Five years ago, anti-government demonstrations in Kyiv forced the country’s president to flee to Russia. Some of you may remember that situation from watching TV news. Others may not recall it at all.
Before I begin, let me first give you a general outline of the situation.
After the collapse of the USSR in 1991, Ukraine declared independence and gave up its nuclear weapons in exchange for security guarantees from the United States, Russia, Great Britain and France.
Five years ago, Russia took advantage of temporary anarchy in Ukraine. It annexed Crimea and announced its intention to seize five regions in eastern Ukraine. The Kremlin was forced to abandon the plan because Ukraine’s army regrouped quickly and resisted. Russia managed only to establish control of the eastern parts of Donetsk and Luhansk regions, also known as Donbas.
So, Ukraine in 2014 lost control of some of some of its territory and part of its economy. The economic consequences of Russia’s aggression were significant and different for the economies of Russia and Ukraine, respectively.
Ukraine’s economy ceased to depend on Russia with respect to financial market and exchange rate influences.
Recall the two world financial crises in 2007, the so-called Asian financial crisis and U.S. subprime mortgage crisis, hit Ukraine exactly one year later in 2008, that is, after the fall-out was felt in Russia and spread to the economies of most post-Soviet states, including Ukraine.
Why did the economic fortunes of Ukraine start to decline before the war started in 2014? Many forget the Ukraine-Russia trade war started in 2012 when Moscow unilaterally imposed numerous trade restrictions on Ukraine.
There is a reason I argue Russia is a country that for five years has shown the ability to almost keep afloat indefinitely, but one which does not have economic growth scenarios under existing sanctions. The nature of American sanctions, unfortunately, is such that they must be renewed annually. Each year it becomes increasingly difficult to do so. While the United States has made enormous efforts to support Ukraine and to support sanctions against Russia, Moscow always manages to find one or two countries among the 28 EU member states, making the same enormous efforts to persuade them to vote against renewing sanctions (which would be tantamount to their removal). A unanimous vote of 28 EU member states is necessary to renew sanctions against Russia.
Complicating the situation further, the U.S. and EU hold completely different positions in regards to sanctions against Russia. The principled position of the United States is international law has been violated and Russia will be under sanctions until it returns Crimea and the Donbas to Ukraine. On the other hand, the EU requires the demilitarization of Donbas before it lifts sanctions, setting the illegal annexation of Crimea aside. This is outcome Russian President Vladimir Putin has tried to achieve.
All the slides I will show you about the state of Russia’s economy over the past five years can be titled, THE PRICE OF CRIMEA.
Vladimir Putin’s annexation of Crimea and armed invasion of eastern Ukraine can be compared to Saddam Hussein’s invasion of Kuwait. Both were blatant and undisguised violations of international law. There was no legal justification to hold a referendum in Crimea in March 2014. The plebiscite was first announced 30 days before the scheduled vote, but was held 10 days later. Compare the plebiscite with the 2014 Scottish independence referendum campaign, which lasted five years.
This much is clear: The 10-day referendum campaign on the independence of Crimea was not an example of democratic political expression. How could it be with armed Russian soldiers patrolling the peninsula? This explains in party why subsequent events impacting Russia’s economy fall under THE PRICE OF CRIMEA rubric.
Russia has lost two trillion rubles more than once. It now loses that amount each year due to under-capitalized companies and lower incomes of the population.
Part of the blame for the fall was the price of oil. Everyone knows how dependent the Russian economy is on oil prices, but here’s how Azeybarzhan and Kazakhstan have fallen, how much other oil-bearing countries have fallen, and how much Russia has fallen.
As the modern Russian poet said: "This train is on fire".
The main counter-sanction they introduced relates to food. During this time, the Russians showed an increase in agriculture by so much, and the fall in imports in the food basket is so much. Russians complain.
But back to Ukraine…
The size of the territories, the rupture of production chains, the flight of bank depositors, as a result of revolution and war, the flight of capital from the country, the depletion of foreign exchange reserves resulted in the almost threefold devaluation of the national currency…
That is what happened to Ukraine during the first three years following the annexation of Crimea by Russia. Large-scale U.S. assistance was key to first mitigate the damage and restore exchange rate stability, and then macroeconomic stability.
