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Global Economy

More than "Europe's granary"

Since the "Orange Revolution" in 2004, Ukraine has faced the abyss several times. Hundreds of thousands protested against election fraud and the power of oligarchs. In 2009 there was even a threat of national bankruptcy due to the enormous foreign debt. Billions in loans from the International Monetary Fund (IMF) saved the country from collapse.

The annexation of Crimea in 2014 plunged Ukraine into a new economic crisis, from which it quickly recovered. "The Crimean crisis has led to an increasing disentanglement of Ukrainian foreign trade," praises Hans Peter Pöhlmann, Eastern Europe expert at the German business development agency Germany Trade & Invest.

Recovery after the Crimean crisis

In fact, the country recently seemed to be on the right track back to normality. "Macroeconomically and macrofinancially, the Ukraine is currently in a much better position than it has been in recent decades," says Gunter Deuber, Head of Economics at the Austrian Raiffeisenbank International. "National debt has been reduced from over 70 percent of gross domestic product to under 50 percent in recent years, and foreign debt has fallen from over 100 percent of gross domestic product to just over 50 percent," Deuber told tagesschau.de.

Ukraine also overcame the Corona crisis relatively well. After a short recession in 2020, the economy is likely to have grown by 3.2 percent last year. An increase of 3.8 percent was last targeted for 2022.

Saber-rattling is already hurting the economy

But the deployment of Russian troops on the eastern Ukrainian border and the fear of war threaten to choke off the upswing. The first signs of the slowdown are already visible: the local currency, the hryvnia, has depreciated significantly against the euro since mid-December, inflation has climbed to ten percent, and the central bank has had to raise interest rates to ten percent. Nowhere in Europe are they higher. And to make matters worse, foreign investors have also withdrawn massive amounts of money.

Ukrainian President Volodymyr Zelenskyy appealed to the population not to panic, not to be tempted to buy hamsters or even to plunder bank accounts. Even if the West constantly warns of an impending Russian invasion, that only fuels panic. The economy will be "destroyed" as a result.

High dependency on Russia

Experts are sure: an additional escalation of the situation on the Ukrainian-Russian border would further weaken the national currency hryvnia and severely affect the economy. In such a scenario, a similarly severe economic downturn as after the Crimean crisis can be expected, says Raiffeisen expert Deuber. In 2014, the gross domestic product collapsed by 6.6 percent, in 2015 even by 9.8 percent. At that time, a currency collapse weighed on the economy, this time it would be real economic losses.

Trade with Russia would probably come to a standstill in the event of war. That would be a hard blow for Ukraine. Because Russia is still one of the most important export countries, even if it is not quite as important as it used to be. In addition, Kiev is dependent on Russian natural gas imports. If part of the transit pipeline infrastructure were to be damaged, this would lead to significant disruptions in energy supplies in large parts of the country, warn the Eastern Europe researchers from the Vienna Institute for International Economic Studies (WIIW). "In the event of a complete disruption in transit, Ukraine would be able to supply households and critical infrastructure with gas for a maximum of up to seven days. After that, the pressure in the system would start to decrease, and Ukraine would no longer have enough gas in the Store to keep the pressure up and supply consumers with gas," says WIIW expert Olga Pindyuk.

Strategic ports

But trade with the EU is also likely to be disrupted if there is a war in eastern Ukraine. According to WIIW expert Pindyuk, the possible destruction of important parts of the country's infrastructure would have an impact on the entire economy. "Ukraine could lose access to its main ports around Odessa, which handle almost half of the country's exports and imports." Ukraine exports grain, rolled steel and chemical products through its seaports – its main exports. Pindyuk: "Black Sea ports and transit pipelines are the most critical pieces of infrastructure that could be damaged in the event of a military invasion."

To date, Ukraine has mainly exported raw materials. The huge country has enormous mineral resources – from iron ore, graphite, titanium, nickel, lithium to rare earths. Even huge, untapped shale gas deposits lie dormant underground. This could one day transform the country from an energy importer to an exporter.

Large areas of arable land

Ukraine is also known as the "granary of Europe". The country is one of the largest wheat exporters in the world. About a third of the fertile black earth soils are in Ukraine. The Ukrainian arable land corresponds to a good quarter of the area that exists in the entire EU. Food is Ukraine's second most important export after iron and steel.

A Russian invasion of eastern Ukraine would affect agricultural exports and could lead to rising food prices in German supermarkets as well. In this respect, the EU also has a major economic interest in preventing a war in Ukraine.

Ukraine could not get through another economic crisis on its own. The country would then need billions in aid. The EU has already pledged €1.2 billion in emergency aid and an additional €120 million in grants. In addition, the IMF could step in with a billion-dollar loan tranche.

The EU is now the largest foreign trade partner

With a foreign trade share of more than 40 percent, the European Union is now Ukraine's largest trading partner. In the EU countries, Ukraine mainly buys machines, chemicals and industrial goods. Overall, however, Ukraine accounts for only about one percent of EU foreign trade and is therefore "not of crucial importance," says Raiffeisen expert Deuber. In terms of imports, Ukraine is as important as South Africa or Thailand, and in terms of exports it is as important as Morocco or Saudi Arabia.

However, Brussels sees great potential in Ukraine and hopes for an expansion of trade with Kiev in the medium and long term. Of the 30 critical raw materials such as lithium or cobalt that the EU has identified, Ukraine alone has 21. The European Union would like to establish a raw materials and battery alliance with Ukraine. In addition, Ukraine could become a hydrogen supplier.

Capital flight and reform backlog as problems

After Poland, Germany is Ukraine's second most important trading partner in the EU. According to GTAI, goods worth almost 4.6 billion euros were exported in 2020. This corresponds to a 0.8 percent share of German exports to non-EU countries. Goods worth 2.5 billion euros were imported. Since 2008, the volume of foreign trade has declined slightly. The Ukraine primarily supplies textiles, metals and chemical products to Germany.

In view of Ukraine's wealth in raw materials, it might come as a surprise that the country is not doing much better economically. But mismanagement, outdated structures, corruption and years of dependence on Russia have repeatedly slowed down the competitiveness of the Ukrainian economy.

"Basically, the country has great potential," says Lars Handrich, Managing Director of DIW Econ, a consulting firm of the German Institute for Economic Research (DIW). One is the many natural resources. But there are burdens on the economy – due to the high capital flight, a lack of reforms and an outdated machine and power plant park.

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