Ukraine Politics


Ukraine: Economy battered as conflict escalates, leaders continue peace negotiations

February 9, 2015

German Chancellor Angela Merkel and French President François Hollande flew to Russia on 6 February in an effort to kick-start peace negotiations with Russian President Vladmir Putin. Merkel and Hollande presented Putin with a peace proposal aimed at ending the months-long conflict in eastern Ukraine. While the details of the proposal and the outcome of the talks have not been revealed, it is a positive first step towards a resolution of the conflict. A previous ceasefire agreement that was signed in September has repeatedly been violated and failed to stop the crisis. Negotiations are scheduled to continue on 11 February when leaders from France, Germany, Ukraine and Russia will meet in Minsk.

The peace talks came amidst a recent escalation in the conflict. Fighting has ramped up in recent weeks and the pro-Russia rebels have been gaining ground. As a result, Ukrainian President Petro Poroshenko has called on the international community to provide extra support for Ukraine, both militarily and financially. The conflict has had a devastating impact on the economy and the country’s finances have depleted. Sharp contractions in economic activity combined with skyrocketing inflation and less than USD 7 billion in international reserves prompted the Central Bank to remove currency controls on the hryvnia on 6 February, which drove the currency to depreciate by more than 30%.

Meanwhile, the IMF returned to Ukraine last month and is discussing an extension of the USD 17 billion bailout program from last year. In addition, the IMF is reviewing the country’s progress on implementing the reforms that were agreed upon in the bailout package. Two tranches of funding, which were due last year, had been postponed as a result of the country taking one month to form a coalition government following the 26 October parliamentary snap elections and another month to pass a budget for 2015.

Looking ahead, Ukraine’s outlook for 2015 is grim. Despite the likelihood of receiving additional funding from the international community, Ukraine’s economy is unlikely to turn around without a resolution to the military conflict. The conflict is centered in the eastern regions of Luhansk and Donetsk, Ukraine’s industrial heartland, which combined represent over 15% of the nation’s GDP. Furthermore, the conflict has weighed heavily on consumer and business confidence and economic activity has declined in other areas of the country as well.

Amidst this political turmoil and Ukraine’s dire financial situation, FocusEconomics panelists have downgraded Ukraine’s 2015 economic outlook for the eighth month in a row. Panelists now expect GDP to contract 2.2% in 2015, which is down 0.4 percentage points from last month’s forecast. For 2016, panelists expect the economy to rebound to a 2.2% expansion.

Author: Angela Bouzanis, Senior Economist

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