I am talking not only about the $15 billion IMF loan, which replenished National Bank of Ukraine reserves, which fell from $18 billion to nearly zero, when the U.S. Treasury guaranteed additional loans to the Ukrainian government in the bond market. As a result, Ukraine had the opportunity to borrow at 1% annual interest. Ukraine’s credit rating at that time would not have allowed borrowing for less than at 9% annual rates.
By the way, exactly two months ago, Ukraine successfully repaid this loan and the U.S. Treasury will not have to fulfill its obligations for us. The United States offered a helping hand at a very difficult moment for Ukraine, one that was remunerated and did not incur losses to the U.S. taxpayers.
Ukraine’s economy began to grow rapidly, a trend that continues today.
Our group predicts that growth will continue along this trajectory. In addition, the IMF, according to a revised forecast, which has become more optimistic, predicts that it will continue according to such a forecast. Nevertheless, this is the difference between good and very good.
What is causing this growth? Growth of so-called real GDP is more modest.
Ukraine receives an additional increase in the value of its economy by keeping a strong national currency, we have a three-time devaluation reserve, which means that even according to a careful forecast after 2 years we go out and the level of pre-crisis GDP.
Many people ask me what drives economic growth of Ukraine. I tell them it is the country’s highly-educated population of Ukraine and the business-oriented, entrepreneurial spirit of the population. One caveat, though, and it is important: This is happening without external investments.
This is not due to official savings.
This is due to the so-called shadowed savings.
Until now, it was difficult to imagine a country in eastern Europe where everyone, including poor old men, each month receive an average of $2,000 in cash. Ukraine, a country awash with $100 billions in cash, is such a country.
That money cache drives growth. It has allowed the population, when wages fall, to maintain their lifestyle by *devouring* previously accumulated savings. It also accounts for why real estate prices did not fall by more than 20% to 25%, while GDP and the economy was almost halved.
So, why are foreign investors cautious? The answer is clear.
You live in Washington and read the newspapers there. If I read your newspapers, I also would not invest a penny in Ukraine. Please, raise your hands if you have learned for the first time that the Ukrainian economy has grown 1.5 times in three years. If this had happened in any Latin America country, the news would be on the front page of the Wall Street Journal.
Investing in a country at war is a high-risk activity. For those who enjoy taking risks, I have three more pieces of news regarding the further growth trend of the Ukrainian economy.
1) We are one of the last six countries on earth, which has not yet opened its land market. Ukraine has a quarter of the world's black soil reserves.
2) We are the last country in Europe, which de jure, but not de facto, acceded to the third energy package of the European Union. Imagine a spot on the map of Europe the size of France, where there are liquified natural gas (LNG) ports and terminals for accepting LNG from the United States. This presents a huge investment opportunity.
Today alternative energy, wind and solar production, accounts for two percent of energy produced. This is also a rapidly developing sector, because the Ukrainian government, like the EU, maintains an artificially high tariff for electricity produced by renewable sources.
Let me to show you a Google map. This is a special service that shows new enterprises opened in Ukraine over the five years alone. There are more than 300, and 30 of them are solar power generation plants. It is an absolutely realistic agricultural growth forecast for Ukraine to produce 100 million tonnes of grain five years from now. Two years ago, it was 50 million tonnes. Today it is 70 million tonnes.
I can talk about Ukraine’s investment prospects at length. Suffice it to say Ukraine is the new China.
Industry monthly wages in Ukraine have fallen from $500 to $200, but labor force skills have not dropped by one percent. No matter how fast wages grow, they will grow at the same rate as the dollar GDP of Ukraine. It will be profitable to produce anything in Ukraine during the next seven to ten years. Ukraine is the new China, only it has a border with the EU and a common free trade zone with the economic bloc. In China, you can still produce anything, but industry monthly wages there are $750, not $200.