Escalation in Donbas - But Notable Reforms and Economic Growth
The situation in eastern Ukraine deteriorated in late January, with volunteer squads beginning a trade blockade against the occupied territories. This move was supported by ordinary Ukrainians, who are increasingly unhappy over rising utility rates. Ukraine still imports coal from the occupied territories, and people are angry that their money is going to Russian proxies. Shortly after the start of the blockade, the militants, supported by Russian forces, unleashed massive attacks outside Avdiyivka, shelling residential areas. With outside temperatures down to -20°C, the shelling cut off heating and power for days. Some observers suggest that the escalation was testing the reaction of the new U.S. administration, as it intensified the day Trump and Putin spoke over the phone. But the attacks may also have been a reaction to the blockade.
The “accidental” elimination of the tax police was another important January development. At the end of 2016, as the Verkhovna Rada was adopting a package of tax changes, the department was eliminated, seemingly by mistake. Initially, this was seen as technical error, but later Finance Minister Oleksandr Danyliuk wrote on his Facebook page that the tax police would not be resurrected. The tax police was dreaded by Ukrainian businesses. A new state body will apparently be set up to replace it. But this is not likely to be the end of the reform.
General economic trends remain positive. In December, industrial output picked up, growing 4.5% y/y, vs. +3.7% y/y in November, on the back of stronger utility performance: +10.4% y/y, vs. +3.5% y/y in November. Overall industrial output increased 2.4% y/y. Consumer prices rose 12.4% ytd, or +14.9% y/y for the year. A 47.2% ytd increase in utility rates was the main driver of CPI growth.
Budget revenues were reported to be 14.2% higher, at UAH 97.2 billion, than the initial projection, and collections increased 20.1% y/y. The consolidated budget deficit was 2.4% of GDP, just over half of what had been projected. Public debt rose to $71.0 billion or 83.2% of GDP, up from $65.5 billion or 79.4% of GDP in 2015. Funding for recently nationalized PrivatBank was the main reason.
The CAD reached $3.4 billion in 2016, or 3.6% of GDP, vs. $0.2 billion or 0.2% of GDP a year ago. Exports continued to fall, by -4.1% y/y, amid recovering imports, at +3.9% y/y. By contrast, financial and capital accounts showed a surplus of $4.7 billion, vs. a $1 billion surplus in 2015, mainly as cash returned to the banking system. Gross international reserves increased by $2.2 billion, to $15.5 billion. The hryvnia was volatile in January, due to jitters over the PrivatBank nationalization, and an upsurge in public spending at the end of 2016. By mid-month, the hryvnia had dipped to UAH 29/dollar in retail. Since excess hryvnia in circulation was the only reason for this volatility, the currency promptly began recovering, and by this writing was at 27.6/dollar in retail, and 27.0/dollar on the FX market.
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