Independence Day 2015: finding the bottom
The worst macroeconomic year since 1994 is also the year Ukraine cleaned out half its banking system, restructured its sovereign debt and raised gas tariffs to cost. Three things that had been postponed for a decade.
By every headline measure this is the worst year since the mid-1990s. Output will fall by roughly a tenth on top of last year's contraction. Consumer prices will rise more than forty per cent. The hryvnia touched thirty to the dollar in February before settling near twenty-two. Reserves fell to about five billion dollars in the spring — under six weeks of imports.
And underneath those numbers, three things are being done that no Ukrainian government since 1991 had been willing to do. It is worth recording them properly, because the headline numbers will be remembered and these will not.
The banking clean-up
Since 2014 the National Bank has withdrawn licences from more than sixty banks. Many were not banks in any functional sense: they were treasury operations for their owners, or currency-conversion vehicles, or mechanisms for moving deposits offshore. The system had well over a hundred and eighty institutions in a country of forty-two million; Poland manages with a fraction of that.
The clean-up has been expensive — deposit guarantee payouts, recapitalisation of what remains — and it has destroyed savings for people who chose badly. It has also removed the single largest source of systemic fragility in the economy, and it will not have to be done again. Related-party lending limits are now being enforced for the first time.
The unfinished part is the largest institution, whose related-party exposure is an open secret. That will be resolved next year, at very great cost to the budget.
Energy pricing
Household gas tariffs have been raised several times and are approaching import parity. This is the reform every government since 2005 promised the IMF and none delivered, because it is deeply unpopular and its benefits are invisible.
The effects are already measurable. Gas consumption by households has fallen sharply. Naftogaz's deficit, which was around five per cent of GDP, is closing toward zero. And the arbitrage that sustained an entire class of intermediary businesses — buying subsidised household gas and reselling it industrially — has been eliminated. That arbitrage was worth billions a year and it funded political influence.
The social compensation scheme covering low-income households is imperfect and expensive to administer, but it exists, which is why the reform has survived.
The debt restructuring
Negotiations with bondholders have concluded this month on terms that involve a twenty per cent principal write-down, a four-year maturity extension and higher coupons, with GDP-linked warrants attached that pay out if growth exceeds certain thresholds after 2021.
Assessed on its own terms it is a competent deal that buys the reform programme roughly four years. The warrants are the part to watch: they transfer some upside from Ukrainian taxpayers to creditors in exactly the scenario where Ukraine recovers strongly. That will become a live political issue toward the end of the decade.
What business should take from this year
Costs in dollar terms are now extraordinarily low, and quality has not fallen proportionally. Ukrainian software engineers, agricultural land, industrial premises and skilled manufacturing labour are all available at prices that do not match the underlying capability. For anyone with a five-year horizon and tolerance for operational complexity, this is the cheapest entry point in the country's history.
The constraints are equally clear: capital controls restrict repatriation, the courts remain unreliable, and the conflict has no settled endpoint. Structure accordingly — arbitration clauses outside Ukraine, holding structures in a treaty jurisdiction, and no exposure you cannot afford to have frozen for two years.
Public procurement is opening up. The electronic tendering pilot launched last year is being extended, and from next year it becomes mandatory. Foreign suppliers who register early will find a market that has been effectively closed to them for two decades.
Twenty-four years in
Countries reform when the alternative is worse, not when the argument is won. Ukraine has spent a decade being told what to do by the IMF and doing very little of it. This year it did most of it, because the fiscal position left no other option.
The question the archive will return to is whether reforms adopted under duress survive the return of comfort. Historically, about half do. Which half depends almost entirely on whether an institution was created to defend them.
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