What will happen to Ukraine’s imploding economy?

Anti-government protestors sweep Independence Square on February 24, 2014 in Kiev, Ukraine.
Anti-government protesters sweep away debris in Independence Square on Feb. 24 in Kiev, Ukraine.
Credit: Getty Images

With President Viktor Yanukovych wanted by the authorities and no agreement on the country’s future, Ukraine faces a potential split between pro-Russian and pro-European factions.

But, explains Lilit Gevorgyan, a senior analyst at IHS Jane’s Insight, it’s Ukraine’s imploding economy, not a political split, that’s the real danger.

Will Ukraine split in two now?

Whilst there are fears of Ukraine splitting into two parts and even Russia’s military intervention on behalf of Yanukovych, it appears that events have progressed much quicker and the power has slipped away from the former president. Yanukovych still has pockets of support amongst the population, but his comeback would require much more than this.

What will happen next?

In the absence of Russian aid, Ukraine’s immediate external financing needs are acute. The country’s National Bank has foreign currency reserves that can cover less than two months of import. The currency is facing steep devaluation, and the immediate debt repayment is looming, including the outstanding payment for the Russian natural gas that Ukraine has been chronically falling behind.

The country’s economy has already been battered by crisis before the political unrest. In fact, its poor state was one of the key reasons behind President Yanukovych’s decision to choose integration with Russia over the EU. Russia offered more tangible support.

How will Russia react?

It may scrap its $15 billion bond-buying scheme with Ukraine, and Gazprom may cancel its 30 percent gas price discount, which went into effect earlier this year. From a Russian perspective, what has happened in Ukraine is not necessarily the best solution for it. They are aware of the extent of Ukraine’s economic troubles and could simply adopt a wait-and-see position while making sure that Ukraine will not enjoy any privileges, such as gas price cut or credit line.



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