The looming threat of Russian invasion hits not only the psycho-emotional state of Ukrainians, but also has a significant impact on the state economy
Just since the beginning of the year, the hryvnia has depreciated by almost 6% and foreign investors and security holders have started withdrawing money from the country.
For example, bonds have plummeted in value. Eurobonds also fell in price. For example, bonds maturing in 2033 lost nearly 9% in value, after which the discount to nominal value reached 19%. In other words, the nominal amount of 1 USD which the Ministry of Finance has to pay on redemption is now selling for 81 cents.
All this leads to a higher interest rate for new government loans. Of course we are only talking about an interest rate increase in theory, because even if Kiev wants to, external creditors would not want to lend money in such an unpredictable situation. At the same time, draining of Ukrainian securities on foreign markets makes the Ministry of Finance lose the possibility to borrow on the domestic market as well, by placing domestic state loans.
Non-residents do not want to lose their money in a high-risk country and withdraw their capital from Ukraine. Hryvnias are actively exchanged for dollars or euros and then withdrawn from the Ukrainian economy, which severely affects the currency exchange rate.
In addition, given the general instability those Ukrainian companies which are traded on international exchanges are also losing value. For example, industrial giants such as Ferrexpo, Kernel and KSG Agro have been hit. Since the beginning of the year, the Ukrainian UX index has fallen only a few percent, but when the Western press started to replicate the news about the Russian troop build-up near the Ukrainian border, the fall recorded a 10 percent figure.
Yet there are only seven companies listed on the Ukrainian market, while the others are traded on the Warsaw Stock Exchange or in London. The stock price of Swiss Ferrexpo, which produces iron ore pellets in Ukraine, has plummeted by nearly 25%.
Against this backdrop, the main threat to Ukraine’s economy is that Ukraine’s public debt is now almost $93bn, or 60% of its annual GDP, and its foreign debt is $55bn (36% of GDP). In other words, our state exists on the principle that new loans pay off the previous ones. However, because of the military threat, Ukraine is no longer in a hurry to lend money, which raises questions about the country’s economic security. Yet it is clear that the longer these tensions continue to escalate, the less leeway the economy will have.
Another danger for our country is that even if tensions on the border are reduced, the economic problems will not go away. If it suddenly turns out that Russia does not attack, Western creditors will start demanding repayment of existing loans from the country’s leadership, and there will be nothing left to pay the debts. That is when the economy may collapse completely.
Whether or not there will be a war with Russia is an open question, but Ukraine’s economic situation is already very fragile. And whatever the outcome, nothing good can be expected in the near future, because the only difference is the scale of the catastrophe.
Kherson. Life