Worse prospects for growth of the Ukrainian economy [FINANCING OBSERVATOR]

After a momentary panic in the currency market, Ukraine's economy calmed down somewhat. However, economists respect: the government should prepare for long-term consequences for the economy.

The head of the board of the Ukrainian central bank of NBU Bohdan Danylyszyn believes that the authorities and the central bank should take into account in their activities the risks associated with the introduction of martial law. In his opinion, developments may reduce the investment attractiveness of Ukraine, so it is necessary to consult and explain the situation to domestic and foreign entrepreneurs in order to prevent possible adverse changes in their plans to invest in Dnieprem.

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Due to the current circumstances and the increased risk that leads to the elimination of the positive effects of the agreements with the IMF and the European Union, it is likely to maintain high foreign lending costs. The privatisation process of state-owned enterprises can be expected to be halted, on the one hand due to a decline in demand for Ukrainian assets, and on the other hand due to a decrease in prices that potential buyers would be willing to pay.

Burning hopes for billions

According to economist Oleh Ustenko of the Blazer Foundation, the key problem and the current unknown is the ability of Ukraine to meet its debt obligations, a large part of the resources currently allocated to defence-related purposes. It would be logical to amend the 2019 budget. Without external financing, the financial stability of the country will be compromised and Ukraine may be forced to freeze payments. It is also not expected to be $2 billion next year for foreign investments. Reason? The current political risk. The already strong emigration tendencies will also increase. This in turn will affect the influence of the Ukrainian ZUS and budget counterparts — Obeys Ustenko. According to the economist, an outflow of investment, a reduction in foreign exchange revenues and significant increases in import prices and consequently in inflation can be expected.

"Our oligarchs, who are responsible for the lion's share of the proceeds, will try to keep them abroad and lead them to tax havens, and importers will shape the price of goods not on the current dollar rate, but on their expectations of devaluation. One quarter of our consumption depends on imports, with a 10% devaluation, this gives an additional inflationary impulse of 2.5%, which means that instead of the 7.5% budgeted, we will have 10% inflation. Foreign investors will also not be willing to put money into Ukraine's economy, resulting in a 10%-20% decrease in comparison to the initial estimates of US$2 billion foreign investment in 2019." — He's expecting Ustenko.

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"From a legal point of view, the introduction of martial law does not affect the market at the moment. On the psychological side, however, the very fact of his announcement affects the expectations and moods of consumers and investors, which can lead to a reduction in demand and investment," says analyst Natalia Koczergin.

Ukrainian business fears the distant effects of the martial law on the economy – convinces economist Alexey Kuszcz in his analysis in Kiev's "Focus". Among the main concerns is the increase in the impact of force services, which can begin to take away from intra-corporate owners. He notes that in a situation of political instability, business reduces investment and brings out capital, and consumers reduce spending to a level that ensures existence and start putting off "for a rainy day". According to his estimates, the total additional capital outflow from Ukraine could reach a billion dollars in the next few months.

"Dynamic development of the economy is not always a derivative of mathematical growth models and functions of maximum benefit. The trends in medium-term development are defined by models in which social, psychological and perceptional factors influence the decisions of the participants in economic processes. The main limitation is the horizon of rational expectations of entities — e.g. consumers or foreign investors" – the economist evaluates. In his opinion, the introduction of martial law may affect macroeconomic stability, which private capital will not want and the state will not be able to provide.

This assessment is confirmed by representatives of investment companies involved in the Ukrainian IT sector, who are asked by Liga.net. In their opinion, the introduction of martial law will hit the industry strongly. Entrepreneurs believe that the increase in voltage will first inhibit the influx of new investors over Dniepr. Foreign contractors will direct them to competition in fear of the reality of the execution of contracts — For example, to India's emerging IT power. It is also possible to move whole work teams abroad.

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According to Yuri Romanenko of the Think Tank Ukrainian Institute of the Future, at local level, martial law can be used as an instrument used for hostile takeovers of businesses. "I think it's obvious to everyone that martial law has proved to be another simulation to handle its affairs. First of all, forcing the donation of businesses," he commented.

IMF yes, privatization no

Meanwhile, concerns have proved to be raised about the interruption of cooperation with the International Monetary Fund. "The IMF states at war do not give money. This is not what anyone thinks when he puts the issue of the war state" - convinced Ukrainian President Petro Poroshenko in the summer of 2014.

However, the IMF has already ensured that the Stand-by programme negotiated a few weeks ago will be implemented, regardless of the introduction of martial law.

"There are no formal legal prohibitions preventing continued cooperation under martial law. We have collaborated with a number of countries where armed conflicts of varying intensity have continued" - informed the Kiev Office of the Fund.

The biggest loser in the current circumstances is Ukrainian privatization so far. In mid-December, two days before the deadline, the government cancelled the tender for the sale of the energy company Centrenergo. In the terms of the privatisation competition there was a record saying that at least two volunteers must participate in it, including at least one foreign entity. 78.3 percent of shares were issued with a call price of 5.98 billion hryvnia. The tender was announced on 29 October and the date of the competition was set for 13 December. The government hoped that the introduction of martial law would not prevent the privatisation of this company. Six investors initially expressed their willingness to participate in this privatisation.

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The Ukrainian government was approached by representatives of Western energy companies, including the French Engie, interested in participating in the privatisation of Centrenergo. However, they eventually resigned. "Publicate for a month in advance the terms of the tender and give a month to raise more than $200 million in Ukraine before the elections and with the martial law, it is unrealistic" - explained In an interview with "Economic Truth" Andrij Faworov, head of the French Energy Resources of Ukraine.

His information was confirmed by Serhii Leschenko, a representative of the Ukrainian Parliament who informed the day before the date of the tender that due to the martial law western investors had resigned.

Although a company from Belarus applied for the tender, as it turned out, Russian capital became behind it, so it was excluded. The tender was therefore cancelled.

Signature: Michał Kozak, economic journalist, correspondent of the Financial Observer in Ukraine.