Ukraine continues to face formidable economic challenges: in the first half of 2015 real GDP fell by 16% year-on-year. This figure excludes not only Crimea, but also the parts of Donbas which are beyond the control of the government; including those would certainly show an even deeper recession. The reasons for this are manifold: the destruction of production and export capacities in Donbas, as well as the high inflation and the implemented (and largely IMF-imposed) fiscal austerity package - both undermining domestic consumer demand. The wisdom of budget consolidation at a time of a severe recession is however highly questionable - especially since it is not fiscal problems which are at the root of the current crisis. The debt restructuring deal agreed in August 2015, which envisages i.a. a 20% 'haircut' on privately held external sovereign debt and an extension of maturities by four years on the remainder, is a welcome step towards reducing the burden of debt service on the country's budget which is at 5% of GDP rather high. However, the USD 4 billion written off represents only a small fraction of total public debt worth USD 68 billion. In addition, the IMF target of saving USD 15.3 billion in debt payments over 2015-2018 will not be met unless Russia, which holds USD 3 billion of Ukraine's sovereign debt, joins the debt restructuring deal.
The prospects for economic stabilisation continue to be highly uncertain. Although the progressive deterioration of the statistical base starting from the second half of 2014 should help ‘improve’ the growth performance in the remainder of this year, for 2015 as a whole a recession to the tune of at least 10% will not be avoided. The recovery prospects ultimately hinge on the solution of the military conflict in Donbas, which the Minsk-II ceasefire agreement (which was very vague on political issues, allowing the two sides to interpret it in completely different ways) failed to provide. The newly signed Association and Deep and Comprehensive Free Trade Agreements (DCFTA) with the EU bear not only chances but also risks. In particular, the latter may materialise if Ukraine fails to attract sufficient foreign direct investment to finance the costly adoption of numerous EU standards as required by the DCFTA.
For further details on the current economic situation and outlook for Ukraine, please refer to the below presentation by Vasily Astrov.