exports grew into a substantially more diversified export base.

The result is that the external position going into 2022 was far more robust than the one going into 2008 or 2014, and that robustness is a large part of why the financial system held.

The general point

A recurring crisis is a structural feature being mistaken for a series of events. If the same thing happens three times under three different governments, the explanation is not the governments.

For anyone assessing a country's external vulnerability, the useful numbers are the current account balance, the reserve cover in months of imports, and the maturity profile of external debt over the next twenty-four months. Those three figures predict external crises better than any measure of growth or reform progress.

Related in this archive

• When the growth number is worse than it looks: reading the composition instead
• An economy that stopped growing, and the three reasons why
• Privatisation: three waves, and what each one produced
• Ukraine Annual Review 2013: the year the model ran out

The same problem recurring under every government makes it structural rather than inherited — in a company too, if the same mistake repeats under different managers, the manager is not the problem. What would have closed the external gap was not more exports but more varied ones. The lesson holds for my own supply chain, and for exactly the same reason.