Ukraine economy in peril as conflict accelerates

Tensions over a build-up of Russian troops on Ukraine’s eastern border have pushed up the cost of raising domestic debt and prompted the government to accelerate efforts to secure more IMF loans, Oleg Ustenko told Reuters by text message on Friday.

“An increase in the concentration of Russian troops along the Ukrainian borders in the short term negatively affects the Ukrainian economy,” Ustenko said, in the first comments by a senior official on the economic impact of the standoff.

Ukraine and Russia have traded blame for a spike in violence in the eastern Donbass region, where Ukrainian troops have battled Russian-backed forces in a conflict that Kyiv says has killed 14,000 people since 2014.

The ongoing tensions pushed Ukrainian sovereign bonds down by as much as 1% in trading on Thursday morning.

Ukraine plunged into recession last year as several nationwide lockdowns to fight the coronavirus pandemic took their toll on business activity. From a 4 per cent contraction in 2020, the government expects growth to rebound to 4.6 per cent in 2021.

A stuttering reform agenda has prevented the government from securing more loans from the International Monetary Fund under a $5 billion deal approved last June.

Ukraine’s parliament is due to vote on anti-corruption legislation on Thursday needed to secure more IMF loans.

The governor of the National Bank of Ukraine Kyrylo Shevchenko told GlobalCapital: “The last year has been a particularly tumultuous one for Ukraine with the fight against Covid-19, a change of central bank governor, and most recently, the reinflammation of tensions with Russia.”

Amid growing inflation, Ukraine became one of the first emerging markets to tighten its monetary policy last month. The NBU  hiked the key rate from 6 per cent to 6.5 per cent— the first increase since 2018.
But inflation jumped to 8.5 per cent in March, driving a further 100 basis points rate hike on Thursday, putting the key policy rate at 7.5 per cent.